As filed with the Securities and Exchange Commission on April 28, 1995
Registration Nos. 33-27896/811-5796
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _____
X Post-Effective Amendment No. 15
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
X Amendment No. 18
FFTW FUNDS, INC.
(Exact name of registrant as specified in charter)
717 FIFTH AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive offices)
Registrant's telephone number: 212-350-8050
STEPHEN J. CONSTANTINE, President
717 Fifth Avenue
New York, New York 10022
(Name and address of agent for service)
With a copy to:
William E. Vastardis
AMT Capital Services, Inc.
430 Park Avenue, 17th Floor
New York, NY 10022
It is proposed that this filing will become effective (check appropriate box)
x immediately upon filing pursuant to paragraph (b) of Rule 485
on __________(date) pursuant to paragraph (b) of Rule 485
60 days after filing pursuant to paragraph (a) of Rule 485
on __________(date) pursuant to paragraph (a) of Rule 485
Registrant has registered an indefinite number of shares pursuant to Rule
24f-2 under the Investment Company Act of 1940. The
Registrant filed the notice required thereunder for
the fiscal year ended December 31, 1994 on February 28, 1995
The total number of pages is ______.
The Exhibit Index is on page ______.
CROSS REFERENCE SHEET
Pursuant to Rule 481(a)
Form N-1A Location in Prospectus and
Item No. Statement of Additional
Information
1Cover Page Cover Page of Prospectus
2Synopsis Prospectus Highlights; Fund
Expenses (in Prospectus)
3Financial Highlights Financial Highlights (in
Prospectus)
4General Description of Investment Objectives and
Registrant Policies; Descriptions of
Investments; Investment
Techniques; Investment
Restrictions; Risks Associated
With the Fund's Investment
Policies and Investment
Techniques; Shareholder
Information (in Prospectus)
5Management of the Fund Fund Expenses; Management of the
Fund (in Prospectus)
6Capital Stock and Other Shareholder Information;
Securities Purchases and Redemptions;
Dividends; Tax Considerations (in
Prospectus)
7Purchase of Securities Purchases and Redemptions;
Being Offered Dividends; Determination of Net
Asset Value; Distribution of Fund
Shares (in Prospectus)
8Redemption or RepurchasePurchases and Redemptions;
Dividends (in Prospectus)
9 Pending Legal Proceedings Not applicable
10Cover Page Cover Page of Statement of
Additional Information
11Table of Contents Statement of Additional
Information Table of Contents
12General Information and History of the Fund; Organization
History of the Fund (in Statement of
Additional Information)
13Investment Objectives Supplemental Descriptions of
Policies Investments; Techniques to Hedge
Interest Rate and Foreign
Currency Risks and Other Foreign
Currency Strategies; Supplemental
Discussion of Risks Associated
With the Fund's Investment
Policies and Investment
Techniques; Investment
Restrictions (in Statement of
Additional Information)
14Management of the Fund Management of the Fund (in
Statement of Additional
Information)
15Control Persons and Principal Control Persons and Principal
Holders of Securities Holders of Securities (in
Statement of Additional
Information)
16Investment Advisory and Distribution of Fund
Other Shares; ServicesManagement
of the Fund; Custodian
and Accounting Agent; Transfer
and Dividend Disbursing Agent;
Legal Counsel; Independent
Auditors(in
Prospectus); Management of
the Fund (in Statement of
Additional Information)
17Brokerage Allocation andPortfolio Transactions (in
Other Practices Statement of Additional
Information)
18Capital Stock and Other Purchases and Redemptions;
Securities Dividends; Shareholder
Information (in Prospectus)
19Purchase, Redemption andPurchases and Redemptions;
of Securities Being OffeDetermination of Net Asset Value
(in Prospectus)
20Tax Status Tax Considerations (in Statement
of Additional Information)
21Underwriters Distribution of Fund Shares (in
Prospectus)
22Calculation of Performance Information (in
Performance Data Prospectus); Calculation of
Performance Data (in Statement of
Additional Information)
23Financial Statements Financial Highlights (in
Prospectus); Financial Statements
(in Statement of Additional
Information)
FFTW FUNDS, INC.
200 Park Avenue, 46th Floor
New York, New York 10166
(212) 681-3000
Distributed by:
AMT CAPITAL SERVICES, INC.
430 Park Avenue, 17th Floor
New York, New York 10022
(212) 308-4848
(800) 762-4848 (outside New York City)
Prospectus - April 28, 1995
FFTW Funds, Inc. (the "Fund") is a no-load, open-end management investment
company managed by Fischer Francis Trees & Watts, Inc. (the "Investment
Adviser"). The Fund currently consists of ten separate portfolios (each a
"Portfolio"), each of which is an actively-managed portfolio invested in high
quality debt securities. There is no sales charge for purchases of shares.
Shares of each Portfolio may be purchased through AMT Capital Services, Inc.
("AMT Capital"), the exclusive distributor. The minimum initial investment in
any Portfolio is $100,000; additional investments or redemptions may be of any
amount.
The ten Portfolios are: (1) U.S. Portfolios - U.S. Short-Term Fixed
Income, Stable Return, U.S. Treasury, AAA Asset-Backed and Broad Market
Fixed Income (the "U.S. Portfolios"); and (2) Global and International
Portfolios - Worldwide Short-Term Fixed Income, Worldwide
Fixed Income-Hedged, International Fixed Income and International Fixed
Income-Hedged (the "Global and International Portfolios").
This Prospectus contains a concise statement of information
investors should know before they invest in the Fund. Please retain this
Prospectus for future reference. A statement containing additional information
about the Fund, dated April 28, 1995 (the "Statement of Additional Information")
has been filed with the Securities and Exchange Commission (the "Commission")
and can be obtained without charge by calling or writing AMT Capital at the
telephone numbers or address stated above. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
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 OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
Prospectus Highlights 3
Fund Expenses 6
Financial Highlights 9
The Fund 14
Investment Objectives and Policies 14
Description of Investments 19
Investment Techniques 21
Investment Restrictions 23
Risks Associated With the Fund's Investment Policies
and Investment Techniques 24
Distribution of Fund Shares 26
Purchases and Redemptions 26
Determination of Net Asset Value 27
Dividends 28
Management of the Fund 29
Tax Considerations 31
Shareholder Information 32
PROSPECTUS HIGHLIGHTS
The Fund
FFTW Funds, Inc. is a no-load, open-end management investment company
consisting of ten different Portfolios, each of which invests primarily in high-
quality debt securities. (Page 14)
The Portfolios - Investment Objectives
The ten Portfolios and their investment objectives are:
U.S. PORTFOLIOS
U.S. Short-Term Fixed Income Portfolio ("U.S. Short-Term") seeks to
attain a high level of total return as may be consistent with the preservation
ofcapital and to maintain liquidity by investing primarily in high-quality fixed
income securities with an average U.S. dollar-weighted duration of less than one
year. (Page 15) This Portfolio seeks to maintain a constant net asset value by
employing the "full payout method" of declaring dividends. See "Dividends -
U.S. Short-Term Fixed Income Portfolio". (Page 27) U.S. Short-Term is not a
money market fund and its shares are not guaranteed by the U.S. Government.
Stable Return Portfolio ("Stable Return") seeks to maintain a stable level of
total return as may be consistent with the preservation of capital by investing
primarily in high-quality debt securities with an average U.S. dollar-weighted
duration of less than three years and by using interest rate hedging as a
stabilizing technique. (Page 15)
U.S. Treasury Portfolio ("U.S. Treasury") seeks to attain a high level of total
return as may be consistent with the preservation of capital and to avoid credit
quality risk by investing primarily in securities issued by the U.S. Treasury
Department with an average U.S. dollar-weighted duration of less than five years
which will provide investors in most jurisdictions with income exempt from state
and local tax. (Page 16)
AAA Asset-Backed Portfolio ("AAA Asset-Backed") seeks to attain a high
level of total return as may be consistent with the preservation of capital by
investing primarily in mortgage- and asset-backed securities, rated in the
highest quality rating category, with an average U.S. dollar-weighted duration
of less than five years. (Page 16)
Broad Market Fixed Income Portfolio ("Broad Market") seeks to attain
a high level of total return as may be consistent with the preservation of
capital by investing primarily in high-quality fixed income securities
reflective of the broad spectrum of the U.S. bond market with an average U.S.
dollar-weighted duration of less than eight years. (Page 16)
GLOBAL AND INTERNATIONAL PORTFOLIOS
Worldwide Short-Term Fixed Income Portfolio ("Worldwide Short-
Term") seeks to attain a high level of total return as may be consistent with
the preservation of capital by investing primarily in high-quality fixed income
securities from bond markets worldwide, denominated in both U.S. dollars and
foreign currencies, with an average U.S. dollar-weighted duration of less than
one year. (Page 17)
Worldwide Fixed Income Portfolio ("Worldwide") seeks to attain a high
level of total return as may be consistent with the preservation of capital by
investing primarily in high-quality fixed income securities from bond markets
worldwide, denominated in both U.S. dollars and foreign currencies, with an
average U.S. dollar-weighted duration of less than six years. (Page 17)
Worldwide Fixed Income-Hedged Portfolio ("Worldwide-Hedged")
seeks to attain a high level of total return as may be consistent with the
preservation of capital by investing primarily in high-quality fixed income
securities from bond markets worldwide, denominated in both U.S. dollars and
foreign currencies, with an average U.S. dollar-weighted duration of less than
six years and by actively utilizing currency hedging techniques. (Page 17)
International Fixed Income Portfolio ("International") seeks to attain a
high level of total return as may be consistent with the preservation of capital
by investing primarily in high-quality fixed income securities from bond markets
worldwide, denominated in foreign currencies, with an average U.S. dollar-
weighted duration of less than six years. (Page 18)
International Fixed Income-Hedged Portfolio ("International-
Hedged") seeks to attain a high level of total return as may be consistent with
the preservation of capital by investing primarily in high-quality fixed income
securities from bond markets worldwide, denominated in foreign currencies, with
an average U.S. dollar-weighted duration of less than six years and by actively
utilizing currency hedging techniques. (Page 18)
Each of Worldwide Short-Term, Worldwide and International Portfolios may
hedge all or any part of its assets against foreign currency risk and may engage
in foreign currency transactions to enhance total return. However, each of
Worldwide-Hedged and International-Hedged will, as a fundamental policy, seek
to hedge at least 65% of its foreign currency-denominated assets against foreign
currency risks to the fullest extent feasible, and will not engage in foreign
currency transactions to enhance total return.
Investment Adviser and Sub-Adviser
Fischer Francis Trees & Watts, Inc. serves as Investment Adviser to the Fund.
The Investment Adviser, organized in 1972, is a registered investment adviser
that currently manages approximately $18 billion in assets entirely in
portfolios of debt securities for 65 major institutional clients including
banks, central banks, pension funds and other institutional clients. The
average size of a client relationship with the Investment Adviser is in excess
of $250 million. Fischer Francis Trees & Watts (the "Sub-Adviser"), a corporate
partnership organized in 1989 under the laws of the United Kingdom and an
affiliate of the Investment Adviser, serves as Sub-Adviser to the Global and
International Portfolios. The Sub-Adviser is also a registered investment
adviser that currently manages in excess of $1 billion in multi-currency
fixed income portfolios for institutional clients. (Page 28)
Administrator and Distributor
AMT Capital Services, Inc. serves as administrator to the Fund, supervising the
general day-to-day business activities and operations of the Fund other than
investment advisory activities. (Page 29) AMT Capital also serves as the
exclusive distributor of shares of each of the Fund's Portfolios. (Page 25)
How to Invest
Shares of each Portfolio may be purchased at the net asset value of the
Portfolio next determined after receipt of the order by submitting a completed
Account Application to AMT Capital and wiring federal funds to AMT Capital's
"Fund Purchase Account" at Investors Bank & Trust Company in Boston,
Massachusetts (the "Transfer Agent"). The minimum initial investment in each
Portfolio is $100,000. There is no minimum amount for subsequent investments.
There are no sales commissions (loads) or 12b-1 fees. (Page 25)
How to Redeem Shares
Shares of each Portfolio may be redeemed, without a transaction charge, at the
net asset value of such Portfolio next determined after receipt by the Transfer
Agent of the redemption request. (Page 26)
Risks
Prospective investors should consider various risks associated with the
Portfolios prior to investing in any Portfolio, including: (1) each Portfolio
may be influenced by changes in interest rates which generally have an inverse
relationship with corresponding market values; (2) each Portfolio may, but
generally each of the Global and International Portfolios will, invest a
significant portion of its assets in securities denominated in foreign
currencies which carry the risk of fluctuations of exchange rates to the U.S.
dollar; (3) each Portfolio may invest in mortgage- and other asset-backed
securities that carry the risk of a faster or slower than expected prepayment of
principal which may affect the duration and return of the security; (4) each
Portfolio, other than U.S. Short-Term, is "non-diversified" under the
Investment Company Act of 1940, which may entail a greater exposure to credit
and market risks than a diversified portfolio (Page 23); and (5) U.S. Short-Term
may, as a result of the "full payout method", reduce the number of shares held
by a shareholder in order to maintain a stable net asset value per share.
(Page 27)
FUND EXPENSES
The following table illustrates the expenses and fees that a shareholder of
the Fund can expect to incur. The purpose of this table is to assist the
investor in understanding the various expenses that an investor in the Fund will
bear directly or indirectly.
Shareholder Transaction Expenses
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
Annual Fund Operating Expenses (after expense reimbursements,
shown as a percentage of average net assets)
Advisory 12b-1 Admin. Other Total
Fees Fees(1) Fees(2) Expenses Expenses
U.S. Portfolios
U.S. Short-Term 0.30% None 0.04% 0.06% 0.40%(3)
Fixed Income
Portfolio
Stable Return 0.35% None 0.04% 0.11% 0.50% (4)
Portfolio
U.S. Treasury 0.35% None 0.04% 0.11%(6) 0.50% (4)
Portfolio
AAA Asset- 0.35% None 0.04% 0.11%(6) 0.50% (4)
Backed Portfolio
Broad Market 0.35% None 0.04% 0.11%(6) 0.50% (4)
Fixed Income
Portfolio
Global and
International
Portfolios
Worldwide Short 0.35% None 0.04% 0.11% 0.50% (4)
Term Fixed
Income Portfolio
Worldwide Fixed 0.40% None 0.04% 0.15% 0.59% (5)
Income Portfolio
Worldwide Fixed 0.40% None 0.04% 0.16% 0.60% (5)
Income-Hedged
Portfolio)
International 0.40% None 0.04% 0.16%(6) 0.60% (4)
Fixed Income
Portfolio
International 0.004 None 0.0004 0.16%(6) 0.60% (4)
Fixed Income-
Hedged Portfolio
____________________
(1) Pursuant to a Distribution Agreement dated as of September 21, 1992,
between the Fund and AMT Capital, AMT Capital provides distribution
services at no cost to the Fund. See "Distribution of Fund Shares".
(2) The Administration Agreement dated as of September 21, 1992, between
AMT Capital and the Fund, pursuant to which AMT Capital provides
administrative services to the Fund, includes an incentive fee, capped at
0.02% of the average daily net assets of a Portfolio, for reducing the
expense ratio for one or more Portfolios. See "Management of the
Fund - Administrator". The incentive fee is not included in the figures
set forth above.
(3) By agreement with the Investment Adviser, total operating expenses are
capped at 0.40% (on an annualized basis) of the average daily net
assets of U.S. Short-Term. All operating expenses in excess of the cap
will be paid by the Investment Adviser. The Investment Adviser will not
attempt to recover prior period reimbursements in the event that
expenses fall below the cap. Without such cap, the total operating
expenses including interest expense (on an annualized basis) for the fiscal year
ending December 31, 1994 was 0.48% of U.S. Short-Term's average daily net
assets.
(4) The Investment Adviser has voluntarily agreed to cap the total
operating expenses at 0.50% of each of Stable Return's, U.S.
Treasury's, AAA Asset-Backed's, Broad Market's and Worldwide Short-
Term's average daily net assets, and at 0.60% of each of International's
and International-Hedged's average daily net assets. Without such
caps, the total operating expenses (on an annualized basis) for Stable
Return and Worldwide Short-Term for the fiscal year ending December
31, 1994 were 1.07% and 0.59%, respectively,of their average daily net
assets.
(5) By agreement with the Investment Adviser, total operating expenses are
capped at 0.60% (on an annualized basis) of the average daily net
assets of each of Worldwide and Worldwide-Hedged. All operating
expenses in excess of the cap will be paid by the Investment Adviser.
The Investment Adviser will not attempt to recover prior period
reimbursements in the event that expenses fall below the cap. Without
such cap, the total operating expenses including interest expense (on an
annualized basis) forWorldwide and Worldwide-Hedged for the fiscal year ending
December31, 1994 were 0.65% and 0.78%, respectively,of their average daily net
assets.
(6) "Other Expenses" are based on estimated expenses for the current
fiscal year.
The following table illustrates the expenses that an investor would pay
on each $1,000 increment of its investment over various time periods, assuming a
5% annual return. As noted in the table above, the Fund charges no redemption
fees of any kind.
Expenses Per $1,000 Investment
1 Year 3 Years 5 Years 10 Years
U.S. Portfolios
U.S. Short-Term Fixed In $4 $13 $23 $51
Stable Return $5 $16 $28 $63
U.S. Treasury $5 $16
AAA Asset-Backed $5 $16
Broad Market Fixed Incom $5 $16
Global and International Portfolios
Worldwide Short-Term Fixed
Income $5 $16 $28 $63
Worldwide Fixed Income $6 $19 $33 $74
Worldwide Fixed Income-H $6 $19 $33 $75
International Fixed Inco $6 $19
International Fixed Inco $6 $19
These examples should not be considered a representation of
future expenses or performance. Actual operating expenses and annual returns
may be greater or lesser than those shown.
In no case will the expenses charged to U.S. Short-Term exceed
0.40% of its average daily net assets for any fiscal year without the consent of
the holders of a majority of the outstanding shares of such Portfolio. Expenses
to either Worldwide or Worldwide-Hedged will not exceed 0.60% of such
Portfolio's average daily net assets for any fiscal year without the consent of
the holders of a majority of the outstanding shares of Worldwide or Worldwide-
Hedged, as the case may be.
At the discretion of and until further notice from the Investment
Adviser, expenses to Stable Return, U.S. Treasury, AAA Asset-Backed, Broad
Market and Worldwide Short-Term will not exceed 0.50% of each such Portfolio's
net assets for any fiscal year and expenses to International and International-
Hedged will not exceed 0.60% of each such Portfolio's net assets for any fiscal
year.
The Portfolio's active management approaches could lead to
higher portfolio transaction expenses as a result of a higher volume of such
transactions. These transaction expenses are not fully reflected in the
expenses subject to the cap described above. See "Investment Techniques -
Portfolio Turnover".
FINANCIAL HIGHLIGHTS
The financial information in the following tables has been
audited in conjunction with the audit of the financial statements of the Fund by
Ernst & Young LLP, independent auditors. The audited financial statements for
the periods ended December 31, 1994 are incorporated by reference in the
Statement of Additional Information. The financial information should be read in
conjunction with the financial statements which can be obtained upon request.
