Prospectus January 2, 1998
o The Park Avenue Portfolio(R)
This Prospectus sets forth important information which a prospective
investor should know before investing in The Park Avenue Portfolio(R) (the
"Portfolio"), a diversified open-end management investment company. Shares of
the Portfolio are currently offered in eight series. Each series is called a
"Portfolio Fund." Each of the Portfolio Funds offers Class A shares. Six of the
Portfolio Funds also offer a second class of shares, Class B shares.
The Portfolio Funds are:
o The Guardian Park Avenue Fund(R) (Class A and Class B) which invests in
U.S. equity securities;
o The Guardian Park Avenue Small Cap Fund(SM) (Class A and Class B) which
invests in equity securities of companies with small market capitalization;
o The Guardian Asset Allocation Fund(SM) (Class A and Class B) which
actively allocates its investments among three broad categories: equity
securities, debt obligations and money market instruments;
o The Guardian Baillie Gifford International Fund(SM) (Class A and Class B)
which invests in equity securities issued by foreign companies;
o The Guardian Baillie Gifford Emerging Markets Fund(SM) (Class A and Class
B) which invests in equity securities issued by emerging market companies;
o The Guardian Investment Quality Bond Fund(SM) (Class A only) which
invests in investment grade debt obligations and U.S. government securities;
o The Guardian Tax-Exempt Fund(SM) (Class A only) which invests in
investment grade obligations issued by state and local authorities; and
o The Guardian Cash Management Fund(SM) (Class A and Class B) which invests
in money market instruments.
Each class of shares within a Portfolio Fund has the same investment
objective and policies, but is sold at an offering price that reflects differing
sales charges and expense levels. The Class A shares are sold subject to an
initial sales charge or "load" and the Class B shares are sold subject to a
contingent deferred sales load. Each class has distinct advantages and
disadvantages, and investors should choose the class that best suits their
individual needs and circumstances.
A Statement of Additional Information for the Portfolio, dated January 2,
1998, has been filed with the Securities and Exchange Commission ("SEC") and is
incorporated into this Prospectus by reference. A free copy of the Statement of
Additional Information may be obtained and further inquiries can be made by
writing Guardian Investor Services Corporation, 201 Park Avenue South, New York,
New York 10003 or by calling 1-800-221-3253.
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution, and the shares are not federally insured
by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other agency. Investment in a Portfolio Fund involves investment risk, including
possible loss of the principal amount invested. Investments in shares of the
Cash Fund are neither insured nor guaranteed by the U.S. government. While the
Cash Fund seeks to maintain a stable price of $1.00 per share, there is no
assurance that it will be able to do so.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PLEASE
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
1
<PAGE>
o Contents
o Prospectus Summary 3
o Transaction Costs and Fund Expenses 7
o Financial Highlights 9
o Investment Objectives and Policies 17
o Risk Considerations 27
o Special Investment Techniques 29
o Management 33
o How to Purchase Shares 37
o How to Redeem Shares 40
o Special Purchase and
Redemption Plans 42
o Exchanges 44
o Calculation of Net Asset Values 45
o Performance Results 46
o Dividends and Distributions 47
o Taxes 47
o Voting Rights and Liabilities 49
o Shareholder Services 49
2
<PAGE>
Prospectus Summary
Important information about investing in the Portfolio Funds is summarized
below. This summary is qualified in its entirety by the more detailed
information contained within this Prospectus. Cross-references in this summary
are to headings in the body of the Prospectus.
o The Portfolio Funds
Shares of the Portfolio are currently offered in eight series or "Portfolio
Funds". Each of the Portfolio Funds offers Class A shares. Six of the Portfolio
Funds offer two classes of shares: The Guardian Park Avenue Fund, The Guardian
Park Avenue Small Cap Fund, The Guardian Asset Allocation Fund, The Guardian
Baillie Gifford International Fund, The Guardian Baillie Gifford Emerging
Markets Fund and The Guardian Cash Management Fund. These Portfolio Funds are
referred to as the "Multiple Class Funds". Both classes are described in this
Prospectus. In general, the Class A shares are sold subject to an initial sales
load and lower operating expenses and the Class B shares are sold subject to a
contingent deferred sales load and higher operating expenses. The Class A shares
of The Guardian Cash Management Fund are offered without an initial sales load.
Shares of one class of Portfolio Funds may only be exchanged for shares of the
same class of another Portfolio Fund.
o Investment Objectives of the Portfolio Funds
Each Portfolio Fund has a separate and distinct investment objective (see
below). Each Portfolio Fund is managed separately, so the risks and
opportunities of each Portfolio Fund should be examined separately. A Portfolio
Fund's investment objective may not be changed without shareholder approval.
The Guardian Park Avenue Fund(R)
The "Park Avenue Fund" seeks long-term growth of capital. Current income is
of lesser importance to the Park Avenue Fund; however, it is expected that
growth of capital will be accompanied by growth in income. The Park Avenue Fund
normally invests at least 80% of its assets in U.S. common stocks or convertible
securities.
The Guardian Park Avenue Small Cap Fund(SM)
The "Small Cap Fund" seeks long-term growth of capital. Current income is
of lesser importance to the Fund; however, it is expected that growth of capital
will be accompanied by growth of income. The Small Cap Fund normally invests at
least 85% of its assets in a diversified portfolio of common stocks and
convertible securities issued by companies with small market capitalization.
These are companies whose total market capitalization places them within the
range of issuers included in the Russell 2000 Index, which is described below
under "Investment Objectives and Policies". As of December 31, 1996, the market
capitalization of the companies included in the Russell 2000 Index ranged from
$20 million to $2.43 billion.
The Guardian Asset Allocation Fund(SM)
The "Asset Allocation Fund" seeks long-term total investment return
consistent with moderate risk. The Asset Allocation Fund uses theoretical models
to allocate its assets among the following asset classes: equity securities,
debt obligations and money market instruments. The Asset Allocation Fund
normally invests in each asset class by purchasing shares of the Park Avenue
Fund, the Bond Fund and the Cash Fund.
The Guardian Baillie Gifford International Fund(SM)
The "International Fund" seeks long-term growth of capital. Income is not a
specific objective, although it is anticipated that growth of capital will be
accompanied by dividend income. The International Fund ordinarily invests at
least 80% of its net assets in common stocks issued by companies domiciled
outside of the United States and in convertible securities which carry the right
to buy such common stocks.
The Guardian Baillie Gifford Emerging Markets Fund(SM)
The "Emerging Markets Fund" seeks long-term capital appreciation. Income is
not a specific objective, although it is anticipated that growth of capital will
be accompanied by dividend income. The Emerging Markets Fund, under normal
conditions, invests at least 65% of its total assets in common stocks issued by
emerging market companies and in
3
<PAGE>
securities that are convertible into such common stocks. The Fund defines an
emerging market company as an entity (i) organized under the laws of, and with a
principal office in, an emerging market country (as defined in "Investment
Objectives and Policies" below); (ii) that derives 50% or more of its total
revenues from either goods or services produced or performed in, or from sales
made in emerging market countries (and which may be located in a "gateway"
country, as defined in "Investment Objectives and Policies"); or (iii) for which
the principal securities market is located in an emerging market country.
The Guardian Investment Quality Bond Fund(SM)
The "Bond Fund" seeks a high level of current income and capital
appreciation without undue risk to principal. The Bond Fund normally invests at
least 80% of the value of its assets in (1) corporate bonds and other debt
obligations rated in one of the four highest rating categories established by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group
("S&P") (commonly referred to as investment grade bonds); and (2) U.S.
government securities and obligations of U.S. government agencies and
instrumentalities. The Bond Fund's assets typically include mortgage-backed
securities and asset-backed securities.
The Guardian Tax-Exempt Fund(SM)
The "Tax-Exempt Fund" seeks to maximize current income exempt from federal
income taxes, consistent with preservation of capital. The Tax-Exempt Fund
invests at least 80% of its net assets in intermediate-term and long-term
investment grade municipal obligations. These are debt securities that are
issued by or on behalf of states, territories and possessions of the United
States and the District of Columbia, and their political subdivisions, agencies,
authorities and instrumentalities, the interest on which is, in the opinion of
bond counsel to the issuer, exempt from federal income tax ("Municipal
Obligations").
The Guardian Cash Management Fund(SM)
The "Cash Fund" seeks as high a level of current income as is consistent
with liquidity and preservation of capital. The Cash Fund primarily invests in
short-term money market instruments such as commercial paper, certificates of
deposit, bankers acceptances, U.S. government securities, repurchase agreements
and other corporate obligations. Although not guaranteed, the Cash Fund is
expected to maintain a stable price of $1.00 per share.
See "Investment Objectives and Policies" for information about each
Portfolio Fund's investment program. There can be no assurance that a particular
Portfolio Fund will achieve its investment objective.
o Who Should Invest; Risk Factors
An investor should select the Portfolio Funds which reflect his or her
financial goals, time horizon and risk tolerance. No single Portfolio Fund is
intended to provide a complete or balanced investment program, but each can
serve as one component of an investor's program to accumulate assets for
retirement, college tuition or other major goals.
By investing in a Portfolio Fund, an investor assumes the risks of
investing in the types of securities acquired by that Portfolio Fund. Investing
in securities involves varying degrees of market risk, credit or financial risk,
and prepayment risk. Foreign securities present additional special risks. For
example, political, social and economic developments abroad might adversely
affect foreign investments. Often, there is less information publicly available
about foreign issuers, so it can be more challenging to assess the viability and
prospects of foreign companies. The value of investments that are denominated in
foreign currencies may be adversely affected by fluctuations in foreign currency
values. In addition, given the particular risks associated with investing in
developing countries, an investment in the Emerging Markets Fund should be
considered speculative.
Each Portfolio Fund's net asset value per share (i.e., share price) will
fluctuate to reflect changes in the value of the securities in its portfolio.
The value a shareholder receives upon redemption of a Portfolio Fund's shares
may be higher or lower than the amount of the original investment.
An investor considering the purchase of shares of a Multiple Class Fund
should choose the class that best suits their needs and circumstances. An
investor should keep in mind that Class B shares have higher
4
<PAGE>
overall operating expenses than Class A shares, a difference that will be
reflected in the net asset value and investment experience of each class. Also,
it should be noted that investors in Class B shares will have the full amount of
their purchase initially invested since there is no initial sales load, while
the initial investment made by investors in Class A shares will reflect the
deduction of an initial sales load. At redemption, Class B shares may be subject
to a contingent deferred sales load, while no such charge is imposed on Class A
shares.
The table below summarizes certain characteristics of each Portfolio Fund.
However, there can be no assurance that a Portfolio Fund will show these
characteristics at all times. In addition, see "Risk Considerations,"
"Investment Objectives and Policies" and "Special Investment Techniques."
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
The Park Avenue Portfolio -- Characteristics of the Funds
- ------------------------------------------------------------------------------------------------------------------------
Risk of Share
Fund Growth Potential Income Potential Price Change Typical Investments
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Park Avenue High Low High U.S. common stocks and convertible securities
- ------------------------------------------------------------------------------------------------------------------------
Small Cap High Low Very High U.S. common stocks and convertible securities
of companies with small market capitalization
- ------------------------------------------------------------------------------------------------------------------------
U.S. common stocks and convertible securities;
investment grade debt obligations, including
mortgaged-backed and asset-backed securities,
Asset Allocation Moderate Moderate Moderate and U.S. government securities; money market
instruments through investments in Park Avenue
Fund, Bond Fund and Cash Fund
- ------------------------------------------------------------------------------------------------------------------------
Common stocks and convertible securities issued
International High Low High by foreign companies
- ------------------------------------------------------------------------------------------------------------------------
Common stocks and convertible securities issued
Emerging Markets High Low Very High by companies in emerging market countries
- ------------------------------------------------------------------------------------------------------------------------
Investment grade debt obligations, including
Bond Low High Moderate mortgage-backed and asset-backed securities,
and U.S. government securities
- ------------------------------------------------------------------------------------------------------------------------
Investment grade debt obligations issued by state
Tax-Exempt Low High Moderate and local authorities
- ------------------------------------------------------------------------------------------------------------------------
Cash N/A Low-Moderate Low Money market instruments
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
o Investment Advisers and Distributor
Guardian Investor Services Corporation ("GISC") and Guardian Baillie
Gifford Limited ("GBG") are the Portfolio Funds' investment advisers. GISC is
wholly owned by The Guardian Insurance & Annuity Company, Inc. ("GIAC") which,
in turn, is wholly owned by The Guardian Life Insurance Company of America
("Guardian Life"). GBG was formed by GIAC and the Scottish investment management
firm of Baillie Gifford Overseas Limited ("BG Overseas"). BG Overseas, which
serves as the sub-investment adviser for the International Fund and the Emerging
Markets Fund, is wholly owned by Baillie Gifford & Co., a Scottish firm which
provides investment management services to institutional investors. GISC also
acts as principal underwriter and distributor of all of the Portfolio Funds'
shares, provides services to the Funds pursuant to an administrative services
agreement and provides additional distribution-related services to the Class B
shares of the Multiple Class Funds under a 12b-1 plan. See "Management." The
investment advisory and administrative services fees paid by all of the Funds
and the 12b-1 fees paid by the Multiple Class Funds are set forth in the
"Transaction Costs and Fund Expenses" table.
o Purchases
Shares of a Portfolio Fund may be purchased at the "public offering price"
which is a Fund's net asset value per share ("NAV"), plus any applicable sales
load. Each Portfolio Fund's NAV is calculated as of the close of business on
each day that the New York Stock Exchange ("NYSE") is open. Investors may select
either Class A shares of any Portfolio Fund or Class B shares of the Multiple
Class Funds. Investors who are considering whether to purchase Class A or Class
B shares of the Multiple Class Funds should evaluate factors such as the amount
of their investment and the length of time it is expected that the shares will
be held. See "How to Purchase Shares."
5
<PAGE>
o Minimum Initial Investment
The minimum initial investment is $1,000 per Portfolio Fund. Additional
payments must be at least $100. The minimum for both initial and additional
payments through payroll deduction plans is $50. See "Calculation of Net Asset
Values" and "How to Purchase Shares".
o Class A Shares
Class A shares of the Portfolio Funds, other than the Cash Fund, are
offered at net asset value plus any applicable initial sales load. The maximum
load is 4.50% of the NAV as of the close of business on the date of purchase (or
4.71% of the amount invested). Class A shares of the Cash Fund are offered at
NAV without a sales load. Class A shares may be more beneficial to larger
investors, who will be able to qualify for the lower sales loads which are
applicable to larger investments. See "Class A Shares -- Initial Sales Load
Alternative".
o Class B Shares
Class B shares of the Multiple Class Funds are offered at NAV, without any
initial sales load. Class B shares are, however, sold subject to a contingent
deferred sales load ("CDSL") which is imposed if the shares are redeemed within
the first six years of the anniversary date of purchase. The maximum CDSL
imposed is 4.0% in the first year. Thereafter, the CDSL declines annually to
1.0% in the sixth year following purchase to 0% after the sixth anniversary of
purchase. The CDSL does not apply to increases in net asset value of the Class B
shares following the date of purchase. Class B shares acquired pursuant to
dividend reimbursement or distribution will not be subject to a CDSL upon their
redemption. Class B shares automatically convert into Class A shares (which pay
lower ongoing operating expenses) after the eighth anniversary of purchase. The
maximum investment which will be accepted for the purchase of Class B shares of
a Portfolio Fund is $250,000. See "Class B Shares -- Contingent Deferred Sales
Load Alternative".
o Redemptions
Shares of a Portfolio Fund may be redeemed at the NAV next determined after
the transfer agent receives a proper redemption request. Each Multiple Class
Fund may impose a CDSL on redemptions of Class B shares. See "Class B Shares --
Contingent Deferred Sales Load Alternative". Redemption requests may be made in
writing, by telephone (if such privilege has been previously requested), or, for
Class A shares of the Cash Fund only, by check. Shares of the Portfolio Funds
may also be redeemed through selected broker-dealer firms. Such broker-dealers
may charge fees for their services in addition to any other currently applicable
sales loads. See "How to Redeem Shares".
o Special Purchase and Redemption Plans
The Portfolio Funds offer the following special purchase and redemption
programs: Automatic Investment Plan, Rights of Accumulation, Investment by
Letter of Intent, Automatic Withdrawal Plan and Checkwriting from the Class A
shares of Cash Fund. See "Special Purchase and Redemption Plans."
o Dividends
Net investment income is normally distributed semi-annually by the Park
Avenue, Small Cap, Asset Allocation, International and Emerging Markets Funds,
and monthly by the Bond and Tax-Exempt Funds. Net realized short-term and
long-term capital gains for these Portfolio Funds are distributed at least
annually. The Cash Fund declares dividends of net investment income and net
realized capital gains daily, and such dividends are distributed monthly.
Income and capital gains dividends can be automatically reinvested in
additional shares of the distributing Portfolio Fund without a sales load. See
"Dividends and Distributions" and "Shareholder Services".
o Exchanges
Shares of one class of a Portfolio Fund may generally be exchanged for
shares of the same class of another Portfolio Fund without the imposition of an
initial sales load or CDSL. Shares of one class of a Portfolio Fund may not be
exchanged for shares of another class of any Portfolio Fund. Shares are
exchanged at their relative NAV's as next determined after the transfer agent
receives a proper exchange request, except that a sales load may be imposed upon
certain exchanges from the Class A shares of the Cash Fund to the shares of the
other Class A Portfolio Funds. Any applicable CDSL payable upon the redemption
of Class B shares following an exchange will be calculated from the date of the
initial purchase of Class B shares, not from the date of the exchange. The
Portfolio Funds also offer Dollar Cost Averaging, an automatic exchange program.
See "Exchanges" and "Taxes".
6
<PAGE>
The Park Avenue Portfolio
Transaction Costs and Fund Expenses
================================================================================
This table is intended to assist investors in understanding the expenses
associated with investing in Class A or Class B shares of the Portfolio Funds.
The table shows the percentages of annual expenses incurred for the year ended
December 31, 1996. Information presented in the table is just an example, and
actual expenses can be higher or lower than those shown. The percentages
representing expenses for the Class A shares have been restated to reflect,
effective May 1, 1996, (i) the imposition of a .25% administrative service fee
on Class A shares (see "Management -- Administrative Services Agreement"), and
(ii) the elimination of 12b-1 fees on Class A shares. The percentages for the
Class B shares of the Park Avenue Fund, the International Fund, the Asset
Allocation Fund and the Cash Fund are based on estimated expenses expected to
have been incurred if Class B shares of those Funds had been in existence during
the entire year ended December 31, 1996. The percentages for the Small Cap Fund
and the Emerging Markets Fund are based on estimated expenses for their first
year of operations. The "Examples" assume a 5% annual rate of return and are
based on the expenses shown in the table. This hypothetical rate of return does
not represent the past or future performance of any Portfolio Fund or class
thereof.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Emerging
Park Avenue Small Cap Asset Allocation International Markets
Fund* Fund Fund++ Fund Fund Cash Fund***
---------------------------------- ---------------- ---------------- ---------------- ----------------
Class A Class B Class A Class B Class A Class B Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shareholder Transaction
Expenses
Maximum Sales Load
Imposed on Purchases
(as a percentage of
NAV) ................... 4.50% None 4.50% None 4.50% None 4.50% None 4.50% None None None
Maximum Sales Load
Imposed on Reinvested
Dividends .............. None None None None None None None None None None None None
Deferred Sales Load
(as a percentage of
redemption proceeds) ... None 4.00% None 4.00% None 4.00% None 4.00% None 4.00% None 4.00%
Exchange Fee ........... None None None None None None None None None None None** None
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Portfolio Fund
Operating Expenses
(as a percentage of
average net assets)
Management Fees
(after waiver) ........ .50% .50% .75% .75% .50% .50% .80% .80% 1.00% 1.00% .50% .50%
12b-1 Fees ............. .00% .75% .00% .75% .00% .75% .00% .75% .00% .75% .00% .75%
Other Expenses
(after waiver)+ ....... .29% .52% .95% 1.10% .65% .99% .90% 1.50% 1.20% 1.35% .40% .00%
Total Fund Operating
Expenses (after expense
reimbursements) ....... 0.79% 1.77% 1.70% 2.60% 1.15% 2.24% 1.70% 3.05% 2.20% 3.10% 0.90% 1.25%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------
Tax-
Exempt Bond
Fund*** Fund***
------- -------
Class A Class A
------- -------
Shareholder Transaction
Expenses
Maximum Sales Load
Imposed on Purchases
(as a percentage of
NAV) ................... 4.50% 4.50%
Maximum Sales Load
Imposed on Reinvested
Dividends .............. None None
Deferred Sales Load
(as a percentage of
redemption proceeds) ... None None
Exchange Fee ........... None None
- -------------------------------------------
Annual Portfolio Fund
Operating Expenses
(as a percentage of
average net assets)
Management Fees
(after waiver) ........ .50% .50%
12b-1 Fees ............. .00% .00%
Other Expenses
(after waiver)+ ....... .25% .25%
Total Fund Operating
Expenses (after expense
reimbursements) ....... 0.75% 0.75%
* This table does not reflect deductions for expenses which relate to owning
Class A Park Avenue Fund shares through a Value Guard variable annuity
contract. The Value Guard prospectus provides information about such
expenses.
** A sales load may be imposed upon certain exchanges from the Class A Cash
Fund to the other Class A Portfolio Funds. See "Exchanges."
*** The fees and expenses shown for the Class A Bond and Tax-Exempt Funds and
the Class A and Class B shares of the Cash Fund reflect GISC's assumption
of some or all of these Funds' "Other Expenses." If these Funds paid all of
their expenses, "Other Expenses" would be .62% for the Bond Fund, .85% for
the Tax-Exempt Fund, and .70% and .50%, respectively, for the Class A and
Class B shares of the Cash Fund. "Total Operating Expenses" would be 1.12%
for the Bond Fund, 1.35% for the Tax-Exempt Fund and 1.20% and 1.75%,
respectively, for the Class A and Class B shares of the Cash Fund, based on
actual results for the year ended December 31, 1996.
+ Includes Administrative Service Fee.
++ The fees and expenses shown for the Asset Allocation Fund reflect
management fee waivers by GISC that reduce the effective annual rate of the
"Management Fees" to .50%. See "Investment Advisers and Distributor".
Absent such waivers, the "Management Fees" would be .65% for both classes
of shares and "Total Operating Expenses" would be 1.30% for Class A shares
and 2.39% for Class B shares. In addition, "Other Expenses" reflect
estimated annualized expenses following the Fund's conversion, effective
May 1, 1997, to a "fund of funds" arrangement. See "Investment Objectives
and Policies -- The Guardian Asset Allocation Fund".
7
<PAGE>
Examples of Fund Expenses
You would pay the following expenses on a hypothetical $1,000 investment in
each Fund, assuming (1) a 5% annual return and (2) redemption at the end of each
time period:
1 Year 3 Years 5 Years 10 Years*
- --------------------------------------------------------------------------------
Park Avenue Fund
Class A $53 $ 69 $ 87 $138
Class B $58 $ 76 $ 96 $182
- --------------------------------------------------------------------------------
Small Cap Fund**
Class A $59 $ 94 N/A N/A
Class B $66 $101 N/A N/A
- --------------------------------------------------------------------------------
Asset Allocation Fund
Class A $58 $ 84 $113 $195
Class B $64 $ 95 $128 $245
- --------------------------------------------------------------------------------
International Fund
Class A $62 $ 96 $133 $237
Class B $71 $114 $160 $305
- --------------------------------------------------------------------------------
Emerging Markets Fund**
Class A $64 $108 N/A N/A
Class B $71 $116 N/A N/A
- --------------------------------------------------------------------------------
Cash Fund
Class A $54 $ 72 $ 93 $151
Class B $52 $ 57 $ 64 $134
- --------------------------------------------------------------------------------
Tax-Exempt Fund
Class A $52 $ 68 $ 85 $134
- --------------------------------------------------------------------------------
Bond Fund
Class A $52 $ 68 $ 85 $134
- --------------------------------------------------------------------------------
You would pay the following expenses on a hypothetical $1,000 investment in
each Fund, assuming (1) a 5% annual return and (2) no redemption at the end of
each time period:
1 Year 3 Years 5 Years 10 Years*
- --------------------------------------------------------------------------------
Park Avenue Fund
Class A $53 $ 69 $ 87 $138
Class B $18 $ 56 $ 96 $182
- --------------------------------------------------------------------------------
Small Cap Fund**
Class A $59 $ 94 N/A N/A
Class B $26 $ 81 N/A N/A
- --------------------------------------------------------------------------------
Asset Allocation Fund
Class A $58 $ 84 $113 $195
Class B $24 $ 75 $128 $245
- --------------------------------------------------------------------------------
International Fund
Class A $62 $ 96 $133 $237
Class B $31 $ 94 $160 $305
- --------------------------------------------------------------------------------
Emerging Markets Fund**
Class A $64 $108 N/A N/A
Class B $31 $ 96 N/A N/A
- --------------------------------------------------------------------------------
Cash Fund
Class A $54 $ 72 $ 93 $151
Class B $12 $ 37 $ 64 $134
- --------------------------------------------------------------------------------
Tax-Exempt Fund
Class A $52 $ 68 $ 85 $134
- --------------------------------------------------------------------------------
Bond Fund
Class A $52 $ 68 $ 85 $134
- --------------------------------------------------------------------------------
* Ten-year figures reflect the conversion of Class B shares to Class A shares
after the eighth anniversary of purchase.
** Because they are new Funds, these expenses are estimated for the Small Cap
and Emerging Markets Funds, and information is presented only for the one-
and three-year periods.
8
<PAGE>
Financial Highlights
The tables on the following pages provide selected data, total returns and
ratios for one Class A share of each Portfolio Fund, and one Class B share of
the Multiple Class Funds. These tables have been audited by Ernst & Young LLP,
independent auditors, except the information provided for the six months ended
June 30, 1997, which is unaudited. This information is supplemented by the
audited financial statements for the Portfolio Funds, and their accompanying
notes, which appear in the 1996 Annual Report to Park Avenue Portfolio
shareholders and the unaudited financial statements and accompanying notes for
the periods ended June 30, 1997, which appear in the June 30, 1997 Semi-Annual
Report to shareholders. The 1996 Annual Report includes further information
about each Fund's 1996 performance and the unqualified report of Ernst & Young
LLP on the Portfolio's 1996 financial statements. The Annual Report and the
Semi-Annual Report are incorporated by reference into the Statement of
Additional Information. Free copies of the Statement of Additional Information,
the Annual Report and the Semi-Annual Report may be obtained by calling
1-800-221-3253 or by writing to GISC, 201 Park Avenue South, New York, New York
10003.
9
<PAGE>
o The Guardian Park Avenue Fund
Selected data for a Class A and Class B share of beneficial interest
outstanding throughout the periods indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Class A
------------------------------------------------------------------------------------------------
Year
Six Months Ended
Ended December 31,
June 30, 1997 1996 1995 1994 1993 1992 1991 1990 1989
(unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $ 37.91 $ 33.97 $ 26.89 $ 28.63 $ 25.17 $ 22.23 $ 18.26 $ 21.56 $ 20.46
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment
operations
Net investment income 0.19 0.42 0.33 0.31 0.50 0.45 0.65 0.68 0.92
Net realized and
unrealized gain/(loss)
on investments 6.79 8.41 8.87 (0.72) 4.56 4.05 5.71 (3.28) 3.88
- ---------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease)
from investment
operations 6.98 8.83 9.20 (0.41) 5.06 4.50 6.36 (2.60) 4.80
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to
shareholders
Dividends from net
investment income (0.17) (0.42) (0.33) (0.31) (0.50) (0.44) (0.66) (0.70) (0.98)
Distributions in excess
of net investment
income -- (0.01) -- -- -- -- -- -- --
Distributions from net
realized gain on
investments (0.66) (4.46) (1.79) (1.02) (1.10) (1.12) (1.73) -- (2.72)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (0.83) (4.89) (2.12) (1.33) (1.60) (1.56) (2.39) (0.70) (3.70)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $ 44.06 $ 37.91 $ 33.97 $ 26.89 $ 28.63 $ 25.17 $ 22.23 $ 18.26 $ 21.56
- ---------------------------------------------------------------------------------------------------------------------------
Total return** 18.40% 26.49% 34.28% (1.44%) 20.28% 20.48% 35.16% (12.21%) 23.66%
===========================================================================================================================
Ratios/supplemental data:
Net assets, end of year
(000's omitted) $1,826,532 $1,392,186 $972,275 $640,917 $560,193 $335,660 $270,095 $216,457 $228,190
Ratio of expenses to
average net assets 0.79% 0.79% 0.81% 0.84% 0.81% 0.68% 0.67% 0.69% 0.70%
Ratio of net investment
income to average
net assets 1.00% 1.19% 1.07% 1.15% 1.89% 1.94% 2.96% 3.51% 4.01%
Portfolio turnover 23% 81% 78% 54% 46% 64% 57% 47% 47%
Average rate of
commissions paid+ $ 0.0550 $ 0.0470 -- -- -- -- -- -- --
</TABLE>
- ----------------------------------------------------------------------------
Class A Class B
-------------------- ---------------------------
Six Months May 1,
Ended 1996* to
1988 1987 June 30, 1997 December 31,
(unaudited) 1996
- ----------------------------------------------- ---------------------------
Net asset value, beginning
of period $ 18.63 $ 20.74 $ 37.90 $ 36.26
- ----------------------------------------------- ---------------------------
Income from investment
operations
Net investment income 0.60 0.47 -- 0.05
Net realized and
unrealized gain/(loss)
on investments 3.23 0.20 6.74 6.10
- ----------------------------------------------- ---------------------------
Net increase/(decrease)
from investment
operations 3.83 0.67 6.74 6.15
- ----------------------------------------------- ---------------------------
Distributions to
shareholders
Dividends from net
investment income (0.55) (0.60) (0.01) (0.05)
Distributions in excess
of net investment
income -- -- -- --
Distributions from net
realized gain on
investments (1.45) (2.18) (0.66) (4.46)
- ----------------------------------------------- ---------------------------
Total distributions (2.00) (2.78) (0.67) (4.51)
- ----------------------------------------------- ---------------------------
Net asset value,
end of period $ 20.46 $ 18.63 $ 43.97 $ 37.90
- ----------------------------------------------- ---------------------------
Total return** 20.78% 2.95% 17.77% 17.35%
=============================================== =============================
Ratios/supplemental data:
Net assets, end of year
(000's omitted) $176,000 $157,045 $ 109,523 $36,006
Ratio of expenses to
average net assets 0.69% 0.68% 1.75%*** 1.77%***
Ratio of net investment
income to average
net assets 2.82% 2.08% -- 0.04%***
Portfolio turnover 58% 50% 23% 81%
Average rate of
commissions paid+ -- -- $ 0.0550 $0.0470
* Commencement of operations of Class B shares.
** Excludes effect of sales load.
*** Annualized.
+ Beginning with the fiscal year ended December 31, 1996, the Fund is
required to disclose its average commission rate per share for trades on
which commissions are charged.
10
<PAGE>
o The Guardian Park Avenue Small Cap Fund
The following table provides information about the financial history of The
Guardian Park Avenue Small Cap Fund (the "Small Cap Fund"). It is based on a
single share of Class A and a single share of Class B outstanding for the
periods ended June 30, 1997. The table is part of the Fund's financial
statements, which are included in the Semi-Annual Report for The Park Avenue
Portfolio for the six months ended June 30, 1997, and which is incorporated by
reference into the Statement of Additional Information. The information in the
table is unaudited.
Class A Class B
------------- -------------
April 2, May 5,
1997+ to 1997+ to
June 30, 1997 June 30, 1997
- ------------------------------------------------------------------
Net asset value, beginning
of period $ 10.00 $ 10.57
- ------------------------------------------------------------------
Income from investment
operations
Net investment income/(loss) 0.01 (0.03)
Net realized and
unrealized gain/(loss)
on investments 1.75 1.20
- ------------------------------------------------------------------
Net increase/(decrease)
from investment
operations 1.76 1.17
- ------------------------------------------------------------------
Distributions to
shareholders
Dividends from net
investment income -- --
Distributions in excess
of net investment
income -- --
Distributions from net
realized gain on
investments -- --
- ------------------------------------------------------------------
Total distributions -- --
- ------------------------------------------------------------------
Net asset value,
end of period $ 11.76 $ 11.74
- ------------------------------------------------------------------
Total return* 17.60% 11.07%
==================================================================
Ratios/supplemental data:
Net assets, end of period
(000's omitted) $32,928 $ 3,548
Ratio of expenses to
average net assets 1.35%(a) 2.15%(a)
Ratio of net investment
income to average
net assets 0.58%(a) (1.29%)(a)
Portfolio turnover 1% 1%
Average rate of
commissions paid $ 0.042 $ 0.042
- ----------
+ Commencement of operations.
* Excludes the effect of sales loads.
(a) Annualized.
11
<PAGE>
o The Guardian Cash Management Fund
Selected data for a Class A and Class B share of beneficial interest
outstanding throughout the periods indicated:
<TABLE>
<CAPTION>
===================================================================================================================
Class A
---------------------------------------------------------------------------------------------
Three
Months
Ended
Six Months Year Ended December 31, Dec. 31,
Ended
June 30, 1997 1996 1995 1994 1993 1992 1991 1990 1989
(unaudited)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $1.000
- -------------------------------------------------------------------------------------------------------------------
Income from investment
operations
Net investment
income 0.023 0.045 0.051 0.034 0.021 0.030 0.053 0.076 0.086
- -------------------------------------------------------------------------------------------------------------------
Distributions to
shareholders
Dividends from
net invest-
ment income (0.023) (0.045) (0.051) (0.034) (0.021) (0.030) (0.053) (0.076) 0.086)
- -------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $1.000
Total return 2.32% 4.62% 5.22% 3.48% 2.15% 3.06% 5.70% 7.91% 8.60%***
===================================================================================================================
Ratios/Supple-
mental Data:
Net assets, end
of period
(000's
omitted) $103,406 $88,217 $69,913 $56,730 $34,731 $37,780 $44,054 $47,143 $3,821
Ratio of
expenses to
average
net assets 0.85%** 0.90% 0.85% 0.87% 1.02% 0.70% 0.67% 0.65% 0.65%**
Ratio of
expenses
subsidized
by GISC 0.32%** 0.30% 0.37% 0.50% 0.42% 0.44% 0.35% 0.41% 0.52%**
Ratio of net
investment
income
to average
net assets 4.64% 4.62% 5.10% 3.54% 2.13% 3.01% 5.30% 7.57% 8.56%**
===================================================================================================================
</TABLE>
===========================================================================
Class A Class B
--------------------------- -----------------------
Year Ended May 1,
September 30, Six Months 1996* to
Ended Dec. 31,
1989 1988 1987 June 30, 1997 1996
(unaudited)
--------------------------- -----------------------
Net asset value,
beginning of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
- -------------------------------------------------- -----------------------
Income from investment
operations
Net investment
income 0.024 0.066 0.053 0.023 0.028
- -------------------------------------------------- -----------------------
Distributions to
shareholders
Dividends from
net invest-
ment income (0.024) (0.066) (0.053) (0.023) (0.028)
- -------------------------------------------------- -----------------------
Net asset value,
end of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Total return 2.40% 6.60% 5.30% 2.32% 2.81%***
================================================== =======================
Ratios/Supple-
mental Data:
Net assets, end
of period
(000's
omitted) $21,961 $20,603 $19,618 $ 4,239 $ 2,583
Ratio of
expenses to
average
net assets 1.00% 1.00% 1.00% 0.85%** 1.16%**
Ratio of
expenses
subsidized
by GISC 0.38% 0.28% 0.35% 1.13%** 0.59%**
Ratio of net
investment
income
to average
net assets 7.63% 6.32% 5.34% 4.64%** 4.43%**
================================================== =======================
* Commencement of operations of Class B shares.
** Ratios are annualized.
*** Not annualized.
12
<PAGE>
o The Guardian Asset Allocation Fund+++
Selected data for a Class A and Class B share of beneficial interest outstanding
throughout the periods indicated:
<TABLE>
<CAPTION>
===============================================================================================================
Class A
----------------------------------------------------------------------------
February 15,
Six Months Year Ended Year Ended Year Ended 1993* to
Ended December 31, December 31, December 31, December 31,
June 30, 1997 1996 1995 1994 1993
(unaudited)
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 12.96 $ 12.19 $ 10.23 $ 10.98 $ 10.00
- ---------------------------------------------------------------------------------------------------------------
Income from investment
operations
Net investment income/(loss) 0.14 0.23 0.23 0.28 0.19
Net realized and unrealized
gain/(loss) on investments
and foreign currency
related transactions 1.71 1.96 2.29 (0.52) 1.02
- ---------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from
investment operations 1.85 2.19 2.52 (0.24) 1.21
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders
Dividends from net
investment income (0.13) (0.23) (0.23) (0.28) (0.18)
Distributions in excess
of net investment income -- -- -- -- --
Distributions from net realized
gain on investments and
foreign currency related
transactions (0.24) (1.19) (0.33) (0.23) (0.05)
- ---------------------------------------------------------------------------------------------------------------
Total Distributions (0.37) (1.42) (0.56) (0.51) (0.23)
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 14.44 $ 12.96 $ 12.19 $ 10.23 $ 10.98
- ---------------------------------------------------------------------------------------------------------------
Total return*** 14.26% 18.74% 24.51% (2.13%) 12.16%
===============================================================================================================
Ratios/supplemental data:
Net assets, end of period
(000's omitted) $ 110,102 $ 88,190 $ 70,591 $ 54,875 $ 50,200
Ratio of expenses to average
net assets 1.17%+ 1.30% 1.25% 1.30% 1.29%+
Ratio of net investment income
to average net assets 2.14%+ 1.91% 1.98% 2.72% 2.07%+
Portfolio turnover 36% 122% 219% 216% 165%
Average rate of commissions
paid++ $ 0.0070 $ 0.0530 -- -- --
===============================================================================================================
</TABLE>
================================================================
Class B
-----------------------------
May 1,
Six Months 1996** to
Ended December 31,
June 30, 1997 1996
(unaudited)
Net asset value,
beginning of period $ 12.92 $ 12.61
- ----------------------------------------------------------------
Income from investment
operations
Net investment income/(loss) 0.06 0.04
Net realized and unrealized
gain/(loss) on investments
and foreign currency
related transactions 1.70 1.50
- ----------------------------------------------------------------
Net increase/(decrease) from
investment operations 1.76 1.54
- ----------------------------------------------------------------
Distributions to shareholders
Dividends from net
investment income (0.06) (0.04)
Distributions in excess
of net investment income -- --
Distributions from net realized
gain on investments and
foreign currency related
transactions (0.24) (1.19)
- ----------------------------------------------------------------
Total Distributions (0.30) (1.23)
- ----------------------------------------------------------------
Net asset value, end of period $ 14.38 $ 12.92
- ----------------------------------------------------------------
Total return*** 13.73% 12.07%
================================================================
Ratios/supplemental data:
Net assets, end of period
(000's omitted) $ 9,219 $ 5,075
Ratio of expenses to average
net assets 2.26%+ 2.39%+
Ratio of net investment income
to average net assets 1.10%+ 0.70%+
Portfolio turnover 36% 122%
Average rate of commissions
paid++ $ 0.0070 $ 0.0530
================================================================
* Commencement of operations.
** Commencement of operations of Class B shares.
*** Excludes effect of the sales load.
+ Annualized.
++ Beginning with the fiscal year ended December 31, 1996, the Fund is
required to disclose its average commission rate per share for trades on
which commissions are charged.
+++ Reflects effect of waiver of a portion of the Management Fee and other
expense adjustments associated with the conversion to a fund of funds
structure as of May 1, 1997. See "Transaction Costs and Fund Expenses."