Financial Highlights
U.S Short-Term Fixed Income Portfolio
For a share Fiscal Year Three Months Fiscal Year Per.
outstanding Ended Ended Ended Ended Ended From
throughout 12/31/94 12/31/93 12/31/92 12/31/92 9/30/91 12/6/89*
period to 9/30/90
Per Share Data
Net asset $9.976 $10.000 $10.000 $10.000 $10.000 $10.000
value, beg.
of per.
Increases (Decreases) From
Investment Operations
Investment
income net 0.443 0.321 0.337 0.119 0.627 0.621
Net realized and unrealized gain
(loss) on investments, and options
and financial future
contracts (0.078) (0.030) 0.008 0.023 0.057 0.037
Total from invesment
operations 0.365 0.291 0.345 0.142 0.684 0.658
Less Distributions
From investment
income, net 0.449 0.315 0.337 0.119 0.627 0.621
In excess of investment
income, net 0.003 - - - - -
From net realized and unrealized gain
on investments, and options and
financial future
contracts - - 0.008 0.023 0.057 0.037
Total distribution
0.452 0.315 0.345 0.142 0.684 0.658
Net asset value,
end of per. $9.889 $9.976 $10.000 $10.000 $10.000 $10.000
Total Return 3.71% 2.88% 3.45% 5.67%(b) 7.11% 8.31%(b)
Ratios/Supplemental Data
Net assets, end
of period $290694868 $417727821 $682513193 $365310697 $269114721 $111956929
Ratio of operating expenses
to average net
assets 0.40% 0.40% 0.40% 0.40%(b) 0.40% 0.50%(b)
Ratio of interest expense
to average net
assets 0.03% 0.08% 0.03% - 0.03% -
Ratio of investment income,
net to average
net assets 4.14% 3.28% 3.37% 4.67%(b) 5.99% 8.23%(b)
Decrease in above ratios
due to waiver of investment
advisory fees and reimburse-
ment of other
expenses 0.08% 0.03% - 0.03%(b) 0.11% 0.86%(b)
(a) Net of waivers and reimbursements, exclusive of interest.
(b) Annualized.
* Commencement of Operations
See Notes to Financial Statements
Financial Highlights
Stable Return Porfolio
For a share outstanding Year Period From
throughout the period: Ended July 26, 1993* to
Dec. 31, 1994 Dec. 31, 1993
Per Share Data
Net asset value, beginni $9.947 $10.000
Increases (Decreases) From
Investment Operations
Investment income, net 0.428 0.138
Net realized and unrealized gain
(loss) on investments and
financial futures contra (0.401) 0.043
Total from investment op 0.027 0.181
Less Distributions
From investment income, 0.428 0.138
From net realized gain on investments
and financial futures co - 0.031
In excess of net realized and
unrealized gains on investments
and financial futures co - 0.065
Total distributions 0.428 0.234
Net asset value, end of $9.546 $9.947
Total Return 0.29% 4.27% (b)
Ratios/Supplemental Data
Net assets, end of
period $4338339 $3482439
Ratio of operating expenses
to average net assets (a 0.50% 0.50%(b)
Ratio of interest expense
to average net assets 1.24% -
Ratio of investment income,
net to average net asset 4.43% 3.68%(b)
Decrease in above ratios
due to waiver of investment
advisory fees and reimburse-
ment of other expenses 0.57% 1.46%(b)
Porfolio turnover 343% 1,841%
(a) Net of waivers and reimbursements, exclusive of interest.
(b) Annualized.
* Commencement of Operations See Notes To Financial Statements
assets in debt securities with variable, floating or zero coupon rates or other
discounted instruments.
Financial Highlights
Worldwide Short-Term
Fixed Income Portfolio Worldwide Fixed Income Portfolio
Fiscal Yr Period From Fiscal Yr Fiscal Yr Per. From
For a share outstanding Ended 12/13/93* to Ended Ended 4/15/92* to
throughout the period: 12/31/94 12/31/93 12/31/94 12/31/93 12/31/92
Per Share Data
Net asset value, beginning
of period $10.013 $10.000 $10.023 $9.976 $10.000
Increases (Decreases) From
Investment Operations
Investment income, net 0.328 0.012 0.503 0.454 0.387
Net realized and unrealized gain
(loss) on investments, options and financial
futures contracts, and foreign currency-
related transactions (0.089) 0.013 (0.737) 1.042 0.530
Total from investment
operations 0.239 0.025 (0.234) 1.496 0.917
Less Distributions
From investment income, 0.254 0.012 0.225 0.453 0.387
In excess of investment 0.000 - 0.008 - -
From capital stock in
excess of par value 0.074 - 0.289 - -
From net realized gain on investments,
options and financial futures contracts,
and foreign currency-related
transactions - - - 0.866 0.554
In excess of net realized gain on investments,
options and financial futures contracts,
and foreign currency-related
transactions - - - 0.130 0.000
Total distributions 0.328 0.012 0.522 1.449 0.941
Net asset value, end of
period $9.924 $10.013 $9.267 $10.023 $9.976
Total Return 2.72% 4.22% (b) (2.25%) 15.86% 13.46% (b)
Ratios/Supplemental Data
Net assets, end of
period $79761931 $6014986 $53721481 $217163036 $82757009
Ratio of operating expenses
to average net assets
(a) 0.50% 0.50%(b) 0.60% 0.59% 0.60%(b)
Ratio of interest expense
to average net assets - - 0.03% 0.27% 0.19%(b)
Ratio of investment income,
net to average net asset 4.17% 2.43%(b) 5.11% 4.48% 5.39%(b)
Decrease in above ratios
due to waiver of investment
advisory fees and reimburse-
ment of other expenses 0.09% 0.76%(b) 0.02% - 0.72%(b)
Portfolio Turnover n/a n/a 1,479% 1,245% 850%
(a) Net of waivers and reimbursements, exclusive of interest.
(b) Annualized.
* Commencement of Operations See Notes To Financial Statements
Financial Highlights
Worldwide Fixed Income-Hedged Portfolio
For a share outstanding Fiscal Year Fiscal Year Period From
throughout the period: Ended Ended May 19, 1992*
Dec. 31, 1994 Dec. 31, 1993 to Dec. 31, 1992
Per Share Data
Net asset value, beginning of period $10.077 $9.848 $10.000
Increases (Decreases) From
Investment Operations
Investment income, net 0.338 0.448 0.319
Net realized and unrealized gain
(loss) on investments, options and
financial futures contracts, and
foreign currency-related
transactions 0.434 (c) 0.754 0.247
Total from investment operations 0.772 1.202 0.566
Less Distributions
From investment income, net 0.437 0.448 0.319
In excess of investment income, net 0.002 - -
From net realized gain on investments,
options and financial futures
contracts, and foreign currency-
related transactions - 0.525 0.399
Total distributions 0.439 0.973 0.718
Net asset value, end of period $10.410 $10.077 $9.848
Total Return 7.84% 12.89% 9.45%
Ratios/Supplemental Data
Net assets, end of period $272,725 $41,137,515 $21,785,134
Ratio of operating expenses
to average net assets (a) 0.60% 0.60% 0.60%
Ratio of interest expense
to average net assets 0.05% 0.26% 0.23%
Ratio of investment income,
net to average net assets 4.72% 4.49% 5.13%
Decrease in above ratios
due to waiver of investment
advisory fees and reimburse-
ment of other expenses 0.17% 0.09% 1.01%
Portfolio Turnover 1,622% 1,254% 826%
(a) Net of waivers and reimbursements, exclusive of interest.
(b) Annualized.
(c) Includes the effect of net realized losses prior to significant
decreases in shares outstanding
See Notes to Financial Statements
THE FUND
The Fund is a no-load, open-end management investment company
organized as a Maryland corporation. The Fund currently consists of ten
Portfolios of hig-quality debt securities, each with its own investment
objectives and policies: (1) U.S. Portfolios - U.S. Short-Term Fixed Incme,
Stable Return, U.S. Treasury, AAA Asset-backed and Broad Market Fixed
Income; and (2) Global and International Portfolios - Worldwide Short-Term
Fixed Income, Worldwide Fixed Income, Worldwide Fixed Income-Hedged,
International Fixed Income and International Fixed Income-Hedged.
INVESTMENT OBJECTIVES AND POLICIES
Each Portfolio seeks to achieve its investment objective by
investing in debt securities of varying durations. Duration incorporates a
bond's yield, coupon interest payments, final maturity and call features into
one measure. Duration is a measure of the expected life of a debt security on a
present value basis. It takes the length of the time intervals between the
present time and the time that the interest and principal payments are scheduled
or, in the case of a callable bond, expected to be received, and weights them by
the present values of the cash to be received at each future point in time. For
any debt security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. In general, for the same
maturity, the lower the stated or coupon rate of interest of a debt security,
the longer the duration of the security; conversely, the higher the stated or
coupon rate of interest of a debt security, the shorter the duration of the
security.
Futures, options and options on futures have durations which,
in general, are closely related to the duration of the securities that underlie
them. Holding long futures or call options (backed by a segregated account of
cash and cash equivalents) will lengthen a Portfolio's duration by approximately
the same amount that holding an equivalent amount of the underlying securities
would. Short futures or put option positions have durations roughly equal to
the negative duration of the securities that underlie those positions, and have
the effect of reducing portfolio duration by approximately the same amount that
selling an equivalent amount of the underlying securities would.
The Investment Adviser or Sub-Adviser may exceed the stated
duration cap of a Portfolio for temporary defensive purposes.
U.S. PORTFOLIOS
Each of the U.S. Portfolios will invest at least 65% of its assets
in U.S. dollar-denominated debt securities. Each of the U.S. Portfolios, other
than U.S. Treasury, may invest up to 35% of its assets in foreign currency-
denominated (non-U.S. dollar) debt securities, although it is not currently
expected that any of the U.S. Portfolios will invest more than a minor portion
of their assets in such securities.
U.S. SHORT-TERM FIXED INCOME PORTFOLIO
The investment objective of U.S. Short-Term is to attain a high
level of total return as may be consistent with the preservation of capital and
to maintain liquidity by investing primarily in high-quality fixed income
securities with an average U.S. dollar-weighted duration of less than one year.
U.S. Short-Term seeks to attain its objectives by investing in
debt securities of U.S. and foreign issuers, including securities issued or
guaranteed by the U.S. Government and its agencies or instrumentalities;
municipal obligations; obligations issued or guaranteed by a foreign government
or any of its political subdivisions, authorities, agencies or instrumentalities
or by supranational organizations; obligations of domestic or foreign
corporations or other entities; obligations of domestic or foreign banks; and
mortgage- and asset-backed securities. The Portfolio may also engage in
repurchase and reverse repurchase agreements. These investments are described
below under "Description of Investments". In addition, U.S. Short-Term may
utilize up to 5% of its assets as margin and premiums to purchase and sell
options, futures and options on futures contracts. U.S. Short-Term may not
invest more than 5% of its total assets in the securities of any issuer
(other than the U.S. Government and its agencies).
U.S. Short-Term seeks to maintain a constant net asset value of
$10 per share by employing the "full payout method" of declaring dividends.
Currently, this policy has been suspended and the NAV has fallen below
10.00/share See "Dividends - U.S. Short-Term Fixed Income Portfolio". No
assurance can begiven that U.S. Short-Term can maintain a constant net asset
value of $10 per share. Additionally, the Portfolio may have to reduce the
number of shares held by shareholders in order to maintain a constant net asset
value of $10 per share.
The shares of U.S. Short-Term are not guaranteed by the U.S.
Government. U.S. Short-Term is not a "money market fund" and may make
investments that are not permitted by money market funds under applicable
regulations. For example, U.S. Short-Term may have a dollar-weighted average
maturity in excess of ninety days. Except for temporary defensive purposes, U.S
Short-Term will not have a dollar-weighted average maturity in excess of three
years.
STABLE RETURN PORTFOLIO
The investment objective of Stable Return is to maintain a
stable level of total return as may be consistent with the preservation of
capital by investing primarily in high-quality debt securities with an average
U.S. dollar-weighted duration of less than three years and by using interest
rate hedging as a stabilizing technique.
Stable Return seeks to attain its objective by investing in debt
securities and instruments of the same type as U.S. Short-Term. Stable Return
will generally purchase securities included in the Merrill Lynch 1-2.99 Year
Treasury Index, which has historically maintained stable returns from quarter to
quarter, relative to longer-term securities. (See "Appendix" in the Statement
of Additional Information.) The price and yield of securities in the 1 to 3
year duration range are generally less volatile than those of securities with a
longer duration. Stable Return will seek to match the average duration of the
Index but cannot guarantee that it will do so. At no time will the average
duration of the Portfolio be more than one year in excess of the average
duration of the Index.
Stable Return is suitable as an investment option for defined
contribution and retirement plans. Stable Return will be managed by the
Investment Adviser in a manner designed to produce returns similar to those of a
guaranteed investment contract ("GIC"). However, unlike a GIC, Stable Return is
not guaranteed by an insurer.
U.S. TREASURY PORTFOLIO
The investment objective of U.S. Treasury is to attain a high
level of total return as may be consistent with the preservation of capital and
to avoid credit quality risk by investing primarily in securities issued by the
U.S. Treasury with an average U.S. dollar-weighted duration of less than five
years which will provide investors in most jurisdictions with income exempt from
state and local tax. (Check with a tax adviser to determine if your state and
local tax laws exempt income derived from U.S. Treasury mutual fund portfolios.)
U.S. Treasury seeks to attain its objective by investing at least
95% of its assets in U.S. dollar-denominated obligations issued by the U.S.
Treasury, and repurchase and reverse repurchase agreements collateralized by
such obligations. U.S. Treasury may invest up to 5% of its assets in U.S.
dollar- or foreign currency-denominated debt securities and instruments of the
same type as U.S. Short-Term.
AAA ASSET-BACKED PORTFOLIO
The investment objective of AAA Asset-Backed is to attain a
high level of total return as may be consistent with the preservation of capital
by investing primarily in mortgage- and asset-backed securities, rated in the
highest quality rating category, with an average U.S. dollar-weighted duration
of less than five years.
AAA Asset-Backed seeks to attain its objective by investing at
least 65% of its assets in mortgage- and asset-backed debt obligations of U.S.
and foreign issuers rated in the highest quality rating category by a nationally
recognized rating service, or deemed to be of comparable quality by the
Investment Adviser. AAA Asset-Backed may also invest up to 35% of its assets in
debt securities and instruments of the same type as U.S. Short-Term, also rated
in the highest quality rating category. The Portfolio may, for temporary
defensive purposes, invest up to 100% of its assets in short-term U.S.
Government securities and money market instruments.
BROAD MARKET FIXED INCOME PORTFOLIO
The investment objective of Broad Market is to attain a high
level of total return as may be consistent with the preservation of capital by
investing primarily in high-quality fixed income securities reflective of the
broad spectrum of the U.S. bond market with an average U.S. dollar-weighted
duration of less than eight years.
Broad Market seeks to attain its objective by investing in debt
securities and instruments of the same type as U.S. Short-Term. The broad
market of fixed income securities includes all investment grade fixed income
securities in the corporate, U.S. Government and mortgage- and asset-backed
markets with durations of greater than one year. The allocation among markets
will vary based upon the issuance of new securities and the retirement of
outstanding securities. The current market allocation is comprised of
approximately 20% in corporate securities, 50% in U.S. Government securities and
30% in mortgage- and asset-backed securities. The Investment Adviser will
manage Broad Market to approximate broad market allocations by purchasing and
selling representative securities in each market, but Broad Market cannot
guarantee that it will match such broad market allocations. The Portfolio may,
for temporary defensive purposes, invest up to 100% of its assets in short-term
U.S. Government securities and money market instruments.
GLOBAL AND INTERNATIONAL PORTFOLIOS
Each of the Worldwide Portfolios will invest at least 65% of its
assets in debt securities of issuers from at least three different countries,
including the United States, with a significant portion of its assets in debt
securities of issuers located outside the United States. Each of the
International Portfolios will invest at least 65% of its assets in debt
securities of issuers from at least three different countries, excluding the
United States. Each of the Portfolios may, for temporary defensive purposes,
invest up to 100% of its assets in short-term U.S. Government securities and
money market instruments.
WORLDWIDE SHORT-TERM FIXED INCOME PORTFOLIO
The investment objective of Worldwide Short-Term is to attain
a high level of total return as may be consistent with the preservation of
capital by investing primarily in high-quality fixed income securities from bond
markets worldwide, denominated in both U.S. dollars and foreign currencies, with
an average U.S. dollar-weighted duration of less than one year.
Worldwide Short-Term seeks to attain its objective by investing
in debt securities of U.S. and foreign issuers, including securities issued or
guaranteed by the U.S. Government and its agencies or instrumentalities;
municipal obligations; obligations issued or guaranteed by a foreign government,
or any of its political subdivisions, authorities, agencies or instrumentalities
or by supranational organizations; obligations of domestic or foreign
corporations or other entities; obligations of domestic or foreign banks; and
mortgage- and asset-backed securities. The Portfolio may also engage in
repurchase and reverse repurchase agreements. Each of these investments are
described below under "Descriptions of Investments". In addition, Worldwide
Short-Term may utilize up to 5% of its assets as margin and premiums to purchase
and sell options, futures and options on futures contracts.
At the Investment Adviser's or Sub-Adviser's discretion,
Worldwide Short-Term may at times seek to hedge all or part of its foreign
currency-denominated assets against foreign currency risks. Worldwide Short-
Term may also enter into transactions in foreign currencies and related
instruments, based on predictions of changes in the exchange rates between
foreign currencies, in an effort to enhance total return. Except for temporary
defensive purposes, Worldwide Short-Term will not have a dollar-weighted
average maturity in excess of three years.
WORLDWIDE FIXED INCOME PORTFOLIO
The investment objective of Worldwide is to attain a high level
of total return as may be consistent with the preservation of capital by
investing primarily in high-quality fixed income securities from bond markets
worldwide, denominated in both U.S. dollars and foreign currencies, with an
average U.S. dollar-weighted duration of less than six years.
Worldwide seeks to attain its objective by investing in debt
securities and instruments of the same type as Worldwide Short-Term, but
generally of a longer average U.S. dollar-weighted duration. The Adviser or Sub
Adviser intends to actively manage the Portfolio and the allocations of the
Portfolio's investment assets among various world bond markets (and currencies)
are not expected to be comparable to, or as diverse as, the allocations accorded
to such markets (and currencies) by the major bond market indices. The
Portfolio will maintain investments in debt securities of issuers from at least
three different countries, including the United States.
At the Investment Adviser's or Sub-Adviser's discretion,
Worldwide may at times seek to hedge all or part of its foreign currency-
denominated assets against foreign currency risks. Worldwide may also enter
into transactions in foreign currencies and related instruments, based on
predictions of changes in the exchange rates between foreign currencies, in an
effort to enhance total return.
WORLDWIDE FIXED INCOME-HEDGED PORTFOLIO
The investment objective of Worldwide-Hedged is to attain a
high level of total return as may be consistent with the preservation of capital
by investing primarily in high-quality fixed income securities from bond markets
worldwide, denominated in both U.S. dollars and foreign currencies, with an
average U.S. dollar-weighted duration of less than six years and by actively
utilizing currency hedging techniques.