13
<PAGE>
o The Guardian Baillie Gifford International Fund
Selected data for a Class A and Class B share of beneficial interest outstanding
throughout the periods indicated:
<TABLE>
<CAPTION>
===================================================================================================================
Class A
-----------------------------------------------------------------------------
February 15,
Six Months Year Ended Year Ended Year Ended 1993* to
Ended December 31, December 31, December 31, December 31,
June 30, 1997 1996 1995 1994 1993
(unaudited)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 15.22 $ 13.57 $ 13.01 $ 13.19 $ 10.00
- ----------------------------------------------------------------------------------------------------------------
Income from investment
operations
Net investment income/(loss) 0.05 0.05 0.04 0.01 0.02
Net realized and unrealized
gain/(loss) on investments
and foreign currency
related transactions 2.04 1.89 1.40 (0.09) 3.32
- ----------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from
investment operations 2.09 1.94 1.44 (0.08) 3.30
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders
Dividends from net
investment income (0.03) (0.05) (0.04) (0.01) --
Distributions in excess
of net investment income -- (0.05) (0.23) -- --
Distributions from net realized
gain on investments and
foreign currency related
transactions -- (0.19) (0.61) (0.09) (0.11)
- ----------------------------------------------------------------------------------------------------------------
Total Distributions (0.03) (0.29) (0.88) (0.10) (0.11)
Net asset value, end of period $ 17.28 $ 15.22 $ 13.57 $ 13.01 $ 13.19
- ----------------------------------------------------------------------------------------------------------------
Total return*** 14.90% 14.33% 11.14% (0.55%) 32.98%
================================================================================================================
Ratios/supplemental data:
Net assets, end of period
(000's omitted) $ 67,424 $ 57,593 $ 44,546 $ 37,542 $ 20,809
Ratio of expenses to average
net assets 1.70%+ 1.70% 1.74% 1.91% 2.35%+
Ratio of net investment income
to average net assets 0.62%+ (0.29%) 0.19% 0.20% (0.21%)+
Portfolio turnover 26% 39% 51% 33% 9%
Average rate of commissions
paid++ $ 0.0530 $ 0.0360 -- -- --
================================================================================================================
</TABLE>
==================================================================
Class B
-------------------------------
May 1,
Six Months 1996** to
Ended December 31,
June 30, 1997 1996
(unaudited)
- ------------------------------------------------------------------
Net asset value,
beginning of period $ 15.12 $ 14.71
- ------------------------------------------------------------------
Income from investment
operations
Net investment income/(loss) -- (0.04)
Net realized and unrealized
gain/(loss) on investments
and foreign currency
related transactions 1.93 0.76
- ------------------------------------------------------------------
Net increase/(decrease) from
investment operations 1.93 0.72
- ------------------------------------------------------------------
Distributions to Shareholders
Dividends from net
investment income -- (0.04)
Distributions in excess
of net investment income -- (0.08)
Distributions from net realized
gain on investments and
foreign currency related
transactions -- (0.19)
- ------------------------------------------------------------------
Total Distributions -- (0.31)
Net asset value, end of period $ 17.05 $ 15.12
- ------------------------------------------------------------------
Total return*** 12.76% 4.34%
==================================================================
Ratios/supplemental data:
Net assets, end of period
(000's omitted) $ 5,033 $ 3,313
Ratio of expenses to average
net assets 3.02%+ 3.05%+
Ratio of net investment income
to average net assets 0.64%+ (1.47%)+
Portfolio turnover 26% 39%
Average rate of commissions
paid++ $ 0.0530 $ 0.0360
==================================================================
* Commencement of operations.
** Commencement of operations of Class B shares.
*** Excludes effect of the sales load.
+ Annualized.
++ Beginning with the fiscal year ended December 31, 1996, the Fund is
required to disclose its average commission rate per share for trades on
which commissions are charged.
14
<PAGE>
o The Guardian Baillie Gifford Emerging Markets Fund
The following table provides information about the financial history of The
Guardian Baillie Gifford Emerging Markets Fund (the "Emerging Markets Fund"). It
is based on a single share of Class A and a single share of Class B outstanding
for the periods ended June 30, 1997. The table is part of the Emerging Markets
Fund's financial statements, which are included in the Semi-Annual Report for
The Park Avenue Portfolio for the six months ended June 30, 1997, and which is
incorporated by reference into the Statement of Additional Information. The
information in the table is unaudited.
Class A Class B
------------- -------------
April 2, May 5,
1997+ to 1997+ to
June 30, 1997 June 30, 1997
- ------------------------------------------------------------------
Net asset value, beginning
of period $ 10.00 $ 10.28
- ------------------------------------------------------------------
Income from investment
operations
Net investment income/(loss) 0.07 0.01
Net realized and
unrealized gain/(loss)
on investments 1.07 0.83
- ------------------------------------------------------------------
Net increase/(decrease)
from investment
operations 1.14 0.84
- ------------------------------------------------------------------
Distributions to
shareholders
Dividends from net
investment income -- --
Distributions in excess
of net investment
income -- --
Distributions from net
realized gain on
investments -- --
- ------------------------------------------------------------------
Total distributions -- --
- ------------------------------------------------------------------
Net asset value,
end of period $ 11.14 $ 11.12
- ------------------------------------------------------------------
Total return* 11.40% 8.17%
==================================================================
Ratios/supplemental data:
Net assets, end of period
(000's omitted) $22,812 $ 1,696
Ratio of expenses to
average net assets 2.24%(a) 3.59%(a)
Ratio of net investment
income to average
net assets 2.31%(a) 0.41%(a)
Portfolio turnover 6% 6%
Average rate of
commissions paid $ 0.115 $ 0.115
- ----------
+ Commencement of operations.
* Excludes the effect of sales loads.
(a) Annualized.
15
<PAGE>
o The Guardian Investment Quality Bond Fund
The Guardian Tax-Exempt Fund
Selected data for a Class A share of beneficial interest outstanding
throughout the periods indicated:
<TABLE>
<CAPTION>
===========================================================================================================================
The Guardian
Investment The Guardian
Quality Bond Tax-Exempt
Fund Fund
----------------------------------------------------------------- ---------------------------
February 15,
Six Months Year Ended Year Ended Year Ended 1993* to Six Months Year Ended
Ended December 31, December 31, December 31, December 31, Ended December 31,
June 30, 1997 1996 1995 1994 1993 June 30, 1997 1996
(unaudited) (unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 9.70 $ 10.00 $ 9.12 $ 10.04 $ 10.00 $ 9.61 $ 9.69
Income from investment
operations
Net investment income/(loss) 0.30 0.55 0.59 0.46 0.37 0.22 0.42
Net realized and unrealized
gain/(loss) on investments
and foreign currency
related transactions -- (0.30) 0.88 (0.90) 0.18 0.04 (0.08)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from
investment operations 0.30 0.25 1.47 (0.44) 0.55 0.26 0.34
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders
Dividends from net
investment income (0.30) (0.55) (0.59) (0.46) (0.37) (0.22) (0.42)
Distributions from net
realized gain on
investments and foreign
currency related
transactions -- -- -- (0.02) (0.14) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.30) (0.55) (0.59) (0.48) (0.51) (0.22) (0.42)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.70 $ 9.70 $ 10.00 $ 9.12 $ 10.04 $ 9.65 $ 9.61
- ---------------------------------------------------------------------------------------------------------------------------
Total return** 3.14% 2.73% 16.64% (4.50%) 4.13% 2.77% 3.62%
===========================================================================================================================
Ratios/supplemental data:
Net assets, end of period
(000's omitted) $83,359 $50,794 $53,706 $43,487 $23,310 $42,382 $39,185
Ratio of expenses to
average net assets 0.75%+ 0.75% 0.75% 1.46% 1.42%+ 0.75%+ 0.75%
Ratio of net investment
income to average
net assets 6.68%+ 5.73% 6.11% 4.94% 3.68%+ 4.67%+ 4.96%
Ratio of expenses
subsidized by GISC 0.38%+ 0.37% 0.39% -- -- 0.40%+ 0.60%
Portfolio turnover 154% 257% 401% 186% 167% 92% 240%
===========================================================================================================================
</TABLE>
====================================================================
The Guardian
Tax-Exempt
Fund
---------------------------------------
February 15,
Year Ended Year Ended 1993* to
December 31, December 31, December 31,
1995 1994 1993
- --------------------------------------------------------------------
Net asset value,
beginning of period $ 8.86 $ 10.20 $ 10.00
Income from investment
operations
Net investment income/(loss) 0.44 0.40 0.34
Net realized and unrealized
gain/(loss) on investments
and foreign currency
related transactions 0.83 (1.30) 0.40
- --------------------------------------------------------------------
Net increase/(decrease) from
investment operations 1.27 (0.90) 0.74
- --------------------------------------------------------------------
Distributions to Shareholders
Dividends from net
investment income (0.44) (0.40) (0.34)
Distributions from net
realized gain on
investments and foreign
currency related
transactions -- (0.04) (0.20)
- --------------------------------------------------------------------
Total Distributions (0.44) (0.44) (0.54)
- --------------------------------------------------------------------
Net asset value, end of period $ 9.69 $ 8.86 $ 10.20
- --------------------------------------------------------------------
Total return** 14.59% (8.98%) 5.55%
====================================================================
Ratios/supplemental data:
Net assets, end of period
(000's omitted) $17,501 $15,967 $21,135
Ratio of expenses to
average net assets 0.75% 1.09% 1.36%+
Ratio of net investment
income to average
net assets 4.66% 4.26% 3.35%+
Ratio of expenses
subsidized by GISC 0.79% 0.47% --
Portfolio turnover 194% 107% 108%
====================================================================
* Commencement of operations.
** Excludes effect of the sales load.
+ Annualized.
16
<PAGE>
Investment Objectives and Policies
Each Portfolio Fund has its own investment objective and policies. A
Portfolio Fund's investment objective is a fundamental policy which may not be
changed without shareholder approval. Certain investment restrictions are also
fundamental policies that may not be changed without shareholder approval.
Non-fundamental investment techniques, policies and restrictions may be changed
by the Portfolio's Board of Trustees without shareholder approval.
Each Portfolio Fund's investment program is highlighted below. The
Portfolio Funds' investment restrictions, additional investment techniques and
certain other features are described under "Special Investment Techniques" and
in the Statement of Additional Information.
o The Guardian Park Avenue Fund
The Park Avenue Fund seeks long-term growth of capital. Income is not a
specific objective, although it is anticipated that long-term growth of capital
will be accompanied by growth of income.
The Park Avenue Fund attempts to achieve its objective by normally
investing at least 80% of the value of its assets in a diversified portfolio of
U.S. common stocks and convertible securities. The Park Avenue Fund intends to
be fully invested in such securities unless circumstances dictate otherwise.
GISC employs quantitative investment models, both proprietary and
non-proprietary, to analyze and evaluate each security which may be purchased,
held or sold by the Park Avenue Fund. These models are used to identify those
securities that represent good relative value in the marketplace and have
reasonable prospects for superior relative price performance. GISC uses
information from numerous sources and value, momentum and other market factors
to modify and refine the quantitative models over time. GISC can also change the
proportion of the Park Avenue Fund's assets which are invested in particular
companies and industries based on its evaluation of the outlook for specific
industries, companies and the economy.
Convertible securities are bonds or preferred stock issues which may be
converted at a specified time and price into shares of common stock of the same
or different issuers. Convertible securities are typically senior to common
stock in a corporation's capital structure, so they may entail less risk than
common stocks. Convertible securities purchased by the Park Avenue Fund will
primarily be rated in one of the top four rating categories established by
nationally recognized statistical rating organizations, making them investment
grade. However, the Fund may acquire convertible securities without regard to
their ratings. See the Statement of Additional Information.
From time to time, the Park Avenue Fund may invest up to 5% of its net
assets in securities of U.S. or foreign companies which are issued and settled
overseas. The Park Avenue Fund may enter into forward foreign currency exchange
contracts in connection with its investments in foreign securities. The Park
Avenue Fund may also invest in repurchase agreements. See "Risk Considerations"
and "Special Investment Techniques."
If adverse market conditions necessitate a defensive posture, the Park
Avenue Fund may temporarily invest some or all of its assets in debt
obligations, including U.S. government securities, investment grade corporate
bonds, commercial paper rated Prime-2 or higher by Moody's or A-2 or higher by
S&P, repurchase agreements, cash and cash equivalents.
o The Guardian Park Avenue Small Cap Fund
The Small Cap Fund seeks long-term growth of capital. Income is not a
specific objective, although it is anticipated that long-term growth of capital
will be accompanied by growth of income.
The Small Cap Fund attempts to achieve its objective by normally investing
at least 85% of its assets in a diversified portfolio of common stocks and
convertible securities issued by companies with small market capitalization.
These are companies whose total market capitalization places them within the
range of issuers included in the Russell 2000 Index. The Russell Indexes are
formulated to serve as a comprehensive representation of the investable domestic
equity market. These indexes, which are comprised solely of common stocks issued
by companies domiciled in the U.S. or its territories, are value weighted. The
Russell 2000 Index
17
<PAGE>
is a subset of the larger, Russell 3000 Index, which measures the performance of
the 3,000 largest domestic companies, based on total market capitalization. The
Russell 2000 Index measures the performance of the 2,000 smallest companies in
the Russell 3000 Index. As of December 31, 1996, the market capitalization of
the companies included in the Russell 2000 Index ranged from $20 million to
$2.43 billion. Some of the small companies in which the Fund may invest may be
unseasoned. The Small Cap Fund may invest up to 15% of total assets in the
securities of issuers which have less than three years of continuous operations.
See "Risk Considerations" for a detailed discussion of the risks associated with
investing in smaller companies.
In selecting investments for the Small Cap Fund, GISC will consider the
investment fundamentals and the risk/reward prospects for each security. These
evaluations are supplemented through the use of various quantitative investment
models, both proprietary and non-proprietary, to identify those securities that
represent good relative value in the marketplace and have reasonable prospects
for superior relative price performance. GISC believes that this multi-faceted
process will enhance investment performance and will improve the consistency of
portfolio results over time. GISC can change the proportion of the Fund's assets
that are invested in particular companies and industries based on its evaluation
of the outlook for specific industries and companies and the economy.
From time to time, the Small Cap Fund may invest up to 10% of its net
assets in securities of U.S. or foreign companies which are issued or settled
overseas in the form of American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs") or other similar securities. An ADR is a
dollar-denominated security issued by a U.S. bank or trust company which
represents, and may be converted into, a foreign security. An EDR is similar,
but is issued by a European bank. ADRs and EDRs may not be denominated in the
same currency as the securities into which they may be converted. Typically,
ADRs, in registered form, are designed for issuance in U.S. securities markets
and EDRs, in bearer form, are designed for issuance in European securities
markets. All such investments will be U.S. dollar-denominated. In addition, the
Small Cap Fund may invest up to 5% of its net assets in foreign securities and
foreign currency exchange contracts. Further information about foreign
securities is contained in "Risk Considerations" and the Statement of Additional
Information.
The Small Cap Fund typically invests its available cash in repurchase
agreements. See "Special Investment Techniques". If adverse market conditions
necessitate a defensive posture, the Fund may temporarily invest some or all of
its assets in debt obligations, including U.S. government securities, investment
grade corporate bonds, commercial paper, repurchase agreements and cash
equivalents.
o The Guardian Baillie Gifford International Fund
The International Fund seeks long-term growth of capital. Income is not a
specific objective, although it is anticipated that growth of capital will be
accompanied by dividend income, which may vary depending on the location of the
investments.
The International Fund attempts to achieve its objective by ordinarily
investing at least 80% of its net assets in a diversified portfolio of common
stocks issued by companies that are domiciled outside of the United States and
in securities which are convertible into such common stocks.
The International Fund does not normally concentrate its investments in any
particular industry or country. Under normal circumstances, at least 65% of the
International Fund's total assets will be invested in companies which are
domiciled in at least three different countries outside of the United States.
However, there are no limitations on the percentage of portfolio assets which
may be invested in securities of issuers from any one country at any given time.
By investing in several countries, the International Fund should, in theory,
decrease the degree to which events in any one country can affect its entire
portfolio. It is anticipated that a significant portion of the International
Fund's investments will normally be divided among four main geographic areas --
Continental Europe, the United Kingdom, Japan and the markets of the Far East
(including Australia and New Zealand).
The International Fund varies its geographic
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scope based on continuous evaluations of economic, market and political trends
worldwide. To determine how portfolio assets will be geographically allocated,
the International Fund's advisers consider the conditions and growth potential
of various economies and securities markets, currency ex-change rates,
technological developments in various countries, and other pertinent financial,
social, national and political information. The International Fund attempts to
distribute its assets among securities issued by companies at different stages
of development, ranging from large, well-established companies to smaller and
newer companies. Securities issued by smaller companies may be less liquid and
subject to greater market volatility and credit risk than those issued by larger
companies.
The International Fund may invest in foreign issuers through sponsored ADRs
and EDRs, or similar investment vehicles. ADRs and EDRs are described above
under "The Guardian Park Avenue Small Cap Fund".
For liquidity purposes, the International Fund may hold cash in U.S.
dollars and foreign currencies, or invest in short-term securities, including
repurchase agreements and domestic and foreign money market instruments. In
addition, the International Fund may enter into forward foreign currency
transactions, or acquire other currency instruments to attempt to minimize the
effects of changes in foreign exchange rates. The Fund may use options or
financial futures to hedge against market or currency risks. See "Special
Investment Techniques".
The International Fund may significantly alter its portfolio as a temporary
defensive measure if its advisers believe that investments in international
equity securities are at risk because of current or anticipated political or
economic conditions. In such event, the International Fund may, without any
percentage limit, acquire investment grade non-convertible preferred stock, debt
obligations, foreign or U.S. government securities, and domestic or foreign
money market instruments.
The International Fund's operating expenses are typically higher than the
expenses incurred by mutual funds that invest exclusively in U.S. equity
securities. Brokerage commissions and custodial fees related to foreign
investments are often higher than those associated with investments in U.S.
securities.
If the U.S. government restricts any type of foreign investment which may
be made by or through the International Fund, the Portfolio's Board of Trustees
will promptly take steps to determine whether significant changes in the Fund's
portfolio are appropriate.
o The Guardian Baillie Gifford Emerging Markets Fund
The Emerging Markets Fund seeks long-term capital appreciation. Income is
not a specific objective, although it is anticipated that growth of capital will
be accompanied by dividend income, which may vary depending on the location of
the investments.
The Emerging Markets Fund, under normal conditions, invests at least 65% of
its total assets in common stocks issued by emerging market companies and in
securities that are convertible into such common stocks. The Fund defines an
emerging market company as an entity (i) organized under the laws of, and with a
principal office in, an emerging market country (as defined below); (ii) that
derives 50% or more of its total revenue from either goods or services produced
or performed in, or from sales made in emerging market countries (and which may
be located in a "gateway" country, as described below); or (iii) for which the
principal securities market is located in an emerging market country. Investing
in emerging markets involves greater risk than investing in more developed
markets. Thus, an investment in the Emerging Markets Fund should be considered
speculative. See "Risk Considerations".
As defined by the Emerging Markets Fund, an emerging market country
includes any country whose economy or markets are considered to be emerging or
developing by the International Finance Corporation and the World Bank, as well
as countries which are classified by the United Nations as developing. The
adviser determines the potential universe of emerging market countries for
investment. The Fund currently expects to invest in issuers located in some or
all of the following emerging market countries: Argentina, Brazil, Chile, China,
Colombia, the Czech Republic, Greece, Hungary, India, Indonesia, Israel, Jordan,
Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Portugal, the Slovak
Republic,
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South Africa, South Korea, Sri Lanka, Taiwan, Thailand, Turkey, Venezuela, and
Zimbabwe. The list of countries in which the Emerging Markets Fund will
potentially invest will vary from time to time, based upon the investment
adviser's assessment of a particular country's present suitability for
investment. The Fund may also invest in issuers located in countries which may
be deemed by the adviser to be "gateways" into emerging market countries, such
as Austria (which serves as a gateway to Eastern European countries such as
Hungary and the Czech Republic).
In addition, the Emerging Markets Fund may ordinarily invest up to 35% of
its net assets in a combination of (i) debt securities of government or
corporate issuers in emerging market countries; (ii) debt and equity securities
of issuers in developed markets; and (iii) cash and money market instruments.
Emerging market debt securities are often rated below investment grade, or
may not be rated by rating agencies in the United States. Normally, the Emerging
Markets Fund will not invest more than 10% of its total assets in debt
securities that are not rated at least investment grade, or if unrated,
determined to be of comparable quality by the investment adviser. The Emerging
Markets Fund is not required to sell automatically when the ratings assigned to
any of its holdings are reduced below investment grade. Investment in
non-investment grade debt securities (commonly known as "junk bonds") are
considered predominantly speculative with regard to the payment of interest and
principal and therefore carry greater risk, including the possibility of issuer
default or bankruptcy. See "Risk Considerations".
Certain emerging market countries prohibit direct foreign investment in
their capital markets and limit investors in those markets, such as the Emerging
Markets Fund, to government-authorized investment companies. In accordance with
the Investment Company Act of 1940 (the "1940 Act"), the Emerging Markets Fund
may invest up to 10% of its total assets in securities of other investment
companies. Shares of these investment companies may at times be acquired at
market prices representing a premium over the actual net asset value of their
portfolio securities. If shares of another investment company are acquired,
shareholders of the Emerging Markets Fund would bear both their proportionate
share of the expenses of the Fund and, indirectly, a proportionate share of the
expenses of the other investment company as well.
The Emerging Markets Fund may significantly alter its portfolio as a
temporary defensive measure if its advisers believe that investments in
international equity securities are at risk because of current or anticipated
political or economic conditions. In such event, the Emerging Markets Fund may,
without any percentage limit, acquire investment grade non-convertible preferred
stock, debt obligations, foreign or U.S. government securities, and domestic or
foreign money market instruments.
The Emerging Markets Fund's operating expenses are typically higher than
the expenses incurred by mutual funds that invest exclusively in U.S. equity
securities. Brokerage commissions and custodial fees related to foreign
investments are often higher than those associated with investments in U.S.
securities.
If the U.S. government restricts any type of foreign investment which may
be made by or through the Emerging Markets Fund, the Portfolio's Board of
Trustees will promptly take steps to determine whether significant changes in
the Fund's portfolio are appropriate.
o The Guardian Investment Quality Bond Fund
The Bond Fund seeks a high level of current income and capital appreciation
without undue risk to principal.
The Bond Fund normally invests at least 80% of the value of its assets in
(1) investment grade corporate bonds and other debt obligations and (2) U.S.
government securities and obligations of U.S. government agencies and
instrumentalities. The Bond Fund's assets typically include mortgage-backed and
asset-backed securities. Under normal conditions, at least 65% of the Bond
Fund's total assets will be invested in debt obligations. A debt obligation is a
certificate or evidence of debt. The issuer of a debt obligation promises to pay
interest for a specified period and to repay the debt on a specified date.
Investment grade bonds are secured and unsecured debt obligations which are
either assigned ratings within the four highest rating categories estab-
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lished by nationally recognized statistical ratings organizations ("NRSROs"),
such as Moody's or S&P, or which are deemed by GISC to be comparable to such
securities. Obligations rated Baa by Moody's or BBB by S&P are deemed to be
investment grade, but such obligations are considered more speculative than
obligations that receive higher ratings. Changes in economic conditions or other
circumstances could lessen the ability of the issuers of securities rated Baa or
BBB to make principal and interest payments.
A portion of the Bond Fund's assets may be rated lower than investment
grade, typically when ratings assigned to investment grade debt obligations
acquired by the Fund are downgraded. Low-quality debt is considered to be
predominantly speculative with respect to the issuer's ability to make principal
and interest payments. (See "Risk Considerations.") The Bond Fund is not
required to sell a security automatically when its rating is downgraded below
investment grade. Normally, less than 10% of the Bond Fund's assets will be
invested in such low-quality debt.
The Bond Fund may invest in mortgage-backed securities, such as mortgage
pass-throughs and collateralized mortgage obligations ("CMOs"). A mortgage
pass-through is collateralized by a pool of mortgages that have a common coupon
rate (i.e., interest rate) and maturity. The holders of a particular mortgage
pass-through share the rights to receive interest and principal payments from
the underlying pool of mortgages, net of servicing fees, as payment for debt
service on the pass-through. CMOs are collateralized by pooled mortgage loans
that may not share coupon rate and maturity characteristics, and are sold as
multi-class bonds. CMO classes have different interests in the stream of
interest and principal payments from the underlying pool of mortgages. Hence,
the classes are typically paid sequentially according to the payment structure
of the CMO. CMOs may be issued or guaranteed by the U.S. government and its
agencies or instrumentalities, or by private entities.
Mortgage-backed securities issued by the Government National Mortgage
Association ("GNMA") are backed by the full faith and credit of the U.S.
government. Privately owned, government sponsored agencies like the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC") issue their own guarantees for interest and principal
payments on the mortgage-backed securities and other obligations they issue.
These guarantees are supported only by the issuer's credit or the issuer's right
to borrow from the U.S. Treasury. Accordingly, such investments may involve a
greater risk of loss of principal and interest than other U.S. government
securities since the Bond Fund must look principally or solely to the issuing or
guaranteeing agency or instrumentality for repayment.
Privately issued mortgage-backed securities purchased by the Bond Fund must
be fully collateralized by GNMA certificates, other government mortgage-backed
securities, or by whole loans. Whole loans are securitized mortgage pools backed
by fixed or adjustable rate mortgages originated by private institutions.
Mortgage-backed securities may be more sensitive to interest rate changes
than conventional bonds which can result in greater price volatility. Because
the collateral underlying mortgage-backed securities may be prepaid at any time,
mortgage-backed securities are also subject to greater prepayment risks than
conventional bonds. Accelerated prepayments of mortgage-backed securities
purchased at a premium impose a risk of loss of principal because the premium
may not have been fully amortized when the principal is repaid. Prepayments tend
to accelerate when interest rates decline, so prepaid mortgage-backed security
proceeds are then likely to be reinvested at lower interest rates. The Statement
of Additional Information contains more information about mortgage-backed
securities, including securities known as "interest only" and "principal only"
stripped mortgage securities.
The Bond Fund may also invest in asset-backed securities. Asset-backed
securities, which are structured similarly to mortgage-backed securities, are
collateralized by interests in pools of loans, receivables or other obligations
originated by single or multiple lenders and may use similar credit
enhancements. The underlying assets, which include motor vehicle installment
purchase contracts, home equity loans, credit card receivables and other credit
arrangements,
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are securitized in pass-through structures similar to mortgage pass-throughs or
in pay-through structures similar to CMO's. The Bond Fund may invest in these
and other types of asset-backed securities that may be developed in the future.
One of the principal characteristics which distinguishes asset-backed
securities from mortgage-backed securities is that asset-backed securities
generally do not have the benefit of first lien security interests in the
related collateral. Certain receivables such as credit card receivables are
generally unsecured, and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, certain of which may hinder the right
to receive full payment. Also, the security interests in the underlying
collateral may not be properly transferred when the pool is created, resulting
in the possibility that the collateral may be resold. Some asset-backed
securities may also have prepayment risk due to refinancing of their
receivables. Generally, these types of loans are of shorter average life than
mortgages, but may have average lives of up to 10 years. These securities, all
of which are issued by non-governmental entities, carry no direct or indirect
governmental guarantees.
In addition, the Bond Fund may invest in trust-preferred (or "capital")
securities. These securities, which are issued by entities such as special
purpose bank subsidiaries, currently are permitted to treat the interest
payments as a tax-deductible cost. Capital securities, which have no voting
rights, have a final stated maturity date and a fixed schedule for periodic
payments. In addition, capital securities have provisions which afford
preference over common and preferred stock upon liquidation, although the
securities are subordinated to other, more senior debt securities of the same
issuer. The issuers of these securities retain the right to defer interest
payments for a period of up to five years, although interest continues to accrue
cumulatively. The deferral of payments may not exceed the stated maturity date
of the securities themselves. The non-payment of deferred interest at the end of
the permissible period will be treated as an incidence of default.
At the present time, the Internal Revenue Service treats capital securities
as debt. Proposed legislation may cause this tax treatment to be modified in the
future. In the event that the tax treatment of interest payments of these types
of securities is modified, the Bond Fund will reconsider the appropriateness of
continued investment in these securities.
Some of the Bond Fund's investments may have variable interest rates. When
an instrument provides for periodic adjustments to its interest rate,
fluctuations in principal value may be minimized. However, changes in the coupon
rate can lag behind changes in market rates, which may adversely affect the Bond
Fund's performance.
The Bond Fund also invests in Treasury bills, Treasury notes and Treasury
bonds, all of which are backed by the full faith and credit of the U.S.
government. From time to time, the Bond Fund may also invest up to 10% of its
total net assets in securities of U.S. or foreign companies which are issued and
settled overseas. All such investments will be U.S. dollar-denominated. (See
"Risk Considerations.") The Bond Fund may invest in so-called "Yankee
Securities", which are securities issued by non-U.S. issuers, denominated in
U.S. dollars, and which trade and are capable of settlement in U.S. markets.
Issuers of Yankee Securities may be corporate or government entities.
The Bond Fund may engage in dollar roll and reverse repurchase agreement
transactions when the adviser believes it would be advantageous to do so. In a
dollar roll transaction, the Bond Fund sells mortgage-backed securities for
delivery in the current month and simultaneously contracts to purchase
substantially similar securities on a specified future date from the same party.
In a dollar roll, the securities that are to be purchased will be of the same
type and have the same interest rate as the sold securities, but will be
supported by different pools of mortgages. A fund that engages in a dollar roll
forgoes principal and interest paid on the sold securities during the roll
period, but is compensated by the difference between the current sales price and
the lower forward price for the future purchase. In addition, the Bond Fund
earns interest by investing the transaction proceeds during the roll period.
In a reverse repurchase agreement transaction, the Bond Fund sells
securities to a bank or securities dealer and agrees to repurchase them at an
agreed time and price. During the period between the sale and the
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forward purchase, the Fund will continue to receive principal and interest
payments on the securities sold. The Bond Fund may also receive interest income
similar to that received in the case of dollar rolls.
The Bond Fund will normally use the proceeds of dollar roll and reverse
repurchase agreement transactions to maintain offsetting positions in securities
or repurchase agreements that mature on or before the settlement date for the
related dollar roll or reverse repurchase agreement. The market value of
securities sold under a reverse repurchase agreement or dollar roll is typically
greater than the amount to be paid for the related forward commitment. Reverse
repurchase agreements and dollar rolls involve the risk that the buyer of the
sold securities might be unable to deliver them when the Bond Fund seeks to
repurchase the securities. If the buyer files for bankruptcy or becomes
insolvent, such buyer or its representative may ask for and receive an extension
of time to decide whether to enforce the Fund's repurchase obligation. The Bond
Fund's use of the transaction proceeds may be restricted pending such decision.
Whenever the Bond Fund enters into a dollar roll or reverse repurchase
agreement transaction, it will maintain cash, U.S. Government securities or
liquid, unencumbered securities that are marked to market daily in a segregated
account with the Fund's custodian. The value of such segregated assets must be
at least equal to the value of the forward commitment or repurchase obligation
(principal plus accrued interest), as applicable. Segregating assets may limit
the Bond Fund's ability to pursue other investment opportunities.
Since the Bond Fund will receive interest on the securities or repurchase
agreements in which it invests the transaction proceeds, dollar rolls and
reverse repurchase agreements may involve leverage. However, since the acquired
securities or repurchase agreements must satisfy the Bond Fund's credit quality
requirements and mature on or before the settlement date for the related dollar
roll or reverse repurchase agreement, and because the Fund will segregate assets
as described above, GISC believes that these transactions do not present the
risks associated with other types of leverage. The Bond Fund does not intend to
enter into dollar roll or reverse repurchase agreement transactions other than
as described above, or for temporary or emergency purposes. In addition, the
staff of the Securities and Exchange Commission has taken the position that
dollar roll and reverse repurchase agreement transactions are deemed to be
borrowings within the meaning of the 1940 Act. Although the Bond Fund intends to
engage in such transactions only in the limited circumstances described above,
the use of such transactions will be subject to the Fund's investment limitation
on borrowings, set forth in the Statement of Additional Information, which
limits the aggregate borrowings of the Bond Fund to no more than 33 1/3% of the
value of the Fund's total assets.
The Bond Fund may invest its available cash in repurchase agreements;
commercial paper which is issued in reliance on the "private placement"
exemption from registration afforded by Section 4(2) of the Securities Act of
1933 ("Section 4(2) paper"); and commercial paper which satisfies the Cash
Fund's credit quality requirements. (See "The Guardian Cash Management Fund.")
Additional investment techniques used by the Bond Fund are described under
"Special Investment Techniques."
o The Guardian Tax-Exempt Fund
The Tax-Exempt Fund seeks to maximize current income exempt from federal
income taxes, consistent with preservation of capital. The Tax-Exempt Fund has
adopted a fundamental investment policy to invest at least 80% of its net assets
in a diversified portfolio of investment-grade Municipal Obligations.
Municipal Obligations are securities which are issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies, authorities and
instrumentalities, the interest on which is, in the opinion of bond counsel to
the issuer, exempt from federal income tax. GISC relies on such opinions without
independent verification.
Municipal Obligations are generally issued to obtain funds for public
purposes, such as the construction of highways, bridges, schools, hospitals and
roads. They may also be issued to refinance outstanding obligations, to obtain
funds for general operating expenses, or to provide funds to other
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public institutions and facilities. Certain industrial development bonds issued
by or on behalf of public authorities to build or operate sports arenas,
airports, and pollution control sites are also Municipal Obligations.
Municipal Obligations are classified as general or specific obligation
bonds, revenue bonds and notes. General obligation bonds are secured by the
issuer's full faith, credit and taxing power. Specific obligation bonds and
revenue bonds are payable from the proceeds of a special excise tax or other
specific revenue source. Tax-exempt industrial development bonds are typically
revenue bonds that are guaranteed solely by the corporate entity on whose behalf
they are issued. Notes are short-term obligations which are sold by
municipalities in anticipation of a bond sale, collection of taxes or receipt of
revenues. Notes are issued to meet short-term funding requirements. The
Tax-Exempt Fund is not limited with respect to which category of Municipal
Obligations it may purchase, though it will limit its investments in industrial
development bonds to 20% of its net assets.
The Tax-Exempt Fund primarily invests its assets in intermediate-term
Municipal Obligations, which have an average weighted maturity of 7 to 12 years,
and in long-term Municipal Obligations, which have an average weighted maturity
of 15 to 25 years. The Tax-Exempt Fund does not have percentage limitations on
the amount of its assets to be allocated to each term category. Thus,
substantially all of the Tax-Exempt Fund's assets may be invested in either
intermediate-term or long-term Municipal Obligations at any one time.
Bonds and short-term Municipal Obligations purchased by the Tax-Exempt Fund
must be investment grade when acquired. Municipal Obligations which carry the
lowest investment-grade rating may have some speculative characteristics.
Changes in economic conditions or other circumstances could lessen the ability
of an issuer of such bonds to make principal and interest payments. The
Tax-Exempt Fund's portfolio may include securities that are downgraded after
acquisition. The Tax-Exempt Fund is not required to sell a security
automatically when its rating is reduced below investment grade. Normally, less
than 10% of the Tax-Exempt Fund's assets will be invested in such low-quality
debt. See "Risk Considerations."
The Tax-Exempt Fund may invest more than 25% of the value of its total
assets in Municipal Obligations which pay interest from similar revenue sources
or securities which are offered within a single state. When Municipal
Obligations are related in these ways, an economic, business or political
development which affects one security could also affect the other related
securities. This investment practice may subject the Tax-Exempt Fund to greater
risks than a fund which does not concentrate its assets in this manner.
From time to time, the Tax-Exempt Fund may invest up to 20% of its net
assets in obligations which pay interest that is subject to regular federal
income tax, or in private activity bonds. The interest on private activity bonds
is a tax preference item for the purpose of the federal alternative minimum tax
("AMT"). The AMT is a special tax that applies only to certain taxpayers. If the
Tax-Exempt Fund receives interest which is treated as a tax preference item, a
proportionate share of any exempt-interest dividend which it pays to its
shareholders may be treated as a preference item for those shareholders who are
subject to the AMT. See "Taxes."
The Tax-Exempt Fund may also purchase tax- exempt floating and variable
rate demand notes and bonds. Variable rate demand notes include master demand
notes. Master demand notes are frequently secured by letters of credit or other
credit supports, which are not expected to adversely affect the tax- exempt
status of these obligations. Master demand notes are redeemable at face value,
but there is no established secondary market for them. Accordingly, when these
obligations are not secured, the Tax-Exempt Fund's right to redeem depends on
the borrower's ability to pay principal and interest on demand. GISC
continuously considers the creditworthiness of the issuers of any floating and
variable rate demand obligations in the Tax-Exempt Fund's portfolio to attempt
to minimize this risk. Master demand notes with a demand feature extending for
more than seven days are treated as illiquid securities. See "Special
Investment Techniques."
The Tax-Exempt Fund may also invest in zero coupon securities ("Zeros").
Zeros are issued or sold
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at a steep discount from their face value, and do not pay interest prior to
maturity or a specified redemption date. The market prices of zero coupon
securities generally are more volatile than the market prices of
interest-bearing securities. Accordingly, Zeros are more likely to respond to
interest rate changes than interest-bearing securities having similar maturities
and credit qualities.
The Tax-Exempt Fund may acquire "stand-by commitments" with respect to
Municipal Obligations to facilitate liquidity in its portfolio. The Tax-Exempt
Fund may also purchase tender option bonds and similar securities. (See the
Statement of Additional Information.) Additional investment techniques used by
the Tax-Exempt Fund are described under "Special Investment Techniques."
o The Guardian Cash Management Fund
The Cash Fund seeks as high a level of current income as is consistent with
liquidity and preservation of capital.
To attempt to achieve this objective, the Cash Fund invests in U.S.
dollar-denominated money market instruments which satisfy the credit quality
requirements described below and mature in 13 months or less or which have a
variable rate of interest that is readjusted no less frequently than every 13
months. Such money market instruments include U.S. government securities (such
as agency obligations and U.S. Treasury notes, bills or bonds), commercial
paper, certificates of deposit or bankers acceptances issued by banks or savings
and loan associations, repurchase agreements and other corporate obligations.
The Cash Fund may also invest in unregistered commercial paper which is issued
in reliance on the "private placement" exemption afforded by Section 4(2) of the
Securities Act of 1933 ("Section 4(2) paper"). The Cash Fund may not invest more
than 5% of its total assets in the securities of any one issuer except U.S.
government securities. The Cash Fund maintains a dollar-weighted average
portfolio maturity of 90 days or less.
The Cash Fund may invest up to 25% of its net assets in certificates of
deposit issued by foreign branches of U.S. banks (known as "Euro CDs") and by
U.S. branches of foreign banks (known as "Yankee CDs"), provided that each
issuing bank's net worth is at least $100,000,000. Such investments present
additional and different risks than U.S. obligations, and correspondingly expose
the Cash Fund to risks which are not faced by money market mutual funds which
invest only in domestic obligations. See "Risk Considerations."
In addition, the Cash Fund may invest in other instruments which are fully
secured or collateralized by the types of obligations described above. Such
instruments will generally be limited to repurchase agreements with domestic
branches of domestic banks.
The Cash Fund's investments consist only of obligations that GISC
determines to present minimal credit risks. GISC follows guidelines adopted by
the Portfolio's Board of Trustees to make such determinations, and the Board
receives reports about GISC's adherence to such guidelines. The guidelines
prescribe that the instruments acquired by the Cash Fund be rated within the two
highest short-term ratings categories assigned by the requisite number of
NRSROs, or, if unrated, be deemed by GISC to be of comparable quality.