Worldwide-Hedged seeks to attain its objective by investing in
debt securities and instruments of the same type as Worldwide. The Adviser or
Sub-Adviser intends to actively manage the Portfolio and the allocations of the
Portfolio's investment assets among various world bond markets are not expected
to be comparable to, or as diverse as, the allocations accorded to such markets
by the major bond market indices. The Portfolio will maintain investments in
debt securities of issuers from at least three different countries, including
the United States.
While currency hedging decisions for Worldwide Short-Term,
Worldwide and International are at the discretion of the Investment Adviser or
Sub-Adviser, Worldwide-Hedged, as a fundamental policy of the Portfolio, which
may only be changed by a vote of shareholders, will attempt to hedge at least
65% of its foreign currency-denominated assets against foreign currency risks to
the fullest extent feasible. Worldwide-Hedged may not enter into transactions
in foreign currencies and related instruments for non-hedging purposes.
INTERNATIONAL FIXED INCOME PORTFOLIO
The investment objective of International is to attain a high
level of total return as may be consistent with the preservation of capital by
investing primarily in high-quality fixed income securities from bond markets
worldwide, denominated in foreign currencies, with an average U.S. dollar-
weighted duration of less than six years.
International will seek to attain its objective by investing at
least 65% of its assets in foreign currency-denominated debt securities and
instruments of the same type as Worldwide. Up to 35% of the balance of its
assets may be invested in U.S. dollar-denominated securities of the same type.
At the Investment Adviser's or Sub-Adviser's discretion,
International may at times seek to hedge all or part of its foreign currency-
denominated assets against foreign currency risks. International may also enter
into transactions in foreign currencies and related instruments, based on
predictions of changes in the exchange rates between foreign currencies, in an
effort to enhance total return.
INTERNATIONAL FIXED INCOME-HEDGED
PORTFOLIO
The investment objective of International-Hedged is to attain a
high level of total return as may be consistent with the preservation of capital
by investing primarily in high-quality fixed income securities from bond markets
worldwide, denominated in foreign currencies, with an average U.S. dollar-
weighted duration of less than six years and by actively utilizing currency
hedging techniques.
International-Hedged seeks to attain its objective by investing
at least 65% of its assets in foreign currency-denominated debt securities and
instruments of the same type as Worldwide. Up to 35% of the balance of its
assets may be invested in U.S. dollar-denominated securities of the same type.
While currency hedging decisions for Worldwide Short-Term,
Worldwide and International are at the discretion of the Investment Adviser or
Sub-Adviser, International-Hedged, as a fundamental policy of the Portfolio,
which may only be changed by a vote of shareholders, will attempt to hedge at
least 65% of its foreign currency-denominated assets against foreign currency
risks to the fullest extent feasible. International-Hedged may not enter into
transactions in foreign currencies and related instruments for non-hedging
purposes.
DESCRIPTION OF INVESTMENTS
The following briefly describes some of the different types of
securities in which the ten Portfolios may invest, subject to each Portfolio's
investment objectives and policies. For a more extensive description of these
assets and the risks associated with them, see the Statement of Additional
Information.
U.S. Treasury and other U.S. Government and Government
Agency Securities. Each Portfolio may purchase securities issued by or
guaranteed as to principal and interest by the U.S. Government, its agencies or
instrumentalities and supported by the full faith and credit of the United
States ("U.S. Government Securities"). Each Portfolio may also purchase
securities issued by a U.S. Government-sponsored enterprise or federal agency
that is supported either by its ability to borrow from the U.S. Treasury (e.g.,
Student Loan Marketing Association) or by its own credit standing (e.g., Federal
National Mortgage Association). Such securities do not constitute direct
obligations of the United States but are issued, in general, under the authority
of an Act of Congress.
Foreign Government and International and Supranational
Agency Securities. Each Portfolio may purchase debt obligations issued or
guaranteed by foreign governments or their subdivisions, agencies and
instrumentalities, and debt obligations issued or guaranteed by international
agencies and supranational entities.
Bank Obligations. Each Portfolio may invest in obligations of
domestic and foreign banks, including time deposits, certificates of deposit,
bankers' acceptances, bank notes, deposit notes, Eurodollar time deposits,
Eurodollar certificates of deposit, variable rate notes, loan participations,
variable amount master demand notes and custodial receipts ("Bank Obligations").
Each portfolio may, from time to time, concentrate more than 25% of its assets
in such Bank Obligations.
Corporate Debt Instruments. Each Portfolio may purchase
commercial paper, notes and other obligations of U.S. and foreign corporate
issuers meeting the Portfolio's credit quality standards (including medium-term
and variable rate notes).
Repurchase and Reverse Repurchase Agreements. Each
Portfolio may enter into repurchase agreements under which a bank or securities
firm (that is a dealer in U.S. Government Securities reporting to the Federal
Reserve Bank of New York) agrees, upon entering into the contract, to sell U.S.
Government Securities to a Portfolio and repurchase such securities from the
Portfolio at a mutually agreed-upon price and date. Each Portfolio may enter
into reverse repurchase agreements under which a primary or reporting dealer in
U.S. Government Securities purchases U.S. Government Securities from a Portfolio
and the Portfolio agrees to repurchase the securities at an agreed-upon price
and date.
Regulations of the Commission require either that securities
sold by a Portfolio under a reverse repurchase agreement be segregated pending
repurchase or that the proceeds be segregated on that Portfolio's books and
records pending repurchase. The Fund will maintain for each Portfolio a
segregated custodial account containing cash, U.S. Government Securities or
other appropriate high-grade debt securities having an aggregate value at least
equal to the amount of such commitments to repurchase, including accrued
interest, until payment is made. Repurchase and reverse repurchase agreements
will generally be restricted to those that mature within seven days. The
Portfolios will engage in such transactions with parties selected on the basis
of such party's creditworthiness. U.S. Short-Term, Worldwide, and Worldwide-
Hedged may not enter into a repurchase agreement or reverse repurchase agreement
if, as a result thereof, more than 25% of each such Portfolio's assets would be
subject to repurchase agreements or reverse repurchase agreements.
Dollar Roll Transactions. Each Portfolio may enter into dollar
roll transactions with selected banks and broker-dealers. Dollar roll
transactions are treated as reverse repurchase agreements for purposes of a
Portfolio's borrowing restrictions and consist of the sale by the Portfolio of
mortgage-backed securities, together with a commitment to purchase similar, but
not identical, securities at a future date, at the same price. In addition, the
Portfolio is paid a fee as consideration for entering into the
commitment to purchase. Dollar rolls may be renewed after
cash settlement and initially involve only a firm commitment
agreement by the Portfolio to buy a security.
Mortgage-Backed Securities. Each Portfolio may purchase
securities that are secured or backed by mortgages or other mortgage-related
assets. Such securities may be issued by such entities as the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC"),
commercial banks, savings and loan associations, mortgage banks or by issuers
that are affiliates of or sponsored by such entities.
Other Asset-Backed Securities. Each Portfolio may also
purchase securities that are secured or backed by assets other than mortgage-
related assets, such as automobile and credit card receivables, and that are
sponsored by such institutions as finance companies, finance subsidiaries of
industrial companies and investment banks. Each Portfolio will only purchase
asset-backed securities that the Investment Adviser determines to be liquid. No
Portfolio will purchase non-mortgage, asset-backed securities that are not rated
at least "AA" by S&P or "Aa" by Moody's, or determined by the Investment Adviser
to be of comparable quality.
Foreign Securities. Each Portfolio may, but generally the
Global and International Portfolios will, invest in securities denominated in
currencies other than the U.S. dollar. The Investment Adviser and the
Sub-Adviser will seek to manage the Global and International Portfolios in
accordance with a global market strategy. Consistent with such a strategy,
these Portfolios may invest in debt securities denominated in any single
currency or multi-currency units. The Investment Adviser and the Sub-Adviser
will adjust the exposure of these Portfolios to different currencies based on
their perception of the most favorable markets and issuers. In allocating
assets among multiple markets, the Investment Adviser and the
Sub-Adviser will assess the relative yield and anticipated direction
of interest rates in particular markets, general market and
economic conditions and the relationship of currencies of various countries to
each other. In their evaluations, the Investment Adviser and the Sub-Adviser
will use internal financial, economic and credit analysis resources as well as
information obtained from external sources.
The Global and International Portfolios will invest primarily in
securities denominated in the currencies of the United States (other than
International and International-Hedged), Japan, Canada, Western European
nations, New Zealand and Australia, as well as securities denominated in the
European Currency Unit. Further, it is anticipated that such securities will be
issued primarily by governmental and private entities located in such countries
and by supranational entities. No Portfolio will invest in countries that are
not considered by the Investment Adviser or the Sub-Adviser to have stable
governments, based on the Investment Adviser's and the Sub-Adviser's analysis of
factors such as general political or economic conditions relating to the
government and the likelihood of expropriation, nationalization, freezes or
confiscation of private property, or whose currencies are not convertible into
U.S. dollars. Under certain adverse conditions and for the duration of such
conditions, each Portfolio may restrict the financial markets or currencies in
which its assets are invested and it may invest its assets solely in one
financial market or in obligations denominated in one currency.
Indexed Notes, Currency Exchange-Related Securities and
Similar Securities. Each Portfolio may purchase notes, the principal amount of
which and/or the rate of interest payable on which is determined by reference to
an index, which may be (i) the rate of exchange between the specified currency
for the note and one or more other currencies or composite currencies; (ii) the
difference in the price or prices of one or more specified commodities on
specified dates; or (iii) the difference in the level of one or more specified
stock indices on specified dates.
Each Portfolio may also purchase principal exchange rate linked securities,
performance-indexed paper and foreign currency warrants. See "Supplemental
Descriptions of Investments" in the Statement of Additional Information.
Securities Denominated in Multi-National Currency Units or
More Than One Currency. Each Portfolio may invest in securities denominated in
a multi-national currency unit, such as the European Currency Unit, which is a
"basket" consisting of specified amounts of the currencies of the member states
of the European Community, a Western European economic cooperative
organization. Each Portfolio may also invest in securities denominated in the
currency of one nation although issued by a governmental entity, corporation or
financial institution of another nation.
Municipal Instruments. Each Portfolio may, from time to time,
purchase municipal instruments when, in the Investment Adviser's opinion, such
instruments will provide a greater rate of return than taxable instruments of
comparable quality. It is not anticipated that such instruments will ever
represent a significant portion of any Portfolio's assets.
INVESTMENT TECHNIQUES
PORTFOLIO TURNOVER
The costs associated with turnover have been and are expected
to remain low relative to equity fund turnover costs. However, due to the
Investment Adviser's and Sub-Adviser's active management style, portfolio
turnover may be higher than other mutual fund portfolios investing primarily in
debt securities. Custodial turnover charges are usually under 1/1000 of 1% of
the transaction value. Turnover costs also include the spread between the "bid"
and the "asked" price of the security bought or sold.
U.S. Short-Term Fixed Income Portfolio. Turnover of U.S.
Short-Term's assets (excluding those having a maturity of one year or less) is
expected to be between 2,000% and 6,000% per year but may, depending upon
market conditions, be higher. This anticipated turnover rate is believed to be
higher than the turnover experienced by most short-term funds, due to the
Investment Adviser's active management of duration.
Worldwide Fixed Income and Worldwide Fixed Income-
Hedged Portfolios. Turnover of the assets of each of Worldwide and Worldwide-
Hedged (excluding those having a maturity of one year or less) is expected to be
between 500% and 1,000% per year, but may, depending upon market conditions,
be higher.
Other Portfolios. It is anticipated that the Worldwide Short-
Term will experience turnover similar to that of the U.S. Short-Term (2,000% to
6,000%), while Stable Return, U.S. Treasury, AAA Asset-Backed, Broad Market,
International and International-Hedged will experience turnover similar to that
of the Worldwide and Worldwide-Hedged (500% to 1,000%).
HEDGING STRATEGIES
Interest Rate Hedging. In order to hedge against changes in
interest rates, each Portfolio may purchase and sell exchange-traded or over-the
counter ("OTC") put and call options on any security in which it is permitted to
invest or on any security index or other index based on the securities in which
it may invest, and may purchase and sell (on a covered basis) financial futures
contracts for the future delivery of fixed-income securities or contracts based
on financial indices, and options on such futures. Each Portfolio may engage in
such activities from time to time at the Investment Adviser's and Sub-Adviser's
discretion, and may not necessarily be engaging in such activities when
movements in interest rates that could affect the value of the assets of the
Portfolio occur.
Foreign Currency Hedging. Each Portfolio may, but generally
the Global and International Portfolios will, enter into forward
foreign currency exchange contracts and may purchase and sell
exchange traded and OTC options on currencies, foreign currency
futures contracts and options on foreign currency futures contracts to
hedge the currency exchange risk associated with its assets or
obligations denominated in foreign currencies. A Portfolio may also engage in
synthetic hedging. Synthetic hedging entails entering into a forward contract
to sell a currency whose changes in value are generally considered to be linked
to a currency or currencies in which some or all of the Portfolio's securities
are or are expected to be denominated, and to buy U.S. dollars. (The amount of
the contract
will not exceed the value of the Portfolio's holdings in linked currencies.)
There is the risk that the perceived linkage between various currencies may not
be present or may not be present during the particular time that a Portfolio is
engaging in proxy hedging. Each Portfolio may also cross-hedge currencies by
entering into forward contracts to sell one or more currencies that are expected
to decline in value relative to other currencies to which the Portfolio has or
in which the Portfolio expects to have portfolio exposure. Except when a
Portfolio enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, where a
corresponding forward currency contract will require no
segregation, a currency contract which obligates a Portfolio to buy or sell
currency will generally require the Portfolio to hold an amount of that currency
or liquid securities denominated in that currency equal to the Portfolio's
obligations or to segregate cash, U.S. Government securities or other
appropriate high-grade debt obligations equal to the amount of the Portfolio's
obligations.
As a result of hedging techniques, the net exposure of each
Portfolio to any one currency may be different from that of its total assets
denominated in such currency. Each of Worldwide-Hedged and International-
Hedged intends to hedge its currency exchange risk to the extent practicable,
but there can be no assurance that all of the assets of either Portfolio
denominated in foreign currencies will be hedged at any time, or that any such
hedge will be effective. Each of Worldwide Short-Term, Worldwide and
International may at times, at the discretion of the Investment Adviser and the
Sub-Adviser, hedge all or part of its currency exchange risk.
Worldwide Short-Term, Worldwide and International may also
decide which securities to purchase or sell, whether to hedge foreign currency
positions and engage in the transactions described in the previous paragraph in
an effort to profit from anticipated changes in the relation between or among
the rates of exchange between various currencies of the countries in which they
are permitted to invest.
Coverage Requirements. All options on securities, securities
indices, other indices and foreign currency written by a Portfolio are required
to be covered. When a Portfolio sells a call option, this means that during the
life of the option the Portfolio will own or have the contractual right to
acquire the securities or foreign currency subject to the option, or will
maintain with the Fund's custodian in a segregated account cash, U.S. Government
Securities or other appropriate high-grade debt obligations in an amount at
least equal to the market value of the securities or foreign currency underlying
the option. When a Portfolio writes a put option, this means that
the Portfolio will maintain with the Fund's custodian in a segregated
account cash, U.S. Government Securities or other appropriate
high-grade debt obligations in an amount at least equal to the exercise
price of the option.
All futures and forward currency contracts purchased or sold for
non-hedging purposes by a Portfolio are also required to be covered. When a
Portfolio purchases a futures or forward currency contract for non-hedging
purposes, this means that the Portfolio will deposit an amount of cash, U.S.
Government Securities or other appropriate high-grade debt obligations in a
segregated account with the Fund's custodian so that the amount so segregated,
plus the amount of initial and variation margin held in the account of its
broker, if applicable, equals the market value of the futures or
forward currency contract.
When a Portfolio sells a futures or forward currency contract for
non-hedging purposes, this means that during the life of the futures or forward
currency contract the Portfolio will own or have the contractual right to
acquire the securities or foreign currency subject to the
futures or forward currency contract, or
will maintain with the Fund's custodian in a segregated account cash, U.S.
Government Securities or other appropriate high-grade debt obligations in an
amount at least equal to the market value of the securities or foreign currency
underlying the futures or forward currency contract.
If the market value of the contract moves adversely to the
Portfolio, or if the value of the securities in the segregated account declines,
the Portfolio will be required to deposit additional cash or securities in the
segregated account at a time when it may be disadvantageous to do so.
Restrictions on Use of Futures Transactions. Regulations of the
Commodity Futures Trading Commission (the "CFTC") applicable to the Fund
require that all of a Portfolio's futures and options on futures transactions
constitute bona fide hedging transactions and that the Portfolio not enter into
such transactions if immediately thereafter, the sum of the amount of initial
margin deposits on the Portfolio's existing futures positions and premiums paid
for related options would exceed 5% of the market value of the Portfolio's total
assets. Each Portfolio is also permitted to engage in transactions in futures
contracts, and options thereon, incidental to such Portfolio's activities in the
securities markets. Under applicable CFTC regulations, the value of the assets
underlying futures positions is not allowed to exceed the sum of cash set aside
in an identifiable manner or short-term U.S. Government or other U.S. dollar-
denominated high-grade short-term debt obligations segregated for this purpose.
ILLIQUID SECURITIES
Although mutual fund portfolios are allowed to invest up to
15% of the value of their net assets in illiquid assets, it is not expected that
any Portfolio will invest a significant portion of its assets in illiquid
securities. All OTC options; repurchase agreements, time deposits and dollar
roll transactions maturing in more than seven days; and loan participations are
treated as illiquid assets.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Each Portfolio may purchase when-issued securities and other
securities that meet the investment criteria of such Portfolio on a forward
commitment basis at fixed purchase terms at a future date beyond customary
settlement time. The purchase will be recorded on the date a Portfolio enters
into the commitment, and the value of the security will thereafter be reflected
in the calculation of the Portfolio's net asset value. The value of the
security on the delivery date may be more or less than its purchase price. No
interest generally will accrue to the Portfolio until settlement. The Fund will
maintain for each Portfolio a segregated custodial account containing cash, U.S.
Government Securities or other appropriate high-grade debt securities having a
value at least equal to the aggregate amount of a Portfolio's forward
commitments.
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment
restrictions for each Portfolio which may only be changed with approval of a
Portfolio's shareholders. Among these policies are (i) that a Portfolio may not
borrow money, except by engaging in reverse repurchase agreements and dollar
roll transactions or from a bank as a temporary measure, provided that
borrowings, excluding reverse repurchase agreements and dollar roll
transactions, will not exceed one-third of total assets and will not be engaged
in for leveraging purposes; (ii) that a Portfolio may not engage in short sales
of securities; and (iii) that a Portfolio may not invest for the purpose of
exercising control or management.
RISKS ASSOCIATED WITH THE FUND'S INVESTMENT POLICIES AND INVESTMENT TECHNIQUES
A more detailed discussion of the risks associated with the
investment policies and investment techniques of the Portfolios appears in the
Statement of Additional Information.
Changes in Interest Rates. The returns that the Portfolios
provide to investors will be influenced by changes in prevailing interest rates.
In
addition, changes in market yields will affect a Portfolio's net asset value
since the prices of portfolio debt securities generally increase when interest
rates decline and decrease when interest rates rise. Prices of shorter-term
securities generally fluctuate less in response to interest rate changes than do
longer-term securities.