Instruments or issuers that have received the highest short-term ratings from at
least two NRSROs, or which have received the highest rating from the single
NRSRO assigning a rating, are considered to be "First Tier Securities" under
Rule 2a-7 of the 1940 Act. Such investments may not yield as high a level of
current income as longer term or lower grade investments, which are generally
less liquid and fluctuate more in value.
The Cash Fund intends to invest primarily in First Tier Securities.
However, it may from time to time buy securities that are rated within the two
highest short-term ratings categories, but which are not First Tier Securities.
Such "Second Tier" investments will be limited to no more than 5% of the Cash
Fund's total assets, based on amortized cost, with investments relating to any
one issuer limited to the greater of 1% of total assets or $1,000,000.
The Cash Fund's rate of return will vary with the returns on its portfolio
investments. Although the Cash Fund seeks to maintain a stable NAV of $1.00 per
share, the prices of its portfolio investments typically vary with interest rate
movements. A national credit crisis or the insolvency of an issuer of an
instrument held by the Cash Fund could precipitate
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sufficient price declines to cause the Fund to fail to maintain its stable NAV.
o The Guardian Asset Allocation Fund
The Asset Allocation Fund seeks long-term total investment return
consistent with moderate investment risk. Total investment return consists of
income and changes in the market value of the Asset Allocation Fund's
investments.
The Asset Allocation Fund uses theoretical models to allocate its assets
among the following types of securities: U.S. common stocks and convertible
securities; investment grade corporate debt securities and U.S. government
securities, including mortgage-backed and asset-backed securities; and money
market instruments. GISC may use theoretical models developed and maintained by
a third party, or may use its own models.
The Asset Allocation Fund attempts to achieve its objective by investing
its assets in accordance with its theoretical models. Ordinarily, the Asset
Allocation Fund invests the equity portion of its assets in the Park Avenue
Fund, the debt portion of its assets in the Bond Fund and the cash portion in
the Cash Fund. This is known as a "fund of funds" arrangement. The Asset
Allocation Fund invests in these other Funds by purchasing Class A shares of
those Funds, with a waiver of the sales load. By investing in these other
Portfolio Funds rather than in individual securities, the Asset Allocation Fund
is better able to diversify its holdings. The Asset Allocation Fund may also
invest in individual securities, including, but not limited to, money market
instruments and certain options and futures used in shifting the Asset
Allocation Fund's investments among different sectors, when the investment
adviser believes it is advisable to do so. Prior to May 1, 1997, the Asset
Allocation Fund invested entirely in individual securities. Beginning May 1,
1997, the Asset Allocation Fund implemented a gradual conversion to the fund of
funds arrangement. By investing in the Park Avenue Fund, the Bond Fund and the
Cash Fund, the Asset Allocation Fund is subject to the same risks associated
with direct investment in those Funds.
The distribution of the Asset Allocation Fund's assets among asset classes
fluctuates from a "neutral position" of 60% allocated to the equity class and
40% allocated to the debt class. Shifts are expected to be modest in magnitude
and gradual in occurrence, but there is no limit on the portions of the Asset
Allocation Fund's assets which may be shifted at any one time. Nor does the Fund
have percentage limitations on the amount to be allocated to any asset class.
Accordingly, from time to time, substantially all of the Asset Allocation Fund's
assets may be invested in equity securities, or debt obligations, or money
market instruments. Generally, however, the models provide for the following
ranges: 20% to 80% equity securities; 20% to 70% debt obligations; and 0% to 60%
money market instruments.
The theoretical models evaluate information about the economy, the markets
and other financial and technical factors on a daily basis to provide "signals"
about portfolio allocations. There can be no assurance that allocations among
asset classes made by GISC in response to the signals will result in the most
favorable return to investors. However, by allocating assets among different
classes and adjusting the mix to reflect the models' perceptions of economic and
market trends, it is anticipated that the Asset Allocation Fund's performance
will be less volatile than that of mutual funds which concentrate their
investments in one asset class.
The Asset Allocation Fund may use financial futures contracts and options
on securities or securities indices to reallocate its assets among asset
classes. GISC believes that engaging in these transactions may generally provide
a hedge against changes in market conditions while minimizing the transaction
costs which the Fund can incur when its portfolio is reallocated. For example,
if the Asset Allocation Fund reallocates 10% of its assets from equities to
debt, it might sell stock index financial futures and purchase bond futures.
Because the transaction costs associated with options and futures tend to be
lower than the costs of buying and selling securities, it is expected that using
options and futures may reduce the Asset Allocation Fund's total transaction
costs. The risks associated with engaging in options and futures transactions
and other investment techniques used by the Asset Allocation Fund are described
under "Special Investment Techniques."
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Risk Considerations
The levels and types of risks associated with investing in a Portfolio Fund
generally correspond to the risks associated with the types of investments it
makes. Those risks are generally described throughout this Prospectus and the
Statement of Additional Information. In addition, investors should consider the
risks described below.
Market risk is the chance that an equity security's price will be
influenced by stock market trends, and the risk that a debt obligation's price
will fall as interest rates rise and rise as interest rates fall. Generally, the
prices of bonds with longer maturities fluctuate more than shorter-term bonds
when interest rates change. U.S. government securities, Municipal Obligations
and mortgage-backed and asset-backed securities, like other debt obligations,
are subject to market risk.
Financial or credit risk relates to an issuer's financial condition. In
general, equity securities issued by weakening companies have declining prices,
and there is a higher likelihood that such issuers will fail to make principal
and interest payments under their debt obligations. NRSROs may downgrade the
ratings assigned for such issuers, highlighting their higher credit risk. U.S.
government securities are substantially protected from financial or credit risk.
However, certain agency obligations, while of the highest credit quality, do not
have a direct U.S. government guarantee.
Prepayment risk is the possibility that a debt security will be prepaid (or
"called") prior to its expected maturity date, and that the proceeds could be
invested at lower interest rates. Intermediate-term and long-term bonds
commonly provide call protection, but mortgage-backed and asset-backed
securities can be prepaid whenever their underlying collateral is prepaid. When
a security is called early, the potential for additional appreciation is lost.
If a premium was paid to acquire a called security, there may even be principal
losses. Prepayments occur more frequently when interest rates decline.
Small companies may present greater opportunities for investment return,
but may also involve greater risks. They may have limited product lines,
markets, or financial resources, or may depend on a limited management group.
While the markets in securities of small 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 Fund 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.
A security that is rated lower than investment grade may be somewhat or
predominantly speculative with respect to its issuer's ability to make principal
and interest payments. While lower rated obligations generally offer higher
current yields than higher grade issues, they also involve higher market and
credit risks. Low quality debt can be particularly sensitive to adverse changes
in general economic conditions, the financial condition of its issuer, or
stresses in its issuer's industry.
Securities issued or settled overseas present additional and different
risks to the Portfolio Funds which invest in them. Foreign securities may be
affected by political, social and economic developments abroad. Foreign
companies and foreign financial institutions may not be subject to accounting
standards or governmental supervision comparable to their U.S. counterparts, and
there may be less public information about their operations. Foreign markets may
be less liquid or more volatile than U.S. markets and may offer less protection
to investors. Foreign countries may impose withholding taxes on interest income
from investments in securities issued there, or may enact confiscatory taxation
provisions targeted to certain investors. The time period for settling
transactions in foreign securities may be longer than the time period permitted
for the settlement of domestic securities transactions and there may be
increased risks associated with holding assets in custody abroad. In addition,
as described in the Statement of Additional Information, the market prices for
foreign securities are not determined at the
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same time of day as the NAVs for the Funds that hold such securities. It may be
difficult to obtain and enforce judgments against foreign entities, and the
expenses of litigation are likely to exceed those which would be incurred in the
United States. Investments in foreign securities that are not denominated in
U.S. dollars may be subject to special risks, such as governmental regulation of
foreign exchange transactions and changes in currency exchange rates. Exchange
rates can affect the value of securities and the interest or earnings thereon
irrespective of the performance of such securities.
Investing in emerging markets, while offering the potential of more rapid
share price appreciation and long-term growth than may be available from
investments in more developed markets, also presents a corresponding higher
degree of risk. Emerging markets may be more likely to be subject to political
unrest and economic instability. The result could be nationalization,
expropriation or confiscation of assets, or repatriation of investment capital.
In the event of such governmental actions, a Fund that invests in such markets
could lose the entire value of a particular investment or group of investments
made in a particular market.
Certain emerging market countries have experienced substantial and, in some
cases, rapidly fluctuating rates of inflation for a number of years. Inflation
has, and may continue to have, a debilitating effect on the underlying economies
of these countries. Many emerging market countries are heavily dependent on
international trade and are particularly adversely affected by the imposition of
trade barriers and other protectionist measures, as well as the depreciation or
devaluation of their currencies, relative to the U.S. dollar. Certain currencies
are not free floating against the U.S. dollar, may not be internationally
traded, or may not be freely converted into other currencies. A devaluation or
restriction in the currencies in which a Fund's portfolio securities investments
are made could have an adverse impact on the Fund.
The securities markets in emerging countries may be less developed, and
offer less liquidity and more volatility than the markets of more developed
countries. Such markets have different clearance and settlement procedures and
there may be occasions where settlements are unable to keep pace with the volume
of securities transactions, making it difficult to complete such transactions.
The inability of a Fund to dispose of a particular portfolio security due to
settlement problems may result in the loss of other attractive investment
opportunities or, alternatively, in losses to the Fund due to subsequent
declines in the value of the portfolio security. If a Fund has entered into a
contract to sell the security, settlement problems could result in potential
Fund liability to the purchaser of that security.
The political or economic turmoil within a particular country or market
could also give rise to the possibility that trading of securities within a
particular market could be terminated or severely curtailed, thereby preventing
a Fund from either pricing or transacting in certain portfolio securities. The
1940 Act permits registered investment companies such as the Portfolio, on
behalf of a Fund, to request that the U.S. Securities and Exchange Commission
(the "SEC") make the determination that an emergency exists, thereby permitting
the Fund to suspend redemptions of its shares during the emergency period. In
the event that such circumstances should arise, the Fund would consider applying
to the SEC for a determination that an emergency exists within the meaning of
the 1940 Act. Prior to the receipt of the SEC's determination, portfolio
securities in the affected markets would be priced at fair value as determined
in good faith by or under the direction of the Trustees.
Future federal tax law changes may adversely affect the tax-exempt status
of interest on Municipal Obligations acquired by the Tax-Exempt Fund or of the
exempt-interest dividends paid by that Fund to its shareholders. Opinions
relating to the validity and tax-exempt status of Municipal Obligations are
rendered by the issuer's bond counsel when the obligations are issued. GISC
relies on such opinions without independent verification or update.
Leverage may be involved when more than 100% of a Portfolio Fund's assets
are invested. This can occur when a Fund enters into when-issued or
delayed-delivery transactions. The Portfolio Funds' investment advisers believe
that these transactions do not present the risks associated with other types of
leverage because, as required by SEC rules, the
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Funds segregate cash or liquid high-grade debt securities with the Portfolio's
custodian when using these investment techniques. See "Special Investment
Techniques."
Portfolio turnover rates for the Portfolio Funds are likely to vary from
year to year. Historical portfolio turnover rates for each of the Portfolio
Funds are set forth under "Financial Highlights". A higher portfolio turnover
rate can result in correspondingly greater transaction costs to a Portfolio
Fund, and increase its short-term capital gains or losses. A Portfolio Fund's
turnover rate will not be a limiting factor when its adviser wants to make
portfolio changes.
For the year ended December 31, 1996, the Bond Fund, the Tax-Exempt Fund
and the Asset Allocation Fund each experienced a portfolio turnover rate in
excess of 100%. The Bond Fund's higher portfolio turnover rate was primarily
attributable to GISC's decision to replace certain treasury bonds. The turnover
rate decreased significantly from fiscal year 1995, however, as treasury
securities and corporate bonds were replaced with higher-yielding corporate
bonds and asset-backed securities to a lesser degree than in 1995. The Asset
Allocation Fund's higher portfolio turnover rate was partially attributable to
GISC's decision to replace certain lower yielding debt obligations in the fixed
income portion of the portfolio, and partially due to replacement of short-term
debt instruments as they approached maturity. The Tax-Exempt Fund's higher
portfolio turnover rate was attributable to the ongoing replacement of
short-term commercial paper, and to purchases of larger blocks of Municipal
Obligations in place of smaller blocks of such securities.
Special Investment Techniques
This section describes various investment techniques which may be used to
manage some or all of the Funds' portfolios of investments. The Statement of
Additional Information contains more detailed information about the Portfolio
Funds' investment practices.
o Repurchase Agreements (All Portfolio Funds)
In a repurchase agreement transaction, a Portfolio Fund purchases a debt
security and obtains a simultaneous commitment from the seller (i.e., a bank or
securities dealer) to repurchase that debt security at an agreed time and price,
reflecting a market rate of interest. The repurchase agreement's yield may be
unrelated to the coupon rate or maturity of the underlying security. Repurchase
agreements are fully collateralized (including the interest earned thereon) by
U.S. government securities, bank obligations, cash or cash equivalents, and are
marked-to-market daily during their respective terms. Deposits of additional
collateral may be required from the seller if the market value of a security
that is subject to a repurchase agreement falls below the resale price set forth
in the repurchase agreement. Costs, delays or losses could result if the seller
becomes bankrupt or is otherwise unable to repurchase a security that is subject
to a repurchase agreement. To minimize this risk, the investment adviser
evaluates the creditworthiness of potential repurchase agreement counterparties
pursuant to guidelines adopted by the Portfolio's Board of Trustees, and the
Board periodically receives and reviews information about the creditworthiness
of securities dealers and banks which enter into repurchase agreements with the
Portfolio Funds. No Portfolio Fund will enter into a repurchase agreement which
matures in more than seven days, if, as a result, more than the applicable
portion of its net assets would be invested in illiquid securities. See
"Illiquid Securities and Exempt Commercial Paper."
o Financial Futures Transactions (International, Emerging Markets, Bond,
Tax-Exempt and Asset Allocation Funds)
To attempt to hedge against fluctuations in interest rates or securities
prices, these Portfolio Funds may purchase or sell interest rate futures
contracts and securities index futures contracts (collectively, "financial
futures contracts"). Interest rate futures contracts obligate the long or short
holder to take or make delivery of a specified quantity of a financial
instrument during a specified future period at a specified price. Securities
index futures contracts are similar in economic effect, but they are based on a
specific index of securities (rather than on specified securities) and are
settled in cash. These Portfolio
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Funds may also purchase and write put and call options on financial futures
contracts as an attempt to hedge against market risks.
There are special risks associated with entering into financial futures
contracts. There may be an imperfect correlation between the price movements of
financial futures contracts and the price movements of the securities in which a
Portfolio Fund invests. There is also a risk that a Portfolio Fund will be
unable to close a futures position when desired because there is no liquid
secondary market for it.
The skills needed to use financial futures contracts effectively are
different from those needed to select a Portfolio Fund's investments. If a
Portfolio Fund's investment adviser misjudges the general direction of interest
rates or markets, the Fund's overall performance may be poorer than it would
have been if the Fund had not entered into financial futures contracts. It is
possible that a Portfolio Fund could lose money on a financial futures contract
and also on the price of related securities, adversely affecting the Portfolio
Fund's performance.
The risk of loss in trading financial futures contracts can be substantial
due to the low margin deposits required and the extremely high degree of
leverage involved in futures pricing. A relatively small price movement in a
financial futures contract could have an immediate and substantial impact, which
may be favorable or unfavorable to a contractholder. It is possible for a
price-related loss to exceed the amount of a Portfolio Fund's margin deposit.
The Bond Fund and the Tax-Exempt Fund may only engage in financial futures
transactions on commodities exchanges or boards of trade. A Portfolio Fund will
have the Portfolio's custodian segregate either cash or liquid high-grade debt
securities that are marked-to-market daily to the extent required to comply with
the 1940 Act whenever it engages in futures transactions. Segregating assets may
limit a Portfolio Fund's ability to pursue other investment opportunities.
None of the Portfolio Funds named above will enter into financial futures
contracts for speculative purposes.
o Options Transactions (International, Emerging Markets, Bond, Tax-Exempt and
Asset Allocation Funds)
These Portfolio Funds may purchase or write (sell) options on individual
securities, securities indices and financial futures contracts to attempt to:
(1) reduce the overall risk of their investments; (2) manage foreign currency
exposure (International and Emerging Markets Funds only); (3) protect unrealized
gains; (4) produce additional revenue; or (5) facilitate the sale of portfolio
securities for investment purposes. The Portfolio Funds engage in options
transactions as a hedging technique, and not for speculative purposes. Using
options as a successful hedge depends on the ability of the Funds' investment
advisers to predict pertinent market movements. Incorrect predictions may make
engaging in such transactions riskier to the Portfolio Funds than trading in the
securities which each Portfolio Fund is authorized to buy and sell.
No Portfolio Fund intends to write covered call options on more than 25% of
its net assets; nor write secured put options on more than 25% of its net
assets; nor purchase put and call options if more than 5% of its total assets
are invested in premiums on such options.
Basically, there are two types of options: call options and put options.
The purchaser of a call option acquires the right to buy a security at a fixed
price during a specified period. The writer (seller) of such an option is then
obligated to sell the security if the option is exercised, and bears the risk
that the security's market price will increase over the purchase price set by
the option. The purchaser of a put option acquires the right to sell a security
at a fixed price during a specified period. The writer of such an option is then
obligated to buy the security if the option is exercised, and bears the risk
that the security's market price will decline from the purchase price set by the
option. Options are typically purchased subject to a premium which can reduce
the risks retained by the option writer.
As the writer of a covered call option or the purchaser of a secured put
option, a Portfolio Fund must own securities that can be used to cover or secure
any such outstanding options. Also, when a Portfolio Fund writes a put option,
it must segregate
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with the Portfolio's custodian either cash or liquid, high-grade debt securities
that are marked-to-market daily. The value of such segregated assets must at
least equal the exercise price of the put option. Segregating assets may limit
the Fund's ability to pursue other investment opportunities while options are
outstanding. The cover for a call option that is related to a foreign currency
can be short-term debt securities having a value equal to the option's face that
are denominated in the same currency as the call.
Options transactions can be voluntarily terminated before the exercise or
expiration of the options only by entering into closing transactions. The
ability to close out an option depends, in part, upon the liquidity of the
option market. If a Portfolio Fund cannot close an option when it wants, it may
miss alternative investment opportunities.
Options trade on U.S. or foreign securities exchanges and in the
over-the-counter ("OTC") market. Exchange listed options are three-party
contracts issued by a clearing corporation. They generally have standardized
prices, expiration dates and performance mechanics. In contrast, all the terms
of an OTC option, including price and expiration date, are set by negotiation
between the buyer and seller (e.g., a Portfolio Fund and a securities dealer or
other financial institution). A Portfolio Fund could lose any premium it paid
for an OTC option, as well as any anticipated benefits of the transaction, if
its counterparty fails to perform under the option's terms. To minimize this
risk, the Portfolio Funds' investment advisers consider the creditworthiness of
any counterparties with whom the Funds may engage in OTC options transactions.
However, there can be no assurance that a counterparty will remain financially
stable while an OTC option is outstanding.
Generally, the staff of the SEC currently requires OTC options and any
assets used to cover such options to be treated as illiquid assets because OTC
options may not be actively traded. Until the SEC staff revises this position,
no Portfolio Fund will engage in OTC option transactions if, as a result, more
than the permitted portion of its net assets is invested in illiquid securities.
(See the Statement of Additional Information.)
o Privatizations (International and Emerging Markets Funds)
Certain foreign governments have begun programs intended to privatize all
or part of their interests in government owned or controlled enterprises
("privatizations"). Investment in these enterprises may represent significant
opportunities for capital appreciation and, as such, may be attractive
investments under appropriate circumstances. Participation in privatizations by
foreign investors such as a Portfolio Fund may be limited by local law or
pursuant to terms which may be less advantageous than those offered to local
investors. There can be no assurance that foreign governments will continue to
sell enterprises currently owned or controlled or that privatization programs
will be successful.
o When-Issued or Delayed-Delivery Transactions (Small Cap, International,
Emerging Markets, Bond, Tax-Exempt and Asset Allocation Funds)
In when-issued or delayed-delivery transactions, a Portfolio Fund commits
to purchase or sell particular securities, with payment and delivery to take
place at a future date. Although a Portfolio Fund does not pay for the
securities or start earning interest on them until they are delivered, it
immediately assumes the risks of ownership, including the risk of price
fluctuation. If a Fund's counterparty fails to deliver a security purchased on a
when-issued or delayed-delivery basis, there may be a loss, and the Fund may
have missed an opportunity to make an alternative investment.
Any Portfolio Fund which purchases securities on a when-issued or
delayed-delivery basis must segregate cash or liquid high-grade debt securities
that are marked-to-market daily with the Portfolio's custodian. The value of
such segregated assets must at least equal the Fund's forward commitments. If a
Portfolio Fund sells securities on a delayed-delivery basis, it must hold the
subject securities in a segregated account while the commitment is outstanding.
Segregating cash or securities can limit a Portfolio Fund's ability to pursue
other investment opportunities.
A Portfolio Fund engages in these transactions to acquire securities that
are appropriate for its portfolio while securing prices or yields that appear
attrac-
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tive when the transactions occur. The Portfolio Funds do not engage in these
transactions to speculate on interest rate changes. However, each Fund reserves
the right to sell securities acquired on a when-issued or delayed-delivery basis
before settlement.
o Lending of Portfolio Securities (Small Cap, Bond, Tax-Exempt and Asset
Allocation Funds)
These Portfolio Funds may lend their portfolio securities to securities
dealers, banks or other institutional investors to earn additional income. Such
loans must be continuously secured by collateral, and the loaned securities must
be marked-to-market daily. The Portfolio Funds will generally continue to be
entitled to all interest earned or dividends paid on the loaned securities,
though lending fees may be paid to the borrower from such interest or dividends.
The Portfolio Funds can increase their income through securities lending by
investing the cash collateral deposited by the borrower in short-term
interest-bearing obligations that meet the Funds' credit quality requirements
and investment policies. As with any extension of credit, however, there are
risks of delay in recovery of the loaned securities and collateral should a
borrower fail financially.
No Portfolio Fund will continue to lend securities if, as a result, the
aggregate value of securities then on loan would exceed 33 1/3% of that Fund's
total net assets. A significant portion of a Portfolio Fund's loan transactions
may be with only one or a few institutions at any given time. This practice can
increase the risk to the Fund should a borrower fail.
Apart from lending their securities and acquiring debt securities, the
Portfolio Funds will not make loans to other persons.
o Forward Foreign Currency Transactions (Park Avenue, International, Emerging
Markets and Small Cap Funds)
Forward foreign currency exchange contracts are used to try to manage the
risks associated with changes in exchange rates. A forward foreign currency
exchange contract is an agreement to exchange a specified amount of U.S. dollars
for a specified amount of foreign currencies at a specified future date. GISC or
GBG, as appropriate, generally uses currency exchange contracts to fix definite
prices for securities it has agreed to buy or sell for a Portfolio Fund. These
contracts are also used to hedge a Portfolio Fund's investments against adverse
exchange rate changes. The profitable use of forward foreign currency
transactions depends on the investment adviser's ability to predict changes in
exchange rates between the U.S. dollar and foreign currencies. A Fund may incur
either a gain or loss on these transactions, which require skills that are
different from those needed to select the Fund's investments. While forward
foreign currency transactions may help reduce losses on securities denominated
in foreign currencies, they may also reduce gains on such securities depending
on the actual changes in the subject currencies. No Portfolio Fund will enter
into forward foreign currency transactions for speculative purposes.
o Illiquid Securities and Exempt Commercial Paper (All Portfolio Funds)
Illiquid securities are securities which are not readily marketable at
their approximate value within seven days, or which are not registered under the
Securities Act of 1933 (the "1933 Act") (except as noted below), or which are
otherwise viewed as illiquid by the SEC staff. As noted above, repurchase
agreements which mature in more than seven days, certain variable rate master
demand notes and OTC options are treated as illiquid securities.
The absence of a trading market can make it difficult to ascertain the
value or dispose of illiquid securities, which, in turn, can adversely affect a
Portfolio Fund's ability to calculate its NAV or manage its portfolio. In
addition, if a significant portion of the Cash Fund's assets are or become
illiquid, that Fund may be unable to maintain a stable NAV of $1.00 per share.
The Statement of Additional Information sets forth each Portfolio Fund's upper
limit for investments in illiquid securities.
Securities which qualify under the exemption from registration for resales
to institutional investors provided by Rule 144A under the 1933 Act may be
treated by the Portfolio Funds as liquid, and purchased without regard to the
illiquidity limits set forth in the Statement of Additional Information,
provided that the Fund's adviser determines that
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such paper is liquid under guidelines adopted by the Board of Trustees.
Similarly, the Portfolio Funds typically treat commercial paper which is issued
in reliance on the "private placement" exemption from registration provided by
Section 4(2) of the 1933 Act as liquid. If the institutional markets for such
securities decline when a Portfolio Fund has invested in them, the Fund could
exceed its illiquidity limit.
o Borrowing (All Portfolio Funds)
The Statement of Additional Information sets forth the restrictions on
borrowing adopted for each of the Portfolio Funds.
o Other (All Portfolio Funds)
New financial products and risk management techniques continue to be
developed. Each Portfolio Fund may use these instruments and techniques to the
extent and when consistent with its investment objectives or regulatory and
federal tax considerations.
Management
o The Board of Trustees
The Portfolio's Board of Trustees (the "Board") meets regularly to review
each Portfolio Fund's investments, performance, expenses, and other business
affairs. The Board elects the Portfolio's officers. The Board has nine members.
Five Trustees are not "interested persons" of the Portfolio, as that term is
defined in the 1940 Act. The names and business experience of the Trustees and
officers of the Portfolio are set forth in the Statement of Additional
Information.
o Investment Advisers and Distributor
Guardian Investor Services Corporation
GISC serves as investment adviser and provides certain administrative
services and facilities necessary to conduct the ongoing business of the Park
Avenue, Small Cap, Bond, Tax-Exempt, Cash and Asset Allocation Funds. GISC
selects, buys and sells securities for these Portfolio Funds; chooses brokers
and dealers to effect the transactions; and negotiates any brokerage
commissions. Each of these Portfolio Funds pays GISC an investment management
fee for the services GISC provides. All payments are due on a quarterly basis.
The Portfolio Funds managed by GISC pay investment management fees at an annual
rate of 0.50% of their respective average daily net assets, other than the Small
Cap Fund and the Asset Allocation Fund.
The Small Cap Fund pays GISC an annual advisory fee of 0.75% of average
daily net assets. This management fee is greater than those paid by most mutual
funds. However, the Portfolio's Trustees believe that this fee is reasonable in
light of the nature of the services to be provided for the Fund. Additionally,
the Trustees believe this fee is appropriate in light of the fees charged by
other mutual funds that have investment objectives and policies similar to that
of the Small Cap Fund.
The Asset Allocation Fund is authorized to pay to GISC an annual advisory
fee of 0.65% of average daily net assets. However, as a "fund of funds",
described above under "Investment Objective and Policies", the effective annual
advisory fee paid by shareholders for advisory services is 0.50% of average
daily net assets, as a result of certain undertakings by GISC.
As a fund of funds, the structure of the advisory fee is as follows: First,
the portion of the Asset Allocation Fund's assets invested in other mutual funds
is subject to a proportionate share of the advisory fee paid by each mutual fund
in which the Fund invests. Since the Fund currently may invest in the Park
Avenue Fund, the Bond Fund and the Cash Fund, each of which pays an annual
advisory fee of 0.50% of average daily net assets, shareholders of the Asset
Allocation Fund bear an effective annual fee of 0.50% for assets invested in
those Portfolio Funds. The Fund does not impose any additional advisory fees for
the portion of its assets invested in other mutual funds. In addition, the Asset
Allocation Fund pays GISC a fee of 0.50% annually for the portion of the Fund's
assets that are invested in individual securities. In total, the Asset
Allocation Fund's shareholders are subject to advisory fees at an overall annual
rate of 0.50%. This fee structure is made possible because GISC has agreed,
while the Asset Allocation Fund operates as a fund of funds, to waive 0.15% of
the annual advisory fee which it is authorized to charge the Fund. GISC may only
discontinue this waiver with the approval of the Portfolio's Trustees.
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GISC is located at 201 Park Avenue South, New York, New York 10003. GISC is
wholly owned by GIAC, which is, in turn, wholly owned by Guardian Life, a mutual
life insurance company organized in the State of New York in 1860. GISC is the
investment adviser to three other open-end management investment companies and
one series fund of another open-end management investment company; is the
manager of another open-end investment company; and is the co-adviser of a
separate account of GIAC. GISC is also the principal underwriter and distributor
of all of the Portfolio Funds' shares and of variable annuity and variable life
insurance contracts issued by GIAC. (See the Statement of Additional
Information.)
Guardian Baillie Gifford Limited
and Baillie Gifford Overseas Limited
GBG is responsible for the overall investment management of the portfolios
of the International Fund and the Emerging Markets Fund, and furnishes the Board
with reports and recommendations about the Funds' investment programs. The
International Fund and the Emerging Markets Fund pay GBG annual investment
management fees of 0.80% and 1.00%, respectively, of average daily net assets of
those Portfolio Funds. These management fees are greater than those paid by most
mutual funds. However, the Portfolio's Trustees believe that these fees are
justified by the international scope of the Funds' activities. Additionally, the
Trustees believe these fees are appropriate in light of the fees charged by
other mutual funds that have investment objectives and policies similar to those
of the International and Emerging Markets Funds.
GBG has appointed BG Overseas to be the sub-investment adviser for the
International Fund and the Emerging Markets Fund. One half of the fee paid by
each of those Portfolio Funds to GBG is payable by GBG to BG Overseas as
compensation for the services of BG Overseas as sub-investment adviser to the
Funds. It is important to note that the sub-investment management fees are not
separately or additionally paid by the Portfolio Funds.
GBG is a Scottish investment management company. It was incorporated in
November 1990 by GIAC and BG Overseas. GIAC owns 51% of GBG's voting stock. BG
Overseas owns the remaining 49% of such voting stock. BG Overseas is wholly
owned by Baillie Gifford & Co., and was incorporated in Scotland to manage money
for institutional clients situated outside of the United Kingdom. Baillie
Gifford & Co., which was founded in 1909, manages money for institutional
clients primarily within the United Kingdom. Baillie Gifford & Co. is a Scottish
partnership. Presently, it is one of the largest independently owned investment
management firms in the United Kingdom.
GBG, BG Overseas and Baillie Gifford & Co. are located at 1 Rutland Court,
Edinburgh, EH3 8EY, Scotland. GBG and BG Overseas provide investment management
and advisory services in the manner described above to two series funds within
one other open-end management investment company.
o Portfolio Managers
Charles E. Albers, CFA, Executive Vice President of the Portfolio, has
managed the Park Avenue Fund since its inception in June 1972. Mr. Albers has
served as co-manager of the Small Cap Fund since its inception in May 1997. Mr.
Albers also manages The Guardian Stock Fund, Inc. and the equity assets of
Guardian Life, and is co-portfolio manager of The Guardian Small Cap Stock Fund,
a series of GIAC Funds, Inc. Mr. Albers is a Senior Vice President of Guardian
Life.
Larry Luxenberg, CFA, Vice President of the Portfolio, has shared portfolio
management responsibility for the Small Cap Fund with Mr. Albers since its
inception in May 1997. Mr. Luxenberg has been a securities analyst for Guardian
Life for the last 12 years. Mr. Luxenberg, who is an Assistant Vice President,
Equity Securities for Guardian Life, has not managed a registered management
investment company prior to serving as co-manager for the Small Cap Fund. Mr.
Luxenberg is also a co-manager of The Guardian Small Cap Stock Fund.
R. Robin Menzies, Vice President of the Portfolio, has been primarily
responsible for the geographical diversification of the International Fund's
assets since its inception in February 1993. Investment teams at BG Overseas
make the securities selections for the International Fund. Mr. Menzies provides
similar services to Baillie Gifford
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<PAGE>
International Fund, one of three series funds included in GIAC Funds, Inc. Mr.
Menzies is a Director of BG Overseas and a Partner of Baillie Gifford & Co.
Thomas G. Sorell, CFA, Vice President of the Portfolio, and Howard W. Chin,
Vice President of the Portfolio, are responsible for the portfolio management of
the Bond Fund effective January 1998. Frank J. Jones, Ph.D., President of the
Portfolio, has overall responsibility for the allocation of the Bond Fund's
assets between the various sectors of fixed income securities selected by Mr.
Sorell and Mr. Chin. Mr. Sorell has had sole or shared responsibilities for the
management of the Bond Fund's assets since January 1997. Mr. Sorell has been a
Vice President of Guardian Life since July 1994 and manages a portion of the
fixed income assets of Guardian Life and its subsidiary, GIAC. Mr. Sorell also
manages the fixed income assets of Guardian Asset Management Corporation, a
Guardian Life subsidiary. From December 1993 through July 1994, Mr. Sorell was
Director of Fixed Income for White River Corporation. From April 1993 to
December 1993, he served as Director of Fixed Income for Fund America
Enterprises. Prior thereto, Mr. Sorell served as a Portfolio Manager for AIG
Investment Advisors. Mr. Chin has been a Vice President of Guardian Life since
September 1997, and manages a portion of the fixed income assets of Guardian
Life and GIAC. Mr. Chin has not previously managed a mutual fund. From May 1993
until September 1997, Mr. Chin was Vice President and Senior Mortgage Strategist
at Goldman Sachs & Co. Prior thereto, he was head of Fixed Income Strategy at
Prudential Securities Incorporated.
Alexander M. Grant, Jr., Vice President of the Portfolio, has managed the
Tax-Exempt Fund since December 1993, and the Cash Fund since October 1986. Mr.
Grant also manages The Guardian Cash Fund, Inc. Since February 1993, Mr. Grant
has also been responsible for managing Guardian Life's tax-exempt assets. Mr.
Grant has been a Second Vice President of Guardian Life since January 1997 and
from September 1993 to December 1996 was an Assistant Vice President. Prior to
September 1993 he was an Investment Officer.
Edward H. Hocknell, Vice President of the Portfolio, is primarily
responsible for allocation decisions regarding geographical diversification of
the Emerging Markets Fund's assets. The decisions to buy and sell securities for
the Emerging Markets Fund are made with the help of several investment teams at
BG Overseas which have expertise in specific overseas securities markets. Mr.
Hocknell provides similar services to Baillie Gifford Emerging Markets Fund, a
series of GIAC Funds, Inc., another open-end management investment company. Mr.
Hocknell has served as a Director of BG Overseas since October 1992.
Frank J. Jones, Ph.D., President of the Portfolio, has had overall
responsibility for the allocation of the Bond Fund's assets since January 1997.
Mr. Jones has served as Executive Vice President and Chief Investment Officer of
Guardian Life since January 1994. Prior thereto, he was Senior Vice President
and Chief Investment Officer of Guardian Life.
Jonathan C. Jankus, CFA, Vice President of the Portfolio, is responsible
for the allocation of the assets of the Asset Allocation Fund. Until January
1997, Mr. Jankus shared this responsibility with Mr. Jones. Mr. Jankus has been
a Second Vice President of Guardian Life since March 1995. From January 1994 to
March 1995, Mr. Jankus was Chief Investment Strategist for Global Bonds for
Barclays Investments. Prior thereto, he was a Senior Vice President at Kidder
Peabody & Co.
o Administrative Services Agreement
Pursuant to the Administrative Services Agreement adopted by the Portfolio
Funds on behalf of both classes of shares, GISC provides information and
administrative services for the benefit of the Portfolio and its shareholders.
These services include providing office space, equipment and personnel,
maintenance of shareholder account records, responding to routine shareholder
inquiries regarding the Portfolio and assisting in the processing of shareholder
transactions and any other services which the Portfolio may reasonably request.
GISC may also enter into related agreements with other broker-dealers or other
financial services firms that provide such services and facilities for their
customers who are shareholders of the Portfolio.
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<PAGE>
Each of the Portfolio Funds pays GISC an administrative services fee for
the services that GISC provides. The Park Avenue Fund pays this fee at an annual
rate of 0.25% of the average daily net assets of those fund assets for which a
"dealer of record" has been designated. The other Portfolio Funds pay an
administrative services fee at an annual rate of 0.25% of their respective
average daily net assets. All payments are due on a monthly basis. As a fund of
funds, the Asset Allocation Fund's administrative services fee is assessed by
charging the portion of assets invested in other Portfolio Funds a proportionate
share of those Funds' fees, and charging the Asset Allocation Fund directly for
the portion of its assets invested in individual securities. The overall annual
rate of the fee payable by Asset Allocation Fund shareholders is 0.25%.
o Distribution Plan and Agreement
Under a Distribution Plan adopted by the Portfolio pursuant to Rule 12b-1
under the 1940 Act (the "12b-1 Plan"), each Multiple Class Fund is authorized to
pay a monthly 12b-1 fee at an annual rate of up to 0.75% of average daily net
assets of the Fund's Class B shares as compensation for distribution-related
services provided to the Class B shares of those Funds.
The 12b-1 fees may be paid by the Multiple Class Funds to third parties,
including GISC, which enter into Distribution Agreements with the Portfolio.
Under the 12b-1 Plan, distribution fees may be used to compensate brokers and
dealers who engage in or support the distribution of the Class B shares of the
Multiple Class Funds. The 12b-1 fees may also be used to pay other
distribution-related shareholder servicing expenses incurred, such as
communications equipment charges, the costs of printing sales literature and
advertising and other overhead. The 12b-1 Plan, in conjunction with the CDSL,
permits an investor to purchase Class B shares through a distributor without the
imposition of an initial sales load.
The 12b-1 Plan is not intended to reimburse any third parties which enter
into Distribution Agreements with the Portfolio (including GISC) for specific
expenses incurred in the distribution of the Class B shares. Thus, if a
distributor's expenses exceed the amount of 12b-1 fees collected, the Multiple
Class Funds are not obligated to pay more. Conversely, if the expenses are less
than the amount of 12b-1 fees collected from a Multiple Class Fund, the
distributor is entitled to retain the difference.
In order to effect the 12b-1 Plan, the Portfolio, on behalf of the Multiple
Class Funds, has entered into a Distribution Agreement with GISC. GISC intends
to use these fees to pay for distribution-related shareholder servicing
expenses, and payments to registered representatives for the sale of Class B
shares. GISC also intends to use the 12b-1 fees to advance payments of up to
3.0% of the proceeds of sales of Class B shares to its registered
representatives and other authorized broker-dealers.
The Board receives quarterly reports about the operation of the 12b-1 Plan
and annually considers whether the 12b-1 Plan should be renewed for each
Multiple Class Fund. The 12b-1 Plan may not be amended to increase materially
the amount of the 12b-1 fees to be paid by a Portfolio Fund without the approval
by a majority of the affected Fund's outstanding Class B shares.
The Portfolio has also entered into a Distribution Plan pursuant to Rule
12b-1 under the 1940 Act with GISC on behalf of the Class A shares. At present,
this Plan has been made dormant and no 12b-1 fees are authorized to be paid in
connection with sales of Class A shares. Under this Plan, each Portfolio Fund
would be subject to a fee at the annual rate of up to 0.25% of the average daily
net assets of that Fund's Class A shares to pay for distribution-related
services provided to Class A shares.
o Expenses of the Portfolio Funds
Each Portfolio Fund pays investment advisory and administrative fees,
brokerage commissions, transfer taxes and other fees related to selecting,
buying and selling its investments. Each Portfolio Fund also pays its
proportionate share of the fees and expenses of Trustees who are not "interested
persons" of the Portfolio; auditing and legal fees and expenses; the costs of
printing and mailing reports and other materials to shareholders; bank
transaction charges and custodian's fees; any unreimbursed proxy solicitors'
fees and expenses; SEC filing fees;
36
<PAGE>
any applicable taxes; fidelity bond insurance premiums; costs of shareholder and
Trustees' meetings; and any other extraordinary expenses which may be incurred.
The fees and expenses incurred by the Portfolio Funds and classes within
Funds, where applicable, are set forth as a percentage of each such Portfolio
Fund's average daily net assets in the "Transaction Costs and Fund Expenses"
table.
From time to time and at their discretion, GISC or GBG may voluntarily
assume some or all of the ordinary operating expenses of the Portfolio Funds
which they manage. GISC is assuming expenses that exceed 0.75% of the Bond and
Tax-Exempt Funds' respective average daily net assets, and expenses that exceed
0.85% of the Cash Fund's average daily net assets, through December 31, 1998.
When GISC ceases to subsidize these Portfolio Funds' expenses, the expenses
actually paid by the Funds will increase and returns to shareholders will
correspondingly decrease.
GISC is currently waiving, on an annual basis, 0.15% of the total advisory
fee which it is authorized to charge to the Asset Allocation Fund. This waiver
is intended to remain in effect during any period in which the Asset Allocation
Fund is operating as a "fund of funds" as described under "Investment Objective
and Policies". Termination of this waiver by GISC is subject to approval of the
Portfolio's Trustees.
GISC paid organizational expenses of $16,400 per Portfolio Fund for each of
the International, Bond, Tax-Exempt and Asset Allocation Funds. GISC paid
organizational expenses of $5,500 per Portfolio Fund for the Small Cap and
Emerging Markets Funds. These expenses are now being amortized over a five year
period to end in 1998 for the International, Bond, Tax-Exempt and Asset
Allocation Funds and in 2002 for the Small Cap and Emerging Markets Funds. See
"Portfolio Affiliates and Principal Holders of Fund Shares" in the Statement of
Additional Information.
How to Purchase Shares
Six of the eight series of the Portfolio offer two classes of shares, Class
A and Class B. The two classes represent interests in the same portfolio of Fund
investments, have the same rights and are otherwise identical, except that each
class bears its own distribution costs and may bear certain transfer agency and
other costs attributable to its sales arrangements or unique to its class. The
Class B shares have an active 12b-1 Plan described under "Distribution Plan and
Agreement" above and have exclusive voting rights with respect to the 12b-1
Plan.
Class A shares are sold with an initial sales load and have lower total
operating expenses than Class B shares. However, because an initial sales load
is deducted at the time of purchase, not all funds will be initially invested.
Class A shares may also qualify for either a reduction or waiver of the initial
sales load. Investors who qualify for reduced or waived initial sales loads
should consider the purchase of Class A shares.
Class B shares are sold subject to a contingent deferred sales load and
have higher total operating expenses. Investors who prefer to have all of their
funds initially invested should consider the purchase of Class B shares.
The Portfolio will not accept a purchase order in excess of $250,000 for
Class B shares, and will recommend that such investors purchase Class A shares
of the same Portfolio Fund. Class B shares may not be purchased through payroll
deduction accounts.
Shares of the Portfolio Funds are available through (1) Guardian Life
agents who are registered representatives of GISC and (2) registered
representatives of other selected broker-dealer firms. The "public offering
prices" of the shares of the Portfolio Funds are calculated on each day the NYSE
is open, as of the earlier of 4:00 p.m. Eastern time or the close of trading on
the NYSE (the "Close of Business"). The public offering price per share on any
day is the current NAV plus any applicable sales load. See "Calculation of Net
Asset Values."
GISC may from time to time provide, at its expense, promotional incentives
either to its own registered representatives or to certain dealers whose
registered representatives have sold, or are expected to sell, significant
amounts of the Portfolio Funds.
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<PAGE>
o Minimums
The minimum initial investment for each Portfolio Fund (including any
applicable sales load) is $1,000, and the minimum for additional purchases is
$100. For each payroll deduction plan account, the minimum for initial and
subsequent purchases is $100. These minimums may be changed at any time at
GISC's discretion.
o Purchase Orders
A purchase order consists of the purchase payment and investment
instructions. An initial purchase order must include a properly completed Park
Avenue Portfolio application. (See "Shareholder Services.") Initial purchases
must be made through a registered representative. Subsequent purchase orders may
be sent directly to NFDS, the Portfolio's transfer agent. Checks must be made
payable to the Portfolio. Third party checks endorsed to the Portfolio and money
orders will not be accepted. The purchase price will be the public offering
price next determined after the purchase order is received. Purchase orders that
are received before the Close of Business will be confirmed at the public
offering price determined that day. Registered representatives of GISC and
broker-dealer firms that have entered into selling agreements with GISC are
obligated to transmit orders promptly. Broker-dealer firms other than GISC may
impose a charge for assisting investors in placing purchase orders. Any such
charge would be in addition to the sales load described below. Each Portfolio
Fund and GISC reserve the right to reject any purchase order and to suspend the
offering of a Fund's shares.
o Purchases by Wire
Purchase payments may be wired in federal funds after an investor has
opened an account with a Portfolio Fund. The minimum wire purchase is $1,000.
The wire address is:
State Street Bank and Trust Company
ABA Routing Number 0110-000-28
Boston, Massachusetts 02101;
Attention: Guardian A/C 9904-713-6
[Name of Portfolio Fund];
Account of [Name of Shareholder and
Shareholder Account Number].
The price per share for a wired order will be the public offering price
next determined after the wired funds are received. Information about wiring
federal funds is available at any bank which is a member of the Automated
Clearing House. Each Portfolio Fund reserves the right to charge the investor's
account a fee for this service. The investor's bank may also charge a fee for
wiring federal funds.
o Purchases by Telephone
Purchases may be made by telephone by calling 1-(800)-343-0817 between 9:00
a.m. and 3:00 p.m., Eastern time, on any Business Day. The telephone purchase
order may be made by the investor or the investor's registered representative,
provided that the investor has completed the appropriate item on the Park Avenue
Portfolio application or Shareholder Privilege form, and the investor's bank is
a member of the Automated Clearing House. An investor may also establish the
telephone purchase privilege by sending a written request with a signature
guarantee, together with a voided check for the investor's bank account. The
funds for the telephone purchase will be automatically deducted from the
investor's bank account designated on the application or form. The price per
share for a telephone purchase order will be the public offering price next
determined after the funds are received by GISC, which normally occurs within
two Business Days after the telephone purchase order.
o Class A Shares -- Initial Sales Load Alternative
Class A shares of all of the Portfolio Funds (except the Cash Fund) are
offered at the public offering price, which is NAV per share, plus an initial
sales load. Class A shares of the Cash Fund are offered at NAV.
The sales load on purchases varies with the size of the purchase as shown
in the following table.
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Initial Sales Load on Purchases
of Class A Shares of the Portfolio Funds*
================================================================================
Sales Sales Concession
Load as Load as to Dealers
Percentage Percentage as Percentage
Amount of of Offering of Amount of Offering
Purchase Payment Price Invested Price**
- --------------------------------------------------------------------------------
Less than $100,000 4.50% 4.71% 4.50%
- --------------------------------------------------------------------------------
$100,000 but less
than $250,000 3.75% 3.90% 3.50%
- --------------------------------------------------------------------------------
$250,000 but less
than $500,000 2.75% 2.83% 2.50%
- --------------------------------------------------------------------------------
$500,000 but less
than $1,000,000 2.00% 2.04% 1.80%
- --------------------------------------------------------------------------------
$1,000,000 but less
than $2,500,000 1.00% 1.01% 0.90%
- --------------------------------------------------------------------------------
$2,500,000 but less
than $5,000,000 0.50% 0.50% 0.45%
- --------------------------------------------------------------------------------
$5,000,000 or more None None ***
================================================================================
* There is no sales load on purchases of Class A shares of the Cash Fund.
** GISC may reallow up to 100% of the applicable sales load to certain
dealers. Any dealer who receives 90% or more of the sales load may be
deemed to be an "underwriter" under the 1933 Act.
*** GISC will use its own resources to pay dealers a concession of at least
0.15%.
o Waiver of Initial Sales Load (Purchases at NAV)
Class A shares of the Portfolio Funds may be purchased without an initial
sales load by: (1) Guardian Life, its subsidiaries or any separate account
thereof; (2) present and retired directors, officers, employees, general agents
and field representatives of Guardian Life or its subsidiaries; (3) directors or
trustees and officers of any open-end management investment company within the
Guardian Fund Complex (as defined in the Statement of Additional Information);
(4) the spouses, parents, siblings, children and grandchildren of the
individuals in (2) or (3) above; (5) present and retired directors, trustees,
officers, partners and employees of broker-dealer firms that have written sales
agreements with GISC, and the spouses, parents, siblings, children and
grandchildren of such individuals; (6) trustees or custodians of any employee
benefit plan, IRA, Keogh plan or trust established for the benefit of persons in
(2) or (3) above; (7) employee benefit plans that either (a) invest at least
$1,000,000 in the Portfolio Funds over a period of 13 months, or (b) cover at
least 200 eligible participants; (8) any trust company or bank trust department
which may exercise discretionary investment authority and holds unallocated
accounts in a fiduciary, agency, custodial or similar capacity; (9)
broker-dealers, financial institutions and registered investment advisers which
have entered into an agreement with GISC providing for the sale of Portfolio
Fund Class A shares to the clients of such entities participating in a "wrap
account" or similar program under which clients pay an account management fee or
transaction fee to such entity; and (10) the Asset Allocation Fund, when making
purchases during periods when it operates as a "fund of funds", as described in
this Prospectus.
Generally, sales commissions are not paid when shares are purchased without
a sales load. However, GISC may pay a sales concession to a broker-dealer firm
or GISC registered representative in an amount not to exceed 0.50% of the amount
invested for the sale of Portfolio Fund Class A shares (except Cash Fund shares)
which are purchased at net asset value by employee benefit plans which fall
within category (7) above.
GISC requires anyone who may be eligible to purchase Class A shares without
a sales load to complete an NAV purchase certification form. This form is
available through registered representatives, or by calling 1-800-221-3253.
Shares purchased under this privilege can only be resold through redemption by
the issuing Portfolio Fund. This privilege may be modified or withdrawn at any
time and without notice.
o Class B Shares -- Contingent Deferred
Sales Load Alternative
Class B shares of the Multiple Class Funds are offered at the next
determined NAV, and no initial sales load is imposed. However, a contingent
deferred sales load or "CDSL", may be imposed upon the redemption of Class B
shares held for six years or less. When redeeming Class B shares, a shareholder
authorizes the Portfolio's Transfer Agent to redeem an additional amount of
shares sufficient to cover the CDSL. The CDSL will be imposed on the lesser of
(1) the original purchase price of the shares or (2) the current value of the
shares being redeemed. Amounts representing an increase in value of Class B
shares since the date of purchase, and Class B shares acquired through the
reinvestment of dividends or
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<PAGE>
capital gains distributions, are not subject to a CDSL. The CDSL on redemptions
of Class B shares decreases over time as shown in the following table.
Contingent Deferred Sales Load on Class B
Shares of the Portfolio Funds
================================================================================
Year Since CDSL as a Percentage of Amount
Purchase Redeemed Subject to Charge
- --------------------------------------------------------------------------------
First Year 4.0%
Second Year 3.5%
Third Year 3.0%
Fourth Year 2.0%
Fifth Year 1.5%
Sixth Year 1.0%
Thereafter None
================================================================================
If the redemption request plus any applicable CDSL exceeds the
shareholder's current Class B share account balance, it will be treated as a
redemption in full, thereby reducing the amount of the net proceeds payable to
the shareholder. In determining the CDSL applicable to a redemption, it will be
assumed that the redemption is made first of shares acquired pursuant to
dividend reinvestments and distributions and then of shares held by the
shareholder for the longest period of time. This will result in the imposition
of a CDSL at the lowest possible rate. For federal tax purposes, the amount of
the CDSL will reduce the gain or increase the loss, as the case may be, realized
on the redemption.
o CDSL Waivers
The CDSL will be waived for exchanges into the Class B shares of the other
Multiple Class Funds, including exchanges into Class B shares of the Cash Fund.
In addition, the CDSL will be waived for a total or partial redemption made
within one year of the death of the shareholder. The CDSL waiver is available
when the decedent is either the sole shareholder or owns the shares with his or
her spouse as a joint tenant with the right of survivorship. This waiver is
applicable only to redemptions of shares held at the time of death.
How to Redeem Shares
o General Information
Shares of any of the Portfolio Funds may be redeemed at the NAV next
calculated after a proper redemption request has been received. For Class B
shares, a CDSL may be imposed at the time of such redemption, if applicable.
Such requests may be made in writing, by telephone or, for the Class A shares of
the Cash Fund only, by check. However, shares held in certificate form or
qualified retirement plan accounts may only be redeemed by written request.
Redemption proceeds will normally be paid within three business days of the
receipt of a redemption request. The Portfolio Funds may delay sending
redemption proceeds for shares purchased by check until such check has been
cleared for payment. This may take up to 15 days. Also, a Portfolio Fund may
postpone payments or suspend redemptions: when the NYSE is closed (besides
weekends and holidays); when trading on the NYSE is restricted; when an
emergency makes it not reasonably practicable for the Fund to sell assets or
calculate its NAV; or as permitted by the SEC. As and when permitted under SEC
rules, a Portfolio Fund may, for example, postpone payments or suspend
redemptions when significant portions of its assets could be affected by
simultaneous redemption and/or exchange requests. At such times, a Portfolio
Fund may restrict or refuse redemption or exchange requests. See "Exchanges."
A Portfolio Fund's NAV can fluctuate from day to day, so the redemption
price may be higher or lower than original cost.
o Redemption by Wire
Redemption proceeds may be wired to a predesignated bank account if the
shareholder has completed the authorization on the Park Avenue Portfolio
application or Shareholder Privilege form. The minimum amount that may be
redeemed by wire is $1,000 or, if less, the entire Portfolio Fund's account
balance. (See "Shareholder Services.") The receiving bank must be a member of
the Automated Clearing House. Each Portfolio Fund reserves the right to charge
shareholders for wire redemptions. NFDS will deduct any charges that it may
assess for wire redemptions from the account from which shares are redeemed.
Applicable taxes are withheld from redemption proceeds, as and when required.
See "Taxes".
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<PAGE>
o Written Redemption Requests
Written redemption requests sent by regular U.S. mail should be addressed
to:
NFDS [Name of Portfolio Fund]
P.O. Box 419611
Kansas City, MO 64141-6611.
Registered, certified or express mail should be sent to:
NFDS [Name of Portfolio Fund]
1004 Baltimore Avenue, Floor DW-05
Kansas City, MO 64105-2112.
Certificates for any shares being redeemed must be properly endorsed and
delivered with the written redemption request.
o Signature Guarantee Requirements
Shareholder signatures on written redemption requests must be guaranteed
when: (1) the request is for $50,000 or more; (2) the request is made by a
shareholder who is not a natural person; or (3) the proceeds are to be made
payable or mailed to a payee or address that is not reflected on the account
records. Signature guarantees can be obtained from most banks, broker-dealer
firms, credit unions or other financial institutions, but not from a notary
public. Signature guarantees are not typically required for redemptions by check
from the Cash Fund or pursuant to an automatic withdrawal plan. See "Redemption
by Check" and "Automatic Withdrawal Plan."
o Telephone Redemption Requests
Shares of a Portfolio Fund which are worth at least $1,000 may be redeemed
by calling NFDS at 1-800-343-0817 before the Close of Business as defined in
"How to Purchase Shares", above. NFDS will not accept telephone redemption
requests after the Close of Business.
Redemption by telephone is available only if the shareholder has elected
this privilege and an appropriate authorization is on file at NFDS. New
investors may authorize the telephone redemption privilege on the Park Avenue
Portfolio application. Current shareholders can complete the applicable item on
the Shareholder Privilege form and submit the form directly to NFDS. Signatures
on the Shareholder Privilege form must be guaranteed by an eligible guarantor
institution to authorize the telephone redemption privilege. Redemption by
telephone is not available for qualified retirement plan accounts or for shares
for which certificates have been issued.
Callers are asked to provide precise information about the account from
which shares will be redeemed and other identifying information. The $1,000
minimum redemption requirement will be waived for shareholders who close out
accounts via telephone. Telephone redemption instructions may be accepted from
any caller who can provide the requested information. Shareholders risk possible
loss of principal, interest and capital appreciation in the event of
unauthorized or fraudulent telephone redemption instructions.
The Portfolio Funds, GISC, GBG, BG Overseas, NFDS and State Street Bank and
Trust Company shall not be liable for any loss, damage, cost or expense
resulting from following the foregoing procedures to implement telephone
redemption instructions which any of them reasonably believed to be genuine. If
the procedures are not followed, however, one or more of such parties may be
liable for losses related to following fraudulent instructions. Telephone
redemption requests are typically recorded, and such recording may be made
without prior disclosure to the caller.
During periods of drastic economic or market changes, it may be difficult
to contact NFDS to request a telephone redemption. If this occurs, written
redemption requests can be sent to NFDS by regular or express mail or through a
broker-dealer firm.
The telephone redemption privilege may be suspended, modified, withdrawn or
made subject to a charge at any time following at least 7 days' notice to
shareholders.
o Redemption by Check (Cash Fund only)
Class A shareholders of the Cash Fund may redeem shares by writing checks
against their Cash Fund accounts. The minimum payable amount is $250 per check.
Shares are redeemed to pay a check on the day that the check is presented for
payment. A shareholder will continue to receive dividends on such shares until
then. The Cash Fund will not honor checks which are payable in amounts
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<PAGE>
that exceed a Cash Fund shareholder's account balance. Such checks will be
returned without payment, and marked "Insufficient Funds." Any check written for
less than the $250 minimum will also be returned to the shareholder as
unpayable, regardless of the value of the shareholder's Cash Fund account.
Currently, there is no fee for writing checks. Since the value of a
shareholder's Cash Fund account changes daily and may not be determined in
advance, a shareholder should not attempt to close a Cash Fund account by
writing checks.
Checkwriting privileges are not available to Cash Fund shareholders who
purchase shares for qualified retirement plan accounts.
The Cash Fund, GISC and State Street Bank reserve the right to modify or
withdraw the checkwriting privilege at any time, or to impose a service charge
for this privilege.
o Repurchase by Broker-Dealer Firms
on Behalf of Shareholders
Shareholders may communicate repurchase requests through GISC or
broker-dealer firms that have entered into selling agreements with GISC. GISC
does not charge a fee for repurchases, but other broker-dealer firms may charge
for this service. Broker-dealer firms are obligated to transmit orders promptly.
The repurchase price will be the NAV next determined after receipt of the
request. Repurchase requests received before the Close of Business will be
priced at the NAV computed that day. The offer to repurchase may be suspended or
discontinued at any time. Repurchases are subject to the same general
requirements set forth in this Prospectus for other redemptions.
o Minimum Account Balance
A Portfolio Fund may close a shareholder's account if the account balance
falls below $1,000 for any reason other than market factors. Exchanges among
Portfolio Funds may cause an account balance in a Fund to fall below $1,000, as
shares of one Fund are redeemed to purchase shares of another. (See
"Exchanges.") A shareholder will be notified and given at least 30 days to
increase an account balance to at least $1,000 before the account is closed. A
shareholder account opened in connection with an Automatic Investment Plan,
Dollar Cost Averaging program, qualified retirement plan or payroll deduction
plan is not subject to the minimum account balance requirement.
o Reinstatement Privilege
A shareholder who has redeemed shares may reinvest as much as the
redemption amount at NAV. Shareholders who wish to reinstate Class B shares will
receive pro rata credit for any CDSL paid in connection with the redemption of
the Class B shares. This privilege can be used by a shareholder only once, and
the reinvestment must be effected within 30 days of the redemption date. NFDS
must be notified in order to take advantage of this privilege. Reinstatement
will be at the NAV next calculated after receipt.
The federal income tax status of a gain realized on a redemption will not
be affected through the reinstatement privilege, although the effects of a loss
may be lessened or nullified by reinvestment in the same series.
Special Purchase and Redemption Plans
The Portfolio Funds offer four special purchase and redemption plans. The
Portfolio Funds may modify or withdraw any of these plans at any time and
without notice, or charge participating shareholders fees to cover
administrative costs. These special plans are not available to anyone who owns
Park Avenue Fund shares through a Value Guard variable annuity contract. For
further information on any of these plans, call the Portfolio's transfer agent
toll free at 1-800-343-0817.
o Automatic Investment Plan
Under an Automatic Investment Plan, money is withdrawn each month from a
shareholder's predesignated bank account for investment in the Portfolio Funds.
The minimum investment is $100 per Portfolio Fund. A shareholder must make an
initial investment of at least $50 in each receiving Portfolio Fund and invest
at least $1,000 in each such Fund during each 12-month period that his or her
automatic investment plan is in effect. By investing the same dollar amount each
month, a shareholder will purchase more shares when a Port-
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folio Fund's NAV is low and fewer shares when the NAV is high. This means that
the shareholder's average purchase price per share can be lower than if he or
she purchased the same total number of shares in a single transaction. While
periodic investing can help build significant savings over time, it does not
assure a profit or protect against loss in a declining market.
An investor must complete the appropriate item on the Park Avenue Portfolio
application or Shareholder Privilege form to establish an automatic investment
plan, and his or her bank must be a member of the Automated Clearing House. The
shareholder may revoke the plan at any time, but it may take up to 15 days from
the date notice is received to terminate the plan. Any purchases of Portfolio
Fund shares made during this period shall be considered authorized. If an
automatic withdrawal cannot be made from the shareholder's predesignated bank
account to provide funds for automatic share purchases, the shareholder's plan
will be terminated.
o Rights of Accumulation
A shareholder can aggregate proposed purchases of Portfolio Fund shares
with current holdings to reduce the initial sales load that would otherwise
apply to the new purchases. Shares held in the name(s) of the shareholder's
spouse or minor children can be included in the aggregated amount, as may any
shares acquired for which a sales load may be applicable (e.g., Class B shares).
Shares acquired without a sales load (e.g., shares acquired through the
reinvestment of dividends or distributions or Cash Fund purchases) are not
includible. To exercise accumulation rights, a shareholder must notify NFDS or
GISC that a purchase will qualify for a reduced initial sales load, and provide
the names and account numbers of any family members whose holdings are to be
aggregated for this purpose.
o Investment by Letter of Intent
An investor who intends to invest $100,000 or more over a period of 13
months can reduce the initial sales load on each of his or her intended
purchases by completing the letter of intent item on the Park Avenue Portfolio
application or Shareholder Privilege form. The sales load charged for each
purchase will be at the reduced rate which would apply to a single investment in
the intended aggregate amount. Current holdings of both classes of shares and
shares held in the name(s) of the shareholder's spouse or minor children can be
used as an accumulation credit towards the completion of a letter of intent, but
shares not otherwise subject to a sales load (e.g., shares acquired through the
reinvestment of dividends or distributions or purchases of Class A shares of the
Cash Fund) are not eligible for accumulation credit. If an investor executes a
letter of intent within 90 days of a prior purchase of one of the Portfolio
Funds (other than The Guardian Cash Management Fund), the prior purchase may be
included under the letter of intent and an appropriate adjustment, if any, with
respect to the sales charges paid by the investor in connection with the prior
purchase will be made, based on the then-current net asset value(s) of the
relevant Fund(s).
A letter of intent does not bind the shareholder to purchase the entire
intended amount, but the shareholder must complete his or her intended
investment to remain eligible for the reduced sales load. NFDS will escrow
shares valued at 5% of the intended investment to assure payment of additional
sales loads if the intended purchases are not made and the shareholder fails to
pay the additional sales load within 20 days after NFDS requests payment.
Escrowed shares that are not needed to pay additional sales loads will be
released from escrow.
o Automatic Withdrawal Plan
A shareholder who owns shares of a Portfolio Fund which are worth at least
$10,000 may arrange for monthly, quarterly, semi-annual or annual redemptions of
a predesignated amount from his or her account. The minimum withdrawal amount is
$100. Payment may be made to the shareholder, a predesignated bank account or to
another payee. Under this plan, sufficient shares are redeemed from the
shareholder's Portfolio Fund account(s) in time to either send a check in the
amount requested on or about the first day of a month, or to be wired to a
predesignated bank account. If the wire option is chosen, the receiving bank
must be a member of the Automatic Clearing House. No CDSL with respect to Class
B shares of a Multiple Class Fund will be imposed on with-
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drawals made under the plan, provided that the amounts withdrawn do not exceed
on an annual basis 10% of the account value at the time the shareholder
establishes an automatic withdrawal plan. Redemptions under the automatic
withdrawal plan will reduce and may ultimately exhaust the value of the
designated Portfolio Fund account(s). Taxable gains or losses may be realized
when shares are redeemed under the automatic withdrawal plan.
Purchasing additional shares concurrently with automatic withdrawals is
likely to be disadvantageous to the shareholder because of tax liabilities and
sales loads. Consequently, the Portfolio Funds will not normally accept
additional purchase payments in single amounts of less than $5,000 from a
shareholder who has this plan in effect. Any charges made by NFDS to operate an
automatic withdrawal plan will be assessed against the shareholder's account(s)
when each withdrawal is effected.
An investor must complete the applicable item on the Park Avenue Portfolio
application or Shareholder Privilege form to establish an automatic withdrawal
plan. Forms must be properly completed and received at least 30 days before the
first payment date. An automatic withdrawal plan may be terminated at any time,
by notice from the shareholder, GISC, NFDS or the Portfolio Funds.
Exchanges
These privileges are not available to anyone who owns Park Avenue Fund
shares through a Value Guard variable annuity contract.
o General Information and Procedures
Shares of each Portfolio Fund may be exchanged for shares of the
corresponding class of any other Portfolio Fund. Exchanges are effected by
redeeming shares of one Portfolio Fund and purchasing shares of another
designated Portfolio Fund with the redemption proceeds. No sales load is imposed
on the shares to be acquired if a load was paid when the exchanged shares were
originally purchased, or if the exchanged shares were acquired through the
reinvestment of dividends or distributions declared by a Portfolio Fund. For
federal income tax purposes, an exchange involves a sale upon which taxable
gains or losses may be realized.
While no CDSL is imposed on the shares being redeemed as part of an
exchange, a CDSL may apply at the time the shares acquired as part of an
exchange are redeemed. Any applicable CDSL payable upon the redemption (without
an exchange) of the Class B shares received as part of the exchange will be
calculated from the date Class B shares are originally purchased, rather than
from the date such shares are exchanged for shares of another Fund. Shares
purchased without a sales load (e.g., Class A Cash Fund shares) may be exchanged
for shares of other Class A Funds, but any applicable sales load must be paid to
acquire shares of another Portfolio Fund through the exchange. All exchanges are
subject to the conditions and considerations described under "How to Purchase
Shares" and "How to Redeem Shares".
Class B shares of the Multiple Class Funds will automatically convert to
Class A shares of the same Fund approximately eight years after the anniversary
of purchase, together with any additional Class B shares representing dividend
reinvestments and distributions. Following their conversion, the shares will be
subject to the lower expenses borne by Class A shares.
Exchanges are effected at the relative NAVs for each Portfolio Fund next
determined after the exchange request is received. Shares may not be exchanged
until after the settlement date for their purchase. Neither GISC nor the
Portfolio Funds presently assess fees or charges in connection with exchanges,
but nominal exchange fees may be charged in the future.
Shareholders may request exchanges in writing or by telephone. A
shareholder may also initiate an exchange by contacting his or her registered
representative. Broker-dealer firms other than GISC may charge for their
assistance in effecting exchange transactions. Any share certificates held by
the shareholder must be properly endorsed and deposited before an exchange will
be effected.
Telephone exchange privileges can be elected by completing the applicable
item on the Park Avenue Portfolio application or Shareholder Privileges form or
by contacting NFDS. NFDS will not honor telephone exchange requests unless an
authorization is on file.
Callers who request exchanges by telephone are asked to provide precise
information about the
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<PAGE>
account from which shares will be exchanged and other identifying information.
Telephone exchange requests may be accepted from any caller who can provide the
requested information. Shareholders risk possible loss of principal, interest
and capital appreciation in the event of unauthorized or fraudulent telephone
exchange requests.
The Portfolio Funds, GISC, GBG, BG Overseas, NFDS and State Street Bank and
Trust Company shall not be liable for any loss, damage, cost or expense
resulting from following the foregoing procedures to implement telephone
exchange instructions which any of them reasonably believed to be genuine. If
the procedures are not followed, however, one or more of such parties may be
liable for losses related to following fraudulent instructions. Telephone
exchange requests are typically recorded, and such recording may be made without
prior disclosure to the caller.
During periods of drastic economic or market changes, it may be difficult
to contact NFDS to request a telephone exchange. If this occurs, written
exchange requests can be sent to NFDS by regular or express mail.
This Prospectus describes the respective investment objectives and policies
of the Portfolio Funds and should be carefully reviewed prior to instituting an
exchange.
Exchange privileges may be modified or withdrawn at any time, upon at least
60 days' notice when such notice is required by SEC rules.
o Right to Reject Purchase Orders and Exchange Requests
Purchases and exchanges of Portfolio Fund shares should be made for
investment purposes only. The Portfolio Funds and GISC each reserve the right to
reject or restrict any specific purchase order or exchange request. In the event
that a Fund or GISC rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed. The Funds are not designed for
professional market timing or for use by entities using programmed or frequent
exchanges. Such exchange activity can have a disruptive effect on the operations
of a Fund to the detriment of shareholders generally. In addition to the rights
reserved above, the Portfolio Funds and GISC each reserves the right to impose
specific limitations with respect to any shareholder or market timer (whether an
individual or organization acting on behalf of one or more individuals),
including (1) limiting the number of exchanges permitted within a specified
period of time and (2) specifically rejecting or otherwise restricting purchase
orders or exchange requests.
o Dollar Cost Averaging
A shareholder may have predesignated dollar amounts of $100 or more
automatically exchanged (or transferred) among Portfolio Funds of the
corresponding class on a monthly or quarterly basis. Before automatic exchanges
begin, a shareholder must either have: (1) a balance of at least $1,000 in both
the originating and the receiving Portfolio Funds; or (2) a balance of at least
$5,000 in the originating Portfolio Fund.
By regularly transferring the same dollar amount, a shareholder will
acquire more shares when a receiving Portfolio Fund's NAV is low and fewer
shares when that Fund's NAV is high. This means that the shareholder's average
price per share can be lower than if he or she acquired the same number of
shares of the receiving Portfolio Fund in a single exchange transaction.
However, periodic investing through automatic exchanges does not assure a profit
or protect against loss in a declining market.
The other general rules and considerations governing exchanges also apply
to automatic exchanges effected under the Dollar Cost Averaging program,
including tax considerations.
Calculation of Net Asset Values
A Portfolio Fund's NAV is determined as of the Close of Business by
subtracting the Fund's liabilities, including expenses which are accrued daily,
from its total assets and dividing the result by the total number of shares
outstanding.
Each Portfolio Fund values its assets at their current market value when
market quotations are readily available. If a market value cannot be
established, assets are valued at fair value as determined in good faith by or
under the direction of the Portfolio's Board of Trustees. Short-term securities
which mature in 60 days or less and all of the assets of the
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Cash Fund are valued by using the amortized cost method, unless the Board
determines that this does not represent fair value. All investments by the
International Fund and the Emerging Markets Fund, and any investments by the
Park Avenue and Small Cap Funds in foreign non-dollar denominated securities,
are valued daily in U.S. dollars based on the then prevailing exchange rate.
Specific information about how the Portfolio Funds value certain assets is set
forth in the Statement of Additional Information.
Performance Results
From time to time, the Portfolio Funds may provide performance information
in advertisements, sales literature or materials furnished to existing or
prospective shareholders. All such information is based upon historical earnings
and is not necessarily representative of future performance. More detailed
information about the calculation of each Portfolio Fund's performance appears
in the Statement of Additional Information.
o Total Returns
Both average annual total return and total return reflect the change in the
value of an investment in a Portfolio Fund over a specified period, assuming the
reinvestment of all income dividends and capital gains distributions. Average
annual total returns show the average change in value for each annual period
within a specified period. Total returns, which are not annualized, show the
total percentage change in value over a specified period.
Promotional materials relating to a Portfolio Fund's investment performance
will always at least provide the average annual total returns for short (1 to 4
years), medium (5 to 9 years) and long periods (10 years or more), or the life
of such Portfolio Fund, if shorter. Such required average annual total returns
will reflect the effects of all recurring and non-recurring charges, as well as
the maximum initial sales load paid when shares are purchased. However, the
Portfolio Funds may also show average annual total returns and total returns
which do not reflect the effects of the sales load.
o Yields
Yields may be quoted for the Bond, Tax-Exempt and Cash Funds. Current yield
is a measure of the net investment income earned on a hypothetical investment
over a specified base period of seven days for the Cash Fund and 30 days (or one
month) for the other Funds which may advertise yields. Yield is expressed as a
percentage of the value of a share at the beginning of the base period. Yields
are annualized, which means that they assume that a Portfolio Fund will generate
the same level of net investment income over a one year period. However, yields
actually fluctuate daily.
The Tax-Exempt Fund may quote its tax equivalent yield, which will be based
on the maximum federal income tax rate then in effect.
The Cash Fund may also quote its "effective yield," which assumes that the
net income earned during a base period will be earned and reinvested for a year.
The effective yield will be slightly higher than the Cash Fund's current yield
due to the compounding effect created by assuming reinvestment of the Fund's net
income.
o Distribution Rates
On occasion, the Bond and Tax-Exempt Funds may quote historical or
annualized distribution rates. A distribution rate is simply a measure of the
level of income dividends and short-term capital gains distributed for a
specified period. A distribution rate is not a complete measure of performance,
and may be higher than yield for certain periods.
o Comparative and Other Information
Advertisements and sales literature for the Portfolio Funds may compare the
Funds' performance to that of other investment vehicles or other mutual funds
having similar investment objectives or programs. Promotional materials may also
compare a Portfolio Fund's performance to one or more indices of the types of
securities which the Fund buys and sells for its portfolio, and be illustrated
by tables, graphs or charts. Promotional materials may additionally contain
references to types and characteristics of certain securities; features of a
Portfolio Fund's portfolio; financial markets; or historical, current or
perceived economic trends within the United States or overseas. Topics of
general investor interest, such as personal financial planning, may also be
discussed.
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In addition, advertisements and sales literature may refer to or reprint
all or portions of articles, reports, statistical information, or independent
rankings or ratings which relate to the Portfolio Funds specifically, or to
other comparable mutual funds or investment vehicles. None of the contents of
such materials will be used to indicate future performance.
Further information about each Portfolio Fund's performance is contained in
the Portfolio's Annual Report, which may be obtained from GISC free of charge.
Dividends and Distributions
Each Portfolio Fund distributes substantially all of its net realized
capital gains and net investment income to its shareholders. A capital gain or
loss is the difference between the purchase and sale prices of a security. The
Portfolio Funds will have net capital gains if their capital gains exceed their
capital losses, which cannot be assured. Net investment income is determined by
subtracting expenses from any interest and dividend income earned by a Portfolio
Fund. When computing interest income, the Portfolio Funds do not amortize
premiums or accrue discounts on long-term debt securities, except as required
for federal income tax purposes.
All of the Portfolio Funds (except the Cash Fund) distribute any net
realized short and long-term capital gains at least annually. The Cash Fund
distributes any short-term gains monthly. It is not expected that the Cash Fund
will realize any long-term capital gains.
The Park Avenue, Small Cap, International, Emerging Markets and Asset
Allocation Funds distribute any net investment income to their shareholders
twice a year. The Bond, Tax-Exempt and Cash Funds declare dividends daily and
distribute any net investment income to their shareholders monthly.
Each Portfolio Fund pays its dividends and other distributions in
additional Fund shares at NAV unless the shareholder requests cash payments.
Shareholders who wish to receive dividends and/or other distributions in cash
should contact their registered representatives or complete the applicable item
on the Park Avenue Portfolio application or Shareholder Privilege form.
Dividends and/or other distributions in amounts of less than $10 will
automatically be reinvested in additional shares of the Portfolio Fund.
Taxes
Each Portfolio Fund is separate for investment and accounting purposes and
will be treated as a separate entity for federal income tax purposes. Each
Portfolio Fund intends to continue to qualify as a regulated investment company
under the Internal Revenue Code so that it will not be subject to federal income
taxes on net investment income and net capital gains distributed to its
shareholders.
o Taxes on Redemptions
When shares of any of the Portfolio Funds are redeemed, including by
exchange into another Portfolio Fund, a shareholder may realize a taxable gain
or a loss. The gain or loss is measured by the difference between the redemption
proceeds and the shareholder's adjusted basis for the redeemed shares.
o Taxes on Portfolio Fund Distributions
The following summary does not apply to accounts that are opened for
qualified retirement plans or by tax-exempt investors. Taxes on Portfolio Fund
distributions to qualified retirement plan accounts are deferred until money is
withdrawn from those accounts. This summary also does not apply to
exempt-interest distributions from the Tax-Exempt Fund. Information about
exempt-interest distributions from the Tax-Exempt Fund appears separately below.
Dividends and capital gains distributions from the Portfolio Funds are
taxable whether received in cash or additional Fund shares. If such dividends
and distributions are declared in October, November or December, they are
taxable for the year in which they were declared, if paid by February 1 of the
following calendar year. Net investment income dividends and short-term capital
gains distributions are taxable as ordinary income. Long-term capital gains
distributions are taxable at a maximum federal income tax rate of 20% or 28% for
individual shareholders, depending on how long the asset was held by a Portfolio
Fund. A capital gains distribution is short-term or long-
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term depending on how long the Portfolio Fund held the securities that produced
it, not how long the shareholder held his or her shares in the Portfolio Fund.
Dividends paid by Portfolio Funds that are attributable to the Funds'
investments in U.S. government securities may be exempt from state and local
income taxes.
Among other things, a Portfolio Fund's NAV reflects undistributed income
and capital gains. When such income and gains are distributed, the NAV is
reduced. An investor who acquires shares near or on the record date for
distributions is entitled to receive these distributions. The distributions are
taxable as income, even though, in effect, the investor has received a return of
capital.
o Distributions from the Tax-Exempt Fund
Net investment income dividends declared and paid by the Tax-Exempt Fund
are, for the most part, "exempt-interest" dividends, whether received in cash or
additional shares of the Fund. Exempt-interest dividends are not subject to
federal income tax, but they may affect the tax liabilities of taxpayers who are
subject to the alternative minimum tax ("AMT"). Exempt-interest dividends are
also includible in the modified income of shareholders who receive Social
Security benefits for purposes of determining the extent to which such benefits
may be taxed. Generally, exempt-interest dividends are not exempt from state or
local taxes. However, a state or locality may provide tax exemptions for its
residents who receive exempt-interest dividends that relate to Municipal
Obligations issued within that state or locality.
Net investment income dividends derived from taxable obligations held in
the Tax-Exempt Fund's portfolio and any capital gains distributions by the Fund
are normally taxable as ordinary income, whether received in cash or additional
shares of the Fund. Gains attributable to market discount on Municipal
Obligations acquired after April 30, 1993 are also treated as ordinary income.
GISC intends to manage the Tax-Exempt Fund to minimize taxable distributions to
the Fund's shareholders. However, there can be no assurance that the Fund will
never make such distributions.
Certain individuals and corporations may be subject to the AMT. For them,
exempt-interest dividends derived from private activity bonds are treated as a
tax preference item. In addition, for corporate shareholders only, all other
exempt-interest dividends are a component of the adjusted current earnings
preference item for purposes of the AMT.