Foreign Investments. Securities issued by foreign governments,
foreign corporations, international agencies and obligations of foreign banks
involve risks not associated with securities issued by U.S. entities. With
respect to certain foreign countries, there is the possibility of expropriation
of assets, confiscatory taxation and political or social instability or
diplomatic developments that could affect investment in those countries. There
may be less publicly available information about a foreign financial
instrument than about a United States instrument and foreign entities may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those of United States entities.
A Portfolio could encounter difficulties in obtaining or enforcing a
judgment against the issuer in certain foreign countries. In addition, certain
foreign investments may be subject to foreign withholding or other taxes,
although the Fund will seek to minimize such withholding taxes whenever
practicable. Investors may be able to deduct such taxes in computing their
taxable income or to use such amounts as credits against their United States
income taxes if more than 50% of a Portfolio's total assets at the close of any
taxable year consist of stock or securities of foreign corporations. See "Tax
Considerations".
Currency Exchange Risks. Changes in foreign currency
exchange rates may affect the value of investments of a Portfolio, especially
the Global and International Portfolios. While Worldwide-Hedged and
International-Hedged will, to the fullest extent practicable, and the other
Portfolios may, hedge their assets against foreign currency risk, no assurance
can be given that currency values will change as predicted, and a Portfolio may
suffer losses as a result of this investment strategy. As a result of hedging
techniques, the net exposure of each such Portfolio to any one currency may be
different from that of its total assets denominated in such currency. The
foreign currency markets can be highly volatile and subject to sharp price
fluctuations, and a high degree of leverage is typical of the foreign currency
instruments in which each Portfolio may invest. Since each
Portfolio, other than Worldwide-Hedged and International-Hedged,
may invest in such instruments in an effort to enhance total return, each such
Portfolio will be subject to additional risks in connection with the volatile
nature of these markets to which the other Portfolios are not subject.
Mortgage and Other Asset-Backed Securities. The yield
characteristics of mortgage- and other asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligation generally may be prepaid at any time because the underlying
assets (i.e., loans) generally may be prepaid at any time. As a result, if an
asset-backed security is purchased at a premium, a prepayment rate that is
faster than expected will reduce yield to maturity, while a prepayment rate that
is slower than expected will have the opposite effect of increasing yield to
maturity. Conversely, if an asset-backed security is purchased at a
discount, faster than expected prepayments
will increase, while slower than expected prepayments will decrease yield to
maturity.
These securities may not have the benefit of any security
interest in the underlying assets and recoveries on repossessed collateral
may not, in some cases, be available to support payments
on these securities. The Portfolios will only invest in asset-backed
securities that the Investment Adviser believes are liquid.
Non-Diversified Portfolios. U.S. Short-Term is "diversified"
under the Investment Company Act of 1940, while the other nine Portfolios are
each "non-diversified" for purposes of such Act and so are subject only to the
diversification requirements necessary for treatment as a "regulated investment
company" under the Internal Revenue Code of 1986 (the "Code"). Under the
Code, with respect to 50% of its assets, a Portfolio may invest up to 25% of its
assets in the obligations of an individual issuer (except that this limitation
does not apply to U.S. Government Securities, as defined below), and with
respect to the remaining 50% of its assets may not invest more than 5% of
its assets in the obligations of an individual issuer (other than U.S.
Government Securities). Because a "non-diversified" portfolio
may invest a larger percentage of its assets in
individual issuers than a diversified portfolio, its exposure to credit and
market risks associated with such investments is increased.
Hedging Transactions. The use of hedging techniques involves
the risk of imperfect correlation in movements in the price of the hedge and
movements in the price of the securities that are the subject of the hedge. In
addition, if interest or currency exchange rates do not move in the direction
against which a Portfolio has hedged, the Portfolio will be in a worse position
than if a hedging strategy had not been pursued, because it will lose part or
all of the benefit of the favorable rate movement due to the cost of the hedge
or offsetting positions. Moreover, hedging transactions that are not entered
into on a U.S. or foreign exchange may subject a Portfolio to exposure to the
credit risk of its counterparty.
Repurchase Agreements. In the event the other party to a
repurchase agreement or a reverse repurchase agreement becomes subject to a
bankruptcy or other insolvency proceeding or such party fails to satisfy its
obligations thereunder, a Portfolio could (i) experience delays in recovering
cash or the securities sold (and during such delay the value of the underlying
securities may change in a manner adverse to the Portfolio) or (ii) lose all or
part of the income, proceeds or rights in the securities to which the Portfolio
would otherwise be entitled.
Dollar Roll Transactions. If the broker-dealer to whom a
Portfolio sells the security underlying a dollar roll transaction becomes
insolvent, the Portfolio's right to purchase or repurchase the security may be
restricted; the value of the security may change adversely over the term of the
dollar roll, the security which the Portfolio is required to repurchase may be
worth less than a security which the Portfolio originally held, and the return
earned by the Portfolio with the proceeds of a dollar roll may not exceed
transaction costs.
Zero Coupon Securities. Because they do not pay interest until
maturity, zero coupon securities tend to be subject to greater interim
fluctuation of market value in response to changes in interest rates than
interest-paying securities of similar maturities. Additionally, for tax
purposes, zero coupon securities accrue income daily even though no cash
payments are received which may require a
Portfolio to sell securities that would not ordinarily be sold to provide
cash for the Portfolio's required distributions.
Concentration in Bank Obligations. Each Portfolio may, at
times, invest in excess of 25% of its assets in Bank Obligations, as defined
above. By concentrating investments in the banking industry, a Portfolio may
have a greater exposure to certain risks associated with the banking industry.
In particular, economic or regulatory developments in or related to the banking
industry will affect the value of and investment return on a Portfolio's shares.
As discussed above, each Portfolio will seek to minimize its exposure to such
risks by investing only in debt securities that are determined by the Investment
Adviser or Sub-Adviser to be of high quality.
DISTRIBUTION OF FUND SHARES
Shares of the Fund are distributed by AMT Capital Services,
Inc. pursuant to a Distribution Agreement (the "Distribution Agreement") dated
as of September 21, 1992 between the Fund and AMT Capital. The Distribution
Agreement requires AMT Capital to use its best efforts on a continuing basis to
solicit purchases of shares of the Fund.
No fees are payable by the Fund pursuant
to the Distribution Agreement, and AMT Capital bears the expense of its
distribution activities.
Under a sales incentive fee agreement dated as of September
21, 1992 between AMT Capital and the Investment Adviser, the Investment
Adviser has agreed to pay AMT Capital a monthly sales incentive fee at an annual
rate of 0.30% of the average daily net asset value of shares
purchased as a result of the sales efforts of
AMT Capital (to the extent such average daily net asset value
exceeds $100 million). For purposes of calculating the monthly sales incentive
fee, the daily net asset value of shares purchased
as a result of the sales efforts of
AMT Capital shall not include shares so purchased and held for more than twelve
months.
Charter Atlantic Corporation, an affiliate of the Investment
Adviser, has a 10% equity interest in AMT Capital.
PURCHASES AND REDEMPTIONS
PURCHASES
There is no sales charge imposed by the Fund. The minimum
initial investment in any Portfolio of the Fund is $100,000; additional
purchases or redemptions may be of any amount.
The offering of shares of the Fund is continuous and purchases
of shares of the Fund may be made Monday through Friday, except for the
holidays declared by the Federal Reserve Bank of New York. At the present time,
these holidays are: New Year's Day, Martin Luther King's Birthday, Presidents'
Day, Memorial Day, Fourth of July, Labor Day, Columbus Day, Veterans Day,
Thanksgiving, and Christmas. The Fund offers shares at a public offering price
equal to the net asset value next determined after a purchase order becomes
effective. Purchases of shares must be made by wire transfer of Federal funds.
Initial share purchase orders are effective on the date when AMT Capital
receives a completed Account Application Form (and other required documents) and
Federal funds become available to the Fund in the Fund's account with the
Transfer Agent as set forth below. The shareholder's bank may impose a charge
to execute the wire transfer.
In order to purchase shares on a particular Business Day, a
purchaser must call AMT Capital at (800) 762-4848 [or within the City of New
York, (212) 308-4848] prior to 4:00 p.m. Eastern time to inform the Fund of the
incoming wire transfer and must clearly indicate which Portfolio is to be
purchased. If Federal funds are received by the Fund that same day, the order
will be effective on that day. If the Fund
receives notification after 4:00 p.m. Eastern
time, or if Federal funds are not received by the Transfer Agent, such purchase
order shall be executed as of the date that Federal funds are received. Shares
purchased will begin accruing dividends on the day Federal funds are received.
REDEMPTIONS
The Fund will redeem all full and fractional shares of the Fund
upon request of shareholders. The redemption price is the net asset value per
share next determined after receipt by the Transfer Agent of proper
notice of redemption as described below.
If such notice is received by the Transfer Agent by 4:00 p.m.
Eastern time on any Business Day, the redemption will be effective and payment
will be made (i) in the case of U.S. Short-Term,
on such Business Day; (ii) in the
case of all other U.S. Portfolios, within seven calendar days, but generally on
the day following receipt of such notice; and
(iii) in the case of the Global and
International Portfolios, within seven calendar days, but generally two business
days following receipt of such notice.
If the notice is received on a day that is not a
Business Day or after 4:00 p.m. Eastern time, the redemption notice will be
deemed received as of the next Business Day.
There is no charge imposed by the Fund to redeem shares of the
Fund; however, a shareholder's bank may impose its own wire transfer fee for
receipt of the wire. Redemptions may be executed in any amount requested by the
shareholder up to the amount such shareholder has invested in the Fund.
To redeem shares, a shareholder or any authorized agent (so
designated on the Account Application Form) must provide the Transfer Agent
with the dollar or share amount to be redeemed, the account to which the
redemption proceeds should be wired (which account shall have been previously
designated by the shareholder on its Account Application Form), the name of the
shareholder and the shareholder's account number. Shares redeemed receive
dividends declared up to and including the day preceding the day of the
redemption.
A shareholder may change its authorized agent or the account
designated to receive redemption proceeds at any time by writing to the Transfer
Agent with an appropriate signature guarantee. Further documentation may be
required when deemed appropriate by the Transfer Agent.
A shareholder may request redemption by calling the Transfer
Agent at (800) 247-0473. Telephone redemption is made available to
shareholders of the Fund on the Account Application. The Fund or the Transfer
Agent may employ procedures designed to confirm that instructions communicated
by telephone are genuine. If the Fund does not
employ such procedures, it may be
liable for losses due to unauthorized or fraudulent instructions.
The Fund or the Transfer Agent may require personal identification
codes and will only wire funds
through pre-existing bank account instructions. No bank instruction changes
will be accepted via telephone.
EXCHANGE PRIVILEGE
Shares of a Portfolio may be exchanged for shares of any other
of the Fund's Portfolios or for other funds distributed
by AMT Capital based on the
respective net asset values of the shares involved
in the exchange, assuming that
shareholders wishing to exchange shares
reside in states where these mutual funds
are qualified for sale. The Fund's Portfolio minimum amounts of $100,000 would
still apply. An exchange order is treated the
same as a redemption followed by a
purchase. Investors who wish to make exchange requests should telephone AMT
Capital or the Transfer Agent.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Portfolio is determined by
adding the market value of all the assets of the
Portfolio, subtracting all of the
Portfolio's liabilities, dividing by the number of shares
outstanding and adjusting to the nearest cent.
The net asset value is calculated by the Fund's Accounting
Agent as of 4:00 p.m. Eastern time on each Business Day.
The following methods are used to calculate the value of a
Portfolio's assets: (1) all portfolio
securities for which over-the-counter market
quotations are readily available (including
asset-backed securities) are valued at
the latest bid price; (2) deposits and repurchase
agreements are valued at their cost
plus accrued interest unless the Investment Adviser or Sub-Adviser determines in
good faith, under procedures established by and under the general supervision of
the Fund's Board of Directors, that such
value does not approximate the fair value
of such assets; (3) positions (e.g., futures and options) listed or traded on an
exchange are valued at their last sale
price on that exchange (or if there were no
sales that day for a particular position,
that position is valued at the closing bid
price); and (4) the value of other assets will be determined in good faith by
the Investment Adviser or Sub-Adviser at fair
value under procedures established by
and under the general supervision of the
Fund's Board of Directors. Quotations of
foreign securities denominated in a foreign
currency are converted to U.S. dollar-
equivalents using the bid price of such currencies (quoted by any major bank) in
effect at the time net asset value is computed.
Since U.S. Short-Term's daily dividend accrual includes
unrealized gains and losses, the net asset
value is expected to remain constant at
$10.00 per share (although, the net asset value will fluctuate if the Board of
Directors suspends the full payout method).
Fluctuations in value may reduce the
number of shares held by shareholders. None of the other Portfolios employs the
full payout method of declaring dividends (see "Dividends" below), and the net
asset value of each will fluctuate with changes in the market prices of the
assets held by such Portfolio.
DIVIDENDS
Dividends are automatically reinvested in additional shares of a
Portfolio on the last day of each month at
the net asset value per share on the last Business
Day of that month. Shareholders must indicate their desire to receive
dividends in cash (payable on the first business day of the following month) on
the Account Application Form. Otherwise all dividends will be reinvested in
additional shares as described above.
In the unlikely event that a Portfolio realizes
net long-term capital gains (i.e., with respect
to assets held more than one year), it
will distribute them at least annually by automatically reinvesting (unless a
shareholder has elected to receive cash)
such long-term capital gains in additional
shares of the Portfolio at the net asset
value on the date the distribution is declared.
U.S. SHORT-TERM FIXED INCOME PORTFOLIO
U.S. Short-Term employs the "full payout method" of paying
dividends to shareholders. Under the full payout method, dividends are
determined and, if a positive amount, declared on each Business Day. In
determining the dividend, there is first
calculated the "Full Payout Amount" for the
day. The Full Payout Amount is equal to (1) that day's net investment income
(including accrued but unpaid interest and amortization of original issue and
market discount or premium), plus (2)that day's net capital gains (both realized
and unrealized), or minus (3) that day's net capital loss (both realized and
unrealized). The amount of that day's
dividend declaration is equal to the average
of the Full Payout Amounts for the previous thirty days (adjusted to the extent
necessary to maintain a constant $10.00 per share net asset value), a procedure
which reduces the likelihood (discussed below) that a particular day's dividend
will be determined to be a negative amount.
U.S. Short-Term expects that each day's dividend will
ordinarily be a positive amount. Such
dividends will reflect all capital gains and
losses on U.S. Short-Term's investments
(both realized and unrealized); thus, the
net asset value per share, determined as described above, will remain constant.
However, if the dividend amount so determined is negative for any day (e.g.,
realized and unrealized capital losses
plus expenses exceed realized and unrealized
capital gains plus investment income), a dividend will not be declared. Instead,
each shareholder's accumulated dividend accrual for the month will be
proportionately reduced. If, on the last
Business Day of the month or at the time a
shareholder closes his or her account, such
shareholder's dividend accrual to date
is negative, the shareholder's account
value will be reduced by the negative accrual
to date (i.e., the shareholder will be deemed to have contributed the relevant
number of shares to the capital of U.S.
Short-Term) so that U.S. Short-Term's net
asset value per share for such day will be maintained at $10.00. Thus, although
the net asset value per share will remain
stable, the aggregate net asset value of the
shares in a shareholder's account will decrease
if such dividend accrual is negative.
By purchasing shares in U.S. Short-Term, shareholders are deemed to have agreed
to make such contributions of capital
in the form of shares as may be necessary to
maintain a stable net asset value per share.
As a result of the foregoing procedure,
the distributions paid by U.S. Short-Term
for any particular month may be more or
less than the amount of net investment income and net realized and unrealized
capital gains or losses actually earned by the Portfolio during such period.
The Full Payout Amount reflects both short-term capital gains
and any long-term capital gains on U.S. Short-Term's investments.
The full pay-out method has currently been suspended.
If, in the view of the Board of Directors, it is inadvisable to
continue the practice of maintaining the net asset value of $10.00 per share by
using the full payout method, the Board
of Directors reserves the right to alter,
suspend or terminate the procedures described above. If such procedures are
altered, the Fund will so inform shareholders.
ALL OTHER PORTFOLIOS
The other Portfolios do not employ the "full payout method".
The net investment income (including accrued but unpaid interest and
amortization of original issue and market discount or premium) of each Portfolio
(other than U.S. Short-Term) will be declared as a dividend payable daily to the
respective shareholders of record as of the close of each Business Day. Each
Portfolio will also declare, to the extent necessary, a net short-term capital
gain dividend once per year.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The Board of Directors of the Fund is responsible for the overall
management and supervision of the Fund. The Fund's Directors are Stephen J.
Constantine, John C Head III, Lawrence B. Krause, Paul Meek and Onder John
Olcay. Additional information about the Directors and the Fund's executive
officers may be found in the Statement of Additional Information under the
heading "Management of the Fund - Board of Directors".
INVESTMENT ADVISER
Subject to the direction and authority of the Fund's Board of
Directors, Fischer Francis Trees & Watts, Inc. is responsible for deciding upon
investments for each Portfolio. The Investment Adviser continuously conducts
investment research and is responsible for the purchase, sale or exchange of
portfolio assets.
Organized in 1972, the Investment Adviser is a registered
investment adviser and a New York corporation that currently manages
approximately $18 billion in assets entirely
in fixed-income portfolios for 65 major
institutional clients including banks, central banks, pension funds and other
institutional clients. The average size
of a client relationship with the Investment
Adviser is in excess of $250 million. Over $10 billion of the amount managed is
made up of short-term assets constituting
institutional reserves. The Investment
Adviser is also the sub-adviser to three portfolios of two other open-end
management investment companies. The Investment Adviser's offices are located
at 200 Park Avenue, New York, New York 10166.
SUB-ADVISER
Fischer Francis Trees & Watts, a corporate partnership
organized under the laws of the United Kingdom
and an affiliate of the Investment
Adviser, is the foreign sub-adviser to the Global and International Portfolios.
Organized in 1989, the Sub-Adviser is a U.S.-registered investment adviser and
currently manages approximately $1 billion in multi-currency fixed-income
portfolios for institutional clients.
The Investment Adviser pays the Sub-Adviser
monthly from its investment advisory fee. The Sub-Adviser's annual fee is 0.35%
of the average foreign currency-denominated net assets of Worldwide Short-Term
and 0.40% of the average foreign currency-denominated net assets of each of
Worldwide, Worldwide-Hedged, International and International-Hedged
Portfolios. From the inception date of both Portfolios, through December 31,
1992, the Sub-Adviser voluntarily agreed to
waive its fees for both Worldwide and
Worldwide-Hedged. The Sub-Adviser is under no obligation to waive its fees for
any Portfolio subsequent to December 31, 1992. The Sub-Adviser's offices are
located at 3 Royal Court, The Royal Exchange, London, EC 3V 3RA.
PORTFOLIO MANAGERS
U.S. Portfolios - David J. Marmon, Portfolio Manager. Mr.