Corporations and Social Security beneficiaries should consult their tax
advisers about the possible consequences to them of investing in the Tax-Exempt
Fund.
o Withholding
The Portfolio Funds are currently required to withhold 31% of all taxable
distributions and redemption proceeds payable to any shareholder who has not
provided a correct taxpayer identification number, or who is otherwise subject
to backup withholding. Corporate and governmental entities are generally exempt
from withholding requirements.
o Tax Information for Shareholders
Following the end of each calendar year, each Portfolio Fund notifies its
shareholders of the amount of dividends and capital gains distributions paid (or
deemed paid) during that year, and shows the portion of those dividends that
qualifies for the corporate dividends-received deduction. The Funds identify
amounts taxable as ordinary income and amounts taxable as capital gains, and
indicate whether any portion of such income is possibly exempt from state or
local taxes. The Tax-Exempt Fund provides its shareholders with information
about the exempt-interest dividends paid to them (since they must disclose it on
their federal income tax returns), and reports the amount that relates to
private activity bonds which could be subject to the AMT. Under certain
circumstances, notices provided to shareholders of the Park Avenue Fund, the
Small Cap Fund, the International Fund and the Emerging Markets Fund also
specify their respective shares of any foreign taxes paid by those Funds. Park
Avenue Fund, Small Cap Fund, International Fund and Emerging Markets Fund
shareholders are required to include their pro-rata share of those taxes in
gross income, but may be entitled to claim a credit or deduction for them.
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o A Special Note
The foregoing is only a summary of some important federal income tax law
provisions that can affect the Portfolio Funds and their shareholders. There may
be other federal, state or local tax law provisions which affect some or all
investors. Prospective investors and current shareholders are urged to consult
their tax advisers about their individual circumstances.
Voting Rights and Liabilities
The Portfolio is registered with the SEC as an open-end management
investment company, and organized as a Massachusetts business trust. It may
issue an unlimited number of shares of beneficial interest in one or more
series, and classes within such series. Presently, the Portfolio offers shares
of eight series. The Park Avenue Fund, the Small Cap Fund, the International
Fund, the Emerging Markets Fund, the Asset Allocation Fund and the Cash Fund
currently offer two classes of shares, designated Class A and Class B shares.
Neither the Portfolio nor its Portfolio Funds are required to hold annual
meetings of shareholders, but special meetings may be called to elect or remove
Trustees, change fundamental policies or the 12b-1 Plan applicable to a class of
shares, or to approve an investment advisory agreement. Shareholders holding at
least 10% of the Portfolio's outstanding shares may call a special meeting for
the purpose of voting to remove any Trustee(s), and the Trustees shall
facilitate communications among shareholders as provided under Section 16(c) of
the 1940 Act. All shares of the Portfolio have equal voting rights. Shares are
voted in the aggregate, unless voting by series or class is required by law, or
when an issue affects the series or class separately. Shares of each Portfolio
Fund are fully paid and nonassessable when issued, are transferrable without
restriction and have no preemptive or conversion rights.
Under Massachusetts law, shareholders of the Portfolio could be held
personally liable for the Portfolio's obligations. However, the Declaration of
Trust expressly disclaims shareholder liability for acts or obligations of the
Portfolio, and requires each instrument entered into or executed by the
Portfolio to provide notice of this disclaimer. The Portfolio's property may
also be used to indemnify any shareholder who is held personally liable for any
obligation of the Portfolio. Thus, the risk of an individual being personally
liable for obligations of the Portfolio or of incurring financial loss because
of shareholder liability is limited to the unlikely circumstance in which both
inadequate insurance existed and the Portfolio was unable to meet its
obligations.
Shareholder Services
o Important Addresses and Telephone Numbers
For Prospective Investors:
Guardian Investor Services Corporation
(GISC) 1-800-221-3253
Executive Office:
201 Park Avenue South
New York, New York 10003
Administrative Office:
P.O. Box 26205
Lehigh Valley, Pennsylvania 18002-6205
For Existing Shareholders:
National Financial Data Services (NFDS)
1-800-343-0817
First class mail:
P.O. Box 419611,
Kansas City, Missouri 64141-6611.
Express, registered and certified mail:
1004 Baltimore Avenue, Floor DW-05
Kansas City, Missouri 64105-2112
o Applications and Shareholder Privilege Forms
A copy of the Park Avenue Portfolio application accompanies this
Prospectus. The application is also available from registered representatives of
GISC and broker-dealer firms that have entered into selling agreements with
GISC. NFDS will open one or more shareholder accounts for a prospective investor
upon receipt and acceptance of the application and payment for his or her
initial investment. Copies of the Shareholder Privilege form are available
directly from GISC. Shareholders can use this form to add or change privileges
for their shareholder accounts.
o Account and Confirmation Statements
Shareholders receive confirmations of purchases and redemptions of shares
of the Portfolio Funds,
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and quarterly statements that show all transactions during the preceding
quarter. Information for tax filing needs is also provided following the end of
each calendar year. (See "Taxes.") Audited annual financial statements and
unaudited semi-annual financial statements for the Portfolio are mailed to
shareholders by the end of February and August of each year.
o Retirement Plans
The Portfolio Funds are suitable for IRAs, SEP-IRAs, Keoghs (profit sharing
or money purchase pension plans), and 401(k) and 403(b) retirement plans. GISC
can provide forms and information about the fees and procedures for establishing
retirement plan accounts. GISC does not serve as either trustee or custodian for
retirement plans that acquire shares of the Portfolio Funds.
o Custodian
State Street Bank and Trust Company, Custody Division, 1776 Heritage Drive,
North Quincy, Massachusetts 02171, is the custodian of each Portfolio Fund's
assets. State Street employs foreign sub-custodians to provide custody of the
Portfolio Funds' foreign assets.
o Transfer and Dividend Paying Agent
National Financial Data Services ("NFDS") is the Portfolio Funds' transfer
and dividend paying agent. NFDS is an affiliate of State Street Bank and Trust
Company.
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o Distributor
Guardian Investor Services Corporation(R)
201 Park Avenue South
New York, New York 10003
o Custodian of Assets
State Street Bank and Trust Company
Custody Division
1776 Heritage Drive
North Quincy, Massachusetts 02171
o Shareholder Servicing Agent, Transfer Agent &
Dividend Paying Agent for State Street Bank
and Trust Company
National Financial Data Services
Post Office Box 419611
Kansas City, Missouri 64141-6611
[LOGO]
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Guardian Investor Services Corporation(R)
201 Park Avenue South
New York, NY 10003
(C)1998 Guardian Investor Services Corporation
EB-010163 1/98
- --------------------------------------------------------------------------------
The Park Avenue Portfolio Prospectus
- --------------------------------------------------------------------------------
THE
PARK AVENUE
PORTFOLIO(R)
-----------------
Prospectus
January 2, 1998
-----------------
o The Guardian
Park Avenue Fund
o The Guardian
Park Avenue
Small Cap Fund
o The Guardian
Asset Allocation Fund
o The Guardian
Baillie Gifford
International Fund
o The Guardian
Baillie Gifford Emerging
Markets Fund
o The Guardian
Investment Quality
Bond Fund
o The Guardian
Tax-Exempt Fund
o The Guardian Cash
Management Fund
[LOGO]
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Guardian Investor
Services Corporation(R)
<PAGE>
The Park Avenue Portfolio(R)
--------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
January 2, 1998
This Statement of Additional Information contains information about the
eight series funds that comprise The Park Avenue Portfolio(R) series trust (the
"Portfolio"). The eight series are The Guardian Park Avenue Fund (R) (the "Park
Avenue Fund"), The Guardian Park Avenue Small Cap Fund(SM) (the "Small Cap
Fund"), The Guardian Asset Allocation Fund(SM) (the "Asset Allocation Fund"),
The Guardian Baillie Gifford International Fund(SM) (the "International Fund"),
The Guardian Baillie Gifford Emerging Markets Fund(SM) (the "Emerging Markets
Fund"), The Guardian Investment Quality Bond Fund(SM) (the "Bond Fund"), The
Guardian Tax-Exempt Fund(SM) (the "Tax-Exempt Fund") and The Guardian Cash
Management Fund(SM) (the "Cash Fund"). The series funds are referred to in this
Statement of Additional Information as the "Funds" and each separately as a
"Fund." This Statement of Additional Information is not a prospectus, but should
be read in conjunction with the Prospectus for the Portfolio dated January 2,
1998. Much of the information contained herein expands upon subjects discussed
in the Prospectus. No investment in shares of any of the Funds should be made
without first reading the Prospectus. A free copy of the Prospectus may be
obtained by writing to Guardian Investor Services Corporation, 201 Park Avenue
South, New York, New York 10003 or by telephoning 1-800-221-3253. This Statement
of Additional Information has been incorporated by reference into the
Prospectus. Please retain this document for future reference.
The terms used in this Statement of Additional Information are the same as
defined in the Prospectus for the Portfolio.
Table of Contents
Page
----
Investment Restrictions ..................................... B-2
The Park Avenue Fund ...................................... B-2
The Small Cap Fund ........................................ B-3
The International Fund .................................... B-4
The Emerging Markets Fund ................................. B-5
The Bond Fund ............................................. B-7
The Tax-Exempt Fund ....................................... B-9
The Cash Fund ............................................. B-10
The Asset Allocation Fund ................................. B-11
Additional Investment Restrictions ........................ B-12
Investment Objectives and Policies .......................... B-13
Special Investment Techniques ............................... B-16
Investment Advisers and Distributor ......................... B-21
Portfolio Transactions and Brokerage ........................ B-27
Redemption of Shares ........................................ B-28
Performance Results ......................................... B-28
Net Asset Value ............................................. B-31
Portfolio Management ........................................ B-33
Portfolio Affiliates and Principal Holders of Fund Shares ... B-38
Taxes ....................................................... B-39
Shareholder Voting Rights ................................... B-40
Trustee Liability ........................................... B-40
Custodian ................................................... B-41
Transfer Agent .............................................. B-41
Financial Statements ........................................ B-41
Legal Opinions .............................................. B-41
Independent Auditors ........................................ B-41
Appendix .................................................... B-42
The Guardian, Guardian Investor Services Corporation, The Park Avenue Portfolio,
The Guardian Park Avenue Fund, The Guardian Tax-Exempt Fund, The Guardian Asset
Allocation Fund, The Guardian Investment Quality Bond Fund, The Guardian Park
Avenue Small Cap Fund, The Guardian Baillie Gifford International Fund, The
Guardian Cash Management Fund and The Guardian Baillie Gifford Emerging Markets
Fund are servicemarks owned by The Guardian Life Insurance Company of America.
<PAGE>
INVESTMENT RESTRICTIONS
In addition to the restrictions described in the section of the Prospectus
entitled "Special Investment Techniques," the Park Avenue Fund and the Cash Fund
have each adopted the following fundamental investment restrictions. These
restrictions cannot be changed without the approval of the holders of a majority
of the outstanding shares of the affected Fund. Under the Investment Company Act
of 1940, as amended (the "1940 Act"), the vote of a majority of the outstanding
voting securities of a Fund means the lesser of the vote of: (1) 67% of the
shares of the Fund at a meeting where more than 50% of the outstanding voting
shares are present in person or by proxy; or (2) more than 50% of the
outstanding voting shares of the Fund. Under the 1940 Act, certain investment
restrictions for each of the International Fund, the Bond Fund, the Tax-Exempt
Fund and the Asset Allocation Fund can only be changed with the approval of the
holders of a majority of the outstanding shares of the affected Fund. Others are
non-fundamental operating policies which can be changed with the approval of a
majority of the Board of Trustees, and without shareholder approval.
The investment restrictions for the Emerging Markets Fund and the Small Cap
Fund are divided into fundamental and non-fundamental categories. Those
restrictions deemed to be fundamental under the 1940 Act may be changed only
upon the approval of shareholders. The remaining restrictions are
non-fundamental and may be amended by the Board of Trustees without a
shareholder vote.
If a percentage restriction is adhered to at the time of investment, a
later violation of the specified limit that results from a change in the value
of the investment or a change in the Fund's net assets will not constitute a
violation of the applicable investment restriction.
The Park Avenue Fund
The following investment restrictions provide that the Park Avenue Fund may
not:
1. Make any purchase which would result in more than 5% of the value of
its total assets being invested in the securities of any one issuer
except U.S. government securities.
2. Purchase the securities of any issuer if such purchase would result in
more than 10% of the voting securities, or the securities of any class
of such issuer, being held by the Fund.
3. Borrow money, except as a temporary measure for emergency purposes, in
an aggregate amount exceeding 5% of the total assets of the Fund.
4. Purchase any security other than those discussed under "Investment
Objectives and Policies," as set forth in the Prospectus.
5. Invest more than 5% of the value of its total assets in companies
(including predecessors) having a record of less than 3 years
continuous operation.
6. Invest in the securities of any company for the purpose of exercising
control or management.
7. Purchase a security if as a result thereof more than 25% of its total
assets will be invested in a particular industry.
8. Purchase the securities of any other investment company.
9. Purchase any put, call, straddle, spread or any combination thereof.
10. Purchase any interest in oil, gas or other mineral exploration or
development programs.
11. Engage in the purchase or sale of real estate or interests therein or
interests in real estate investment trusts, commodities or commodity
contracts.
12. Purchase or retain the securities of any issuer if, to the knowledge
of the Fund, officers or trustees of the Fund or of the Fund's
investment adviser who own individually more than one-half of 1% of
the securities of such issuer together own more than 5% of such
securities.
13. Act as a securities underwriter except to the extent that it may be
regarded as an underwriter upon disposition of any of its securities
which are subject to legal or contractual restrictions on re-sale or
are otherwise not readily saleable.
14. Invest more than 15% of the value of its net assets in securities
which are not readily marketable or which are restricted as to resale
under federal securities laws, excluding any such securities that have
been determined
B-2
<PAGE>
by the Trustees (or the person(s) designated by them to make such
determinations) to be readily marketable.
15. Purchase securities on margin or make any short sales of securities.
16. Make loans of money or other assets except through the purchase of
privately issued notes, bonds, debentures or other debt securities
either from the issuer or others. Purchases of a portion of an issue
of publicly distributed debt securities and repurchase agreements are
not deemed to be loans for purposes of this limitation. Under a
repurchase agreement, the Fund may purchase and simultaneously resell
for later delivery (normally within seven days) obligations issued or
guaranteed as to principal and interest by the U.S. government, its
agencies or instrumentalities.
17. Pledge, mortgage or hypothecate its assets to an extent greater than
10% of the Fund's total asset value. However, in order to comply with
certain state statutes or investment restrictions, the Fund will not
as a matter of operating policy, pledge, mortgage or hypothecate its
assets to the extent that at any time the percentage of pledged assets
plus the sales load will exceed 10% of the offering price of the
Fund's shares.
Since shares of the Park Avenue Fund are available as an underlying
investment for certain variable annuity contracts issued by The Guardian
Insurance & Annuity Company, Inc. ("GIAC"), the Fund's investments may be
subject to additional restrictions imposed by the insurance laws and regulations
of the states where GIAC offers such contracts.
The Small Cap Fund
The following fundamental investment restrictions provide that the Small
Cap Fund may not:
1. As to 75% of the Fund's total assets, purchase any security (other
than obligations of the U.S. Government, its agencies or
instrumentalities and investment companies) if as a result, more than
5% of the Fund's total assets (taken at current value) would then be
invested in the securities of a single issuer.
2. Purchase more than 10% of any class of securities of any issuer. All
debt securities and all preferred stocks are each considered as one
class.
3. Borrow money, except that the Fund may (i) borrow up to 5% of the
value of its total assets (not including the amount borrowed) for
temporary or emergency needs; and (ii) engage in reverse repurchase
agreements or other transactions which may involve a borrowing from
banks or other persons, provided that the aggregate amount involved in
all such transactions shall not exceed 33% of the value of the Fund's
total assets (including the amount borrowed) less liabilities (other
than borrowings) or such other percentage permitted by law.
4. Mortgage, pledge or hypothecate more than 5% of the value of its total
assets and then only to secure borrowings effected within the above
restriction.
5. Make loans to other persons except for loans of portfolio securities
and except through the purchase of debt obligations and repurchase
agreements in which the Fund may invest, consistent with its
investment objectives and policies, provided that repurchase
agreements maturing in more than seven days, when taken together and
at current value, may not exceed 15% of the Fund's net assets.
6. Purchase any securities other than the obligations of the U.S.
Government, or its agencies or instrumentalities, if, immediately
after such purchase, more than 25% of the value of the Fund's total
assets would be invested in the securities of issuers in the same
industry (there is no limitation as to investments in obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities).
7. Engage in the underwriting of the securities of other issuers, except
to the extent that the Fund may be deemed to be an underwriter under
the Securities Act of 1933 in connection with the sale of portfolio
securities.
8. Purchase or sell real estate (although it may purchase securities of
issuers that engage in real estate operations as well as readily
marketable interests such as real estate investment trusts and readily
marketable securities of companies which invest in real estate).
9. Write, purchase or sell puts, calls, or any combination thereof.
10. Purchase or sell commodities or commodity contracts.
11. Issue any senior securities except as permitted under the 1940 Act.
B-3
<PAGE>
The following non-fundamental investment restrictions may be changed by the
Board of Trustees without a shareholder vote. Under these restrictions, the Fund
may not:
12. Invest more than 5% of the value of its total assets in warrants or
more than 2% of such value in warrants which are not listed on the New
York or American Stock Exchanges, except that warrants attached to
other securities are not subject to these limitations.
13. Purchase securities restricted as to resale if, as a result, (i) more
than 10% of the Fund's total assets would be invested in such
securities, or (ii) more than 5% of the Fund's total assets (excluding
any securities eligible for resale under Rule 144A under the
Securities Act of 1933) would be invested in such securities.
14. Invest in (a) securities which at the time of such investment are not
readily marketable, (b) securities restricted as to resale, and (c)
repurchase agreements maturing in more than seven days, if, as a
result, more than 15% of the Fund's net assets (taken at current
value) would then be invested in the aggregate in securities described
in (a), (b), and (c) above.
15. Invest in securities of other registered investment companies.
16. Purchase securities on margin or sell securities short, or participate
on a joint or a joint and several basis in any trading account in
securities.
17. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may
invest in the securities of companies which invest in or sponsor such
programs.
18. Purchase or retain the securities of any issuer, if, to the knowledge
of the Fund, the officers, directors and employees of the Fund or of
the Adviser who individually own more than 1/2 of 1% of the
outstanding securities of such issuer together own more than 5% of the
securities of such issuer.
19. Purchase securities for the purpose of exercising control over another
company.
The International Fund
The following investment restrictions provide that the International Fund
may not:
1. Borrow money, except that the Fund may borrow from banks up to 20% of
the value of its total assets as a temporary measure for extraordinary
or emergency needs, for example, to enable the Fund to meet redemption
requests or to settle transactions on different stock markets where
different settlement dates apply which might otherwise require the
sale of portfolio securities at a time when it would not be in the
Fund's best interests to do so. Up to 5% of the Fund's total assets
may be borrowed from non-banking institutions. The Fund may not,
however, borrow money for investment purposes.
2. Mortgage, pledge or hypothecate more than 5% of the value of its total
assets, and then only to secure borrowings effected within the above
restriction. For purposes of this restriction, collateral arrangements
with respect to options, financial futures contracts, options on
futures contracts, when-issued or delayed delivery securities, forward
contracts, or similar collateral arrangements which may be required in
connection with securities transactions by the 1940 Act are not
considered a pledge of assets.
3. Make loans of money or portfolio securities, except through the
purchase of debt obligations or repurchase agreements in which the
Fund may invest consistent with its investment objective and policies.
4. Purchase any securities if, immediately after such purchase, more than
25% of the value of the Fund's total assets would be invested in the
securities of issuers in the same industry. For purposes of this
restriction, the obligations of each foreign government are deemed to
constitute an industry.
5. Invest more than 5% of the value of its total assets in the securities
of any one issuer or purchase more than 10% of the outstanding voting
securities, or any class of securities, of any one issuer. For
purposes of this restriction, all outstanding debt securities of an
issuer are considered as one class, and all preferred stock of an
issuer is considered as one class. (This restriction does not apply to
obligations issued or guaranteed by the U.S. or foreign governments,
or their respective agencies or instrumentalities.)
6. Invest more than 10% of the value of its total assets in warrants or
more than 2% of such value in warrants which are not listed on the New
York Stock Exchange, American Stock Exchange, or one of the major
foreign stock exchanges, except that warrants attached to other
securities in which the Fund invests are not subject to these
limitations.
B-4
<PAGE>
7. Invest more than 15% of the value of its net assets in securities
which are not readily marketable or which are restricted as to resale
under the U.S. federal securities laws, excluding any such securities
that have been determined by the Trustees (or the person(s) designated
by them to make such determinations) to be readily marketable.
8. Engage in the underwriting of the securities of other issuers, except
to the extent that the Fund may be deemed to be an underwriter under
the Securities Act of 1933 in selling its portfolio securities.
9. Invest in securities of other U.S. or foreign investment companies,
except that: (a) the Fund may purchase such securities in the open
market, without regard to section (b) below, provided that immediately
thereafter (i) not more than 10% of the Fund's total assets would be
invested in such securities, (ii) not more than 5% of the Fund's total
assets would be invested in securities of any one investment company,
and (iii) not more than 3% of the total outstanding voting stock of
any one investment company would be owned by the Fund; or (b) the Fund
may acquire such securities as part of a merger, consolidation,
reorganization, acquisition of assets, offer of exchange or as a
dividend.
10. Purchase securities on margin, sell securities short, maintain a short
position or participate on a joint or a joint and several basis in any
trading account in securities, except that the Fund may (i) obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of securities; (ii) purchase or sell futures
contracts; and (iii) deposit or pay initial or variation margin in
connection with financial futures contracts or related options
transactions.
11. Purchase or sell put options, call options, or combinations thereof,
except that the Fund may (i) write covered call and secured put
options and enter into closing purchase transactions with respect to
such options, (ii) purchase put and call options, provided that the
premiums on all outstanding options do not exceed 5% of its total
assets, and enter into closing sale transactions with respect to such
options; and (iii) engage in financial futures contracts and related
options transactions to seek to hedge against either a decline in the
value of securities included in the Fund's portfolio or an increase in
the price of securities which the Fund plans to purchase in the
future.
12. Purchase or sell commodities or commodity contracts, except that the
Fund may enter into financial futures contracts, options contracts,
options on futures contracts and forward foreign currency exchange
contracts as described in the Prospectus and Statement of Additional
Information.
13. Purchase or sell real estate (although it may purchase securities of
issuers that engage in real estate operations, securities that are
secured by interests in real estate, or securities that represent
interests in real estate, including real estate investment trusts).
14. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may
invest in the securities of companies which invest in or sponsor such
programs.
15. Purchase or retain the securities of any issuer if, to the knowledge
of the Fund, the officers, trustees and employees of the Fund or of
the Fund's investment adviser or sub-investment adviser who
individually own more than one half of 1% of the outstanding
securities of such issuer together own more than 5% of the securities
of such issuer.
16. Purchase securities for the purpose of exercising control over another
company.
17. Issue any "senior securities" as defined in the 1940 Act (except for
engaging in futures and options transactions as well as any other
investment techniques set forth in the Prospectus or Statement of
Additional Information, and except for borrowing subject to the
restrictions set forth under Investment Restriction 1, above).
The Emerging Markets Fund
The following fundamental investment restrictions provide that the Emerging
Markets Fund may not:
1. Borrow money, except that the Fund may borrow from banks up to 20% of
the value of its total assets as a temporary measure for extraordinary
or emergency needs, for example, to enable the Fund to meet redemption
requests or to settle transactions on different stock markets where
different settlement dates apply which might otherwise require the
sale of portfolio securities at a time when it would not be in the
Fund's best interests to do so. Up to 5% of the Fund's total assets
may be borrowed from non-banking
B-5
<PAGE>
institutions. The Fund may not, however, borrow money for investment
purposes.
2. Mortgage, pledge or hypothecate more than 5% of the value of the
Fund's total assets, and then only to secure borrowings effected
within the above restriction. Neither the deposit in escrow of
underlying securities in connection with the writing of call options,
nor the deposit in escrow of U.S. Treasury bills in connection with
the writing of put options, nor the deposit of cash and cash
equivalents in a segregated account with the Fund's custodian or in a
margin account with a broker in connection with futures transactions,
options transactions, nor the writing of call and put options in
spread transactions, is deemed to be a pledge.
3. Make loans to other persons except for loans of portfolio securities
and except through the purchase of debt obligations and repurchase
agreements in which the Fund may invest, consistent with its
investment objectives and policies, provided that repurchase
agreements maturing in more than seven days, when taken together and
at current value, may not exceed 15% of the Fund's net assets.
4. Purchase any securities if, immediately after such purchase, more than
25% of the value of a Fund's total assets would be invested in the
securities of issuers in the same industry. There is no limitation as
to the Fund's investments in obligations issued by U.S. branches of
domestic banks or issued or guaranteed by the U.S. government, its
agencies or instrumentalities. For purposes of this restriction, the
obligations of each foreign government are deemed to constitute an
industry.
5. Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities and investment companies) if as a
result, more than 5% of the Fund's total assets (taken at current
value) would then be invested in the securities of any one issuer, or
purchase more than 10% of the outstanding voting securities, or any
class of securities, of any one issuer. For purposes of this
restriction, all outstanding debt securities of an issuer are
considered as one class, and all preferred stock of an issuer is
considered as one class. (This restriction does not apply to
obligations issued or guaranteed by the U.S. or foreign governments,
or their respective agencies or instrumentalities.)
6. Engage in the underwriting of the securities of other issuers, except
to the extent that the Fund may be deemed to be an underwriter under
the Securities Act of 1933 in selling its portfolio securities.
7. Purchase or sell commodities or commodity contracts, except that the
Fund may enter into financial futures contracts, options contracts,
options on futures contracts and forward foreign currency exchange
contracts as described in the Prospectus and Statement of Additional
Information.
8. Purchase or sell real estate (although it may purchase securities of
issuers that engage in real estate operations, securities that are
secured by interests in real estate, or securities that represent
interests in real estate, including real estate investment trusts).
9. Issue any "senior securities" as defined in the 1940 Act (except for
engaging in futures and options transactions as well as any other
investment techniques described in the Prospectus or Statement of
Additional Information, and except for borrowing subject to the
restrictions set forth under Investment Restriction 1, above).
The following non-fundamental investment restrictions may be changed by
vote of the Board of Trustees, without a vote of shareholders. Under these
restrictions, the Fund may not:
10. Purchase securities for the purpose of exercising control over another
company.
11. Purchase or sell put options, call options, or combinations thereof,
except that the Fund may (i) write covered call and secured put
options and enter into closing purchase transactions with respect to
such options, (ii) purchase put and call options, provided that the
premiums on all outstanding options do not exceed 5% of its total
assets, and enter into closing sale transactions with respect to such
options; and (iii) engage in financial futures contracts and related
options transactions to seek to hedge against either a decline in the
value of securities included in the Fund's portfolio or an increase in
the price of securities which the Fund plans to purchase in the
future, or to increase the current return of its portfolio by writing
covered call or covered put options, as each is described in the
Prospectus and Statement of Additional Information.
12. Invest more than 10% of the value of its total assets in warrants or
more than 2% of such value in warrants which are not listed on the New
York Stock Exchange, American Stock Exchange, or one of the major
foreign stock exchanges, except that warrants attached to other
securities in which the Fund invests are not subject to these
limitations.
B-6
<PAGE>
13. Invest more than 15% of the value of its net assets in securities that
are not readily marketable or which are restricted as to disposition
under the U.S. securities laws or otherwise. This restriction shall
not apply to securities purchased or sold pursuant to Rule 144A under
the Securities Act of 1933. This restriction will apply to repurchase
agreements maturing in more than seven days. This restriction will
also apply to securities received as a result of a corporate
reorganization or similar transaction affecting readily marketable
securities already held in the Fund's portfolio. To the extent that
securities received under these circumstances, together with other
securities considered illiquid by the staff of the Securities and
Exchange Commission ("SEC") or by the Portfolio's Board of Trustees,
exceed the applicable percentage of the value of the Fund's total
assets, the Fund will attempt to dispose of them in an orderly fashion
in order to reduce its holdings in such securities to less than the
applicable threshold.
14. Purchase securities of other U.S. or foreign investment companies,
except that the Fund may make such a purchase (a) in the open market
provided that immediately thereafter (i) not more than 10% of the
Fund's total assets would be invested in such securities; (ii) not
more than 5% of the Fund's total assets would be invested in
securities of any one investment company; and (iii) not more than 3%
of the total outstanding voting stock of any one investment company
would be owned by the Fund, or (b) as part of an offer of exchange,
reorganization or as a dividend.
15. Purchase securities on margin, sell securities short, maintain a short
position or participate on a joint or a joint and several basis in any
trading account in securities, except that the Fund may (i) obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of securities; (ii) purchase or sell futures
contracts; and (iii) deposit or pay initial or variation margin in
connection with financial futures contracts or related options
transactions.
16. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Funds may
invest in the securities of companies which invest in or sponsor such
programs.
17. Purchase or retain the securities of any issuer if, to the knowledge
of the Portfolio, the officers, trustees and employees of the
Portfolio or of the Portfolio's investment manager or sub-investment
manager who individually own more than one half of 1% of the
outstanding securities of such issuer together own more than 5% of the
securities of such issuer.
The Bond Fund
The following investment restrictions provide that the Bond Fund may not:
1. Purchase any security other than those discussed under "Investment
Objectives and Policies," as set forth in the Prospectus.
2. Invest more than 5% of the value of its total assets in securities of
issuers having a record, together with predecessors, of less than
three years of continuous operation. This restriction does not apply
to any obligation issued or guaranteed by the U.S. government, its
agencies or instrumentalities.
3. Borrow money, except that the Fund may (i) borrow up to 10% of the
value of its total assets for temporary or emergency purposes; and
(ii) engage in reverse repurchase agreements, dollar rolls or other
transactions which may involve a borrowing from banks or other
persons, provided that the aggregate amount involved in all such
transactions shall not exceed 33 1/3% of the value of the Fund's total
assets (including the amount borrowed) less liabilities (other than
borrowings) or such other percentage permitted by law.
4. Mortgage, pledge or hypothecate more than 5% of the value of its total
assets, and then only to secure borrowings effected within the above
restriction. For purposes of this restriction, collateral arrangements
with respect to options, financial futures contracts, options on
futures contracts, when-issued or delayed delivery securities, forward
contracts, or similar collateral arrangements which may be required in
connection with securities transactions by the 1940 Act are not
considered a pledge of assets.
5. Make loans to others, except through the purchase of debt obligations
or repurchase agreements, or by lending the Fund's portfolio
securities, consistent with its investment objectives, policies and
techniques as set forth in the Prospectus or Statement of Additional
Information.
6. Purchase any securities other than the obligations of U.S. branches of
domestic banks or of the U.S. government, or its agencies or
instrumentalities, if, immediately after such purchase, more than 25%
of the value of the Fund's total assets would be invested in the
securities of issuers in the same industry. For the
B-7
<PAGE>
purpose of this restriction, gas, electric, water and telephone
utilities will each be treated as a separate industry.
7. With respect to 75% of its total assets, invest more than 5% of the
value of its total assets in the securities of any one issuer or
purchase more than 10% of the outstanding voting securities, or any
other class of securities, of any one issuer. For purposes of this
restriction, all outstanding debt securities of an issuer are
considered as one class, and all preferred stock of an issuer is
considered as one class. This restriction does not apply to
obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities.
8. Invest more than 5% of the value of its total assets in warrants or
more than 2% of such value in warrants which are not listed on the New
York or American Stock Exchanges, except that warrants attached to
other securities in which the Fund invests are not subject to these
limitations.
9. Invest more than 15% of the value of its net assets in securities
which are not readily marketable or which are restricted as to resale
under federal securities laws, excluding any such securities that have
been determined by the Trustees (or the person(s) designated by them
to make such determinations) to be readily marketable.
10. Engage in the underwriting of the securities of other issuers, except
to the extent that the Fund may be deemed to be an underwriter under
the Securities Act of 1933 in selling portfolio securities.
11. Purchase securities on margin or sell securities short, or participate
on a joint or a joint and several basis in any trading account in
securities, except that the Fund may (i) obtain such short-term
credits as may be necessary for the clearance of purchases and sales
of securities; (ii) purchase or sell futures contracts; and (iii)
deposit or pay initial or variation margin in connection with
financial futures contracts or related options transactions.
12. Purchase or sell commodities or commodity contracts, except that the
Fund may invest in financial futures contracts, options and options on
financial futures contracts as described in the Prospectus and
Statement of Additional Information.
13. Purchase or sell real estate (although it may purchase securities of
issuers that engage in real estate operations), securities that are
secured by interests in real estate, or securities that represent
interests in real estate, including real estate investment trusts.
14. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may
invest in the securities of companies which invest in or sponsor such
programs.
15. Purchase or retain the securities of any issuer if, to the knowledge
of the Fund, the officers, trustees and employees of the Fund or of
the Adviser who individually own more than one-half of 1% of the
outstanding securities of such issuer together own more than 5% of the
securities of such issuer.
16. Purchase securities for the purpose of exercising control over another
company.
17. Issue any "senior securities" as defined in the 1940 Act, except for
engaging in futures and options transactions as well as any other
investment techniques set forth in the Prospectus or the Statement of
Additional Information, and except for borrowing subject to the
restrictions set forth under Investment Restriction 3, above.
18. Purchase or sell put options, call options, or combinations thereof,
except that the Fund may (i) write covered call and secured put
options and enter into closing purchase transactions with respect to
such options, (ii) purchase put and call options, provided that the
premiums on all outstanding options do not exceed 5% of its total
assets, and enter into closing sale transactions with respect to such
options; and (iii) engage in financial futures contracts and related
options transactions to seek to hedge against either a decline in the
value of securities included in the Fund's portfolio or an increase in
the price of securities which the Fund plans to purchase in the
future.
19. Invest in securities of other investment companies, except that: (a)
the Fund may purchase such securities in the open market, without
regard to section (b), below, provided that immediately thereafter (i)
not more than 10% of the Fund's total assets would be invested in such
securities, (ii) not more than 5% of the Fund's total assets would be
invested in securities of any one investment company, and (iii) not
more than 3% of the total outstanding voting stock of any one
investment company would be owned by the Fund; or (b) the Fund may
acquire such securities as part of a merger, consolidation,
reorganization, acquisition of assets, offer of
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exchange or as a dividend.
The Tax-Exempt Fund
The following investment restrictions provide that the Tax-Exempt Fund may
not:
1. Purchase securities other than Municipal Obligations (as that term is
defined in the Prospectus) and certain taxable obligations as set
forth in the Prospectus and Statement of Additional Information.
2. Borrow money, except that the Fund may borrow up to 10% of the value
of its total assets as a temporary measure for extraordinary or
emergency needs, such as enabling the Fund to meet redemption requests
which might otherwise require the sale of portfolio securities at a
time when it is not in the Fund's best interests. The Fund may not,
however, borrow money for investment purposes.
3. Mortgage, pledge or hypothecate more than 5% of the value of its total
assets, and then only to secure borrowings effected within the above
restriction. For purposes of this restriction, collateral arrangements
with respect to options, financial futures contracts, options on
futures contracts, when-issued or delayed delivery securities, forward
contracts, or similar collateral arrangements which may be required in
connection with securities transactions by the 1940 Act are not
considered a pledge of assets.
4. Purchase securities on margin, sell securities short or participate on
a joint or a joint and several basis in any trading account in
securities, except that the Fund may (i) obtain such short-term
credits as may be necessary for the clearance of purchases and sales
of securities; (ii) purchase or sell futures contracts; and (iii)
deposit or pay initial or variation margin in connection with
financial futures contracts or related options transactions.
5. Underwrite the securities of other issuers, except to the extent that
the Fund may be deemed to be an underwriter under the Securities Act
of 1933 in selling portfolio securities and except that the Fund may
bid separately or as part of a group for the purchase of Municipal
Obligations directly from an issuer for its own portfolio to take
advantage of the lowest purchase price available.
6. Invest more than 15% of the value of its net assets in securities
which are not readily marketable or which are restricted as to resale
under federal securities laws, excluding any such securities that have
been determined by the Trustees (or the person(s) designated by them
to make such determinations) to be readily marketable.
7. Purchase or sell real estate or real estate limited partnerships, but
this shall not prevent the Fund from investing in Municipal
Obligations secured by real estate or interests therein.
8. Purchase or sell commodities or commodity contracts, except that the
Fund may enter into financial futures contracts, options contracts and
options on futures contracts as described in the Prospectus and
Statement of Additional Information.
9. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may
invest in the securities of issuers which invest in or sponsor such
programs.
10. Make loans to others, except through the purchase of debt obligations
or repurchase agreements or by lending the Fund's portfolio securities
consistent with its investment objectives, policies and techniques as
set forth in the Prospectus or Statement of Additional Information.
11. Invest more than 5% of its assets in the obligations of any issuer,
except that up to 25% of the value of the Fund's total assets may be
invested, and securities issued or guaranteed by the U.S. government
or its agencies or instrumentalities may be purchased, without regard
to any such limitations. For purposes of this Investment Restriction,
identification of the "issuer" will be based on a determination of the
source of assets and revenues committed to meeting interest and
principal payments of each security.
12. Invest more than 25% of its assets in the securities of issuers in any
single industry; provided that there shall be no limitation on the
purchase of Municipal Obligations. For purposes of this Investment
Restriction, industrial development bonds, where the payment of
principal and interest is the ultimate responsibility of companies
within the same industry, are grouped together as an "industry."
13. Purchase more than 10% of the voting securities of any issuer or
invest in companies for the purpose of exercising control.
14. Invest in securities of other investment companies, except that: (a)
the Fund may purchase such securities in the open market, without
regard to section (b), below, provided that immediately thereafter (i)
not more than
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10% of the Fund's total assets would be invested in such securities,
(ii) not more than 5% of the Fund's total assets would be invested in
securities of any one investment company, and (iii) not more than 3%
of the total outstanding voting stock of any one investment company
would be owned by the Fund; or (b) the Fund may acquire such
securities as part of a merger, consolidation, reorganization,
acquisition of assets, offer of exchange or as a dividend.
15. Purchase or retain the securities of any issuer if, to the knowledge
of the Fund, the officers, trustees and employees of the Fund or of
the Fund's investment adviser who individually own more than one-half
of 1% of the outstanding securities of such issuer together own more
than 5% of the securities of such issuer.
16. Issue any "senior securities" as defined in the 1940 Act, except for
engaging in futures and options transactions as well as any other
investment techniques set forth in the Prospectus or Statement of
Additional Information, and except for borrowing subject to the
restrictions set forth under Investment Restriction 2, above.
17. Purchase or sell put options, call options, or combinations thereof,
except that the Fund may (i) write covered call and secured put
options and enter into closing purchase transactions with respect to
such options, (ii) purchase put and call options, provided that the
premiums on all outstanding options do not exceed 5% of its total
assets, and enter into closing sale transactions with respect to such
options; and (iii) engage in financial futures contracts and related
options transactions to seek to hedge against either a decline in the
value of securities included in the Fund's portfolio or an increase in
the price of securities which the Fund plans to purchase in the
future.
The Cash Fund
The following investment restrictions provide that the Cash Fund may not:
1. Purchase the securities of any issuer if, immediately after such
purchase, more than 5% of the Fund's total assets, taken at market
value, would be invested in such securities.
2. Purchase any securities, other than obligations of the U.S. government
or its agencies or instrumentalities, if, immediately after such
purchase, more than 10% of the outstanding voting securities of one
issuer would be owned by the Fund.
3. Purchase any securities, other than obligations of U.S. branches of
domestic banks or of the U.S. government, or its agencies or
instrumentalities, if, immediately after such purchase, more than 25%
of the value of the Fund's total assets would be invested in the
securities of issuers in the same industry.
4. Make loans to others, except through the purchase of debt obligations
and repurchase agreements in which the Fund may invest, consistent
with its investment objective and policies.
5. Purchase or retain the securities of any issuer if any officer or
trustee of the Fund is an officer or director of such issuer and owns
beneficially more than one-half of 1% of the securities of such issuer
and all of the officers and trustees of the Fund and its investment
adviser together own more than 5% of the securities of such issuer.
6. Purchase or sell real estate; however, the Fund may purchase
marketable securities issued by the companies which invest in real
estate or interests therein.
7. Purchase securities on margin or sell short.
8. Purchase or sell commodities or commodity futures contracts, or oil,
gas or mineral exploration or development programs.
9. Underwrite securities of other issuers.
10. Purchase warrants, or write, purchase or sell puts, calls, straddles,
spreads or combinations thereof.
11. Participate on a joint or joint-and-several basis in any securities
trading account.
12. Purchase the securities of any other investment company.
13. Purchase securities of any issuer for the purpose of exercising
control or management.
14. Borrow money, except from banks for temporary or emergency purposes or
to meet redemption requests which might otherwise require the untimely
disposition of securities (not for leveraging), provided that
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<PAGE>
borrowing in the aggregate may not exceed 10% of the value of the
Fund's total assets, including the amount borrowed, at the time of
such borrowing.
15. Mortgage, pledge or hypothecate any assets except in connection with
any borrowing and in amounts not in excess of 10% of the value of the
Fund's total assets at the time of such borrowing or make additional
investments during any period that borrowings exceed 5% of the value
of the Fund's total assets.
16. Issue any senior securities (except for borrowing subject to the
restrictions set forth in the Prospectus).
17. Invest more than 10% of the value of its net assets in securities
which are not readily marketable or which are restricted as to resale
under federal securities laws, excluding any such securities that have
been determined by the trustees (or the person(s) designated by them
to make such determinations) to be readily marketable.
18. Underwrite securities of other issuers, except to the extent that the
Fund or its investment adviser may be deemed to be an underwriter
under the Securities Act of 1933 in selling portfolio securities.
The Asset Allocation Fund
The following investment restrictions provide that the Asset Allocation
Fund may not:
1. Purchase or sell put options, call options, or combinations thereof,
except that the Fund may (i) write covered call and secured put
options and enter into closing purchase transactions with respect to
such options, (ii) purchase put and call options, provided that the
premiums on all outstanding options do not exceed 5% of its total
assets, and enter into closing sale transactions with respect to such
options; and (iii) engage in financial futures contracts and related
options transactions to seek to hedge against either a decline in the
value of securities included in the Fund's portfolio or an increase in
the price of securities which the Fund plans to purchase in the
future.
2. Borrow money, except that the Fund may borrow up to 10% of the value
of its total assets as a temporary measure for extraordinary or
emergency needs, such as enabling the Fund to meet redemption requests
which might otherwise require the sale of portfolio securities at a
time when it is not in the Fund's best interests. The Fund may not,
however, borrow money for investment purposes.
3. Mortgage, pledge or hypothecate more than 5% of the value of its total
assets, and then only to secure borrowings effected within the above
restriction. For purposes of this restriction, collateral arrangements
with respect to options, financial futures contracts, options on
futures contracts, when-issued or delayed delivery securities, forward
contracts, or similar collateral arrangements which may be required in
connection with securities transactions by the 1940 Act are not
considered a pledge of assets.
4. Engage in the underwriting of securities, except to the extent that
the Fund may be deemed an underwriter under the Securities Act of 1933
in selling portfolio securities.
5. Invest in real estate, real estate limited partnership interests,
securities that are secured by interests in real estate, or securities
that represent interests in real estate, including real estate
investment trusts, although the Fund may purchase securities of
issuers which engage in real estate operations.
6. Invest in commodities or commodity contracts, except that it may
invest in financial futures contracts, options and options on
financial futures contracts as described in the Prospectus or
Statement of Additional Information.
7. Make loans to others, except through the purchase of debt obligations
or repurchase agreements, or by lending the Fund's portfolio
securities consistent with its investment objectives, policies and
techniques as set forth in the Prospectus or Statement of Additional
Information.
8. Invest more than 5% of the value of its total assets in the securities
of any one issuer or purchase more than 10% of the outstanding voting
securities, or any other class of securities, of any one issuer. For
purposes of this 10% restriction, all outstanding debt securities of
an issuer are considered as one class, and all preferred stock of an
issuer is considered as one class. This restriction does not apply to
obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities or to any security issued by any investment
company or series thereof.
9. Invest 25% or more of its assets in securities of issuers in any one
industry. For the purpose of this restriction, gas, electric, water
and telephone utilities will each be treated as a separate industry.
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<PAGE>
10. Invest more than 5% of the value of its total assets in securities of
issuers having a record, together with predecessors, of less than
three years of continuous operation. The restriction does not apply to
any obligation issued or guaranteed by the U.S. government, its
agencies or instrumentalities.
11. Purchase or retain the securities of any issuer if, to the knowledge
of the Fund, those officers and trustees of the Fund or of the Fund's
investment adviser who individually own more than one-half of 1% of
the outstanding securities of such issuer together own more than 5% of
such securities.
12. Issue any "senior securities" as defined in the 1940 Act, except for
engaging in futures and options transactions as well as any other
investment techniques set forth in the Prospectus or Statement of
Additional Information, and except for borrowing subject to the
restrictions set forth under Investment Restriction 2, above.
13. Purchase securities for the purpose of exercising control over another
company.
14. Purchase securities on margin or sell securities short or participate
on a joint or a joint and several basis in any trading account in
securities, except that the Fund may (i) obtain such short-term
credits as may be necessary for the clearance of purchases and sales
of securities, (ii) purchase or sell futures contracts; and (iii)
deposit or pay initial or variation margin in connection with
financial futures contracts or related options transactions.
15. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may
invest in the securities of companies which invest in or sponsor such
programs.
16. Invest in the securities of other investment companies, except that
(a) during any period in which the Fund operates as a "fund of funds"
in accordance with the Prospectus and applicable law, and
notwithstanding (b) and (c) below, the Fund may purchase, without
limit, shares of The Guardian Park Avenue Fund, The Guardian
Investment Quality Bond Fund and The Guardian Cash Management Fund,
and any other mutual fund currently existing or hereafter created
whose investment adviser is the Fund's adviser or an affiliate
thereof, or the respective successors in interest of any such mutual
fund or adviser; (b) during any period in which the Fund does not
operate as a "fund of funds" in accordance with the Prospectus, the
Fund may purchase securities of other investment companies in the open
market, without regard to section (c) below, provided that immediately
thereafter (i) not more than 10% of the Fund's total assets would be
invested in such securities, (ii) not more than 5% of the Fund's total
assets would be invested in securities of any one investment company,
and (iii) not more than 3% of the total outstanding voting stock of
any one investment company would be owned by the Fund; or (c) the Fund
may acquire securities of other investment companies as part of a
merger, consolidation, reorganization, acquisition of assets, offer of
exchange or as a dividend.
17. Invest more than 10% of the value of its total assets in warrants or
more than 2% of such value in warrants which are not listed on the New
York or American Stock Exchanges, except that warrants attached to
other securities in which the Fund invests are not subject to these
limitations.
18. Invest more than 15% of the value of its net assets in securities
which are not readily marketable or which are restricted as to resale
under federal securities laws, excluding any such securities that have
been determined by the Trustees (or the person(s) designated by them
to make such determinations) to be readily marketable.
Additional Investment Restrictions
The Park Avenue Fund will not issue any "senior securities" as defined in
the 1940 Act, except for any investment technique set forth in the Prospectus or
Statement of Additional Information which may be treated as a senior security,
or except for borrowing subject to the Fund's Investment Restriction Number 3.
Notwithstanding the reservation of right provided by its Investment
Restriction No. 6, the Bond Fund will not purchase any securities of U.S.
branches of domestic banks if, immediately after such purchase, more than 25% of
the Fund's total assets would be invested in such securities.
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the information contained in the
Prospectus section entitled "Investment Objectives and Policies."
The International Fund and the Emerging Markets Fund
Several foreign governments permit investments by non-residents only
through participation in certain specifically organized investment companies.
Subject to the provisions of the 1940 Act, the International Fund and the
Emerging Markets Fund may invest in the shares of other investment companies. In
addition, pursuant to exemptive relief granted to those Funds under the 1940
Act, a portion of the equity and convertible securities which may be acquired by
the Funds may be issued by foreign companies that, in each of their most recent
fiscal years, derived more than 15% of their gross revenues from their
activities as brokers, dealers, underwriters or investment advisers.
The International Fund may also invest a portion of its assets in unit
trusts organized in the United Kingdom (which are analogous to United States
mutual funds) and which invest in smaller foreign markets than those in which
the International Fund would ordinarily invest directly. GBG and BG Overseas,
the International Fund's investment advisers, believe that investments in such
unit trusts will enhance the geographical diversification of the Fund's assets
while reducing the risks associated with investing in certain smaller foreign
markets. Investments by the International Fund in such unit trusts are likely to
provide increased liquidity and lower transaction costs than are normally
associated with direct investments in such markets. At the present time, the
International Fund intends to limit its investments in unit trusts, together
with its investments in other investment companies, to no more than 5% of its
total assets.
The Park Avenue Fund, The Small Cap Fund, The Bond Fund, The Tax-Exempt Fund and
The Asset Allocation Fund
Convertible securities purchased by the Park Avenue Fund, the Small Cap
Fund and the Asset Allocation Fund, and debt securities purchased by the Bond
Fund and the Tax-Exempt Fund will primarily be "investment grade," i.e., rated
in one of the top four rating categories established by nationally recognized
statistical rating organizations like Moody's Investors Service, Inc.
("Moody's") and Standard & Poor's Ratings Group ("Standard & Poor's"). Under
normal conditions, less than 5% of the assets of the Park Avenue Fund, the Small
Cap Fund and the Asset Allocation Fund, and less than 10% of the other named
Funds' assets, will consist of securities rated lower than "investment grade."
Such holdings will typically result from reductions in the ratings of securities
after such securities were acquired by the Funds as "investment grade"
securities, though the Park Avenue Fund, the Small Cap Fund and the Asset
Allocation Fund may acquire convertible securities without regard to their
ratings.
Lower rated securities may be subject to certain risks not typically
associated with "investment grade" securities, such as the following: (1) the
market for lower rated securities, which expanded rapidly during a period of
economic expansion, has only been tested during one period of economic downturn;
(2) reliable and objective information about the value of lower rated
obligations may be difficult to obtain because the market for such securities
may be thinner and less active than that for investment grade obligations; (3)
adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower than investment grade
obligations, and, in turn, adversely affect their market; (4) companies that
issue lower rated obligations may be in the growth stage of their development,
or may be financially troubled or highly leveraged, so they may not have more
traditional methods of financing available to them; (5) when other institutional
investors dispose of their holdings of lower rated debt securities, the general
market and the prices for such securities could be adversely affected; and (6)
the market for lower rated securities could be impaired if legislative proposals
to limit their use in connection with corporate reorganizations or to limit
their tax and other advantages are enacted.
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<PAGE>
The Bond Fund and The Asset Allocation Fund
The Bond Fund and the Asset Allocation Fund may purchase mortgage-backed
securities, such as collateralized mortgage obligations ("CMOs") and mortgage
pass-throughs.
Payments of principal and interest on the mortgage obligations underlying
CMOs are not passed through directly to the holders. Rather, they are made to an
independent trustee created specifically for the allocation of such interest and
principal payments because CMOs are frequently issued in a variety of classes or
series which are designed to be retired sequentially as the underlying mortgages
are repaid. In the event of prepayment on such mortgages, the class of
obligations next scheduled to mature generally will be paid down first. Thus,
even if the issuer does not supply additional collateral, there will be
sufficient collateral to secure the obligations which remain outstanding. A
mortgage pass-through, on the other hand, is secured by a pool of mortgages with
common characteristics, so it will not have the class structure associated with
CMOs. For this reason, payments of principal and interest on the underlying
mortgages can be passed-through to all holders of the mortgage pass-through.
And, all such holders will share the same pre-payment risk.
Many factors affect the frequency of unscheduled prepayments or
refinancings of the underlying mortgages, including interest rate changes,
economic conditions, the ages of the mortgages and locations of the mortgaged
properties. Prepayments on mortgage obligations tend to occur more frequently
after interest rates generally have declined. The return provided to the Funds
will be lower if the proceeds of prepaid mortgage-backed securities are
reinvested in securities that provide lower coupons. In addition, the Funds may
suffer losses on prepaid obligations which were acquired at a premium.
When interest rates are rising, mortgage-backed securities may suffer price
declines, particularly if their durations extend because mortgage prepayments or
refinancings slow down. Securities that have lost value will have an adverse
impact on a Fund's total return.
Stripped mortgage securities are another type of mortgage-backed security.
Stripped mortgage securities are created by separating the interest and
principal payments generated by a pool of mortgage-backed bonds to create two
classes of securities. Generally, one class receives only interest payments
(IOs) and one principal payments (POs). IOs and POs are acutely sensitive to
interest rate changes and to the rate of principal prepayments. They are very
volatile in price and may have lower liquidity than most mortgage-backed
securities. Certain CMOs may also exhibit these qualities, especially those
which pay variable rates of interest which adjust inversely with and more
rapidly than short-term interest rates. The Portfolio's Board of Trustees has
adopted procedures for use by GISC, the investment adviser to these Funds, to
ascertain the liquidity and fair value of their investments, including their
mortgage-backed securities holdings. There is no guarantee that the Funds'
investments in CMOs, IOs or POs will be successful, and the Funds' total return
could be adversely affected as a result.
The Park Avenue Fund, The Small Cap Fund, The International Fund, The Emerging
Markets Fund and The Asset Allocation Fund
As described in the Prospectus, the Park Avenue Fund, the Small Cap Fund,
the International Fund, the Emerging Markets Fund and the Asset Allocation Fund
are permitted to invest in convertible securities. Convertible securities are
fixed-income securities, such as bonds or preferred stock, which may be
converted at a stated price within a specified period of time into a specific
number of shares of common stock of the same or a different issuer. Convertible
securities also have characteristics similar to non-convertible debt securities
in that they ordinarily provide income with generally higher yields than those
of common stock of the same or a similar issuer. However, convertible securities
are usually subordinated to non-convertible debt securities. Convertible
securities carry the potential for capital appreciation should the value of the
underlying common stock increase, but they are subject to a lesser risk of a
decline in value, relative to the underlying common stock, due to their
fixed-income nature. Due to the conversion feature, however, the interest rate
or dividend rate on a convertible security is generally less than would be the
case if the securities were not convertible.
In evaluating a convertible security the investment advisers look primarily
at the attractiveness of the underlying common stock and at the fundamental
business strengths of the issuer. Other factors considered by the investment
advisers include the yield of the convertible security in relation to the yield
of the underlying common stock, the premium over investment value and the degree
of call protection.
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The Tax-Exempt Fund
Diversification. For the purpose of diversification under the 1940 Act, the
identification of the issuer of Municipal Obligations depends on the terms and
conditions of the security. When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the security is backed only
by the assets and revenues of the subdivision, such subdivision would be deemed
to be the sole issuer. Similarly, in the case of an industrial development bond,
if that bond is backed only by the assets and revenues of the non-governmental
issuer, then such non-governmental issuer would be deemed to be the sole issuer.
If, however, in either case, the creating government or some other entity
guarantees a security, such a guaranty would be considered a separate security
and will be treated as an issue of such government or other entity.
Municipal Lease/Purchase Agreements. The Tax-Exempt Fund may invest in
Municipal Lease/Purchase Agreements which are similar to installment purchase
contracts for property or equipment. These obligations typically are not fully
backed by the issuing municipality's credit and their interest may become
taxable if the lease is assigned. If the governmental issuer does not
appropriate sufficient funds for the following year's lease payments, the lease
will terminate, with the possibility of default on the lease obligation, which
may result in loss to the Fund.
Stand-by Commitments. The Tax-Exempt Fund may acquire stand-by commitments
from brokers, dealers or banks to facilitate its portfolio liquidity. Under a
stand-by commitment, the obligor must repurchase, at the Fund's option,
specified securities held in the Fund's portfolio at a specified price. Thus,
stand-by commitments are comparable to put options. The exercise of a stand-by
commitment is subject to the ability of the seller to make payment on demand.
The Tax-Exempt Fund does not intend to exercise its rights under stand-by
commitments for trading purposes. The Tax-Exempt Fund may pay for stand-by
commitments if such action is deemed necessary, thus increasing to a degree the
cost of the underlying Municipal Obligation and similarly decreasing such
security's yield. Gains realized in connection with stand-by commitments will be
taxable.
Tender Option Bonds. The Tax-Exempt Fund may invest in tender option bonds,
which generally are long-term Municipal Obligations which are coupled with
options to tender the underlying Municipal Obligations to third-party financial
institutions at periodic intervals. Holders of tender option bonds pay periodic
fees to the financial institution(s) that provide(s) the option(s). Such fees
are typically equal to the difference between the Municipal Obligation's fixed
coupon rate and the rate at or near the commencement of the option period that
would cause the securities, coupled with the tender option, to trade at par on
the date that a remarketing or similar agent would make the relevant rate
determinations. Thus, the holder effectively holds a demand obligation that
bears interest at the prevailing short-term tax-exempt rate. In certain
instances and for certain tender option bonds, the option may be terminable in
the event of a default in payment of principal or interest on the underlying
Municipal Obligation and for other reasons. Accordingly, GISC will consider, on
an ongoing basis, the creditworthiness of: (1) the issuers of Municipal
Obligations which are coupled with tender options; (2) any custodian; and (3)
the provider of the tender option.
The Fund will purchase tender option bonds only when it is satisfied that
any custodial arrangements and the tender option arrangements, including the fee
payment arrangements, will not adversely affect the tax-exempt status of the
underlying Municipal Obligations and that payment of any tender fees will not
have the effect of creating taxable income for the Fund. Based on the tender
option bond agreement, the Fund expects to be able to value the tender option
bond at par; however, the value of the instrument will be monitored to assure
that it is valued at fair value.
Other. The Tax-Exempt Fund may also invest in Municipal Obligations with
embedded derivatives. Such securities increase their interest rate payments to
the holder if rates go up and prices correspondingly decline. As the price of a
security goes down, the income goes up, offsetting the price decline.
Ratings of Municipal Obligations. Subsequent to its purchase by the Fund,
an issue of rated Municipal Obligations may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. Neither event
will require the sale of such Municipal Obligations by the Fund, but GISC will
consider such event in determining whether the Fund should continue to hold the
Municipal Obligations. To the extent that the ratings given by Moody's or
Standard & Poor's for Municipal Obligations may change as a result of changes in
such organizations or their rating systems, the Fund will attempt to use
comparable ratings as standards for its investments in accordance with the
investment policies contained in the Prospectus and this Statement of
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<PAGE>
Additional Information. See the Appendix to this Statement of Additional
Information for a more detailed discussion of securities ratings.
SPECIAL INVESTMENT TECHNIQUES
Each Fund has an investment objective which it pursues through its stated
investment policies and special investment techniques. There can be no assurance
that the objective of a Fund will be achieved. The following is a description of
certain of the special investment techniques which may be used by the investment
advisers on behalf of the Funds to the extent permitted by the Funds' investment
restrictions. This section supplements the description of "Special Investment
Techniques" contained in the Prospectus.
Options on Securities.
General. Each of the International Fund, the Emerging Markets Fund, the
Bond Fund, the Tax-Exempt Fund and the Asset Allocation Fund may purchase put
and call options and write (sell) covered call options and secured put options.
As a covered call option writer, a Fund must own securities which are acceptable
for the purpose of covering any outstanding options. So long as the Fund is
obligated as a writer of a put option, it will invest an amount not less than
the exercise price of the put option in eligible securities (i.e., cash or cash
equivalents). These duties reduce a Fund's flexibility to pursue other
investment opportunities while options are outstanding.
During the option period, the covered call writer gives up the potential
for capital appreciation above the exercise price should the underlying security
rise in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying security would result in the writer
having to deliver the underlying security to the holder of the option at the
exercise price, which will likely be lower than the security's value. For the
secured put writer, substantial depreciation in the value of the underlying
security would result in the exercise of the option by the holder, thereby
obligating the writer to purchase the underlying securities at the exercise
price, which will likely exceed the security's value. If a covered call option
expires unexercised, the writer realizes a gain and the buyer a loss in the
amount of the premium. If the covered call option writer has to sell the
underlying security because of the exercise of the call option, the writer
realizes a gain or loss from the sale of the underlying security, with the
proceeds being increased by the amount of the premium. If a secured put option
expires unexercised, the writer realizes a gain and the buyer a loss in the
amount of the premium. If the secured put writer has to buy the underlying
security because of the exercise of the put option, the secured put writer
incurs an unrealized loss to the extent that the current market value of the
underlying security is less than the exercise price of the put option. However,
this would be offset in whole or in part by gain from the premium received and
any interest income earned on the investment of the premium.
The exercise price of an option may be below, equal to or above the current
market value of the underlying security at the time the option is written. The
buyer of a put who also owns the related security is protected by ownership of a
put option against any decline in that security's price below the exercise price
less the amount paid for the option. The ability to purchase put options allows
a Fund to protect capital gains in an appreciated security which is already
owned, without being required to actually sell that security. At times a Fund
may seek to establish a position in securities upon which call options are
available. By purchasing a call option a Fund is able to fix the cost of
acquiring the security, this being the cost of the call plus the exercise price
of the option. This procedure also provides some protection from an unexpected
downturn in the market, because a Fund is only at risk for the amount of the
premium paid for the call option which it can, if it chooses, permit to expire.
The Funds named above may also write or purchase spread options, which are
options for which the exercise price may be a fixed monetary spread or yield
spread between the security underlying the option and another security that is
used as a benchmark. Spread options involve the same risks as are associated
with purchasing and selling options on securities generally, as described above.
The writer (seller) of a spread option which expires unexercised realizes a gain
in the amount of the premium and any interest earned on the investment of the
premium. However, if the spread option is exercised, the writer will forego the
potential for capital appreciation or incur an unrealized loss to the extent the
market value of the underlying security exceeds or is less than the exercise
price of such spread option. The purchaser of a spread option incurs costs equal
to the amount of the premium paid for such option if the spread option expires
unexercised, or the associated transaction costs if the
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purchaser closes out the spread option position.
A Fund which is authorized to buy and sell options may purchase a put
option and a call option, each with the same expiration date, on the same
underlying security. The Fund will profit from the combination position if an
increase or decrease in the value of the underlying security is sufficient for
the Fund to profit from exercise of either the call option or the put option.
Combined option positions involve higher transaction costs (because of the
multiple positions taken) and may be more difficult to open and close out than
other option positions.
Options on Securities Indices. The Funds named above may write or purchase
options on securities indices, subject to their general investment restrictions
regarding options transactions. Index options offer the Funds the opportunity to
achieve many of the same objectives sought through the use of options on
individual securities. Options on securities indices are similar to options on a
security except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the securities index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. This amount of cash is equal to such difference between the
closing price of the index and the exercise price of the option. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount. Unlike security options, all settlements are in cash and gain or
loss depends on the aggregate price movements in the relevant index rather than
price movements in individual securities.
Price movements in securities which the Funds own or intend to purchase
probably will not correlate perfectly with movements in the level of a
securities index and, therefore, the Funds bear the risk of a loss on a
securities index option which is not completely offset by movements in the price
of such securities. Because securities index options are settled in cash, a call
writer cannot determine the amount of its settlement obligations in advance and,
unlike call writing on a specific security, cannot provide in advance for, or
cover, its potential settlement obligations by acquiring and holding underlying
securities. The Funds may, however, cover call options written on a securities
index by holding a mix of securities which substantially replicate the movement
of the index or by holding a call option on the securities index with an
exercise price no higher than the call option sold.
When a Fund writes an option on a securities index, it will be required to
cover the option or to segregate assets equal in value to 100% of the exercise
price in the case of a put, or the contract value in the case of a call. In
addition, where a Fund writes a call option on a securities index at a time when
the exercise price exceeds the contract value, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess.
Options on securities indices involve risks similar to those risks relating
to transactions in financial futures contracts described below. Also, a
purchased option may expire worthless, in which case the premium which was paid
for it is lost.
Financial Futures Transactions.
General. The International Fund, the Emerging Markets Fund, the Bond Fund,
the Tax-Exempt Fund and the Asset Allocation Fund may enter into interest rate
futures contracts and securities index futures contracts (collectively referred
to as "financial futures contracts") primarily to hedge (protect) against
anticipated future changes in interest rates or equity market conditions which
otherwise might affect adversely the value of securities which these Funds hold
or intend to purchase. In addition, the Asset Allocation Fund may also enter
into financial futures contracts to reallocate assets among the Fund's equity,
fixed- income and money market asset categories while minimizing transaction
costs or generally as a hedge against changes in market conditions. A "sale" of
a financial futures contract means the undertaking of a contractual obligation
to deliver the securities or the cash value called for by the contract at a
specified price during a specified delivery period. A "purchase" of a financial
futures contract means the undertaking of a contractual obligation to acquire
the securities at a specified price during a specified delivery period.
When a Fund enters into a financial futures contract, it is required to
deposit with its custodian, on behalf of the broker, a specified amount of cash
or eligible securities called "initial margin." The initial margin required for
a financial futures contract is set by the exchange on which the contract is
traded. Subsequent payments, called "variation margin," to and from the broker
are made on a daily basis as the market price of the financial futures contract
fluctuates. At the time of delivery, pursuant to the contract, adjustments are
made to recognize differences
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in value arising from the delivery of securities with a different interest rate
than that specified in the contract. With respect to securities index futures
contracts, settlement is made by means of a cash payment based on any
fluctuation in the contract value since the last adjustment in the variation
margin was made.
If a Fund owned long-term bonds and interest rates were expected to rise,
it could sell interest rate futures contracts. If interest rates did increase,
the value of the bonds in such Fund's portfolio would decline, but this decline
should be offset in whole or in part by an increase in the value of the Fund's
interest rate futures contracts. If, on the other hand, long-term interest rates
were expected to decline, a Fund could hold short-term debt securities and
benefit from the income earned by holding such securities, while at the same
time purchasing interest rate futures contracts on long-term bonds. Thus, a Fund
could take advantage of the anticipated rise in the value of long-term bonds
without actually buying them. The interest rate futures contracts and short-term
debt securities could then be liquidated and the cash proceeds used to buy
long-term bonds.
Although some financial futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the contractual
commitment is closed out before delivery of the security. The offsetting of a
contractual obligation is accomplished by purchasing (or selling as the case may
be) on a commodities or futures exchange an identical financial futures contract
calling for delivery in the same month. Such a transaction, if effected through
a member of an exchange, cancels the obligation to make or take delivery of the
securities. All transactions in the futures market are made, offset or fulfilled
through a clearing house associated with the exchange on which the contracts are
traded. A Fund will incur brokerage fees when it purchases or sells financial
futures contracts, and will be required to maintain margin deposits. If a liquid
secondary market does not exist when a Fund wishes to close out a financial
futures contract, it will not be able to do so and will continue to be required
to make daily cash payments of variation margin in the event of adverse price
movements.
Special Considerations Relating to Financial Futures Contracts. Financial
futures contracts entail risks. If the investment adviser's judgment about the
general direction of interest rates or markets is wrong, the overall performance
may be poorer than if the Fund had not entered into financial futures contracts.
For example, in some cases, securities called for by a financial futures
contract may not have been issued at the time the contract was written. There
may also be an imperfect correlation between movements in prices of financial
futures contracts and portfolio securities being hedged. The degree of
difference in price movement between financial futures contracts and the
securities being hedged depends upon such things as differences between the
securities being hedged and the securities underlying the financial futures
contracts, and variations in speculative market demand for financial futures
contracts and securities. In addition, the market prices of financial futures
contracts may be affected by certain factors. If participants in the futures
market elect to close out their contracts through offsetting transactions rather
than meet margin requirements, distortions in the normal relationship between
the securities and financial futures markets could result. Price distortions
could also result if investors in financial futures contracts decide to make or
take delivery of underlying securities rather than engage in closing
transactions, which would reduce the liquidity of the futures market. In
addition, because the margin requirements in the futures markets are less
onerous than margin requirements in the cash market, increased participation by
the speculators in the futures market could cause temporary price distortions.
Due to the possibility of price distortions in the futures market and because
there may be an imperfect correlation between movements in the prices of
securities and movements in the prices of financial futures contracts, a correct
forecast of market trends by the investment adviser may still not result in a
successful hedging transaction. If this should occur, the Funds could lose money
on the financial futures contracts and also on the value of their portfolio
securities.
Options on Financial Futures Contracts.
The International Fund, the Emerging Markets Fund, the Bond Fund, the
Tax-Exempt Fund and the Asset Allocation Fund may purchase and write call and
put options on financial futures contracts. An option on a financial futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a financial futures contract at a specified exercise price
at any time during the period of the option. Upon exercise, the writer of the
option delivers the financial futures contract to the holder at the exercise
price. A Fund would be required to deposit with its custodian initial margin and
variation margin with respect to put and call options on a financial futures
contract as written by it.
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When-Issued or Delayed-Delivery Transactions.
The Small Cap Fund, the International Fund, the Emerging Markets Fund, the
Bond Fund, the Tax-Exempt Fund and the Asset Allocation Fund may enter into
when-issued or delayed delivery transactions. Prior to settlement of these
transactions, the value of the subject securities will fluctuate, reflecting
interest rate changes. Accordingly, when a Fund commits to buy particular
securities and make payment in the future, it must set aside, in a segregated
account with the custodian, cash or liquid high grade securities at least equal
in value to its commitments. In the case of a sale of securities on a
delayed-delivery basis, a Fund will instruct the custodian to hold the subject
portfolio securities in a segregated account while the commitment is
outstanding. These obligations to segregate cash or securities will limit the
investment advisers' ability to manage each Fund's investments.
Lending of Portfolio Securities.
The Small Cap Fund, the Bond Fund, the Tax-Exempt Fund and the Asset
Allocation Fund may lend their portfolio securities to broker-dealers, banks and
other institutional investors.
These Funds will typically receive commitment fees from the borrowers which
are normally payable upon the expiration of the loan transactions. However, if a
Fund calls the loaned securities prior to the expiration date of a loan, the
Fund may not be entitled to receive the entire commitment fee. The Funds do not
expect to call loaned securities prior to the applicable loan expiration date
unless the current market value of the loaned securities exceeds the expected
return of the loan, including commitment fee income, on the expiration date.
These loan transactions may be structured to permit similar, but not necessarily
identical, securities to be returned to the Funds upon the expiration of a loan.
Since there are risks of delays in recovery or even loss of rights in the
collateral related to all types of secured credit, the loans will be made only
to borrowers deemed by GISC to be creditworthy and will not be made unless, in
GISC's judgment, the income which can be earned justifies the risk. Any such
loans entered into by the Funds will create leverage for the Funds, as lender.
This leverage results from the expectation that the income and gains on the
securities acquired by the Funds with the loan collateral provided by the
borrower will exceed the cost of the loan transaction. Accordingly, each Fund
will only enter into a loan transaction if its earnings or net asset value are
expected to increase faster than otherwise would be the case. However, should
the income and gains earned on the securities acquired with the loan collateral
fail to exceed the cost of the loan, the Fund's earnings or net asset value will
decline faster than otherwise would be the case.
In the event the borrower is unable to complete a loan transaction, or in
the event of any default or insolvency of the borrower, each Fund will retain
the collateral it received in connection with the loan transaction. If this
collateral is insufficient to fully satisfy its rights under the loan agreement,
the affected Fund will take whatever steps it deems advisable to satisfy its
claim.
The Funds may pay reasonable custodian and administrative fees in
connection with the loans.
Foreign Currency Futures and Options on Foreign Currency Futures.
The International Fund and the Emerging Markets Fund may purchase and sell
futures contracts on foreign currencies, related options thereon and options on
foreign currencies as a hedge against possible variation in foreign exchange
rates. A futures contract on a foreign currency is an agreement between two
parties to buy and sell a specified amount of a particular currency for a
particular price on a future date. An option on a foreign currency futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a foreign currency futures contract at a specified price at
any time during the period of the option. An option transaction on a foreign
currency provides the holder with ability to buy or sell a particular currency
at a fixed price on a future date, and is used to hedge the currency exchange
rate risk on non-U.S. dollar-denominated securities owned by a Fund, anticipated
to be purchased by the Fund, or sold by the Fund but not yet delivered. Options
on foreign currencies may be traded on U.S. and foreign exchanges or in the
over-the-counter market.
Foreign currency futures contracts and options on foreign currency futures
contracts are traded on boards of trade and futures exchanges. Buyers and
sellers of foreign currency futures contracts are subject to the same risks
which apply to the use of future contracts generally. In addition, there are
risks associated with foreign currency futures contracts similar to those
associated with options on foreign currencies, described above. Moreover, the
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ability to close out positions in such options is subject to the maintenance of
a liquid secondary market. In order to reduce this risk, a Fund will not
purchase or sell options on foreign currency options unless, in the opinion of
the Fund's investment adviser, a sufficiently liquid secondary market exists so
that the risks connected to such options transactions are not greater than the
risks associated with the underlying foreign currency futures contract.
A Fund will only write covered options on foreign currency or foreign
currency futures contracts. A put on a foreign currency or foreign currency
futures contract written by the Fund will be considered covered if the Fund
segregates cash, U.S. government securities or other liquid high-grade debt
securities, equal to the average exercise price of the put. A call on a foreign
currency or on a foreign currency futures contract written by the Fund will be
considered covered if the Fund owns short-term debt securities with a value
equal to the face amount of the option contract denominated in the currency upon
which the call is written.
A Fund will purchase an option on foreign currency as a hedge against
fluctuations in exchange rates. However, should exchange rates move adversely to
the Fund's position, the Fund may forfeit both the entire price of the option
plus the related transaction costs.
Engaging in foreign futures and foreign options transactions involves the
execution and clearing of trades on or subject to the rules of a foreign board
of trade. Neither the National Futures Association ("NFA") nor any domestic
(U.S.) exchange regulates activities of any foreign boards of trade, including
the execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable foreign
law. This is true even if the exchange is formally linked to a domestic market
so that a position taken on the exchange may be liquidated by a transaction on
the appropriate domestic market. Moreover, applicable laws or regulations will
vary depending on the foreign country in which the foreign futures or foreign
options transaction occurs. Therefore, entities (such as the Funds) which trade
foreign futures or foreign options contracts may not be afforded certain of the
protective measures provided by the Commodity Exchange Act, Commodity Futures
Trading Commission ("CFTC") regulations, the rules of the NFA or those of a
domestic (U.S.) exchange. In particular, monies received from customers for
foreign futures or foreign options transactions may not be provided the same
protections as monies received in connection with transactions on U.S. futures
exchanges. In addition, the price of any foreign futures or foreign options
contract and, therefore, the potential profit and loss thereon, may be affected
by any variance in the foreign exchange rate between the time the order for the
futures contract or option is placed and the time it is liquidated, offset or
exercised.
Forward Foreign Currency Transactions.
The foreign securities held by the Park Avenue, Small Cap, International
and Emerging Markets Funds may be denominated in foreign currencies and the
Funds may temporarily hold foreign currency in connection with such investments.
As a result, the value of the assets held by a Fund may be affected favorably or
unfavorably by changes in foreign currency exchange rates and exchange control
regulations. The Funds may enter into forward foreign currency exchange
contracts ("forward currency contracts") in an effort to control some of the
uncertainties of foreign currency exchange rate fluctuations. A forward currency
contract is an agreement to purchase or sell a specific currency at a specified
future date and price agreed to by the parties at the time of entering into the
contract. The Funds will not engage in forward currency contracts for
speculation, but only as an attempt to hedge against changes in currency
exchange rates affecting the values of securities which a Fund holds or intends
to purchase. Thus, a Fund will not enter into a forward currency contract if
such contract would obligate the Fund to deliver an amount of foreign currency
in excess of the value of the Fund's portfolio securities or other assets
denominated in that currency.
A Fund will normally be expected to use forward currency contracts to fix
the value of certain securities it has agreed to buy or sell. For example, when
a Fund enters into a contract to purchase or sell securities denominated in a
particular foreign currency, the Fund could effectively fix the maximum cost of
those securities by purchasing or selling a foreign currency contract, for a
fixed value of another currency, in the amount of foreign currency involved in
the underlying transaction. In this way, the Fund can protect the value of
securities in the underlying transaction from an adverse change in the exchange
rate between the currency of the underlying securities in the transaction and
the currency denominated in the foreign currency contract, during the period
between the date the security is purchased or sold and the date on which payment
is made or received.
The Funds may also use forward currency contracts to hedge the value, in
U.S. dollars, of securities it currently owns. For example, if a Fund holds
securities denominated in a foreign currency and anticipates a substantial
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decline (or increase) in the value of that currency against the U.S. dollar, the
Fund may enter into a foreign currency contract to sell (or purchase), for a
fixed amount of U.S. dollars, the amount of foreign currency approximating the
value of all or a portion of the securities held which are denominated in such
foreign currency.
Upon the maturity of a forward currency transaction, a Fund may either
accept or make delivery of the currency specified in the contract or, at any
time prior to maturity, enter into a closing transaction which involves the
purchase or sale of an offsetting contract. An offsetting contract terminates a
Fund's contractual obligation to deliver the foreign currency pursuant to the
terms of the forward currency contract by obligating the Fund to purchase the
same amount of the foreign currency, on the same maturity date and with the same
currency trader, as specified in the forward currency contract. The Fund will
realize a gain or loss as a result of entering into such an offsetting contract
to the extent the exchange rate between the currencies involved moved between
the time of the execution of the original forward currency contract and the
offsetting contract.
The use of forward currency contracts to protect the value of securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities a Fund owns or intends to acquire, but
it does fix a future rate of exchange. Although such contracts minimize the risk
of loss resulting from a decline in the value of the hedged currency, they also
limit the potential for gain resulting from an increase in the value of the
hedged currency. The benefits of forward currency contracts to the Funds will
depend on the ability of the Funds' investment advisers to accurately predict
future currency exchange rates.
Regulatory Restrictions.
To the extent required to comply with the 1940 Act and rules and
interpretations thereunder, a Fund may not maintain open short positions in
financial futures contracts, call options written on financial futures contracts
or call options written on indexes if, in the aggregate, the market value of all
such open positions exceeds the current value of the securities in its
portfolio, 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. When purchasing a financial futures contract or
writing a put option on a financial futures contract, the Fund must segregate
cash, cash-equivalents (including any margin) or liquid high-grade debt
obligations equal to the market value of such contract. These cover and
segregation requirements may limit the Fund's ability to pursue other investment
opportunities.
In order to comply with the Commodity Futures Trading Commission Regulation
4.5 and thereby avoid being deemed a "commodity pool operator," a Fund will use
commodity futures or commodity options contracts solely for bona fide hedging
purposes within the meaning and intent of Regulation 1.3(z), or, with respect to
positions in commodity futures and commodity options contracts that do not come
with the meaning and intent of Regulation 1.3(z), the aggregate initial margin
and premiums required to establish such positions will not exceed 5% of the fair
market value of the assets of the Fund, after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into. In the
case of an option that is in-the-money at the time of purchase, the in-the-money
amount (as defined in Section 190.01(x) of the CFTC Regulations) may be excluded
in computing such 5%.