Marmon is responsible for management of the U.S. short-term portfolios. He
joined FFTW in 1990 from Yamaichi International (America) where he was head
of futures and options research. Mr. Marmon was previously a financial analyst
and strategist at the First Boston Corporation, where he developed hedging
programs for financial institutions and industrial firms. Mr. Marmon has a B.A.
summa cum laude in economics from Alma College and an M.A. in economics
from Duke University. Stewart M. Russell, Portfolio Manager. Mr. Russell is
also responsible for management of the U.S. short-term portfolios. He joined
FFTW in 1992 from the short-term proprietary trading desk in the global markets
area of J.P. Morgan, where he was responsible for proprietary positioning of U.S
and non-U.S. government obligations, corporate bonds, and asset-backed
securities. Earlier at the bank,
Mr. Russell managed the short-term interest rate
risk group, coordinating a $10 billion
book of assets and liabilities. Mr. Russell
holds a B.A. in government from Cornell University and an M.B.A. in finance
from New York University. Patricia L. Cook, Managing Director. Ms. Cook is
responsible for management of the U.S. long-term portfolios. She joined FFTW in
1991 after twelve years with Salomon Brothers, where she most recently
established and headed the bond strategy
team that analyzes relative values among
mortgages, treasuries, and other sectors of the fixed-income markets and
developed portfolio strategies for
Salomon Brothers' global institutional clients.
Ms. Cook worked initially as an analyst in the firm's proprietary trading unit
before joining the firm's financing desk. Ms. Cook has a B.A. from St. Mary's
College and an M.B.A. from New York University.
Global and International Portfolios - Liaquat Ahamed,
General Manager of the Sub-Adviser. Mr. Ahamed is responsible for
management of the global and international portfolios. He joined FFTW in 1988
after nine years with the World Bank, where he was in charge of all investments
in non-U.S. dollar government bond markets. Mr. Ahamed also served as an
economist with senior government officials in the Philippines, Korea, and
Bangladesh. He has a B.A. in economics from Trinity College, Cambridge
University and an A.M. in economics from Harvard University.
ADMINISTRATOR
Pursuant to an Administration Agreement dated as of
September 21, 1992 between the Fund and AMT Capital Services, Inc., AMT
Capital is Administrator to the Fund and provides for or assists in managing and
supervising all aspects of the general day-
to-day business activities and operations
of the Fund other than investment advisory
activities, including custodial, transfer
agency, dividend disbursing, accounting, auditing, compliance and related
services.
Founded in early 1992, AMT Capital is a registered broker-
dealer whose senior managers are former officers of Morgan Stanley and The
Vanguard Group, where they were responsible for the administration and
distribution of The Pierpont Funds, a $5 billion fund complex now owned by J.P.
Morgan, and the private label administration group of Vanguard, which
administered nearly $10 billion in assets for 45 portfolios, respectively.
The Fund pays AMT Capital a monthly fee at an annual rate of
0.04% of the average daily net assets of the Fund. The Fund also reimburses AMT
Capital for certain costs. In addition, the Fund has agreed to pay the
Administrator an incentive fee for reducing the expense ratio of one or more
Portfolios of the Fund below the specified expense ratio established for such
Portfolios. The maximum incentive fee is 0.02% of the average daily net assets
of a Portfolio.
TAX CONSIDERATIONS
The following discussion is for general information only. An
investor should consult with his or her own
tax adviser as to the tax consequences
of an investment in a Portfolio, including the status of distributions from each
Portfolio under applicable state or local law.
FEDERAL INCOME TAXES
Each active Portfolio has qualified
for and intends to continue to qualify
to be treated as a regulated investment
company ("RIC") under the Internal Revenue
Code of 1986, as amended. To qualify, a Portfolio must meet certain income,
distribution and diversification requirements. In any year in which a Portfolio
qualifies as a RIC and distributes all of
its taxable income on a timely basis, the
Portfolio will not pay U.S. federal income
or excise tax. Each Portfolio intends to
distribute all of its taxable income by automatically reinvesting such amount in
additional shares of the Portfolio and
distributing those shares to its shareholders,
unless a shareholder elects, on the Account Application Form, to receive cash
payments for such distributions.
Dividends paid by a Portfolio are taxable to shareholders even
though the dividends are automatically reinvested in additional shares of a
Portfolio. Dividends paid by a Portfolio from its investment company taxable
income (including interest and net short-
term capital gains) will be taxable to a
U.S. shareholder as ordinary income.
Distributions of net capital gains (the excess
of net long-term capital gains over net short-
term capital losses), if any, designated
as capital gains dividends are taxable to
shareholders as long-term capital gain,
regardless of how long they have held
their Portfolio shares. None of the amounts
treated as distributed to a Portfolio's
shareholders will be eligible for the corporate
dividends received deduction.
A distribution will be treated as paid on December 31 of the
current calendar year if it is declared by a Portfolio in October, November or
December with a record date in any such month and paid by the Portfolio during
January of the following calendar year. Such distributions will be taxable to
shareholders in the calendar year in which
the distributions are declared, rather
than the calendar year in which the distributions
are received. Each Portfolio will
inform shareholders of the amount and tax status of all amounts treated as
distributed to them not later than 60 days
after the close of each calendar year.
Any gain or loss realized by a shareholder upon the sale or
other disposal of shares of a Portfolio, or upon receipt of a distribution in a
complete liquidation of the Portfolio, generally
will be a capital gain or loss which
will be long-term or short-term, generally depending upon the shareholder's
holding period for the shares.
Each Portfolio may be required to withhold U.S. federal income
tax at the rate of 31% of all taxable distributions
payable to shareholders who fail
to provide the Portfolio with their correct taxpayer identification number or to
make required certifications, or who have been notified by the IRS that they are
subject to backup withholding. Backup w
ithholding is not an additional tax. Any
amounts withheld may be credited against the shareholder's U.S. federal income
tax liability.
Income received by a Portfolio from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. In certain circumstances, a Portfolio may be
eligible and may elect to "pass through" to the
Portfolio's shareholders the amount
of foreign income and similar taxes paid by
the Portfolio. Each shareholder will be
notified within 60 days after the close of a
Portfolio's taxable year whether the
foreign taxes paid by the Portfolio will "pass through" for the year.
U.S. SHORT-TERM FIXED INCOME PORTFOLIO
Under the full payout method of paying dividends adopted by
U.S. Short-Term, it is possible that shareholders may receive distributions in
excess of their ratable share of U.S. Short-Term's
earnings and profits from time to
time. It is also possible that Full Payout Income may be negative, and that the
number of shares held by a shareholder will be reduced through a contribution of
capital. See "Dividends" above. As a result, the shareholder may have taxable
income that is greater or less than the net
increase in shares in the shareholder's
account at the end of the month. A shareholder's
basis in shares of U.S. Short-
Term may be adjusted to reflect an excess
distribution or contribution to capital,
which would affect the amount of capital
gain or loss realized when the shares are
sold.
STATE AND LOCAL TAXES
A Portfolio may be subject to state, local or foreign taxation in
any jurisdiction in which the Portfolio may be deemed to be doing business.
Portfolio distributions may be subject to state and local taxes.
Distributions of a Portfolio which are derived from interest on obligations of
the U.S. Government and certain of its agencies, authorities and
instrumentalities may be exempt from state and local taxes in certain states.
Shareholders should consult their own tax advisers regarding
the possible exclusion for state and local income tax purposes of the portion of
dividends paid by a Portfolio which is attributable to interest from obligations
of the U.S. Government and its agencies, authorities and instrumentalities.
SHAREHOLDER INFORMATION
DESCRIPTION OF THE FUND
The Fund was established under Maryland law by the filing of
its Articles of Incorporation on February 23, 1989. The Fund has been in
operation since December 6, 1989. The Fund's Articles of Incorporation permit
the Directors to authorize the creation of additional portfolios, each of which
will issue a separate class of shares. Currently, the Fund has ten separate
Portfolios. The Fund bears all expenses of its operations other than those
incurred by the Investment Adviser under its investment advisory agreement. In
particular, the Fund pays: investment advisory fees; administration fees;
custodian, transfer agent, accounting agent and dividend disbursing agent fees
and expenses; legal and auditing fees; expenses of preparing and printing
shareholder reports; registration fees and expenses; proxy and
annual shareholder meeting expenses, if any; and directors' fees and expenses.
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in
Director elections and other matters submitted to shareholders for their vote.
Matters to be acted upon that affect a particular Portfolio, including approval
of the investment advisory agreement with the Investment Adviser and the
submission of changes of fundamental investment policy of a Portfolio, will
require the affirmative vote of the shareholders of such Portfolio. The
election of the Fund's Board of Directors and the approval of the Fund's
independent public accountants are voted upon by shareholders on a Fund-wide
basis. As a Maryland corporation, the Fund is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Fund's or a Portfolio's operation and for the election of
Directors under certain circumstances.
Directors may be removed by shareholders at a special meeting.
A special meeting of the Fund shall be called by the Directors upon written
request of shareholders owning at least 10% of the Fund's outstanding shares.
PERFORMANCE INFORMATION
From time to time the Fund may advertise a Portfolio's "yield"
and "total return". A Portfolio's yield for any 30-day (or one month) period is
computed by dividing the net investment income per share earned during such
period by the maximum public offering price per share on the last day of the
period, and then annualizing such 30-day (or one month) yield in accordance with
a formula prescribed by the Commission which provides for compounding on a
semiannual basis. Advertisements of a Portfolio's total return may disclose its
average annual compounded total return for the period since the Portfolio's
inception. A Portfolio's total return for such period is computed by finding,
through use of a formula prescribed by the Commission, the average annual
compounded rate of return over the period that would equate an assumed initial
amount invested to the value of the investment at the end of the period. For
purposes of computing total return, dividends and capital gains distributions
paid on shares are assumed to have been reinvested when received. As described
above, the Fund imposes no sales charges applicable to purchases and
redemptions. Total return and yield figures are based on a Portfolio's
historical performance and are not intended to indicate future performance.
The value of an investment in a Portfolio will fluctuate and the shares in an
investor's account, when redeemed, may be worth more or less than their original
cost.
CUSTODIAN AND ACCOUNTING AGENT
Investors Bank & Trust Company, P.O. Box 1537, Boston,
Massachusetts 02205-1537, is Custodian and Accounting Agent for the Fund.
TRANSFER AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, P.O. Box 1537, Boston,
Massachusetts 02205-1537, is Transfer Agent for the shares of the Fund, and
Dividend Disbursing Agent for the Fund.
LEGAL COUNSEL
Dechert Price & Rhoads, 1500 K Street, N.W., Washington,
D.C. 20005-1208, is legal counsel for the Fund.
INDEPENDENT AUDITORS
Ernst & Young LLP, 787 Seventh Avenue, New York, New
York 10019, is the independent auditor for the Fund. Ernst & Young LLP also
renders accounting services to the Investment Adviser and the Sub-Adviser.
SHAREHOLDER INQUIRIES
Inquiries concerning the Fund may be made by writing to AMT Capital
Services, Inc., 430 Park Avenue, 17th Floor, New York, New York 10022 or by
calling AMT Capital at (800) 762-4848 [or (212) 308-4848, if within New
STATEMENT OF ADDITIONAL INFORMATION
FFTW FUNDS, INC.
200 Park Avenue, 46th Floor
New York, New York 10166
(212) 681-3000
FFTW Funds, Inc. (the "Fund") is a no-load, open-end
management investment company managed by Fischer Francis Trees &
Watts, Inc. (the "Investment Adviser"). The Fund currently consists of
ten separate portfolios (each a "Portfolio"): (1) U.S. Portfolios - U.S.
Short-Term Fixed Income Portfolio ("U.S. Short-Term"); Stable Return
Portfolio ("Stable Return"); U.S. Treasury Portfolio ("U.S. Treasury");
AAA Asset-Backed Portfolio ("AAA Asset-Backed");and Broad Market
Fixed Income Portfolio ("Broad Market"); and (2) Global and
International Portfolios - Worldwide Short-Term Fixed Income
Portfolio ("Worldwide Short-Term"); Worldwide Fixed Income
Portfolio ("Worldwide"); Worldwide Fixed Income-Hedged Portfolio
("Worldwide-Hedged"); International Fixed Income Portfolio
("International"); and International Fixed Income-Hedged Portfolio
("International-Hedged"). Shares of each Portfolio may be purchased
through AMT Capital Services, Inc. ("AMT Capital"), the exclusive
distributor.
This Statement of Additional Information is not a
prospectus and should be read in conjunction with the prospectus of the
Fund, dated April 28, 1995 (the "Prospectus"), which has been filed
with the Securities and Exchange Commission (the "Commission") and
can be obtained, without charge, by calling or writing AMT Capital at
the telephone number or address stated below. This Statement of
Additional Information incorporates by reference the Prospectus.
Distributed by: AMT Capital Services, Inc.
430 Park Avenue, 17th Floor
New York, New York 10022
(212) 308-4848
(800) 762-4848 (outside New York City)
The date of this Statement of Additional Information is April 28, 1995.
TABLE OF CONTENTS
Page
History of the Fund 3
Organization of the Fund 3
Management of the Fund 4
Board of Directors and Officers 4
Investment Adviser and Sub-Advis 5
Portfolio Managers 7
Administrator 8
Control Persons and Principal Holders of 8
Distribution of Fund Shares 12
Supplemental Descriptions of Investments 12
Supplemental Investment Techniques 18
Supplemental Discussion of Risks Associated With the
Fund's Investment Policies and Investm 19
Supplemental Techniques to Hedge Interest Rate and Foreign
Currency Risks and Other Foreign Curre 21
Forward Foreign Currency Exchange Contracts
and Associated Risks 21
Options 23
Futures Contracts and Options on 27
Other Hedging Techniques 30
Investment Restrictions 30
Portfolio Transactions 32
Tax Considerations 33
Shareholder Information 37
Calculation of Performance Data 38
Financial Statements 39
Appendix 40
Merrill Lynch 1-2.99 Year Treasu 40
Quality Rating Descriptions 41
HISTORY OF THE FUND
From its inception on February 23, 1989 to September
27, 1989, the name of the Fund was "FFTW Institutional Reserves
Fund, Inc.". The Fund commenced operations on December 6, 1989.
From September 27, 1989 to July 22, 1991 the name of the Fund was
"FFTW Reserves, Inc." On July 22, 1991 the name of the Fund was
changed to its present name, "FFTW Funds, Inc." Prior to the effective
date of this Statement of Additional Information, the U.S. Short-Term
Fixed Income Portfolio which commenced operations on December 6,
1989, Worldwide Fixed Income Portfolio which commenced operations
on April 15, 1992, and Worldwide Fixed Income-Hedged Portfolio
which commenced operations on May 19, 1992, were known as Short-
Term Series (and prior to September 18, 1991 as FFTW Institutional
Reserves Fund Stock), Worldwide Series and Worldwide Hedged
Series, respectively. The seven other Portfolios were established on
February 16, 1993.
ORGANIZATION OF THE FUND
The authorized capital stock of the Fund consists of
1,000,000,000 shares with $.001 par value, allocated as follows: (i)
100,000,000 shares each to Stable Return, U.S. Treasury, AAA Asset-
Backed, Broad Market, Worldwide Short-Term, Worldwide and
Worldwide-Hedged; (ii) 50,000,000 shares each to International and
International-Hedged; and (iii) 200,000,000 shares to U.S. Short-Term.
Each share of each Portfolio has equal voting rights as to each share of
such Portfolio. Shareholders have one vote for each share held. All
shares issued and outstanding are fully paid and non-assessable,
transferable, and redeemable at net asset value at the option of the
shareholder. Shares have no preemptive or conversion rights.
The shares of the Fund have non-cumulative voting
rights, which means that the holders of more than 50% of the shares
voting for the election of Directors can elect 100% of the Directors if
they choose to do so, and, in such event, the holders of the remaining
less than 50% of the shares voting for the election of Directors will not
be able to elect any person or persons to the Board of Directors.
No Portfolio of the Fund shall be liable for the
obligations of any other Portfolio.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS AND OFFICERS
The Fund is managed by its Board of Directors. The
individuals listed below are the officers and directors of the Fund. An
asterisk (*) has been placed next to the name of each director who is an
"interested person" of the Fund, as such term is defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), by
virtue of his affiliation with the Fund or the Investment Adviser.
*Stephen J. Constantine, 200 Park Avenue, New York,
NY. President and Director of the Fund. Mr. Constantine has been a
shareholder and Managing Director of the Investment Adviser for the
last five years.
John C Head III, 545 Madison Avenue, New York,
NY. Director of the Fund. Mr. Head has been a general partner of John
Head & Partners L.P., a merchant banking firm providing financial
advice to corporations in the insurance industry, since August 1987. He
is a director of Sphere Drake Holding Plc, Anglo American Insurance
Company Ltd. and Integon Corporation. From 1986 until August 1987,
Mr. Head was chairman of Odyssey Investors, Inc., an affiliate of
Odyssey Partners (a partnership making specific and designated
investments). From 1983 until 1986, Mr. Head was a managing
director of Morgan Stanley & Co. Incorporated.
Lawrence B. Krause, University of California - San
Diego ("UCSD"), La Jolla, CA. Director of the Fund. Mr. Krause is a
member of the Editorial Advisory Board of the Political Science
Quarterly, a member of the Council on Foreign Relations, and
Vice-Chairman of the U.S. National Committee for Pacific Economic
Cooperation. In December, 1990, he was selected as the first holder of
the Pacific Economic Cooperation Chair at UCSD. In 1989, Mr.
Krause became the Director, Korea-Pacific Program at UCSD. In
1988, he was named Coordinator of the Pacific Economic Outlook
Project for the Pacific Economic Cooperation Conference. Mr. Krause
was the first appointment to the new Graduate School of International
Relations and Pacific Studies at UCSD and joined the faculty as a
professor on January 1, 1987. From 1969 - 1986 Mr. Krause was a
senior fellow of the Brookings Institution. Mr. Krause is also an author
of numerous publications.
Paul Meek, 5837 Cove Landing Road, Burke, Va.
Director of the Fund. Since 1985, Mr. Meek has been a financial and
economic consultant to foreign central banks under the auspices of each
of the Harvard Institute for International Development, the International
Monetary Fund and the World Bank. Mr. Meek is a principal in PM
Consulting (financial and economic consulting) and has been since
1985. PM Consulting was a consultant to the Investment Adviser from
1985 - January, 1989; such consulting arrangement has been
terminated. From 1982-1985, Mr. Meek was Vice President and
Monetary Adviser of the Federal Reserve Bank of New York. Mr.
Meek has been a trustee of the Weiss, Peck & Greer group of mutual
funds since 1988.
*Onder John Olcay, 200 Park Avenue, New York, NY.
Chairman of the Board of the Fund. Mr. Olcay has been a shareholder
and Managing Director of the Investment Adviser for the last five years.
Stephen P. Casper, 200 Park Avenue, New York, NY.
Treasurer of the Fund. Mr. Casper has been a shareholder and
Managing Director of the Investment Adviser since December 1991. In
addition, Mr. Casper has been the Chief Financial Officer of the
Investment Adviser since February 1990. From March 1984 through
January 1990, Mr. Casper was Treasurer of Rockefeller & Company, a
registered investment adviser.
Kyle L. Chang, 200 Park Avenue, New York, NY.