INVESTMENT ADVISERS AND DISTRIBUTOR
Guardian Investor Services Corporation ("GISC"). GISC is the investment
adviser for each of the Funds (except the International Fund and the Emerging
Markets Fund). GISC and the Portfolio have entered into a written investment
advisory agreement which provides that GISC shall act as the applicable Funds'
investment adviser, manage their investments and provide them with various
services and facilities. The investment advisory agreement will continue in full
force and effect from year to year with respect to each Fund so long as its
continuance is approved at least annually by vote of a majority of the
outstanding voting securities of that Fund, or by vote of the Board of Trustees
of the Portfolio, including a majority of the Trustees who are not parties to
the agreement or "interested persons" of the Portfolio or of GISC, cast in
person at a meeting called for that purpose. The agreement will terminate
automatically upon its assignment and may be terminated with respect to any Fund
without penalty at any time by either party upon 60 days' written notice.
Under the terms of the investment advisory agreement, GISC provides or pays
for certain of the Funds' administrative costs. Among the services and
facilities provided or paid for by GISC are: office space; clerical staff and
recordkeeping; and the services of all Fund personnel, including any fees and
expenses of the Trustees who are
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affiliated with The Guardian Life Insurance Company of America ("Guardian
Life"). All other costs and expenses are to be paid by the Funds that GISC
advises.
The investment advisory agreement provides that neither GISC, nor any of
its personnel shall be liable for any error of judgment or mistake of law or for
any loss suffered by GISC or the Funds in connection with the matters to which
the investment advisory agreement relates, except for loss resulting from
willful misfeasance or misconduct, willful default, bad faith, or gross
negligence in the performance of its or his/her duties on behalf of GISC or the
Funds or from reckless disregard by GISC or any such person of the duties of
GISC under the investment advisory agreement.
Guardian Life has registered and maintains the exclusive ownership interest
of the following trademarks or service marks, as the case may be: "The Guardian
Park Avenue Fund," "The Guardian Park Avenue Small Cap Fund," "The Guardian
Investment Quality Bond Fund," "The Guardian Tax-Exempt Fund," "The Guardian
Cash Management Fund," "The Guardian Asset Allocation Fund", "The Guardian
Baillie Gifford International Fund" and "The Guardian Baillie Gifford Emerging
Markets Fund." If the investment advisory agreement is terminated with respect
to any or all of the Funds and it is not replaced by an agreement with another
affiliate of Guardian Life, any affected Fund's continued use of its name is
subject to the approval of Guardian Life.
The investment advisory agreement includes a provision that if any 1940 Act
requirement is relaxed by rule, regulation or order of the SEC, then any
provision of the agreement which reflects such 1940 Act requirement shall be
deemed to incorporate the effect of such rule, regulation or order.
A service agreement between GISC and Guardian Life provides that the latter
will furnish the office space, clerical staff, services and facilities which
GISC needs to perform its duties under the investment advisory agreement. GISC's
officers and other personnel are salaried employees of Guardian Life; they
receive no compensation from GISC. GISC reimburses Guardian Life for its
expenses under the service agreement.
The following chart details the investment management fees paid to GISC by
the Funds named during the periods noted. The Small Cap Fund did not commence
operations until after December 31, 1996, and therefore no information is
provided for the Small Cap Fund.
- --------------------------------------------------------------------------------
Fund Name Year ended Year ended Year ended
12/31/94 12/31/95 12/31/96
- --------------------------------------------------------------------------------
Park Avenue $3,046,391 $4,093,163 $5,851,464
Cash $ 229,729 $ 332,665 $ 388,947
Bond $ 126,947 $ 255,331 $ 259,454
Tax-Exempt $ 90,421 $ 83,564 $ 105,144
Asset Allocation $ 357,563 $ 404,836 $ 510,556
- --------------------------------------------------------------------------------
Guardian Baillie Gifford Limited ("GBG"). GBG is the investment adviser to
the International Fund and the Emerging Markets Fund pursuant to an investment
advisory agreement between GBG and the Portfolio. GBG was formed in November
1990 through a joint venture between GIAC, a wholly owned subsidiary of Guardian
Life and Baillie Gifford Overseas Limited ("BG Overseas"), which is wholly owned
by Baillie Gifford & Co.
The agreement provides that GBG is responsible for the overall investment
management of the investment portfolios of the International Fund and the
Emerging Markets Fund. Under the terms of the agreement, GBG is responsible for
all decisions to buy and sell securities for the Funds, furnishes the Board with
recommendations with respect to the Funds' investment policies, provides the
Board with regular reports pertaining to the implementation and performance of
such policies, and maintains certain books and records as required by the 1940
Act and by any other applicable laws and regulations. GBG has, in turn, entered
into a sub-investment advisory agreement with BG Overseas appointing the latter
as sub-investment adviser and delegating to BG Overseas much of the day-to-day
management responsibilities for the Funds' portfolios (see "Baillie Gifford
Overseas Limited" below).
The agreement between GBG and the Portfolio will continue in full force and
effect with respect to each Fund from year to year, provided its continuance is
specifically approved at least annually by vote of a majority of the outstanding
securities of the respective Funds, or by vote of the Board of Trustees of the
Portfolio, including a majority of the Trustees who are not parties to the
agreement or "interested persons" of the Portfolio or of GBG,
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cast in person at a meeting called for the purpose of voting on such
continuance.
The agreement provides that neither GBG, nor any of its officers,
directors, or employees shall be liable for any error of judgment or mistake of
law or for any loss suffered by either Fund in connection with the matters to
which the agreement relates, except for loss resulting from willful misfeasance
or misconduct, willful default, bad faith, or gross negligence in the
performance of its or his/her duties on behalf of a Fund or from reckless
disregard by GBG or any such person of the duties of GBG under the agreement.
The agreement includes a provision that if any 1940 Act requirement is
relaxed by rule, regulation or order of the SEC, then any provision of the
agreement which reflects such 1940 Act requirement shall be deemed to
incorporate the effect of such rule, regulation or order.
The agreement may be terminated with respect to a Fund, without penalty, at
any time by either party upon 60 days' written notice and will terminate
automatically upon its assignment. In addition, either party may terminate the
agreement immediately in any of the following situations: (1) the other party
commits any material breach of its obligations under the agreement which, if
curable, is not remedied within 30 days; (2) the dissolution of the other party;
or (3) the termination or expiration of the joint venture agreement between GIAC
and BG Overseas. Termination of the investment advisory agreement with respect
to one Fund will not affect its validity with respect to the other Fund.
In the event that the agreement is terminated and unless it is replaced by
another agreement between GIAC and BG Overseas or their affiliates, the
continued use of the names "The Guardian Baillie Gifford International Fund" and
"The Guardian Baillie Gifford Emerging Markets Fund" is subject to the approval
of both GIAC and BG Overseas.
The management fees paid by the International Fund to GBG for the years
ended December 31, 1996, December 31, 1995, and December 31, 1994 were $423,523,
$331,752 and $253,292, respectively. The Emerging Markets Fund did not commence
operations until after December 31, 1996, and therefore no information is
provided for that Fund.
Baillie Gifford Overseas Limited. BG Overseas is the sub-investment adviser
for the International and Emerging Markets Funds pursuant to a sub-investment
advisory agreement with GBG. Pursuant to this sub-investment advisory agreement,
BG Overseas manages the day-to-day operations of each Fund's portfolio. In so
doing, BG Overseas has full discretion to purchase and sell portfolio
securities, to select brokers for the execution of such purchases, sales, and to
negotiate brokerage commissions, if any, subject to monitoring by GBG. GBG
continually monitors and evaluates the performance of BG Overseas.
The sub-investment advisory agreement will continue in full force and
effect with respect to each Fund from year to year, provided its continuance is
specifically approved at least annually (1) by the Board of Directors of GBG and
(2) by either (a) a majority of the outstanding securities of the respective
Funds or (b) the Board of Trustees of the Portfolio, including approval by a
vote of the majority of the Trustees who are not parties to the sub-investment
advisory agreement or "interested persons" of the Portfolio or of GBG, cast in
person at a meeting called for the purpose of voting on such continuance.
The sub-investment advisory agreement provides that neither BG Overseas,
nor any of its officers, directors or employees shall be liable for any error of
judgment or mistake of law or for any loss suffered by GBG or either Fund in
connection with the matters to which the sub-investment advisory agreement
relates, except for any loss resulting from willful misfeasance or misconduct,
willful default, bad faith, or gross negligence in the performance of its or
his/her duties on behalf of GBG or the Funds or from reckless disregard by BG
Overseas or any such person of the duties of BG Overseas under the
sub-investment advisory agreement.
The sub-investment advisory agreement includes a provision that if any 1940
Act requirement is relaxed by rule, regulation or order of the SEC, then any
provision of the sub-investment advisory agreement which reflects such 1940 Act
requirement shall be deemed to incorporate the effect of such rule, regulation
or order.
The sub-investment advisory agreement may be terminated, without penalty,
at any time by either party upon 60 days' written notice and will terminate
automatically upon its assignment. In addition, either party may terminate the
sub-investment advisory agreement immediately in any of the following
situations: (1) the other party commits any material breach of its obligations
under the agreement which, if curable, is not remedied within 30 days; (2) the
dissolution of the other party; or (3) the termination or expiration of the
joint venture agreement
B-23
<PAGE>
between GIAC and BG Overseas. Termination of the sub-investment advisory
agreement with respect to one Fund will not affect its validity with respect to
the other Fund.
Of the management fees that it receives under its investment advisory
agreement with the International and Emerging Markets Funds, GBG pays 0.40% of
the average daily net assets of the International Fund and 0.50% of the average
daily net assets of the Emerging Markets Fund to BG Overseas as compensation for
BG Overseas' services as the Funds' sub-investment adviser. For the years ended
December 31, 1996, December 31, 1995 and December 31, 1994, BG Overseas received
$211,761, $165,876 and $126,646, respectively, from GBG as compensation for its
services to the International Fund. The Emerging Markets Fund did not commence
operations until after December 31, 1996, and therefore no information is
provided for that Fund.
(See the Prospectus section entitled "Management" for more information
about the Portfolio's investment advisory agreements.)
The Administrative Services Agreement. GISC and the Portfolio have also
entered into an Administrative Services Agreement on behalf of both classes of
shares pursuant to which GISC will provide information and administrative
services for the benefit of the Portfolio and its shareholders. These services
include providing office space, equipment and personnel, maintenance of
shareholder account records, responding to routine shareholder inquiries
regarding the Portfolio and assisting in the processing of shareholder
transactions and any other services which the Portfolio may reasonably request.
GISC may also enter into related agreements with other broker-dealers or other
financial services firms that provide such services and facilities for their
customers who are shareholders of the Portfolio. The Administrative Services
Agreement may be terminated at any time by either party upon 60 days' written
notice. The Agreement may not be assigned without the consent of the Portfolio.
Any material amendments to the Agreement, including an increase in the amount of
fees, must be approved by the Board of Trustees of the Portfolio. For the period
from May 1, 1996 (effectiveness of the Administrative Services Agreement) to
December 31, 1996, the Funds paid fees under the Administrative Services
Agreement to GISC in the amounts set forth in the following table. Since the
Small Cap Fund and the Emerging Markets Fund did not commence operations until
after December 31, 1996, no information is provided with respect to those Funds.
- --------------------------------------------------------------------------------
Administrative Service Fees Paid by the Funds
from May 1, 1996 to December 31, 1996
- --------------------------------------------------------------------------------
Name of Fund Class A Shares Class B Shares*
- --------------------------------------------------------------------------------
Park Avenue $1,087,354 $19,018
Asset Allocation $ 176,899 $ 4,608
International $ 88,088 $ 3,257
Bond $ 86,597 --
Tax-Exempt $ 40,748 --
Cash $ 121,068 $ 3,340
- --------------------------------------------------------------------------------
* The Bond Fund and the Tax-Exempt Fund do not offer Class B shares.
Underwriting Agreement. The Portfolio has also entered into an underwriting
agreement with GISC which, together with a distribution plan and agreement
pursuant to Rule 12b-1 under the 1940 Act (see below), governs the sale and
distribution of Fund shares and payment of commissions to GISC. Shares are
offered continuously; however, the Portfolio reserves the right to cease the
offer of any Fund's shares at any time, subject to applicable laws, rules and
regulations. The underwriting agreement shall remain in full force and effect
from year to year so long as its continuance is approved at least annually by
the Board of Trustees of the Portfolio, including a majority of Trustees who are
not parties to the agreement or interested persons of any such party. It will
terminate upon assignment and may be terminated with respect to any or all of
the Funds at any time by either party on not less than 30 nor more than 60 days'
written notice. Termination of the underwriting agreement with respect to one
Fund will not affect its validity with respect to any other Fund. The agreement
also provides that the Portfolio shall indemnify GISC and persons in control of
GISC with respect to certain liabilities, including liabilities arising under
the Securities Act of 1933. Shares of each Fund may be purchased through
Guardian Life agents who are registered representatives and licensed by GISC to
sell Fund shares, and through registered representatives of selected
broker-dealers which are members of the National Association of Securities
Dealers, Inc. and which have entered into selling agreements with GISC. GISC may
reallow up to 100% of any sales charge on shares sold by
B-24
<PAGE>
dealers with whom it has sales agreements.
Contingent Deferred Sales Load -- Class B Shares. As discussed in the
Prospectus, Class B shares redeemed within six years of purchase generally are
subject to a contingent deferred sales load ("CDSL") subject to waivers
described in the Prospectus. For the period May 1, 1996 (commencement of
operations of Class B shares) to December 31, 1996, GISC received the following
CDSLs with respect to redemptions of Class B shares of the Multiple Class Funds.
Since the Small Cap Fund and the Emerging Markets Fund had not commenced
operations as of December 31, 1996, no information is provided for those Funds.
- --------------------------------------------------------------------------------
CDSLs Received for the
Fund Period Ended December 31, 1996
---- ------------------------------
Park Avenue $6,448
Asset Allocation $1,360
International $ 96
Cash $2,044
- --------------------------------------------------------------------------------
Distribution Plan Pursuant to Rule 12b-1 and Distribution Agreement. Under
a Distribution Plan adopted by the Portfolio pursuant to Rule 12b-1 under the
1940 Act (the "12b-1 Plan"), each Portfolio Fund which issues Class B shares
(the "Multiple Class Funds") is authorized to pay a monthly 12b-1 fee at an
annual rate of up to 0.75% of average daily net assets of the Fund's Class B
shares as compensation for distribution-related services provided to the Class B
shares of those Funds.
The 12b-1 fees may be paid by the Portfolio Funds to third parties,
including GISC, which enter into Distribution Agreements with the Portfolio.
Under the 12b-1 Plan, distribution fees may be used to compensate brokers and
dealers who engage in or support the distribution of the Class B shares of the
Multiple Class Funds. The 12b-1 fees may also be used to pay other
distribution-related expenses incurred, such as communications equipment
charges, printing prospectuses, statements of additional information and reports
for prospective investors, the costs of printing sales literature and
advertising materials, training and educating sales personnel and other
overhead. The 12b-1 Plan, in conjunction with the CDSL, permits an investor to
purchase Class B shares through a distributor without the imposition of an
initial sales load.
In order to effect the 12b-1 Plan, the Portfolio, on behalf of the Multiple
Class Funds, has entered into a Distribution Agreement with GISC. GISC is
compensated by the fees it receives under the 12b-1 Plan and is not paid any
additional amounts under the Distribution Agreement. GISC intends to use these
fees to pay for distribution-related expenses for Class B shareholders and
payments to registered representatives for the sale of Class B shares. GISC also
intends to use the 12b-1 fees to advance payments of up to 3.0% of the proceeds
of sales of Class B shares to its registered representatives and other
authorized broker-dealers.
GISC absorbs its distribution and service expenses which exceed the amount
of 12b-1 fees collected. No Fund is obligated to reimburse GISC for such excess
expenses, and GISC will not carry one year's deficiency to a subsequent year in
order to recover such deficiency from the subsequent year's fee. Similarly, if
the 12b-1 Plan or Underwriting Agreement, as either pertains to a Fund, is
terminated or not renewed, any expenses incurred by GISC on behalf of such Fund
which are in excess of fees which GISC has received or accrued shall be absorbed
by GISC. Conversely, if GISC's expenditures for a Fund under the 12b-1 Plan are
less than the amount collected, GISC is entitled to retain the excess. However,
the Trustees are authorized to negotiate changes to the 12b-1 Plan, such as a
fee reduction or increased services, if the fee paid by a Fund in a particular
year exceeds the covered expenses. Alternatively, the Trustees may find such
excess justifiable under the circumstances.
The 12b-1 Plan specifically provides that while it is in effect, the
selection and nomination of the Trustees who are not "interested persons" of the
Portfolio, as that term is defined in the 1940 Act, shall be made solely at the
discretion of the Trustees who are not interested persons of the Portfolio.
The fees to be paid by a Fund under the 12b-1 Plan may not be amended in a
material way without approval by vote of: (1) a majority of the Trustees; (2) a
majority of the Trustees who are not "interested persons" of the Portfolio and
have no direct or indirect financial interest in the operation of the 12b-1 Plan
or related agreements ("Independent Trustees"); and (3) a majority of such
Fund's outstanding voting securities, as defined by the 1940
B-25
<PAGE>
Act.
The 12b-1 Plan will continue from year-to-year for each Fund if such
continuance is specifically approved by vote of the Board, and by vote of the
Independent Trustees, cast in person at a meeting called for the purpose of
voting on the 12b-1 Plan.
The 12b-1 Plan may be terminated with respect to the Portfolio or a Fund
(1) at any time by vote of a majority of the Trustees, a majority of the
Independent Trustees, or a majority of that Fund's outstanding voting
securities, or (2) by GISC on 60 days' notice in writing to the Portfolio.
For the period from May 1, 1996 (commencement of operations of the Class B
shares) to December 31, 1996, the Class B shares of the Multiple Class Funds
paid fees under the Rule 12b-1 Plan to GISC as set forth in the following table.
The table details the amount that the Class B shares of each Fund paid to GISC
and how GISC used that money to promote sales and provide customer service
during this period. Since the Small Cap Fund and the Emerging Markets Fund did
not commence operations until after December 31, 1996, no information is
provided with respect to those Funds.
- --------------------------------------------------------------------------------
Rule 12b-1 Fees Paid by Class B shares of the Funds
and Expenditures by GISC from May 1, 1996 to December 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
GISC's Expenditures to Print
Fund -- Name and 12b-1 GISC's Marketing and and Mail Prospectuses Distribution Trail Amounts Retained
Fees Paid to GISC Advertising Expenditures for Prospective Investors Expenses Commissions by GISC
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Park Avenue
$56,796 $69,633 $85,977 $905,172 $48,417 $0
- -------------------------------------------------------------------------------------------------------------------------------
Asset Allocation
$13,822 $16,068 $15,417 $ 86,838 $ 6,577 $0
- -------------------------------------------------------------------------------------------------------------------------------
International
$ 7,028 $12,618 $10,271 $ 44,796 $ 4,233 $0
- -------------------------------------------------------------------------------------------------------------------------------
Cash
$ 3,708 $ 9,228 $ 7,974 $ 53,968 $ 3,329 $0
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Portfolio has also entered into a Distribution Plan with GISC on behalf
of the Class A shares. This Plan was made dormant by the Board as of May 1, 1996
and no 12b-1 fees are currently authorized to be paid in connection with sales
of Class A shares. The following chart details the amount that the Class A
shares of each Fund paid GISC under this 12b-1 Plan and how GISC used that money
to promote sales and provide customer service during the first four months of
1996, when this Plan was operational.
- --------------------------------------------------------------------------------
12b-1 Plan for Class A Shares
Fees Paid by the Funds
and Expenditures by GISC
For the Period January 1, 1996 to April 30, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
GISC's Expenditures to Print
Fund -- Name and 12b-1 GISC's Marketing and and Mail Prospectuses Distribution Trail Amounts Retained
Fees Paid to GISC Advertising Expenditures for Prospective Investors Expenses Commissions by GISC
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Park Avenue Fund
$513,750 $108,726 $22,486 $119,347 $395,140 $0
- -------------------------------------------------------------------------------------------------------------------------------
Asset Allocation
Fund
$60,609 $ 40,388 $10,909 $ 8,539 $ 50,116 $0
- -------------------------------------------------------------------------------------------------------------------------------
International Fund
$39,035 $ 38,487 $10,609 $ 5,492 $ 32,683 $0
- -------------------------------------------------------------------------------------------------------------------------------
Bond Fund
$44,517 $ 38,894 $10,647 $ 6,261 $ 36,095 $0
- -------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt Fund
$10,577 $ 32,491 $10,035 $ 4,784 $ 39,311 $0
- -------------------------------------------------------------------------------------------------------------------------------
Cash Management
Fund
$59,491 $ 40,220 $10,882 $ 8,392 $ 52,415 $0
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
B-26
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
GISC currently serves as investment adviser to several Guardian-sponsored
mutual funds, serves as manager of one other mutual fund and is the co-adviser
of a separate account established by its corporate parent, GIAC. GBG and BG
Overseas currently serve as investment adviser and sub-investment adviser,
respectively, to two series of one other Guardian-sponsored mutual fund. In the
future, each of GISC, GBG or BG Overseas (collectively, the "Advisers") may act
as investment advisers to other Guardian-sponsored mutual funds or GIAC separate
accounts. At times, investment decisions may be made to purchase or sell the
same investment security for one or more of the other clients advised by the
Advisers. It is each Adviser's practice to allocate purchase and sale
transactions among the Funds and other clients whose assets they manage in such
manner as is deemed equitable, which may or may not be beneficial to the Funds.
The Advisers have no formula for the distribution of brokerage business
when placing orders for the purchase and sale of portfolio securities. For
over-the-counter transactions, the Advisers attempt to deal with a primary
market maker unless they believe better prices and execution are available
elsewhere. In allocating portfolio transactions among brokers, the Advisers give
consideration to brokers whom they believe can obtain the best price and
execution of orders and to brokers who furnish statistical data, research and
other factual information. The Advisers are authorized to pay a commission in
excess of that which another broker may charge for effecting the same
transaction if they consider that such commissions they pay for brokerage,
research services and other statistical data are appropriate and reasonable for
the services rendered. The research services and statistical data which the
Advisers receive in connection with the Funds' portfolio transactions may be
used by the Advisers to benefit other clients and will not necessarily be used
in connection with the Funds. The Advisers do not participate in commissions
paid by the Funds to other brokers or dealers and do not knowingly receive any
reciprocal business directly or indirectly as a result of such commissions.
While the Advisers will be primarily responsible for the placement of each
Fund's business, the policies and practices will be subject to review by the
Board of Trustees. The following chart details brokerage commissions paid by the
Funds during the years ended December 31, 1994, 1995 and 1996.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Brokerage Commissions
Paid by the Funds Comprising
The Park Avenue Portfolio
- ------------------------------------------------------------------------------------------------
Commissions Paid Commissions Paid Commissions Paid
During the Year Ended During the Year Ended During the Year Ended
Fund December 31, 1994 December 31, 1995 December 31, 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Park Avenue Fund $1,070,414 $1,477,817 $1,655,483
- ------------------------------------------------------------------------------------------------
Asset Allocation Fund $ 129,259 $ 126,876 $ 107,020
- ------------------------------------------------------------------------------------------------
International Fund $ 128,338 $ 114,727 $ 104,968
- ------------------------------------------------------------------------------------------------
</TABLE>
The Cash Fund, Bond Fund and Tax-Exempt Fund primarily purchase securities in
principal transactions at net prices. None of these Funds paid separate
brokerage commissions during the time periods covered by the foregoing chart.
Since the Small Cap Fund and the Emerging Markets Fund had not commenced
operations prior to December 31, 1996, no information is provided for those
Funds.
- --------------------------------------------------------------------------------
In any particular year, market conditions could necessitate portfolio
activity which results in high or low turnover rates. Portfolio turnover is
calculated by dividing the lesser of purchases or sales of a Fund's securities
during a fiscal year by the average monthly value of the Fund's securities
during such fiscal year. In determining the portfolio turnover rate, all
securities whose maturities or expiration dates at the time of acquisition were
one year or less are excluded. Turnover rates may be affected by factors such as
purchase and redemption requirements and market volatility, and may vary greatly
from time to time. The portfolio turnover rate of a Fund may be higher during
its early history. Increased portfolio turnover will not necessarily indicate a
variation from a Fund's stated investment policies, but may result in greater
brokerage commissions and, consequently, higher expenses. The following chart
shows each Fund's portfolio turnover rate during the time periods noted.
B-27
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Portfolio
Turnover Rates
- ------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate Portfolio Turnover Rate Portfolio Turnover Rate
for the Year Ended for the Year Ended for the Year Ended
Fund* December 31, 1994 December 31, 1995 December 31, 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Park Avenue Fund 54% 78% 81%
- ------------------------------------------------------------------------------------------------------
International Fund 33% 51% 39%
- ------------------------------------------------------------------------------------------------------
Bond Fund 186% 401% 257%
- ------------------------------------------------------------------------------------------------------
Tax-Exempt Fund 107% 194% 240%
- ------------------------------------------------------------------------------------------------------
Asset Allocation Fund 216% 219% 122%
- ------------------------------------------------------------------------------------------------------
</TABLE>
* The Cash Fund's Portfolio turnover rate is not meaningful since, by its
nature, a money market mutual fund that invests in short-term instruments
will turn its portfolio over several times during the course of a year.
Since the Small Cap Fund and the Emerging Markets Fund did not commence
operations until after December 31, 1996, no information is provided for
those Funds.
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
National Financial Data Services, the Portfolio's shareholder servicing
agent, will typically pay redemption proceeds within three business days after
it receives a proper redemption request. Redemptions will generally be made in
cash but may be made wholly or partly in readily marketable securities or other
non-cash assets if the Board of Trustees should determine that orderly
liquidation of a Fund's securities is impracticable or that payment wholly in
cash would have a material adverse effect on the remaining shareholders. The
redemption will be made at the NAV next determined after the redemption request
is received in proper form. Shares that are purchased by check cannot be
redeemed until the check has cleared. This may take up to 15 calendar days.
Shareholders are not permitted to elect whether the redemption will be made in
cash or securities. The Portfolio has elected to be governed by Rule 18f-1 under
the 1940 Act, so it is committed to pay cash redemptions to each shareholder
during any 90-day period up to the lesser of $250,000 or 1% of the net asset
value of a Fund at the beginning of such period. Any portfolio securities paid
or distributed in kind will be valued as described under "Net Asset Value"
below. A subsequent sale of such securities would ordinarily require payment of
brokerage commissions by the redeeming shareholders.
The right to redeem a Fund's shares may be suspended, or the payment date
postponed, for any period during which: (1) the New York Stock Exchange ("NYSE")
is closed (other than customary weekend and holiday closings); (2) trading on
the NYSE is restricted for any reason; (3) an emergency exists, as a result of
which disposal by a Fund of securities owned by it is not reasonably
practicable, or it is not reasonably practicable for a Fund fairly to determine
the value of its net assets, as determined by the SEC under its rules and
regulations; or (4) the SEC, by order, so permits suspension for the protection
of shareholders of a Fund.
PERFORMANCE RESULTS
As described in the Prospectus, a Fund may state its yield, average annual
total return and total return in advertisements, sales materials and investor
communications. These various measures of performance are described and
illustrated below.
Performance figures are based upon historic results and do not represent
future performance. With the exception of the Cash Fund, Class A shares are sold
at NAV plus a maximum sales load of 4.50% of the NAV. Class B shares of the
Multiple Class Funds are sold at NAV, subject to a maximum contingent deferred
sales load of 4.0%. Returns will fluctuate and may be different for Class A and
Class B shares of the same Portfolio Fund, since Class B shares bear higher
overall expenses than Class A shares. Factors affecting Fund performance include
general market conditions, the level of overall operating expenses, investment
management fees, and, with respect to the International and Emerging Markets
Funds, exchange rates. Any additional fees charged by a broker, dealer or other
financial services firm will further reduce the returns described in this
section. Class A shares of the Funds
B-28
<PAGE>
are redeemable at NAV. Class B shares of the Funds are redeemable subject to a
CDSL. Redemption proceeds may be more or less than the original cost.
NOTE: Performance illustrations provided for the Class A Park Avenue Fund
and the Class A Cash Fund for periods ending prior to January 1, 1993 do not
reflect the imposition of charges under the Portfolio's Class A 12b-1 Plan which
went into effect on January 1, 1993. No 12b-1 fees are currently being imposed
on the Class A shares of any Fund. Restating these Funds' performance results to
include the effect of such charges would reduce the performance results.
Yield is a measure of the net investment income per share earned over a
specific time period (one month or 30 days in the case of the Bond Fund and the
Tax-Exempt Fund, and seven days in the case of the Cash Fund) expressed as a
percentage of the maximum offering price of the Fund's shares.
Yield is computed in accordance with the following SEC standardized method.
YIELD = 2 [(((a-b)/cd) + 1 )^6 - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
This standardized methodology is not necessarily consistent with generally
accepted accounting principle
The Bond Fund's yield for the 30-day period ended June 30, 1997 was 6.20%,
and the Tax-Exempt Fund's yield was 4.83% for the same period. The Tax-Exempt
Fund's tax equivalent yield is computed by dividing that portion of the yield
(as calculated above) which is tax-exempt by one minus the maximum federal
income tax rate (currently, 39.6%) and adding the product to that portion, if
any, of the Fund's yield that is not tax-exempt. Using this formula, the tax
equivalent yield of the Tax-Exempt Fund for the 30-day period ended June 30,
1997 was 8.00%.
The Cash Fund provides current yield and effective yield quotations, which
are calculated in accordance with SEC standards and are based upon changes in
account value during a recent seven-day base period. Current yield quotations
are computed by annualizing (on a 365-day basis) the "base period return." The
"base period return" is computed by determining the net change, exclusive of
capital changes, in the value of one Cash Fund share and dividing that amount by
the value of one Fund share at the beginning of the base period. Effective yield
is computed by compounding the "base period return." The Cash Fund's current
yield for the seven days ended June 30, 1997 was 4.85% for Class A shares and
4.85% for Class B shares. Its effective yield for the same period was 4.97% for
Class A shares and 4.97% for Class B shares.
Yields are affected by market conditions, portfolio quality, portfolio
maturity, type of instruments held and operating expenses.
A Fund's average annual total return is computed in accordance with the
following SEC standardized method.
P(1 + T)^n = ERV
Where: P = a hypothetical initial purchase order of $1,000 from which the
maximum sales load is deducted
T = average annual total return
n = number of years
ERV = ending redeemable value of the hypothetical $1,000 purchase at
the end of the period
Total return is calculated in a similar manner, except that the results are
not annualized. Each calculation assumes that all dividends and distribution are
reinvested at NAV on the reinvestment dates during the period, but do not take
into account income taxes due on Fund distributions. Any statements of total
return or other performance data of a Fund will be accompanied by the Fund's
average annual total returns for the one-year, five-year and ten-year periods as
of the end of the most recent calendar quarter, if applicable. A Fund may also
advertise total return and average annual total return information for different
periods of time.
B-29
<PAGE>
Recent returns for Class A shares of all of the Funds except the Cash Fund
are presented below. All figures reflect average annual total returns, except
the returns for the Small Cap Fund and the Emerging Markets Fund, which reflect
their actual total return since inception on April 2, 1997.
<TABLE>
<CAPTION>
Asset
Park Avenue Small Cap International Emerging Markets Bond Tax-Exempt Allocation
Total Return Fund Fund Fund Fund Fund Fund Fund
------------ ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
1 year ended June 30, 1997 .......... 29.17% N/A 13.58% N/A 3.22% 3.11% 21.47%
5 years ended June 30, 1997 ......... 22.07% N/A N/A N/A N/A N/A N/A
10 years (or life of Fund if less)
ended June 30, 1997 ............... 15.24% 12.31% 14.04% 6.39% 4.00% 3.08% 13.95%
</TABLE>
The following example shows the average annual total return performance of
Class A shares of each Fund (except for the Cash Fund), and show actual
performance for the Small Cap and Emerging Markets Funds since their inception
on April 2, 1997. The example shows the percentage change for each period and
the ending redeemable value, or ERV, of a hypothetical $1,000 investment. The
example takes into account all expenses of Class A shares, including sales
charges, and assumes reinvestment of all capital gains distributions and income
dividends.
Total Returns - Class A shares
<TABLE>
<CAPTION>
Park Avenue Small Cap Asset Allocation International Emerging Markets Bond
Period Fund Fund Fund Fund Fund Fund
- ------ ---- ---- ---- ---- ---- ----
% Return ERV % Return ERV % Return ERV % Return ERV % Return ERV % Return ERV
-------- --- -------- --- -------- --- -------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 year ended
June 30, 1997 ..... 29.17% $1,292 -- -- 21.47% $1,215 13.58% $1,136 -- -- 3.22% $1,032
3 years ended
June 30, 1997 ..... 25.40% $1,972 -- -- 18.42% $1,661 11.05% $1,370 -- -- 5.73% $1,182
5 years (or life of
Fund if less) ended
June 30, 1997 ..... 22.07% $2,711 12.31% $1,123 13.95% $1,769 14.04% $1,775 6.39% $1,064 4.00% $1,187
10 years ended
June 30, 1997 ..... 15.24% $4,130 -- -- -- -- -- -- -- -- -- --
</TABLE>
Tax-Exempt
Period Fund
- ------ ----
% Return ERV
-------- ---
1 year ended
June 30, 1997 ..... 3.11% $1,031
3 years ended
June 30, 1997 ..... 5.00% $1,157
5 years (or life of
Fund if less) ended
June 30, 1997 ..... 3.08% $1,142
10 years ended
June 30, 1997 ..... -- --
The table below shows the total cumulative return and average annual total
return for Class A shares of the Park Avenue Fund for the one-year, five-year
and ten-year periods, as well as the life of the Fund, through June 30, 1997.
================================================================================
Period Ended The Guardian The Guardian
June 30, 1997 Park Avenue Fund* Park Avenue Fund++
- --------------------------------------------------------------------------------
Lifetime Cumulative Total Return+ 4,516.92% 4,309.16%
- --------------------------------------------------------------------------------
Lifetime Average Annual Total Return+ 16.51% 16.30%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Ten Year Cumulative Total Return 332.47% 313.01%
- --------------------------------------------------------------------------------
Ten Year Average Annual Total Return 15.77% 15.24%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Five Year Cumulative Total Return 183.83% 171.05%
- --------------------------------------------------------------------------------
Five Year Average Annual Total Return 23.20% 22.07%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
One Year Average Annual Total Return 35.26% 29.17%
================================================================================
- --------------------------------------------------------------------------------
* Shows performance without deduction of sales load.
+ Period beginning June 1, 1972.
++ Reflects deduction of current maximum sales load of 4.5% at beginning of
period. Prior to August 25, 1988, shares of the Park Avenue Fund were
offered with a higher sales load, so actual returns would have been
somewhat lower.
================================================================================
Average annual total return information for Class B shares of the Park
Avenue, Asset Allocation and International Funds for the year ended June 30,
1997 and the period May 1, 1996 (commencement of operations) to June 30, 1997
are set forth below. Actual total return information for Class B shares of the
Small Cap Fund and the Emerging Markets Fund is provided for the period May 5,
1997 (commencement of operations) to June 30, 1997. These return figures assume
the reinvestment of all dividends, a redemption at the end of each period and
the deduction of any applicable CDSL.
B-30
<PAGE>
Total Returns - Class B Shares
<TABLE>
<CAPTION>
Park Avenue Asset Allocation International Small Cap Emerging Markets
Period Fund Fund Fund Fund Fund
- ------ ------------------ ------------------ ------------------- ------------------- -----------------
% Return ERV % Return ERV % Return ERV % Return ERV % Return ERV
-------- --- -------- --- -------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended June 30, 1997 29.79% $1,297.90 20.09% $1,200.90 13.02% $1,130.20 N/A N/A N/A N/A
Life of Fund 29.15% $1,347.00 20.30% $1,240.10 12.05% $1,141.60 6.86% $1,068.60 3.96% $1,039.60
</TABLE>
As noted in the Prospectus, each Fund may compare its performance to
certain indices, similar mutual funds and other investment vehicles.
Additionally, a Fund may quote information from industry and financial
publications in its promotional materials. In particular:
(1) the Park Avenue Fund may compare its performance to that of the S&P
500, Dow Jones Industrials, Russell 3000, or the New York Stock Exchange
Composite Index;
(2) the Small Cap Fund may compare its performance to that of the Russell
2000 Index;
(3) the International Fund may compare its performance to the Morgan
Stanley Capital International's Europe, Australia and the Far East ("EAFE")
Index;
(4) the Emerging Markets Fund may compare its performance to that of the
Morgan Stanley Capital International Emerging Markets Free Index;
(5) the Bond Fund may compare its performance to the Salomon Brothers
Government and High Grade Bond Indices, the Shearson-Lehman Government Bond or
Government/Corporate Bond Indices, the Merrill Lynch Government Master or
Government/Corporate Master Indices, and the Lehman Mortgage-Backed Securities
or the Lehman Aggregate Bond Indices;
(6) The Tax-Exempt Fund may compare its performance to the Lehman Brothers
Municipal Bond Index;
(7) The Cash Fund may compare its performance to the Consumer Price Index
or the Bank Rate Monitor; and
(8) The Asset Allocation Fund may compare its performance to the S&P 500
and the Lehman Aggregate Bond Index.
Performance calculations contained in reports by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc., Morningstar, the WM Company
or industry or financial publications of general interest such as Business Week,
Financial World, Forbes, Financial Times, The Wall Street Journal, The New York
Times, Barron's and Money which may be quoted by the Funds are often based upon
changes in NAV with all dividends reinvested and may not reflect the imposition
of any sales loads.
NET ASSET VALUE
Each Fund's NAV is determined as of the earlier of 4:00 p.m. Eastern time
or the close of trading on the NYSE on each day on which the NYSE is open for
business. The NAV is calculated by adding the value of all securities, cash or
other assets, subtracting liabilities, dividing the remainder by the number of
shares outstanding and adjusting the results to the nearest full cent per share.
The Cash Fund. Securities held by the Cash Fund are valued at their
amortized cost. Amortized cost is acquisition cost as adjusted for amortization
of any discount or premium at a constant daily rate to maturity. This method
provides certainty in valuation, but may result in valuations that are higher or
lower than the price which would be received if an instrument was sold prior to
its maturity because neither unrealized gains nor unrealized losses are
accounted for.
The Cash Fund's use of amortized cost and the maintenance of the Cash
Fund's net asset value at $1.00 per share is based on its election to value its
portfolio in accordance with the provisions of Rule 2a-7 under the 1940 Act. As
a condition of operating under that rule, the Cash Fund must: maintain a
dollar-weighted average portfolio maturity of 90 days or less; purchase U.S.
dollar-denominated instruments having remaining maturities of thirteen months or
less; and invest only in securities that are determined to present minimal
credit risks and that are eligible for investment under the rule. Eligible
securities are securities rated within the two highest rating categories
assigned by the requisite number of nationally recognized statistical rating
organizations ("NRSROs") or, if unrated, deemed to be of comparable quality by
GISC, the Cash Fund's investment adviser in accordance with
B-31
<PAGE>
guidelines adopted by the Board of Trustees.
The aforementioned guidelines were adopted by the Board of Trustees and are
designed to stabilize the Cash Fund's NAV at $1.00, taking into account current
market conditions and the Fund's investment objective. These guidelines mandate
periodic review, as the Board deems appropriate and at such intervals as are
reasonable in light of current market conditions, of the relationship between
the amortized cost value per share and a NAV based upon available indications of
market value. In such review, investments for which market quotations are
readily available are valued at the most recent bid price or quoted yield
equivalent for such securities or for securities of comparable maturity, quality
and type as obtained from one or more of the major market makers for the
securities to be valued. Other investments and assets are valued at fair value,
as determined in good faith by or under the direction of the Portfolio's Board
of Trustees.