Secretary of the Fund. Ms. Chang has been an Administrative Assistant
with the Investment Adviser since April 1989. Ms. Chang was
employed by Salomon Brothers Inc from June 1987 to April 1989 as an
Executive Assistant. From November 1984 to June 1987 she was a
Benefits Administrator at the Bank of New York.
Carla E. Dearing, 430 Park Avenue, New York, NY.
Assistant Treasurer of the Fund. Ms. Dearing has served as Senior
Vice President, Principal, and Director of AMT Capital Services since
its inception in March 1992. Ms. Dearing is also Senior Vice President
and Principal of AMT Capital Advisers, Inc. since January 1992. Ms.
Dearing was a former Vice President of Morgan Stanley & Co., where
she worked from June 1984 to August 1986 and from November 1988
to January 1992.
William E. Vastardis, 430 Park Avenue, New York,
NY. Assistant Secretary of the Fund. Mr. Vastardis serves as
administrator of the Fund on behalf of AMT Capital Services. Prior to
April 1992, Mr. Vastardis served as Vice President and head of the
Vanguard Group Inc.'s private label administration unit for seven years,
after six years in Vanguard's fund accounting operations.
Directors and officers of the Fund collectively owned
less than 1% of the Fund's outstanding shares as of April 28, 1995.
INVESTMENT ADVISER AND SUB-ADVISER
The Fund has two sets of advisory agreements, one for
U.S. Short-Term, Worldwide and Worldwide-Hedged (the "original"
agreement), and one for each of the other seven Portfolios (the "new"
agreements). The Fund also has two sets of sub-advisory agreements,
one for Worldwide and Worldwide-Hedged, and one for each of
Worldwide Short-Term, International and International-Hedged.
Pursuant to their terms, the advisory agreements
between the Fund and the Investment Adviser (the "Advisory
Agreements") and the sub-advisory agreements (the "Sub-Advisory
Agreements") between the Investment Adviser and its affiliate Fischer
Francis Trees & Watts (the "Sub-Adviser"), a corporate partnership
organized under the laws of the United Kingdom, remain in effect for
two years following their date of execution and thereafter will
automatically continue for successive annual periods, so long as such
continuance is specifically approved at least annually by (a) the Board
of Directors or (b) the vote of a "majority" (as defined in the 1940 Act)
of a Portfolio's outstanding shares voting as a single class; provided,
that in either event the continuance is also approved by at least a
majority of the Board of Directors who are not "interested persons" (as
defined in the 1940 Act) of the Fund, the Investment Adviser or the
Sub-Adviser by vote cast in person at a meeting called for the purpose
of voting on such approval. Each Advisory Agreement was most
recently approved by the Directors on February 1, 1995. The original
Advisory Agreement was approved by U.S. Short-Term's shareholders
on April 3, 1991 and by Worldwide's and Worldwide-Hedged's
shareholders on December 31, 1992, and the new Advisory Agreements
were approved by the Investment Adviser as sole shareholder of each
Portfolio on February 18, 1993. The Sub-Advisory Agreements were
most recently approved by the Directors on February 1, 1995. The
original Sub-Advisory Agreement was approved by Worldwide and
Worldwide-Hedged shareholders on December 31, 1992, and the new
Sub-Advisory Agreements were approved by the Investment Adviser as
sole shareholder of each Portfolio on February 18, 1993.
Each Advisory and Sub-Advisory Agreement is
terminable without penalty on not less than 60 days' notice by the Board
of Directors or by a vote of the holders of a majority of the relevant
Portfolio's outstanding shares voting as a single class, or upon not less
than 60 days' notice by the Investment Adviser or the Sub-Adviser.
Each Advisory and Sub-Advisory Agreement will terminate
automatically in the event of its "assignment" (as defined in the 1940
Act).
The Investment Adviser pays all of its expenses arising
from the performance of its obligations under the Advisory Agreements,
including all executive salaries and expenses of the directors and
officers of the Fund who are employees of the Investment Adviser or its
affiliates and office rent of the Fund. The Investment Adviser also pays
a monthly sales incentive fee to AMT Capital Services, Inc., the
Distributor for the Fund. See "Distribution of Fund Shares" in the
Prospectus. In addition, the Investment Adviser will pay all of the fees
payable to its affiliate as Sub-Adviser. The Sub-Adviser pays all of its
expenses arising from the performance of its obligations under the Sub-
Advisory Agreements. Subject to the expense reimbursement provisions
described in the Prospectus under "Fund Expenses", other expenses
incurred in the operation of the Fund are borne by the Fund, including,
without limitation, investment advisory fees, brokerage commissions,
interest, fees and expenses of independent attorneys, auditors,
custodians, accounting agents, transfer agents, taxes, cost of stock
certificates and any other expenses (including clerical expenses) of
issue, sale, repurchase or redemption of shares, expenses of registering
and qualifying shares of the Fund under federal and state laws and
regulations, expenses of printing and distributing reports, notices and
proxy materials to existing shareholders, expenses of printing and filing
reports and other documents filed with governmental agencies, expenses
of annual and special shareholders' meetings, fees and expenses of
directors of the Fund who are not employees of the Investment Adviser
or its affiliates, membership dues in the Investment Company Institute,
insurance premiums and extraordinary expenses such as litigation
expenses. Fund expenses directly attributable to a Portfolio are charged
to that Portfolio; other expenses are allocated proportionately among all
the Portfolios in relation to the net assets of each Portfolio.
Both the Investment Adviser and the Sub-Adviser are
directly or indirectly wholly-owned by Charter Atlantic Corporation, a
New York corporation.
As compensation (subject to expense caps as described
under "Fund Expenses" in the Prospectus) for the services rendered by
the Investment Adviser under the Advisory Agreements, each Portfolio
pays the Investment Adviser a monthly advisory fee (each of U.S.
Short-Term, Worldwide and Worldwide-Hedged pays its fees quarterly)
calculated by applying the following annual percentage rates to such
Portfolio's average daily net assets for the month (quarter):
U.S. Portfolios Rate
U.S. Short-Term 0.30%
Stable Return 0.35%
U.S. Treasury 0.35%
AAA Asset-Backed 0.35%
Broad Market 0.35%
Global and International Portfolios
Worldwide Short-Term 0.35%
Worldwide 0.40%
Worldwide-Hedged 0.40%
International 0.40%
International-Hedged 0.40%
For the fiscal year ended December 31, 1994,
the periods ended December 31, 1993 and the periods ended
December 31, 1992, the amount of advisory fees (net of
waivers and reimbursements) paid by each
Portfolio were as follows:
Portfolio Year Ended Periods Ended Periods Ended
12/31/94 12/31/93 12/31/92
U.S. Short-Term $625321 1369875 2038477
Income Portfolio
Worldwide Fixed 517,489 595,287 0
Income Portfolio (1)
Worldwide Fixed 35,809 120,271 0
Hedged Portfolio (2)
Stable Return 0 0 N/A
Portfolio (3)
Worldwide Short- $182,447 0 N/A
Term Fixed Income
Portfolio (4)
(1) Commencement of Operations was April 15, 1992.
(2) Commencement of Operations was May 19, 1992.
(3) Commencement of Operations was July 26, 1993.
(4) Commencement of Operations was December 13, 1993.
PORTFOLIO MANAGERS
In addition to the portfolio managers mentioned in the
Prospectus, the following persons are also responsible for managing the
portfolios:
Adnan Akant, Managing Director. Mr. Akant is
responsible for management of the U.S. short-term portfolios. He joined
FFTW in 1984 after serving as senior investment officer of the World
Bank, where he was responsible for the investment and trading of the
Bank's actively-managed liquidity portfolio and a member of the
investment strategy committee. At the Massachusetts Institute of
Technology, Mr Akant earned a Ph.D. in systems science, and M.S.
degrees in finance and international management and engineering.
Willett S. Moore, Jr., Managing Director. Mr.
Moore is responsible for management of the U.S. long-term portfolios.
Mr. Moore joined FFTW in 1976 from Alliance Capital Management
Corp., where he had been a member of the fixed-income policy
committee in charge of formulating bond strategy and was responsible
for management of discretionary fixed-income portfolios. Previously,
Mr. Moore served as the investment officer in charge of all portfolios of
taxable fixed-income securities for the trust department of Colorado
National Bank. Mr. Moore holds a B.A. degree from Stanford
University.
ADMINISTRATOR
Pursuant to its terms, the Administration Agreement
between the Fund and AMT Capital Services, Inc., a Delaware
corporation, will remain in effect for two years following the date of
execution and thereafter will automatically continue for successive
annual periods. AMT Capital provides for, or assists in managing and
supervising all aspects of, the general day-to-day business activities and
operations of the Fund other than investment advisory activities,
including custodial, transfer agency, dividend disbursing, accounting,
auditing, compliance and related services.
The Fund pays AMT Capital a monthly fee at an
annual rate of 0.04% of the average daily net assets of the Fund. The
Fund also reimburses AMT Capital for certain costs. In addition, the
Fund has agreed to pay the Administrator an incentive fee for reducing
the expense ratio of one or more Portfolios of the Fund below the
specified expense ratio established for such Portfolios. The maximum
incentive fee is 0.02% of the average daily net assets of a Portfolio.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF
SECURITIES
As of March 31, 1995, no shareholder was a "control
person" (as such term is defined in the 1940 Act) of the Fund.
As of March 31, 1995, the following persons held 5
percent or more of the outstanding shares of U.S. Short-Term:
Amount and Nature
Name and Address of of Beneficial Percent
Title of Class Beneficial Owner Ownership of Portfolio
Common Stock, $.State Street Bank & TrusDirect Ownership24.00%
per Share Trustee for Bull HN Information
Systems, Inc. - Retirement
Distribution Account, One
Enterprise Drive, North Quincy,
MA 02171
Common Stock, $.Wachovia Bank of North Direct Ownership17.55%
per Share Carolina, Trustee for RJR
Nabisco Defined Benefit Plan,
P.O. Box 3099, Winston-Salem,
NC 27150-3099
Common Stock, $.Philip Morris Companies,Direct Ownership11.93%
per Share 120 Park Avenue, New York
10017-5523
Common Stock, $.State Street Bank & TrusDirect Ownership7.93%
per Share Trustee for Pacific Gas and
Electric Co. Short-Term
Liquidity Portfolio, One
Enterprise Drive, North Quincy,
MA 02171
Common Stock, $.State Street Bank & TrusDirect Ownership7.63%
per Share Trustee for Bull HN Information
Systems, Inc. - Retirement
Aggregate Account, One
Enterprise Drive, North Quincy,
MA 02171
Common Stock, $.U.S. Trust Co., Trustee for 5.68%
per Share Corning, Inc., 777 Broadway,
10th Floor, New York, NY
10003-9598
As of March 31, 1995, the following person held 5 percent or more of
the outstanding shares of Stable Return:
Amount and Nature
Name and Address of of Beneficial Percent
Title of Class Beneficial Owner Ownership of Portfolio
Common Stock, $.Corporation for SupportiDirect Ownership 95.87%
per Share Housing, 342 Madison Avenue,
Suite 505, New York, NY 10173
As of March 31, 1995, the following persons held 5 percent or more of
the outstanding shares of Worldwide Short-Term:
Amount and Nature
Name and Address of of Beneficial Percent
Title of Class Beneficial Owner Ownership of Portfolio
Common Stock, $.Monsanto Company, 800 N.Direct Ownership 81.66%
per Share Lindbergh Blvd., Bldg. E, St.
Louis, MO 63167
Common Stock, $.Henry J. Kaiser Family Direct Ownership 8.20%
per Share Foundation, c/o Bankers Trust
Co., 34 Exchange Place - 2nd
Floor, Jersey City, NJ 07302
Common Stock, $.Sprint (Short/IntermediaDirect Ownership5.75%
per Share Shawnee Mission Parkway,
Westwood, KS 66205-2005
As of March 31, 1995, the following persons held 5 percent or more of
the outstanding shares of Worldwide:
Amount and Nature
Name and Address of of Beneficial Percent
Title of Class Beneficial Owner Ownership of Portfolio
Common Stock, $.Northrop Corporation EmpDirect Ownership45.53%
per Share Benefit Plan, 1840 Century Park
East, Los Angeles, CA 90067-
2101
Common Stock, $.Chase Manhattan Bank, TrDirect Ownership16.04%
per Share for Amoco Corporation Master
Trust Employee Pension Plan,3
Chase Metrotech Center,
Brooklyn, NY 11245
Common Stock, $.The Edna McConnell ClarkDirect Ownership8.20%
per Share Foundation, 250 Park Avenue,
New York, NY 10017
Common Stock, $.Western Pennsylvania Teamsters 7.69%
per Share and Employees Pension Fund, 49
Auto Way, Pittsburgh, PA
15206-0260
Common Stock, U.S. Trust Company, TrusDirect Ownership6.94%
$.001 per Share Corning, Inc., 114 West 47th
Street, New York, NY 10036-
8701
Common Stock, $.Cornell University, TerrDirect Ownership6.69%
per Share Ithaca, NY 14853-0001
Common Stock, Pension Fund of the RetiDirect Ownership6.36%
$.001 per Plan of Norfolk Southern Corp.
Share and Participating Subsidiary
Cos., 3 Commercial Place,
Norfolk, VA 23510-2191
As of March 31, 1995, the following persons held 5 percent or more of
the outstanding shares of Worldwide-Hedged:
Amount and Nature
Name and Address of of Beneficial Percent
Title of Class Beneficial Owner Ownership of Portfolio
Common Stock, $.Bankers Trust Co., TrustDirect Ownership 95.93%
per Share Premark International Master
Defined Benefit Trust 105884-99,
34 Exchange Place, Jersey City,
NJ 07302
DISTRIBUTION OF FUND SHARES
Shares of the Fund are distributed by AMT Capital
Services, Inc. pursuant to a Distribution Agreement (the "Distribution
Agreement") dated as of September 21, 1992 between the Fund and
AMT Capital. The Distribution Agreement requires AMT Capital to
use its best efforts on a continuing basis to solicit purchases of shares of
the Fund. No fees are payable by the Fund pursuant to the Distribution
Agreement, and AMT Capital bears the expense of its distribution
activities. The Fund and AMT Capital have agreed to indemnify one
another against certain liabilities.
Under a sales incentive fee agreement dated as of
September 21, 1992, between AMT Capital and the Investment Adviser,
the Investment Adviser has agreed to pay AMT Capital a monthly sales
incentive fee at an annual rate of 0.30% of the average daily net asset
value of shares purchased as a result of the sales efforts of AMT
Capital (to the extent such average daily net asset value exceeds $100
million). For purposes of calculating the sales incentive fee, the daily
net asset value of shares purchased as a result of the sales efforts of
AMT Capital does not include shares so purchased and held for over
twelve months.
SUPPLEMENTAL DESCRIPTIONS OF INVESTMENTS
The different types of securities in which the Portfolios
may invest, subject to their respective investment objectives, policies
and restrictions, are described in the Prospectus under "Descriptions of
Investments". Additional information concerning the characteristics of
certain of the Portfolio's investments are set forth below.
U.S. Treasury and U.S. Government Agency
Securities. U.S. Government Securities include instruments issued by
the U.S. Treasury, including bills, notes and bonds. These instruments
are direct obligations of the U.S. Government and, as such, are backed
by the full faith and credit of the United States. They differ primarily in
their interest rates, the lengths of their maturities and the dates of their
issuances. In addition, U.S. Government Securities include securities
issued by instrumentalities of the U.S. Government, such as the
Government National Mortgage Association ("GNMA"), which are also
backed by the full faith and credit of the United States. U.S.
Government Agency Securities include instruments issued by
instrumentalities established or sponsored by the U.S. Government, such
as the Student Loan Marketing Association ("SLMA"), the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). While these securities are issued,
in general, under the authority of an Act of Congress, the U.S.
Government is not obligated to provide financial support to the issuing
instrumentalities.
Foreign Government and International and
Supranational Agency Securities. Obligations of foreign governmental
entities have various kinds of government support and include
obligations issued or guaranteed by foreign governmental entities with
taxing powers or issued or guaranteed by international or supranational
entities. These obligations may or may not be supported by the full
faith and credit of a foreign government or several foreign governments.
Examples of international and supranational entities include the
International Bank for Reconstruction, and Development ("World
Bank"), the European Steel and Coal Community, the Asian
Development Bank, the European Bank for Reconstruction and
Development and the Inter-American Development Bank. The
governmental members, or "shareholders", usually make initial capital
contributions to the supranational entity and in many cases are
committed to make additional capital contributions if the supranational
entity is unable to repay its borrowings.
Bank Obligations. The Fund limits its investments in
U.S. bank obligations to obligations of U.S. banks that in the
Investment Adviser's opinion meet sufficient creditworthiness criteria.
The Fund limits its investments in foreign bank
obligations to obligations of foreign banks (including U.S. branches of
foreign banks) that, in the opinion of the Investment Adviser or the Sub-
Adviser, are of an investment quality comparable to obligations of U.S.
banks in which each Portfolio may invest.
Corporate Debt Instruments. Corporate debt securities
of domestic and foreign issuers include such instruments as corporate
bonds, debentures, notes, commercial paper, medium-term notes,
variable rate notes and other similar corporate debt instruments. As
described in the Fund's Prospectus, U.S. Treasury and AAA Asset-
Backed will only invest in securities rated in the highest rating category
or of comparable creditworthiness in the opinion of the Investment
Adviser. Each of the other Portfolios will invest only in those securities
that are rated at least "A" by S&P or Moody's rating service or
determined by the Investment Adviser or the Sub-Adviser to be of
similar creditworthiness. Bonds rated in these categories are generally
described as high-grade debt obligations with a very strong capacity to
pay principal and interest on a timely basis.
Repurchase and Reverse Repurchase Agreements.
When participating in repurchase agreements, a Portfolio buys
securities from a vendor (e.g., a bank or securities firm) with the
agreement that the vendor will repurchase the securities at the same
price plus interest at a later date. Repurchase agreements may be
characterized as loans secured by the underlying securities. Such
transactions afford an opportunity for the Portfolio to earn a return on
available cash at minimal market risk, although the Portfolio may be
subject to various delays and risks of loss if the vendor becomes subject
to a proceeding under the U.S. Bankruptcy Code or is otherwise unable
to meet its obligation to repurchase. The securities underlying a
repurchase agreement will be marked to market every business day so
that the value of such securities is at least equal to the value of the
repurchase price thereof, including the accrued interest thereon.
When participating in reverse repurchase agreements, a
Portfolio sells U.S. Government Securities and simultaneously agrees to
repurchase them at an agreed upon price and date. The difference
between the amount the Portfolio receives for the securities and the
amount it pays on repurchase is deemed to be a payment of interest.
The Fund will maintain for each Portfolio a segregated custodial
account containing cash, U.S. Government Securities or other
appropriate high-grade debt securities having an aggregate value at least
equal to the amount of such commitments to repurchase, including
accrued interest, until payment is made. Reverse repurchase agreements
create leverage, a speculative factor, but will be not considered as
borrowings for the purposes of limitations on borrowings.
In addition, repurchase and reverse repurchase
agreements may also involve the securities of certain foreign
governments in which there is an active repurchase market. The
Investment Adviser expects that such repurchase and reverse repurchase
agreements will primarily involve government securities of countries
belonging to the Organization for Economic Cooperation and
Development ("OECD"). Transactions in foreign repurchase and
reverse repurchase agreements may involve additional risks.