In the event of a deviation of over 1/2 of 1% between the Cash Fund's NAV
based upon available market quotations or market equivalents and $1.00 per share
based on amortized cost, the Board will promptly consider what action, if any,
should be taken. Action will also be taken to reduce, to the extent reasonably
practicable, any material dilution or other unfair results which might arise
from differences between the Cash Fund's NAV based upon market values and
amortized cost. Such action may include redemption in kind, selling portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
the average portfolio maturity, withholding or paying dividends or
distributions, or using a market value NAV.
The Board will also take such action as it deems appropriate if securities
held by the Cash Fund are downgraded, go into default, become ineligible for
investment under Rule 2a-7, or come to present greater than minimal credit
risks. In the event that securities accounting for 1/2 of 1% or more of the Cash
Fund's total assets default in a material way that is related to the issuer's
financial condition, the SEC will be notified and advised of the actions to be
taken in response to the situation.
Since dividends from net investment income and from net realized and
unrealized gains will be accrued daily and paid monthly, the net asset value per
share will ordinarily remain at $1.00, but the Cash Fund's daily dividends will
vary in amount, and there may be days when there will be no dividend. If net
realized or unrealized losses on any day exceeds interest income, less expenses,
the net asset value per share on that day might decline.
The International Fund and the Emerging Markets Fund. The calculation of
the NAV of the International Fund and the Emerging Markets Fund may not occur
contemporaneously with the determination of the value of those Funds' portfolios
because trading on foreign exchanges may not take place every day the NYSE is
open and the NYSE may be closed when foreign exchanges are open for business.
Hence, it is possible that the value of the Funds' assets may change
significantly on days when the Funds' shares are not valued. The foregoing also
applies to any holdings of foreign securities by the other Funds which are
authorized to make such investments.
Securities Valuations. Securities that are listed or traded on any U.S. or
foreign securities exchange or on the NASDAQ National Market System are valued
at the last sale price or, if there have been no sales during the day, at the
mean of the closing bid and asked prices. Where a security is traded on more
than one exchange, the security is valued on the exchange on which it is
principally traded unless it was not traded on that exchange on the date in
question. In such cases, the last sale price of the security on other exchanges
shall be used. Securities traded both on an exchange and in the over-the-counter
markets will be valued according to the broadest and most representative market.
Investments in U.S. government securities (other than short-term securities) are
valued at the average of the quoted bid and asked price in the over-the-counter
market. Certain debt securities may be valued each business day by an
independent pricing service ("Service"). The use of a Service to ascertain
values has been approved by the Portfolio's Board of Trustees. Debt securities
for which quoted bid prices, in the judgment of a Service, are readily available
and are representative of the bid side of the market are valued at the mean
between the quoted bid and asked prices, each as obtained from the Service.
Other debt securities that are valued by the Service are carried at estimated
market value as determined by the Service, based on methods which include
consideration of: yields or prices of government securities of comparable
quality, coupon, maturity and type; indications as to values from dealers; and
general market conditions. Securities for which market quotations are not
readily available, including certain mortgage-backed and asset-backed
securities, and illiquid securities and certain other debt securities, are
valued at fair value as determined in good faith by or under the direction of
the Portfolio's Board of Trustees. Repurchase agreements are carried at cost
which approximates market value. Options are valued at the last sale price
unless the bid price is higher or the asked price is lower, in which event such
bid or asked price is used. Financial futures contracts are valued at the
settlement prices established each day by the boards of trade or exchanges on
which they are traded.
B-32
<PAGE>
Foreign securities are valued in the currencies of the markets where they trade.
Conversions to U.S. dollar values occur in connection with each calculation of
the International and Emerging Markets Funds' net asset value per share.
PORTFOLIO MANAGEMENT
The trustees and officers of the Portfolio are named below. Information
about their principal occupations and certain other affiliations during the past
five years is also provided. The business address of each trustee and officer is
201 Park Avenue South, New York, New York 10003 unless otherwise noted. The
"Guardian Fund Complex" referred to in this biographical information is
comprised of (1) the Portfolio, (2) The Guardian Cash Fund, Inc., (3) The
Guardian Stock Fund, Inc., (4) The Guardian Bond Fund, Inc. and (5) GIAC Funds,
Inc. (a series fund that issues its shares in three series).
Name and Address Title Business History
---------------- ----- ----------------
CHARLES E. ALBERS (57) Executive Vice Senior Vice President, The
President Guardian Life Insurance Company
of America 1/91 to present; Vice
President, Equity Securities, The
Guardian Insurance & Annuity
Company, Inc. Executive Vice
President, Guardian Asset
Management Corporation and
Guardian Investor Services
Corporation. Officer of various
mutual funds within the Guardian
Fund Complex. Director, Guardian
Baillie Gifford Limited.
JOHN C. ANGLE (74)* Trustee Retired. Former Chairman of the
3800 South 42nd Street Board and Chief Executive
Lincoln, Nebraska 68516 Officer, The Guardian Life
Insurance Company of America;
Director 1/78-present. Director
(Trustee) of The Guardian
Insurance & Annuity Company,
Inc., Guardian Investor Services
Corporation 6/82-2/96. Director
(Trustee) of various mutual funds
within the Guardian Fund Complex.
JOSEPH A. CARUSO (45) Secretary Vice President and
Corporate Secretary, The Guardian
Life Insurance Company of
America, 1/96-present; Second
Vice President and Corporate
Secretary prior thereto.
Secretary, The Guardian Insurance
& Annuity Company, Inc., Guardian
Investor Services Corporation,
Guardian Asset Management
Corporation, Park Avenue Life
Insurance Company, and various
mutual funds within the Guardian
Fund Complex.
HOWARD W. CHIN (45) Vice President
Vice President, Investments, The
Guardian Life Insurance Company
of America, since September 1997.
Vice President, Fixed Income
Research and Fixed Income Sales,
Securities, Goldman Sachs & Co.
5/93 - 9/97. Prior thereto, Head
of Fixed Income Strategies,
Prudential Securities
Incorporated. Officer of various
mutual funds within the Guardian
Fund Complex.
FRANK J. FABOZZI (49) Trustee Adjunct Professor of Finance,
858 Tower View Circle School of Management -- Yale
New Hope, Pennsylvania University, 2/94-present;
18938 Visiting Professor of Finance and
Accounting, Sloan School of
Management -- Massachusetts
Institute of Technology prior
thereto. Editor, Journal of
Portfolio Management. Director
(Trustee) of various mutual funds
within the Guardian Fund Complex.
Director (Trustee) of various
closed-end investment companies
sponsored by Blackrock Financial
Management.
- ----------
* Trustee who is an "interested person" under the 1940 Act.
B-33
<PAGE>
Name and Address Title Business History
---------------- ----- ----------------
ARTHUR V. FERRARA (67)* Trustee Retired. Chairman of the Board
70 Baldwin Farms South and Chief Executive Officer, The
Greenwich, Connecticut Guardian Life Insurance Company
06831 of America 1/93-12/95; President,
Director and Chief Executive
Officer prior thereto. Director
(Trustee) of The Guardian
Insurance & Annuity Company,
Inc., Guardian Investor Services
Corporation and various mutual
funds within the Guardian Fund
Complex.
LEO R. FUTIA (78)* Trustee Retired. Former Chairman of The
18 Interlaken Road Board and Chief Executive
Greenwich, Connecticut 06830 Officer, The Guardian Life
Insurance Company of America;
Director 5/70-present. Director
(Trustee) of The Guardian
Insurance & Annuity Company,
Inc., Guardian Investor Services
Corporation and various mutual
funds within the Guardian Fund
Complex. Director (Trustee) of
various mutual funds sponsored by
Value Line, Inc.
ALEXANDER M. GRANT, JR. (48) Second Vice Second Vice President,
President Investments, The Guardian Life
Insurance Company of America,
1/97 to present; Assistant Vice
President, Investments, 9/93 to
12/96; Investment Officer prior
thereto. Second Vice President,
Investments, Park Avenue Life
Insurance Company, Guardian
Investor Services Corporation and
The Guardian Insurance & Annuity
Company, Inc. Officer of various
mutual funds within the Guardian
Fund Complex.
WILLIAM W. HEWITT, JR. (69) Trustee Retired. Former Executive Vice
P.O. Box 2359 President, Shearson Lehman
Princeton, New Jersey 08543 Brothers, Inc. Director (Trustee)
of various mutual funds within
the Guardian Fund Complex.
Director (Trustee) of various
mutual funds sponsored by
Mitchell Hutchins Asset
Management, Inc.
THOMAS R. HICKEY, JR. (46) Vice President Vice President, Equity
Operations, The Guardian Life
Insurance Company of America.
Vice President, Operations, The
Guardian Insurance & Annuity
Company, Inc. Vice President,
Operations, Guardian Investor
Services Corporation and various
mutual funds within the Guardian
Fund Complex.
EDWARD H. HOCKNELL (36) Vice President Director, Baillie Gifford
c/o Baillie Gifford Overseas Overseas Limited 10/92-present;
Limited Portfolio Manager, Baillie
1 Rutland Court Gifford & Co. prior thereto.
Edinburgh, EH3 8EY, Officer of various mutual funds
Scotland within the Guardian Fund Complex.
JONATHAN C. JANKUS (50) Vice President Second Vice President,
Investments, The Guardian Life
Insurance Company of America
3/95-present; Chief Investment
Strategist-Global Bonds, Barclays
Investments 1/94-3/95; Senior
Vice President, Kidder Peabody &
Co. prior thereto. Vice
President, Guardian Asset
Management Corporation.
- ----------
* Trustee who is an "interested person" under the 1940 Act.
B-34
<PAGE>
Name and Address Title Business History
---------------- ----- ----------------
FRANK J. JONES (59) President Executive Vice President and
Chief Investment Officer, The
Guardian Life Insurance Company
of America 1/94-present; Senior
Vice President and Chief
Investment Officer prior thereto.
Executive Vice President and
Chief Investment Officer and
Director, The Guardian Insurance
& Annuity Company, Inc. Executive
Vice President and Chief
Investment Officer, Park Avenue
Life Insurance Company, Director
and President, Guardian Asset
Management Corporation. Director,
Guardian Investor Services
Corporation and Guardian Baillie
Gifford Limited. Officer of
various mutual funds within the
Guardian Fund Complex.
ANN T. KEARNEY (46) Controller Second Vice President, Group
Pensions, The Guardian Life
Insurance Company of America
1/95-present; Assistant Vice
President and Equity Controller
6/94-12/94; Assistant Controller
prior thereto. Second Vice
President of The Guardian
Insurance & Annuity Company, Inc.
and Guardian Investor Services
Corporation. Controller of
various mutual funds within the
Guardian Fund Complex.
SIDNEY I. LIRTZMAN (67) Trustee Professor of Management
38 West 26th Street 9/67-present and Acting Dean of
New York, New York 10010 the School of Business Management
2/95-present, City University of
New York-Baruch College.
President, Fairfield Consulting
Associates, Inc. Public Director
of the Board of Directors of the
Independent Budget Office of the
City of New York. Director
(Trustee) of various mutual funds
within the Guardian Fund Complex.
LAWRENCE A. LUXENBERG (42) Vice President Second Vice President, Equity
Securities, The Guardian Life
Insurance Company of America
1/97-present; Assistant Vice
President, Equity Securities,
prior thereto. Officer of various
mutual funds within the Guardian
Fund Complex.
R. ROBIN MENZIES (44) Vice President Partner, Baillie Gifford & Co.
c/o Baillie Gifford Overseas 4/81-present. Director, Baillie
Limited Gifford Overseas Limited
1 Rutland Court 11/90-present. Director, Guardian
Edinburgh, EH3 8EY, Baillie Gifford Limited
Scotland 11/90-present.
NIKOLAOS S. MONOYIOS (47) Vice President Vice President, Equity
Securities, The Guardian Life
Insurance Company of America.
Vice President, Guardian Asset
Management Corporation, Guardian
Investor Services Corporation.
Officer of various mutual funds
within the Guardian Fund Complex.
JOHN B. MURPHY (50) Second Vice Vice President, Equity
President Securities, The Guardian Life
Insurance Company of America.
Vice President, Guardian Asset
Management Corporation and Park
Avenue Life Insurance Company.
Officer of various mutual funds
within the Guardian Fund Complex.
B-35
<PAGE>
Name and Address Title Business History
---------------- ----- ----------------
FRANK L. PEPE (55) Treasurer Vice President, Equity Management
Control, The Guardian Life
Insurance Company of America
since 1/96; Second Vice
President, Equity Management
Control prior thereto. Vice
President and Controller, The
Guardian Insurance & Annuity
Company, Inc. and Guardian
Investor Services Corporation.
Controller, Guardian Asset
Management Corporation. Officer
of various mutual funds within
the Guardian Fund Complex.
RICHARD T. POTTER, JR. (43) Counsel Vice President and Equity
Counsel, The Guardian Life
Insurance Company of America
1/96-present; Second Vice
President and Equity Counsel
prior thereto. Counsel, The
Guardian Insurance & Annuity
Company, Inc., Guardian Investor
Services Corporation, Guardian
Baillie Gifford Limited, Guardian
Asset Management Corporation and
various mutual funds within the
Guardian Fund Complex.
JOSEPH D. SARGENT* (60) Chairman President, Chief Executive
Officer and Director, The
Guardian Life Insurance Company
of America, since 1/96; President
and Director prior thereto.
Director (Trustee), President and
Chief Executive Officer of The
Guardian Insurance & Annuity
Company, Inc., Guardian Investor
Services Corporation, Park Avenue
Life Insurance Company, Guardian
Asset Management Corporation and
various mutual funds within the
Guardian Fund Complex.
CARL W. SCHAFER (61) Trustee President, Atlantic Foundation
P.O. Box 1164 (charitable foundation supporting
Princeton, New Jersey 08542 mainly oceanographic exploration
and research). Director of
Roadway Express (trucking), Evans
Systems, Inc. (a motor fuels,
convenience store and diversified
company), Electronic Clearing
House, Inc. (financial
transactions processing), Wainoco
Oil Corporation and Nutraceutrix
Inc. (biotechnology). Chairman of
the Investment Advisory Committee
of the Howard Hughes Medical
Institute 1985-1992. Director
(Trustee) of various mutual funds
within the Guardian Fund Complex.
Director (Trustee) of various
mutual funds sponsored by
Mitchell Hutchins Asset
Management, Inc. and Paine
Webber, Inc.
ROBERT G. SMITH (65) Trustee President, Smith Affiliated
132 East 72nd Street Capital Corp. 4/82-present.
New York, New York 10021 Director (Trustee) of various
mutual funds within the Guardian
Fund Complex.
THOMAS G. SORELL (42) Vice President Vice President, Fixed Income
Securities, The Guardian Life
Insurance Company of America
10/94-present. Director of Fixed
Income, White River Corporation,
12/93 to 7/94. Director of Fixed
Income, Fund America Enterprises,
4/93-12/93; Portfolio Manager,
AIG Investment Advisors, prior
thereto. Vice President, Guardian
Asset Management Corporation.
Vice President, Investments: Park
Avenue Life Insurance Company.
Officer of various mutual funds
with the Guardian Fund Complex.
DONALD P. SULLIVAN, JR. (43) Second Vice Second Vice President, Equity
President Administration, The Guardian Life
Insurance Company of America
11/94-present; Assistant Vice
President, Equity Administration
prior thereto. Vice President,
The Guardian Insurance & Annuity
Company, Inc. and Guardian
Investor Services Corporation.
Officer of various mutual funds
within the Guardian Fund Complex.
- ----------
*Trustee who is an "interested person" under the 1940 Act.
B-36
<PAGE>
The Portfolio pays the Trustees who are not "interested persons" of the
Portfolio an annual retainer fee of $1,000 per Fund and a per meeting fee of
$500 per Fund. Trustees who are "interested persons" of the Portfolio, except
Mr. Sargent, receive the same fees, but they are paid by GISC. Mr. Sargent
receives no compensation for his trusteeship. The officers of the Portfolio are
employees of Guardian Life; they receive no compensation from the Portfolio.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Compensation Table*
- --------------------------------------------------------------------------------------------------------------------
Aggregate Accrued Pension or Estimated Annual Total Compensation from the
Compensation Retirement Benefits Benefits Upon Portfolio and Other Members
Name and Title from the Portfolio** Paid by the Portfolio Retirement of the Fund Complex**
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Frank J. Fabozzi, $18,300 N/A N/A $28,600
Trustee
- --------------------------------------------------------------------------------------------------------------------
William W. Hewitt, Jr. $18,300 N/A N/A $35,300
Trustee
- --------------------------------------------------------------------------------------------------------------------
Sidney I. Lirtzman $18,300 N/A N/A $35,300
Trustee
- --------------------------------------------------------------------------------------------------------------------
Carl W. Schafer $18,300 N/A N/A $35,300
Trustee
- --------------------------------------------------------------------------------------------------------------------
Robert G. Smith $18,300 N/A N/A $35,300
Trustee
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Trustees who are "interested persons" of the Portfolio are not compensated
by the Portfolio, so information about their compensation is not included
in this table.
** Includes compensation paid to attend meetings of the Board's Audit
Committee.
- --------------------------------------------------------------------------------
Each Trustee is also a director of The Guardian Stock Fund, Inc., The
Guardian Bond Fund, Inc., The Guardian Cash Fund, Inc. and GIAC Funds, Inc., a
series fund consisting of Baillie Gifford International Fund, Baillie Gifford
Emerging Markets Fund and The Guardian Small Cap Stock Fund. The Portfolio and
the other funds named in this paragraph are a "Fund Complex" for purposes of the
federal securities laws. The following table provides information about the
compensation paid by the Portfolio and the Fund Complex to the Portfolio's
Trustees during the year ended December 31, 1996.
As of October 1, 1997, the number of shares of each Fund owned by all
officers and trustees of the Portfolio in the aggregate totalled less than 1% of
the outstanding shares of each Fund.
B-37
<PAGE>
PORTFOLIO AFFILIATES AND PRINCIPAL HOLDERS OF FUND SHARES
Guardian Entities. Guardian Life, 201 Park Avenue South, New York, New York
10003, is the parent company and sole stockholder of GIAC. GIAC, also located at
201 Park Avenue South, New York, New York 10003, is the parent and sole
stockholder of GISC.
The Park Avenue Fund. As of September 30, 1997, The Guardian/Value Line
Separate Account, established by GIAC, held 4,684,216, or 11%, of the Park
Avenue Fund's Class A shares.
Owners of variable annuity contracts issued by GIAC have the beneficial
interest in these Park Avenue Fund shares. At any shareholders meetings where
shareholders of the Park Avenue Fund are entitled to vote, GIAC, as the owner of
record, votes the Park Avenue Fund shares which are attributable to variable
annuity contracts in accordance with voting instructions received from
contractowners.
The Cash Fund. As of September 30, 1997, GIAC and GISC each owned shares of
the Cash Fund for their own accounts as follows: GIAC -- 2,853,509 (3%) Class A
shares; GISC -- 987,786 (0.8%) Class A shares and 1,064,490 (26%) Class B
shares. At any shareholders meeting(s), GIAC and GISC are expected to vote their
respective shares of the Portfolio Funds FOR proposals presented by Management.
As of September 30, 1997, Separate Account L, a separate account established by
GIAC, owned 15,538,278 (14%), of the Class A shares of the Cash Fund.
The Small Cap, International, Emerging Markets, Bond, Tax-Exempt and Asset
Allocation Funds. As of September 30, 1997, Guardian Life was in control of the
Bond Fund, the Emerging Markets Fund and the Tax-Exempt Fund, and owned more
than 5% of the outstanding Class A shares issued by the Small Cap Fund, the
International Fund and the Asset Allocation Fund. Guardian Life initially
invested in these Funds to provide them with sufficient capital to commence
their operations and acquire securities. Guardian Life's positions in these
Funds as of September 30, 1997 were:
Number Percentage
of of Class A Shares
Fund Shares Outstanding
---- ------ -----------
Small Cap ............................. 2,000,000 41%
International ......................... 1,195,745 29%
Emerging Markets ...................... 2,000,000 92%
Asset Allocation ...................... 1,285,243 16%
Bond .................................. 4,441,157 51%
Tax-Exempt ............................ 4,088,027 87%
At any shareholders meeting where shareholders of these Funds are entitled
to vote, Guardian Life will vote its shares FOR proposals presented by
Management.
In addition, GISC owned 150,999, or 1%, of the Class A shares of the Bond
Fund, 135,594, or 18%, of the Class B shares of the Asset Allocation Fund,
107,528, or 31%, of the Class B shares of the International Fund, 141,643, or
18%, of the Class B shares of the Small Cap Fund, and 145,631, or 75%, of
the Class B shares of the Emerging Markets Fund, on September 30, 1997.
Except as disclosed above, Management of the Portfolio does not know of any
other person who owned beneficially 5% or more of the shares of any of the
Portfolio Funds as of September 30, 1997.
The International Fund, Bond Fund, Tax-Exempt Fund, Asset Allocation Fund,
Small Cap Fund and Emerging Markets Fund incurred expenses in connection with
their organization in the amounts of $15,218, $16,418, $16,418, $16,418, $5,500
and $5,500, respectively. GISC advanced these expenses to the Funds; they
included legal and auditing fees, registration fees and preparation and printing
costs for the registration statement and other documents. Each of these
Portfolio Funds has reimbursed GISC for its organizational expenses, which are
being amortized on a straight-line basis over a five-year period.
B-38
<PAGE>
TAXES
For federal income tax purposes, each Fund is treated as a separate entity.
Each Fund intends to qualify and to continue to qualify to be taxed as a
regulated investment company under the U.S. Internal Revenue Code of 1986, as
amended (the "Code"). So long as a Fund qualifies as a regulated investment
company and complies with the provisions of the Code pertaining to regulated
investment companies which distribute substantially all of their net income
(both net ordinary income and net capital gains) to their shareholders, the Fund
will not incur a tax liability on that portion of its net ordinary income and
net realized capital gains which have been distributed to its shareholders. The
Code imposes a 4% nondeductible excise tax on each regulated investment company
with regard to the amount, if any, by which such investment company does not
meet the distribution requirements specified in the Code. Accordingly, each Fund
intends to distribute all or substantially all of its net investment income and
net capital gains.
Options, short sales, forward contracts, financial futures contracts and
foreign currency transactions entered into by a Fund are subject to special tax
rules. These rules may accelerate income to the Fund, defer Fund losses, cause
adjustments in the holding periods of Fund securities, convert capital gain into
ordinary income and convert short-term capital losses into long-term capital
losses. As a result, these rules could affect the amount, timing and character
of Fund distributions.
Income received by a Fund from sources within various foreign countries
will generally be subject to foreign income taxes withheld at the source. If the
United States has entered into a tax treaty with the country in which the payor
is a resident, foreign tax withholding from dividends and interest is typically
set at a rate between 10% and 15%. If the United States has not entered into a
tax treaty with the country in which the payor is a resident, such withholding
may be as high as 30% to 35%. Taxes paid to foreign governments will reduce a
Fund's return on its investments. A shareholder's pro rata share of foreign
income taxes paid by a Fund is treated as taxable income to that shareholder.
Accordingly, the Portfolio, on behalf of the Park Avenue Fund, the Small Cap
Fund, the International Fund and the Emerging Markets Fund, has made an election
under Section 853 of the Code so that those Funds' shareholders can claim a
credit (subject to certain limits contained in the Code) or deduction on their
income tax returns for their pro rata portions of the Funds' foreign income
taxes, assuming these Funds continue to meet the eligibility requirements for
such treatment. Under the Code, no deduction for foreign taxes may be claimed by
individual shareholders who do not elect to itemize deductions on their federal
income tax returns.
Shareholders of a Fund may exchange their shares for shares of another Fund
within the Portfolio (the "reinvested shares"). If a shareholder (other than a
tax-exempt entity) makes such exchanges, the shareholder will recognize a
capital gain or loss for federal income tax purposes measured by the difference
between the value of the reinvested shares and the basis of the exchanged
shares. Upon the exchange of shares which were purchased subject to a sales
charge after October 3, 1989 and held less than 91 days, the lesser of (1) the
sales charge incurred on the exchanged shares or (2) the sales charge waived on
the reinvested shares is included in the basis of the reinvested shares and is
not included in the basis of the exchanged shares. If a shareholder realizes a
loss on the redemption of Fund shares and reinvests in shares of the same Fund
within the period beginning 30 days before and ending 30 days after the
redemption, the transactions may be subject to the wash sale rules resulting in
a disallowance of such loss for federal income tax purposes. Any loss recognized
on the disposition of Fund shares held for six months or less will be treated as
long-term capital loss to the extent that the shareholder has received any
long-term capital gain distributions on such shares. In addition, if a
shareholder sells shares that have been held for six months or less at a loss,
the loss will be disallowed to the extent of any exempt-interest dividends
received by the shareholder on such shares.
Interest on indebtedness that is incurred to purchase or carry shares of a
mutual fund which distributes exempt-interest dividends during the year is not
deductible for federal income tax purposes. Further, the Tax- Exempt Fund may
not be an appropriate investment for persons who are "substantial users" of
facilities financed by industrial development bonds held by the Fund or who are
"related persons" to such users; such persons should consult their tax advisers
before investing in the Tax-Exempt Fund.
If the Portfolio establishes additional series funds, each such series will
be treated as a separate entity for federal income tax purposes.
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The discussions of "Taxes" in the Prospectus and this Statement of
Additional Information are general and abbreviated. Interpretations of the
Code's provisions and U.S. Treasury regulations can change at any time.
Additionally, no attempt has been made to describe any state, local or foreign
tax consequences of purchasing, owning and redeeming shares of the Portfolio
Funds.
SHAREHOLDER VOTING RIGHTS
The Portfolio generally is not required to hold shareholder meetings. Under
the Portfolio's Amended and Restated Declaration of Trust, however, shareholder
meetings will be held for all shareholders or just the shareholders of affected
Funds, as the case may be, in connection with the following matters: (1) the
election or removal of trustees if a meeting is called for such purpose; (2) the
adoption of any contract for which shareholder approval is required by the 1940
Act; (3) termination of the Portfolio or any Fund to the extent and as provided
in the Amended and Restated Declaration of Trust; (4) the amendment of the
Amended and Restated Declaration of Trust to the extent and as provided in the
Amended and Restated Declaration of Trust; (5) to determine whether a court
action, proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Portfolio or any Fund or the
shareholders, to the same extent as the shareholders of a Massachusetts business
corporation; and (6) such additional matters as may be required by law, the
Amended and Restated Declaration of Trust, the By-Laws of the Portfolio, any
registration of the Portfolio with the SEC or any state, or as the trustees may
consider necessary or desirable. Shareholders also would be entitled to vote
upon changes in fundamental investment objectives, policies or restrictions
which pertain to any Fund(s) in which they have a voting interest.
Each trustee serves until the earlier of: (1) the next meeting of
shareholders, if any, called for the purpose of electing trustees and until the
election and qualification of his or her successor; or (2) such trustee's death,
resignation, retirement or removal by a two-thirds vote of the trustees or by a
majority vote of the outstanding shares of the Portfolio. In accordance with the
1940 Act: (1) the Portfolio will hold a shareholders meeting for the election of
trustees at such time as less than a majority of the trustees have been elected
by shareholders; and (2) if, as a result of a vacancy in the Board of Trustees,
less than two-thirds of the trustees have been elected by shareholders. In that
event, the vacancy will be filled only by a vote of shareholders.
A special meeting of the shareholders shall be called by the trustees for
the purpose of removing a trustee upon the written request of shareholders
owning at least 10% of the outstanding shares entitled to vote at the meeting.
Whenever ten or more persons who have been shareholders of record for at least
six months preceding the date of application, and who hold in the aggregate
either shares having a net asset value of at least $25,000 or at least one
percent of the outstanding shares, whichever is less, wish to communicate with
other shareholders for the purpose of obtaining signatures to request a meeting,
the trustees shall either afford the applicants access to a list of the names
and addresses of all shareholders of record or mail the communication to the
Portfolio shareholders at the applicants' cost.
TRUSTEE LIABILITY
The Amended and Restated Declaration of Trust provides that the trustees
will not be liable for errors of judgment or mistakes of fact or law. However,
nothing in the Amended and Restated Declaration of Trust protects a trustee
against any liability to which the trustee would otherwise be subject by reason
of willful malfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his or her office. The By-laws of the
Portfolio provide for indemnification by the Portfolio of the trustees and the
officers of the Portfolio except with respect to any matter as to which any such
person did not act in good faith in the belief that his or her action was in, or
not opposed to, the best interests of the Portfolio. Such person may not be
indemnified against any liability to the Portfolio or the Portfolio's
shareholders to which he or she would otherwise be subject by reason of willful
malfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
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CUSTODIAN
State Street Bank and Trust Company ("State Street Bank"), Custody
Division, 1776 Heritage Drive, North Quincy, Massachusetts 02171, is the
custodian of the Portfolio's assets.
Portfolio securities purchased for a Fund outside of the U.S. are cleared
through foreign depositories and are maintained in the custody of foreign banks
and trust companies which are members of State Street Bank's Global Custody
Network. State Street Bank and each of the foreign custodial institutions
holding portfolio securities of a Fund have been selected in accordance with
regulations under the 1940 Act. Nevertheless, with respect to foreign
custodians, there can be no assurance that a Fund, and the value of its shares,
will not be adversely affected by acts of foreign governments, financial or
operational difficulties of the foreign custodians, difficulties and costs of
obtaining jurisdiction over, or enforcing judgment against, the foreign
custodians, or application of foreign law to a Fund's foreign custodial
arrangements. Accordingly, an investor should recognize that the noninvestment
risks associated with holding assets abroad may be greater than those associated
with investing in the U.S.
State Street Bank plays no part in formulating the investment policies of
the Funds or in determining which portfolio securities are to be purchased or
sold by the Funds.
TRANSFER AGENT
National Financial Data Services ("NFDS"), P.O. Box 419611, Kansas City,
Missouri 64141-6611, is the Portfolio's transfer agent and dividend paying
agent. NFDS issues and redeems shares of each Fund and distributes dividends to
each Fund's shareholder accounts.
NFDS plays no part in formulating the investment policies of the Funds or
in determining which portfolio securities are to be purchased or sold by the
Funds.
FINANCIAL STATEMENTS
The Portfolio's financial statements appear in the 1996 Annual Report to
Park Avenue Portfolio shareholders. The report of Ernst & Young LLP, independent
auditors of the Portfolio, on such financial statements also appears in the 1996
Annual Report. The Report to Park Avenue Portfolio shareholders is incorporated
by reference into this Statement of Additional Information. Unaudited financial
statements for the six months ended June 30, 1997 appear in the Portfolio's
Semi-Annual Report to shareholders. The Semi-Annual Report is also incorporated
by reference into this Statement of Additional Information. Free copies of the
Annual and Semi-Annual Reports are available upon request.
LEGAL OPINIONS
The legality of the shares described in the Prospectus has been passed upon
by Richard T. Potter, Jr., Counsel of the Portfolio. Federal securities law
matters relating to the Portfolio have been passed upon by the law firm of
Vedder, Price, Kaufman & Kammholz of Chicago, Illinois.
INDEPENDENT AUDITORS
The Portfolio's independent auditors are Ernst & Young LLP, 787 Seventh
Avenue, New York, New York 10019. Ernst & Young LLP audits and reports on the
annual financial statements of the Portfolio which appear in the Annual Report
to Shareholders for the year ended December 31, 1996. That Annual Report is
incorporated by reference into this Statement of Additional Information.
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APPENDIX
DESCRIPTIONS OF TYPES OF DEBT OBLIGATIONS
U.S. Government Agency and Instrumentality Securities: U.S. government
agency securities are debt obligations issued by agencies or authorities
controlled by and acting as instrumentalities of the U.S. government established
under authority granted by Congress. U.S. government agency obligations include,
but are not limited to, those issued by the Bank for Co-operatives, Federal Home
Loan Banks, Federal Intermediate Credit Banks, and the Federal National Mortgage
Association. U.S. government instrumentality obligations include, but are not
limited to, those issued by the Export-Import Bank and Farmers Home
Administration. Some obligations issued or guaranteed by U.S. government
agencies and instrumentalities are supported by the full faith and credit of the
U.S. Treasury; others, by the right of the issuer to borrow from the Treasury;
others by discretionary authority of the U.S. government to purchase certain
obligations of the agency or instrumentality; and others only by the credit of
the agency or instrumentality. No assurance can be given that the U.S.
government will provide financial support to such U.S. government sponsored
agencies or instrumentalities in the future, since it is not obligated to do so
by law.
U.S. Treasury Securities: U.S. Treasury securities consist of Treasury
Bills, Treasury Notes and Treasury Bonds. These securities are each backed by
the full faith and credit of the U.S. government and differ in their interest
rates, maturities, and dates of issuance. U.S. Treasury Bills are issued with
maturities of up to one year. U.S. Treasury Notes may be issued with an original
maturity of not less than one year and not more than 10 years. U.S. Treasury
Bonds may be issued with any maturity, but generally have original maturities of
over 10 years.
Certificates of Deposit: Certificates of deposit are negotiable receipts
issued by a bank or savings and loan association in exchange for the deposit of
funds. A certificate of deposit earns a specified rate of return over a definite
period of time. Normally a certificate can be traded in a secondary market prior
to maturity. Eurodollar certificates of deposit are U.S. dollar-denominated
deposits in banks outside the U.S. The bank may be a foreign branch of a U.S.
bank. Eurodollar deposits in foreign branches of U.S. banks are the legal
equivalent of domestic deposits, but are not covered by FDIC insurance. Yankee
certificates of deposit are U.S. dollar-denominated deposits issued and payable
by U.S. branches of foreign banks.
Commercial Paper: Commercial paper is generally defined as unsecured
short-term notes issued in bearer form by large, well-known corporations and
finance companies. Maturities on commercial paper range from a few days to nine
months. Commercial paper is also sold on a discount basis.
Bankers Acceptances: Bankers acceptances generally arise from short-term
credit arrangements designed to enable businesses to obtain funds in order to
finance commercial transactions. Generally, an acceptance is a time draft drawn
on a bank by an exporter or an importer to obtain a stated amount of funds to
pay for specific merchandise. The draft is then "accepted" by a bank that, in
effect, unconditionally guarantees to pay the face value of the instrument on
its maturity date.
Repurchase Agreements: Repurchase agreements are instruments by which a
Fund purchases a security and obtains a simultaneous commitment from the seller
(a domestic bank or broker-dealer) to repurchase the security at an agreed upon
price and date. The resale price is in excess of the purchase price and reflects
an agreed upon market rate unrelated to the coupon rate on the purchased
security. Such transactions afford an opportunity for a Fund to invest
temporarily available cash and earn a return that is insulated from market
fluctuations during the term of the agreement. The risk to a Fund is limited to
the risk that the seller will be unable to pay the agreed upon sum upon the
delivery date. Repurchase agreements are collateralized by cash or the
securities purchased in connection with the agreement. In the event a selling
party to an agreement is unable to repurchase the securities pursuant to that
agreement, a Fund will liquidate the collateral held and thus recover the
proceeds loaned under the agreement. The loss to a Fund will be the difference
between the proceeds from the sale and the repurchase price. Investments in
repurchase agreements will be limited to transactions with financial
institutions believed by the Board of Trustees of the Portfolio to present
minimal credit risks.
Corporate Obligations: Such instruments include bonds and notes issued by
U.S. and foreign corporations in order to finance longer term credit needs.
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DESCRIPTION OF LONG TERM DEBT RATINGS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Aaa. Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa. Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present which make the long-term risk appear somewhat greater than the "Aaa"
securities.
A. Bonds which are rated "A" possess many favorable investment attributes
and are considered as upper- medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa. Bonds which are rated "Baa" are 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. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B. Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from "Aa" through "B" in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
STANDARD & POOR'S RATINGS GROUP ("STANDARD & POOR'S")
AAA. Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
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 small degree.
A. Debt rated "A" has 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.
With respect to Municipal Obligations, debt rated "A" differs from the two
higher ratings because:
General Obligation Bonds -- There is some weakness in the local economic
base, debt burden, balance between revenues and expenditures, or quality of
management. Under certain adverse circumstances, any one such weakness might
impair the ability of the issuer to meet debt obligations at some future date.
Revenue Bonds -- Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management performance
appears adequate.
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
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higher rated categories.
General Obligation Bonds -- Under certain adverse conditions, weakness in
the local economic base, debt burden, balance between revenues and expenditures,
or quality of management could contribute to a lesser capacity for payment of
debt service. The difference between "A" and "BBB" rating is that the latter
shows more than one fundamental weakness, or one very substantial fundamental
weakness, whereas the former shows only one deficiency among the factors
considered.
Revenue Bonds -- Debt coverage is only fair. Stability of the pledged
revenues could show substantial variations, with the revenue flow possibly being
subject to erosion over time. Basic security provisions are no more than
adequate. Management performance could be stronger.
BB and B. Debt rated "BB" or "B" is regarded, on balance, as predominantly
speculative with respect to the capacity to pay interest and repay principal in
accordance with the terms of the obligation. "BB" indicates a lower degree of
speculation than "B." While such debt will likely have some quality and
protective characteristics, those characteristics can be outweighed by large
uncertainties or major exposures to adverse conditions.
Note: Standard & Poor's ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within the major categories.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S
P-1 (Prime-1). Issuers (or supporting institutions) rated P-1 have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation;
well-established access to a range of financial markets and assured sources of
alternate liquidity.
P-2 (Prime-2). Issuers (or supporting institutions) rated P-2 have a strong
ability for repayment of senior short-term obligations. This will normally be
evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
STANDARD & POOR'S
A-1. Issues in the A-1 category, which is the highest category, have a very
strong degree of safety regarding timely payment. Those issues determined to
possess extremely strong safety characteristics are denoted with a plus (+) sign
designation.
A-2. Capacity for timely payment on issues rated A-2 is strong. However,
the relative degree of safety is not as high as for issues designated `A-1'.
DUFF & PHELPS, INC.
Duff 1+ Issues rated Duff 1+ have the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or ready access
to alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
Duff 1 Issues rated Duff 1 have very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
Duff 1- Issues rated Duff 1- have high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
Duff 2 Issues rated Duff 2 have good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
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FITCH INVESTORS SERVICES, INC.
F-1+ Issues rated F-1+ have exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
F-1 Issues rated F-1 have very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree than
issues rated `F-1+'.
F-2 Issues rated F-2 have good credit quality. Issues carrying this rating
have a satisfactory degree of assurance for timely payments, but the margin of
safety is not as great as the `F-1+' and `F-1' ratings.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
MOODY'S
Moody's ratings for state municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors affecting
the liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk,
long-term secular trends for example, may be less important over the short run.
A short-term rating may also be assigned on an issue having a demand feature.
Such ratings will be designated as VMIG or, if the demand feature is not rated,
as NR. Short-term ratings on issues with demand features are differentiated by
the use of the VMIG symbol to reflect such characteristics as payment upon
periodic demand, rather than fixed maturity dates, and payment relying on
external liquidity. Additionally, investors should be alert to the fact that the
source of payment may be limited to the external liquidity with no or limited
legal recourse to the issuer in the event the demand is not met. MIG and VMIG
ratings indicate that the rated securities are investment grade.
MIG 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 designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
STANDARD & POOR'S
SP-1. The issuers of these municipal notes exhibit very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
SP-2. The issuers of these municipal notes exhibit satisfactory capacity to
pay principal and interest.
USING THE RATINGS
Ratings represent each rating organization's opinion as to the quality of
the securities that they undertake to rate. It should be emphasized that ratings
are relative and subjective, and are not absolute standards of quality.
Consequently, securities with the same maturity, interest rate and rating may
have different market prices or yields. Subsequent to its purchase by a Fund, an
issue of securities may cease to be rated or its rating may be reduced. The
investment adviser will consider such an event in determining whether a Fund
should continue to hold the security. Although ratings may be an initial
criterion for selection of portfolio investments, the investment adviser also
performs its own credit analysis with respect to the securities it purchases and
holds for a Fund.
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