Dollar Roll Transactions. "Dollar roll" transactions
consist of the sale by a Portfolio to a bank or broker-dealer (the
"counterparty") of GNMA certificates or other mortgage-backed
securities together with a commitment to purchase from the
counterparty similar, but not identical, securities at a future date, at the
same price. The counterparty receives all principal and interest
payments, including prepayments, made on the security while it is the
holder. The Portfolio receives a fee from the counterparty as
consideration for entering into the commitment to purchase. Dollar rolls
may be renewed over a period of several months with a new purchase
and repurchase price fixed and a cash settlement made at each renewal
without physical delivery of securities. Moreover, the transaction may
be preceded by a firm commitment agreement pursuant to which the
Portfolio agrees to buy a security on a future date.
A Portfolio will not use such transactions for leverage
purposes and, accordingly, will segregate cash, U.S. Government
securities or other high grade debt obligations in an amount sufficient to
meet its purchase obligations under the transactions.
Dollar rolls are similar to reverse repurchase
agreements because they involve the sale of a security coupled with an
agreement to repurchase. Like all borrowings, a dollar roll involves
costs to a Portfolio. For example, while a Portfolio receives a fee as
consideration for agreeing to repurchase the security, the Portfolio may
forgo the right to receive all principal and interest payments while the
counterparty holds the security. These payments to the counterparty
may exceed the fee received by the Portfolio, thereby effectively
charging the Portfolio interest on its borrowing. Further, although the
Portfolio can estimate the amount of expected principal prepayment
over the term of the dollar roll, a variation in the actual amount of
prepayment could increase or decrease the cost of the Portfolio's
borrowing.
Mortgage-Backed Securities. Mortgage-backed
securities are securities which represent ownership interests in, or are
debt obligations secured entirely or primarily by, "pools" of residential
or commercial mortgage loans or other mortgage-backed securities (the
"Underlying Assets"). In the case of mortgage-backed securities
representing ownership interests in the Underlying Assets, the principal
and interest payments on the underlying mortgage loans are distributed
monthly to the holders of the mortgage-backed securities. In the case of
mortgage-backed securities representing debt obligations secured by the
Underlying Assets, the principal and interest payments on the underlying
mortgage loans, and any reinvestment income thereon, provide the funds
to pay debt service on such mortgage-backed securities. Mortgage-
backed securities may take a variety of forms, but the two most
common are mortgage pass-through securities, which represent
ownership interests in the Underlying Assets, and collateralized
mortgage obligations ("CMOs"), which are debt obligations
collateralized by the Underlying Assets.
Certain mortgaged-backed securities are issued that
represent an undivided fractional interest in the entirety of the
Underlying Assets (or in a substantial portion of the Underlying Assets,
with additional interests junior to that of the mortgage-backed security),
and thus have payment terms that closely resemble the payment terms of
the Underlying Assets.
In addition, many mortgage-backed securities are
issued in multiple classes. Each class of such multi-class mortgage-
backed securities ("MBS"), often referred to as a "tranche", is issued at
a specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayment on the Underlying Assets may
cause the MBSs to be retired substantially earlier than their stated
maturities or final distribution dates. Interest is paid or accrues on all
or most classes of the MBSs on a periodic basis, typically monthly or
quarterly. The principal of and interest on the Underlying Assets may
be allocated among the several classes of a series of a MBS in many
different ways. In a relatively common structure, payments of principal
(including any principal prepayments) on the Underlying Assets are
applied to the classes of a series of a MBS in the order of their
respective stated maturities so that no payment of principal will be made
on any class of MBSs until all other classes having an earlier stated
maturity have been paid in full.
Mortgage-backed securities are often backed by a pool
of Underlying Assets representing the obligations of a number of
different parties. To lessen the effect of failures by obligors on
Underlying Assets to make payments, such securities may contain
elements of credit support. Such credit support falls into two
categories: (i) liquidity protection; and (ii) protection against losses
resulting from ultimate default by an obligor on the Underlying Assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default ensures ultimate payment
of obligations on at least a portion of the assets in the pool. Such
protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a
combination of such approaches. A Portfolio will not pay any
additional fees for such credit support, although the existence of credit
support may increase the price of a security.
The Investment Adviser expects that governmental,
government-related and private entities may create new types of
mortgage-backed securities offering asset pass-through and
asset-collateralized investments in addition to those described above.
As such new types of mortgage-related securities are developed and
offered to investors, the Investment Adviser will, consistent with each
Portfolio's investment objectives, policies and quality standards,
consider whether it would be appropriate for such Portfolio to make
investments in them.
The duration of a mortgage-backed security, for
purposes of a Portfolio's average duration restrictions, will be computed
based upon the expected average life of that security.
Other Asset-Backed Securities. The Investment
Adviser expects that other asset-backed securities (unrelated to
mortgage loans) will be developed and offered to investors in the future.
Several types of such asset-backed securities have already been offered
to investors, including securities backed by automobile loans and credit
card receivables. Consistent with each Portfolio's investment objectives
and policies, a Portfolio may invest in other types of asset-backed
securities as they become available.
Zero Coupon Securities and Custodial Receipts. Zero
coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured
interest coupons and receipts for their underlying principal (the
"coupons") which have been separated by their holder, typically a
custodian bank or investment brokerage firm. A holder will separate the
interest coupons from the underlying principal (the "corpus") of the U.S.
Treasury security. A number of securities firms and banks have
stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including
"Treasury Income Growth Receipts" ("TIGRS") and "Certificate of
Accrual on Treasuries" ("CATS"). The underlying U.S. Treasury
bonds and notes themselves are held in book-entry form at the Federal
Reserve Bank or, in the case of bearer securities (i.e., unregistered
securities which are owned ostensibly by the bearer or holder thereof),
in trust on behalf of the owners thereof. Counsel to the underwriters of
these certificates or other evidences of ownership of the U.S. Treasury
securities have stated that for Federal tax and securities law purposes,
in their opinion, purchasers of such certificates, such as a Portfolio,
most likely will be deemed the beneficial holders of the underlying U.S.
Treasury securities.
Recently, the Treasury has facilitated transfer of
ownership of zero coupon securities by accounting separately for the
beneficial ownership of particular interest coupon and corpus payments
on Treasury securities through the Federal Reserve book-entry record-
keeping system. The Federal Reserve program as established by the
Treasury Department is known as "Separate Trading of Registered
Interest and Principal of Securities" ("STRIPS"). Under the STRIPS
program, a Portfolio can be able to have its beneficial ownership of zero
coupon securities recorded directly in the book-entry record-keeping
system in lieu of holding certificates or other evidences of ownership of
the underlying U.S. Treasury securities.
When U.S. Treasury obligations have been stripped of
their unmatured interest coupons by the holder, the principal or corpus
is sold at a deep discount because the buyer receives only the right to
receive a future fixed payment on the security and does not receive any
rights to periodic interest (cash) payments. Once stripped or separated,
the corpus and coupons may be sold separately. Typically, the coupons
are sold separately or grouped with other coupons with like maturity
dates and sold in such bundled form. Purchasers of stripped obligations
acquire, in effect, discount obligations that are economically identical to
the zero coupon securities that the Treasury sells itself.
Loan Participations. A loan participation is an interest
in a loan to a U.S. corporation (the "corporate borrower") which is
administered and sold by an intermediary bank. The borrower of the
underlying loan will be deemed to be the issuer of the participation
interest except to the extent the Portfolio derives its rights from the
intermediary bank who sold the loan participation. Such loans must be
to issuers in whose obligations a Portfolio may invest. Any
participation purchased by a Portfolio must be issued by a bank in the
United States with assets exceeding $1 billion. See "Supplemental
Discussion of Risks Associated With the Fund's Investment Policies and
Investment Techniques".
Variable Amount Master Demand Notes. Variable
amount master demand notes permit the investment of fluctuating
amounts at varying rates of interest pursuant to direct arrangements
between a Portfolio (as lender) and the borrower. These notes are direct
lending arrangements between lenders and borrowers, and are generally
not transferable, nor are they ordinarily rated by either Moody's or
S&P.
Currency-Indexed Notes. In selecting the two
currencies with respect to which currency-indexed notes are adjusted,
the Investment Adviser and the Sub-Adviser will consider the
correlation and relative yields of various currencies. Each Portfolio
may purchase a currency-indexed obligation using the currency in which
it is denominated and, at maturity, will receive interest and principal
payments thereon in that currency. The amount of principal payable by
the issuer at maturity, however, will vary (i.e., increase or decrease) in
response to the change (if any) in the exchange rate between the two
specified currencies during the period from the date the instrument is
issued to its maturity date. The potential for realizing gains as a result
of changes in foreign currency exchange rates may enable a Portfolio to
hedge the currency in which the obligation is denominated (or to effect
cross-hedges against other currencies) against a decline in the U.S.
dollar value of investments denominated in foreign currencies while
providing an attractive market rate of return. Each Portfolio will
purchase such indexed obligations to generate current income or for
hedging purposes and will not speculate in such obligations.
Principal Exchange Rate Linked Securities. Principal
exchange rate linked securities (or "PERLs") are debt obligations, the
principal on which is payable at maturity in an amount that may vary
based on the exchange rate between the U.S. dollar and a particular
foreign currency at or about that time. The return on "standard"
principal exchange rate linked securities is enhanced if the foreign
currency to which the security is linked appreciates against the U.S.
dollar, and is adversely affected by increases in the foreign exchange
value of the U.S. dollar; "reverse" principal exchange rate linked
securities are like the "standard" securities, except that their return is
enhanced by increases in the value of the U.S. dollar and adversely
impacted by increases in the value of the foreign currency. Interest
payments on the securities are generally made in U.S. dollars at rates
that reflect the degree of foreign currency risk assumed or given up by
the purchaser of the notes.
Performance Indexed Paper. Performance indexed
paper (or "PIPs") is U.S. dollar-denominated commercial paper, the
yield of which is linked to certain foreign exchange rate movements.
The yield to the investor on performance indexed paper is established at
maturity as a function of spot exchange rates between the U.S. dollar
and a designated currency as of that time. The yield to the investor will
be within a range stipulated at the time of purchase of the obligation,
generally with a guaranteed minimum rate of return that is below, and a
potential maximum rate of return that is above, market yields on U.S.
dollar-denominated commercial paper, with both the minimum and
maximum rates of return on the investment corresponding to the
minimum and maximum values of the spot exchange rate two business
days prior to maturity.
Other Foreign Currency Exchange-Related Securities.
Securities may be denominated in the currency of one nation although
issued by a governmental entity, corporation or financial institution of
another nation. For example, a Portfolio may invest in a British pound
sterling-denominated obligation issued by a United States corporation.
Such investments involve credit risks associated with the issuer and
currency risks associated with the currency in which the obligation is
denominated.
The Investment Adviser or the Sub-Adviser bases its
decision for a Portfolio to invest in any foreign currency exchange-
related securities that may be offered in the future on the same general
criteria applicable to the Investment Adviser's or Sub-Adviser's decision
for such Portfolio to invest in any debt security, including the Portfolio's
minimum ratings and investment quality criteria, with the additional
element of foreign currency exchange rate exposure added to the
Investment Adviser's or Sub-Adviser's analysis of interest rates, issuer
risk and other factors.
Securities Denominated in Multi-National Currency
Units or More Than One Currency. An illustration of a multi-national
currency unit is the European Currency Unit (the "ECU"), which is a
"basket" consisting of specified amounts of the currencies of the
member states of the European Community, a Western European
economic cooperative organization. The specific amounts of currencies
comprising the ECU may be adjusted by the Council of Ministers of the
European Community to reflect changes in relative values of the
underlying currencies. The Investment Adviser does not believe that
such adjustments will adversely affect holders of ECU-denominated
obligations or the marketability of such securities. European
supranational entities, in particular, issue ECU-denominated
obligations.
Foreign Currency Warrants. Foreign currency
warrants such as currency exchange warrants ("CEWs") are warrants
that entitle the holder to receive from their issuer an amount of cash
(generally, for warrants issued in the United States in U.S. dollars)
which is calculated pursuant to a predetermined formula and based on
the exchange rate between a specified foreign currency and the U.S.
dollar as of the exercise date of the warrant. Foreign currency warrants
generally are exercisable upon their issuance and expire as of a
specified date and time. Foreign currency warrants have been issued in
connection with U.S. dollar-denominated debt offerings by major
corporate issuers in an attempt to reduce the foreign currency exchange
risk which, from the point of view of prospective purchasers of the
securities, is inherent in the international fixed income marketplace.
The formula used to determine the amount payable upon exercise of a
foreign currency warrant may make the warrant worthless unless the
applicable foreign currency exchange rate moves in a particular
direction (e.g., unless the U.S. dollar appreciates or depreciates against
the particular foreign currency to which the warrant is linked or
indexed). In addition, foreign currency warrants are subject to other
risks associated with foreign securities, including risks arising from
complex political or economic factors.
Municipal Instruments. Municipal notes may include
such instruments as tax anticipation notes, revenue anticipation notes,
and bond anticipation notes. Municipal notes are issued by state and
local governments and public authorities as interim financing in
anticipation of tax collections, revenue receipts or bond sales.
Municipal bonds, which may be issued to raise money for various
public purposes, include general obligation bonds and revenue bonds.
General obligation bonds are backed by the taxing power of the issuing
municipality and are considered the safest type of bonds. Revenue
bonds are backed by the revenues of a project or facility such as the
tolls from a toll bridge. Industrial development revenue bonds are a
specific type of revenue bond backed by the credit and security of a
private user. Revenue bonds are generally considered to have more
potential risk than general obligation bonds.
Municipal obligations can have floating, variable or
fixed rates. The value of floating and variable rate obligations generally
is more stable than that of fixed rate obligations in response to changes
in interest rate levels. Variable and floating rate obligations usually
carry rights that permit a Portfolio to sell them at par value plus accrued
interest upon short notice. The issuers or financial intermediaries
providing rights to sell may support their ability to purchase the
obligations by obtaining credit with liquidity supports. These may
include lines of credit, which are conditional commitments to lend,
letters of credit, which will ordinarily be irrevocable, both issued by
domestic banks or foreign banks which have a branch, agency or
subsidiary in the United States. When considering whether an
obligation meets a Portfolio's quality standards, the Investment Adviser
will look at the creditworthiness of the party providing the right to sell
as well as to the quality of the obligation itself.
Municipal securities may be issued to finance private
activities, the interest from which is an item of tax preference for
purposes of the federal alternative minimum tax. Such "private
activity" bonds might include industrial development revenue bonds, and
bonds issued to finance such projects as solid waste disposal facilities,
student loans or water and sewage projects.
SUPPLEMENTAL INVESTMENT TECHNIQUES
Borrowing. Each Portfolio may borrow money
temporarily from banks when (i) it is advantageous to do so in order to
meet redemption requests, (ii) a Portfolio fails to receive transmitted
funds from a shareholder on a timely basis, (iii) the custodian of the
Fund fails to complete delivery of securities sold or (iv) a Portfolio
needs cash to facilitate the settlement of trades made by the Portfolio.
In addition, each Portfolio may, in effect, lend securities by engaging in
reverse repurchase agreements and/or dollar roll transactions and may,
in effect, borrow money by doing so. Securities may be borrowed by
engaging in repurchase agreements. See "Investment Restrictions" and
"Supplemental Descriptions of Investments".
Securities Lending. Each Portfolio, except U.S. Short-
Term, is authorized to lend securities from its investment portfolios,
with a value not exceeding 33 1/3% of its total assets, to banks, brokers
and other financial institutions if it receives collateral in cash, U.S.
Government Securities or irrevocable bank stand-by letters of credit
which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The loans
will be terminable at any time by the Fund and the relevant Portfolio
will then receive the loaned securities within five days. During the
period of such a loan, the Portfolio receives the income on the loaned
securities and a loan fee and may thereby increase its total return.
SUPPLEMENTAL DISCUSSION OF RISKS ASSOCIATED
WITH THE FUND'S INVESTMENT POLICIES AND
INVESTMENT TECHNIQUES
The risks associated with the different types of
securities in which the Portfolios may invest are described in the
Prospectus under "Risks Associated With the Fund's Investment Policies
and Investment Techniques". Additional information concerning risks
associated with certain of the Portfolio's investments is set forth below.
Foreign Investments. Foreign financial markets, while
growing in volume, have, for the most part, substantially less volume
than United States markets, and securities of many foreign companies
are less liquid and their prices more volatile than securities of
comparable domestic companies. The foreign markets also have
different clearance and settlement procedures, and in certain markets
there have been times when settlements have been unable to keep pace
with the volume of securities transactions, making it difficult to conduct
such transactions. Delivery of securities may not occur at the same time
as payment in some foreign markets. Delays in settlement could result
in temporary periods when a portion of the assets of a Portfolio is
uninvested and no return is earned thereon. The inability of a Portfolio
to make intended security purchases due to settlement problems could
cause the Portfolio to miss attractive investment opportunities. Inability
to dispose of portfolio securities due to settlement problems could result
either in losses to a Portfolio due to subsequent declines in value of the
portfolio security or, if the Portfolio has entered into a contract to sell
the security, could result in possible liability to the purchaser. There is
generally less government supervision and regulation of exchanges,
financial institutions and issuers in foreign countries than there is in the
United States. In addition, a foreign government may impose exchange
control regulations which may have an impact on currency exchange
rates.
Foreign Bank Obligations. Obligations of foreign
banks involve somewhat different investment risks than those affecting
obligations of United States banks, including the possibilities that their
liquidity could be impaired because of future political and economic
developments, that their obligations may be less marketable than
comparable obligations of United States banks, that a foreign
jurisdiction might impose withholding taxes on interest income payable
on those obligations, that foreign deposits may be seized or nationalized,
that foreign governmental restrictions such as exchange controls may be
adopted that might adversely affect the payment of principal and interest
on those obligations and that the selection of those obligations may be
more difficult because there may be less publicly available information
concerning foreign banks or the accounting, auditing and financial
reporting standards, practices and requirements applicable to foreign
banks may differ from those applicable to United States banks. Foreign
banks are not generally subject to examination by any United States
government agency or instrumentality. Also, investments in commercial
banks located in several foreign countries are subject to additional risks
due to the combination in such banks of commercial banking and
diversified securities activities.
Dollar Roll Transactions. The entry into dollar rolls
involves potential risks of loss which are different from those related to
the securities underlying the transactions. For example, if the
counterparty becomes insolvent, a Portfolio's right to purchase from the
counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Portfolio is able to purchase
them. Similarly, a Portfolio may be required to purchase securities in
connection with a dollar roll at a higher price than may otherwise be
available on the open market. Since, as noted above under
"Supplemental Descriptions of Investments", the counterparty is
required to deliver a similar, but not identical, security to a Portfolio,
the security which the Portfolio is required to buy under the dollar roll
may be worth less than an identical security. Finally, there can be no
assurance that a Portfolio's use of cash that it receives from a dollar roll
will provide a return that exceeds borrowing costs.
Mortgage and Other Asset-Backed Securities.
Prepayments on securitized assets such as mortgages, automobile loans
and credit card receivables ("Securitized Assets") generally increase
with falling interest rates and decrease with rising interest rates;
furthermore, prepayment rates are influenced by a variety of economic
and social factors. In general, the collateral supporting non-mortgage
asset-backed securities is of shorter maturity than mortgage loans and is
less likely to experience substantial prepayments. In addition to
prepayment risk, borrowers on the underlying Securitized Assets may
default in their payments creating delays or loss of principal.
Non-mortgage asset-backed securities involve certain
risks that are not presented by mortgage-backed securities. Primarily,
these securities do not have the benefit of a security interest in assets
underlying the related mortgage collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give
such debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another
party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical
issuance and technical requirements under state laws, the trustee for the
holders of the automobile receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore,
there is a possibility that recoveries on repossessed collateral may not,
in some cases, be available to support payments on these securities.
Some forms of asset-backed securities are relatively
new forms of investments. Although each Portfolio will only invest in
asset-backed securities that the Investment Adviser believes are liquid,
because the market experience in certain of these securities is limited,
the market's ability to sustain liquidity through all phases of a market
cycle may not have been tested.
Forward Commitments. Each Portfolio may purchase
securities on a when-issued or forward commitment basis, which
involves a risk of loss if the value of the securities to be purchased
increases prior to the settlement date and the counterparty to the trade
fails to execute the transaction. If this were to occur, the net asset value
of a Portfolio, which includes any appreciation or depreciation of a
security purchased on a forward basis, would decline by the amount of
such unrealized appreciation.
Loan Participations. Because the issuing bank of a
loan participation does not guarantee the participation in any way, it is
subject to the credit risks generally associated with the underlying
corporate borrower. In addition, because it may be necessary under the
terms of the loan participation for a Portfolio to assert through the
issuing bank such rights as may exist against the underlying corporate
borrower, in the event that the underlying corporate borrower should fail
to pay principal and interest when due, the Portfolio could be subject to
delays, expenses and risks which are greater than those which would
have been involved if the Portfolio had purchased a direct obligation
(such as commercial paper) of the borrower. Moreover, under the terms
of the loan participation, the purchasing Portfolio may be regarded as a
creditor of the issuing bank (rather than of the underlying corporate
borrower), so that the Portfolio also may be subject to the risk that the
issuing bank may become insolvent. Further, in the event of the
bankruptcy or insolvency of the corporate borrower, the loan
participation might be subject to certain defenses that can be asserted by
a borrower as a result of improper conduct by the issuing bank. The
secondary market, if any, for these loan participation interests is limited,
and any such participation purchased by a Portfolio will be treated as
illiquid, until the Board of Directors determines that a liquid market
exists for such participations. Loan participations will be valued at
their fair market value, as determined by procedures approved by the
Board of Directors.
SUPPLEMENTAL TECHNIQUES TO HEDGE INTEREST
RATE AND FOREIGN CURRENCY RISKS AND OTHER
FOREIGN CURRENCY STRATEGIES
Each of the Portfolios may enter into forward foreign
currency contracts (a "forward contract") and may purchase and write
(on a covered basis) exchange-traded or over-the-counter ("OTC")
options on currencies, foreign currency futures contracts and options on
foreign currency futures contracts primarily to protect against a
decrease in the U.S. Dollar equivalent value of its foreign currency
portfolio securities or the payments thereon that may result from an
adverse change in foreign currency exchange rates. Under normal
circumstances, each of Worldwide-Hedged and International-Hedged
intends to hedge its currency exchange risk to the fullest extent feasible,
but there can be no assurance that all of the assets of either Portfolio
denominated in foreign currencies will be hedged at any time, or that
any such hedge will be effective. Each of the other Portfolios may at
times, at the discretion of the Investment Adviser and the Sub-Adviser,
hedge all or some portion of its currency exchange risk.
Conditions in the securities, futures, options and
foreign currency markets will determine whether and under what
circumstances the Fund will employ any of the techniques or strategies
described below. The Fund's ability to pursue certain of these strategies
may be limited by applicable regulations of the Commodity Futures
Trading Commission ("CFTC") and the federal tax requirements
applicable to regulated investment companies. See "Restrictions on the
Use of Futures Transactions" under "Investment Techniques - Hedging
Strategies" in the Prospectus, and "Tax Considerations" below.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND ASSOCIATED RISKS
Each Portfolio may, but generally the Global Portfolios
will, purchase forward contracts. A forward contract obligates one
party to purchase and the other party to sell a definite amount of a given
foreign currency at some specified future date.
In some circumstances the purchase or sale of
appropriate forward contracts may help offset declines in the U.S.
dollar-equivalent value of a Portfolio's foreign currency denominated
assets and income available for distribution to such Portfolio's
shareholders that result from adverse changes in the exchange rate
between the U.S. dollar and the various foreign currencies in which a
Portfolio's assets or income may be denominated. The U.S. dollar-
equivalent value of the principal of and rate of return on foreign
currency denominated securities will decline if the exchange rate of the
U.S. dollar rises in relation to that currency. Such declines could be
partially or completely offset by an increase in the value of a forward
contract on that foreign currency.
In addition to entering into forward contracts with
respect to assets that a Portfolio holds (a "position hedge"), the
Investment Adviser or the Sub-Adviser may purchase or sell forward
contracts or foreign currency options in a particular currency with
respect to specific anticipated transactions (a "transaction hedge"). By
purchasing forward contracts, the Investment Adviser or Sub-Adviser
can establish the rate at which a Portfolio will be contractually entitled
to exchange U.S. dollars for a foreign currency or a foreign currency for
U.S. dollars at some point in the future and thereby lock in the U.S.
dollar cost of purchasing foreign currency denominated portfolio
securities or set the U.S. dollar value of the income from securities it
owns or the proceeds from securities it intends to sell.
While the use of foreign currency forward contracts
may protect a Portfolio against declines in the U.S. dollar-equivalent
value of the Portfolio's assets, such use will reduce the possible gain
from advantageous changes in the value of the U.S. dollar against
particular currencies in which their assets are denominated. Moreover,
the use of foreign currency forward contracts will not eliminate
fluctuations in the underlying U.S. dollar-equivalent value of the prices
of or rates of return on the assets held in the portfolio and the use of
such techniques will subject the Portfolio to certain risks.
The foreign exchange markets can be highly volatile,
subject to sharp price fluctuations. In addition, trading forward
contracts can involve a degree of leverage. As a result, relatively small
movements in the rates of exchange between the currencies underlying a
contract could result in immediate and substantial losses to the investor.
Trading losses that are not offset by corresponding gains in assets
being hedged could reduce the value of assets held by a Portfolio.
Moreover, the precise matching of the forward contract
amounts and the value of the hedged portfolio securities involved will
not generally be possible because the future value of such foreign
currency denominated portfolio securities will change as a consequence
of market movements in the value of those securities unrelated to
changes in exchange rates and the U.S. dollar-equivalent value of such
assets between the date the forward contract is entered into and the date
that it is sold. Accordingly, it may be necessary for a Portfolio to
purchase additional foreign currency in the cash market (and to bear the
expense of such purchase) if the market value of the security is less than
the amount of the foreign currency it may be obligated to deliver
pursuant to the forward contract.
The success of any currency hedging technique will
depend on the ability of the Investment Adviser or Sub-Adviser
correctly to predict movements in foreign currency exchange rates. If
the Investment Adviser or Sub-Adviser incorrectly predicts the direction
of such movements or if unanticipated changes in foreign currency
exchange rates occur, a Portfolio's performance will be poorer than if
they had not entered into such contracts. The accurate projection of
currency market movements is extremely difficult, and the successful
execution of a hedging strategy is highly uncertain.
The cost to a Portfolio of engaging in foreign currency
forward contracts will vary with factors such as the foreign currency
involved, the length of the contract period and the market conditions
then prevailing, including general market expectations as to the direction
of the movement of various foreign currencies against the U.S. dollar.
Furthermore, the Investment Adviser or Sub-Adviser may not be able to
purchase forward contracts with respect to all of the foreign currencies
in which the Portfolio's portfolio securities may be denominated. In
those circumstances the correlation between the movements in the
exchange rates of the subject currency and the currency in which the
portfolio security is denominated may not be precise. Moreover, if the
forward contract is entered into in an over-the-counter transaction, the
Portfolio generally will be exposed to the credit risk of its counterparty.
If a Portfolio enters into such contracts on a foreign exchange, the
contract will be subject to the rules of that foreign exchange. Foreign
exchanges may impose significant restrictions on the purchase, sale or
trading of such contracts, including the imposition of limits on price
moves. Such limits may significantly affect the ability to trade such a
contract or otherwise to close out the position and could create
potentially significant discrepancies between the cash and market value
of the position in the forward contract. Finally, the cost of purchasing
forward contracts in a particular currency will reflect, in part, the rate
of return available on instruments denominated in that currency. The
cost of purchasing forward contracts to hedge portfolio securities that
are denominated in currencies that in general yield high rates of return
may thus tend to reduce that rate of return toward the rate of return that
would be earned on assets denominated in U.S. dollars.
Other Strategies of Worldwide Short-Term, Worldwide
and International. The Global and International Portfolios may use
forward contracts to hedge the value of portfolio securities against
changes in exchange rates; however, unlike the other Global and
International Portfolios, Worldwide-Hedged and International-Hedged
will not use forward contracts to seek to enhance the rate of return on its
portfolio. Each of Worldwide Short-Term, Worldwide and International
may also attempt to enhance the return on its portfolio by entering into
forward contracts and currency options, as discussed below, in a
particular currency in an amount in excess of the value of its assets
denominated in that currency or when it does not own assets
denominated in that currency. If the Investment Adviser or Sub-Adviser
is not able correctly to predict the direction and extent of movements in
foreign currency exchange rates, entering into such forward or option
contracts may decrease rather than enhance the return on such Portfolio.
In addition, if such a Portfolio enters into forward contracts when it
does not own assets denominated in that currency, the Portfolio's
volatility may increase and losses on such contracts will not be offset by
increases in the value of Portfolio assets.
OPTIONS
Options on Foreign Currencies. Each Portfolio may
purchase and sell (or write) put and call options on foreign currencies to
protect against a decline in the U.S. dollar-equivalent value of its
portfolio securities or payments due thereon or a rise in the U.S. dollar-
equivalent cost of securities that it intends to purchase. A foreign
currency put option grants the holder the right, but not the obligation, at
a future date to sell a specified amount of a foreign currency to its
counterparty at a predetermined price. Conversely, a foreign currency
call option grants the holder the right, but not the obligation, to purchase
at a future date a specified amount of a foreign currency at a
predetermined price.
As in the case of other types of options, the benefit to a
Portfolio deriving from the purchase of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the direction or
to the extent anticipated, the Portfolio could sustain losses on
transactions in foreign currency options which would require them to
forego a portion or all of the benefits of advantageous changes in such
rates.
Each Portfolio may write options on foreign currencies
for hedging purposes. For example, where a Portfolio anticipates a
decline in the dollar value of foreign currency denominated securities
due to adverse fluctuations in exchange rates it could, instead of
purchasing a put option, write a call option on the relevant currency. If
the expected decline occurs, the option will most likely not be exercised,
and the decrease in value of portfolio securities will be offset by the
amount of the premium received.
Similarly, instead of purchasing a call option to hedge
against an anticipated increase in the dollar costs of securities to be
acquired, a Portfolio could write a put option on the relevant currency
which, if rates move in the manner projected, will expire unexercised
and allow the Portfolio to hedge such increased costs up to the amount
of the premium. As in the case of other types of options, however, the
writing of a foreign currency option will constitute only a partial hedge
up to the amount of the premium, and only if rates move in the expected
direction. If this movement does not occur, the option may be exercised
and the Portfolio would be required to purchase or sell the underlying
currency at a loss which may not be fully offset by the amount of the
premium. Through the writing of options on foreign currencies, a
Portfolio also may be required to forego all or a portion of the benefits
that might otherwise have been obtained from favorable movements in
exchange rates.
Options on Securities. Each Portfolio may also enter
into closing sale transactions with respect to options it has purchased.
A put option on a security grants the holder the right, but not the
obligation, at a future date to sell the security to its counterparty at a
predetermined price. Conversely, a call option on a security grants the
holder the right, but not the obligation, to purchase at a future date the
security underlying the option at a predetermined price.
A Portfolio would normally purchase put options in
anticipation of a decline in the market value of securities in its portfolio
or securities it intends to purchase. If such Portfolio purchased a put
option and the value of the security in fact declined below the strike
price of the option, such Portfolio would have the right to sell that
security to its counterparty for the strike price (or realize the value of
the option by entering into a closing transaction), and consequently
would protect itself against any further decrease in the value of the
security during the term of the option.
Conversely, if the Investment Adviser or Sub-Adviser
anticipates that a security that it intends to acquire will increase in
value, it might cause a Portfolio to purchase a call option on that
security or securities similar to that security. If the value of the security
does rise, the call option may wholly or partially offset the increased
price of the security. As in the case of other types of options, however,
the benefit to the Portfolio will be reduced by the amount of the
premium paid to purchase the option and any related transaction costs.
If, however, the value of the security fell instead of rose, the Portfolio
would have foregone a portion of the benefit of the decreased price of
the security in the amount of the option premium and the related
transaction costs.
A Portfolio would purchase put and call options on
securities indices for the same purposes as it would purchase options on
securities. Options on securities indices are similar to options on
securities except that the options reflect the change in price of a group
of securities rather than an individual security and the exercise of
options on securities indices are settled in cash rather than by delivery of
the securities comprising the index underlying the option.
Transactions by a Portfolio in options on securities and
securities indices will be governed by the rules and regulations of the
respective exchanges, boards of trade or other trading facilities on which
the options are traded.
Considerations Concerning Options. The writer of an
option receives a premium which it retains regardless of whether the
option is exercised. The purchaser of a call option has the right, for a
specified period of time, to purchase the securities or currency subject to
the option at a specified price (the "exercise price"). By writing a call
option, the writer becomes obligated during the term of the option, upon
exercise of the option, to sell the underlying securities or currency to the
purchaser against receipt of the exercise price. The writer of a call
option also loses the potential for gain on the underlying securities or
currency in excess of the exercise price of the option during the period
that the option is open.
Conversely, the purchaser of a put option has the right,
for a specified period of time, to sell the securities or currency subject to
the option to the writer of the put at the specified exercise price. The
writer of a put option is obligated during the term of the option, upon
exercise of the option, to purchase securities or currency underlying the
option at the exercise price. A writer might, therefore, be obligated to
purchase the underlying securities or currency for more than their
current market price or U.S. dollar value, respectively.
Each Portfolio may purchase and sell both exchange-
traded and OTC options. Currently, although many options on equity
securities and options on currencies are exchange-traded, options on
debt securities are primarily traded in the over-the-counter market. The
writer of an exchange-traded option that wishes to terminate its
obligation may effect a "closing purchase transaction". This is
accomplished by buying an option of the same series as the option
previously written. Options of the same series are options with respect
to the same underlying security or currency, having the same expiration
date and the same exercise price. Likewise, an investor who is the
holder of an option may liquidate a position by effecting a "closing sale
transaction". This is accomplished by selling an option of the same
series as the option previously purchased. There is no guarantee that
either a closing purchase or a closing sale transaction can be effected.
An exchange-traded option position may be closed out
only where there exists a secondary market for an option of the same
series. For a number of reasons, a secondary market may not exist for
options held by a Portfolio, or trading in such options might be limited
or halted by the exchange on which the option is trading, in which case
it might not be possible to effect closing transactions in particular
options the Portfolio has purchased with the result that the Portfolio
would have to exercise the options in order to realize any profit. If the
Portfolio is unable to effect a closing purchase transaction in a
secondary market in an option the Portfolio has written, it will not be
able to sell the underlying security or currency until the option expires
or deliver the underlying security or currency upon exercise or otherwise
cover its position.
Exchange-traded options in the United States are issued
by a clearing organization affiliated with the exchange on which the
option is listed which, in effect, guarantees every exchange-traded
option transaction. In contrast, OTC options are contracts between a
Portfolio and its counterparty with no clearing organization guarantee.
Thus, when the Portfolio purchases OTC options, it relies on the dealer
from which it purchased the OTC option to make or take delivery of the
securities underlying the option. Failure by the dealer to do so would
result in the loss of the premium paid by the Portfolio as well as the loss
of the expected benefit of the transaction. The Investment Adviser or
Sub-Adviser will only purchase options from dealers determined by the
Investment Adviser to be creditworthy.
Exchange-traded options generally have a continuous
liquid market whereas OTC options may not. Consequently, a Portfolio
will generally be able to realize the value of an OTC option it has
purchased only by exercising it or reselling it to the dealer who issued it.
Similarly, when the Portfolio writes an OTC option, it generally will be
able to close out the OTC option prior to its expiration only by entering
into a closing purchase transaction with the dealer to which the Portfolio
originally wrote the OTC option. Although a Portfolio will enter into
OTC options only with dealers that agree to enter into, and that are
expected to be capable of entering into, closing transactions with the
Portfolio, there can be no assurance that the Portfolio will be able to
liquidate an OTC option at a favorable price at any time prior to
expiration. Until the Portfolio is able to effect a closing purchase
transaction in a covered OTC call option the Portfolio has written, it
will not be able to liquidate securities used as cover until the option
expires or is exercised or different cover is substituted. In the event of
insolvency of the counterparty, the Portfolio may be unable to liquidate
an OTC option. In the case of options written by a Portfolio, the
inability to enter into a closing purchase transaction may result in
material losses to the Portfolio. For example, since the Portfolio must
maintain a covered position with respect to any call option on a security
it writes, the Portfolio may be limited in its ability to sell the underlying
security while the option is outstanding. This may impair the Portfolio's
ability to sell a portfolio security at a time when such a sale might be
advantageous.
There is no systematic reporting of last sale information
for foreign currencies or any regulatory requirement that quotations
available through dealers or other market sources be firm or revised on
a timely basis. Quotation information available is generally
representative of very large transactions in the interbank market and
thus may not reflect relatively smaller transactions (i.e., less than $1
million) where rates may be less favorable. The interbank market in
foreign currencies is a global, around-the-clock market. To the extent
that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements
may take place in the underlying markets that cannot be reflected in the
options market until they reopen. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts
than those that may be involved in the use of foreign currency options,
investors may be disadvantaged by having to deal in an odd lot market
(generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for
round lots.
The use of options to hedge a Portfolio's foreign
currency-denominated portfolio, or to enhance Worldwide Short-Term's,
Worldwide's or International's return raises additional considerations.
As described above, a Portfolio may, among other things, purchase call
options on securities it intends to acquire in order to hedge against
anticipated market appreciation in the price of the underlying security or
currency. If the market price does increase as anticipated, the Portfolio
will benefit from that increase but only to the extent that the increase
exceeds the premium paid and related transaction costs. If the
anticipated rise does not occur or if it does not exceed the amount of the
premium and related transaction costs, the Portfolio will bear the
expense of the options without gaining an offsetting benefit. If the
market price of the underlying currency or securities should fall instead
of rise, the benefit the Portfolio obtains from purchasing the currency or
securities at a lower price will be reduced by the amount of the premium
paid for the call options and by transaction costs.
Each Portfolio also may purchase put options on
currencies or portfolio securities when it believes a defensive posture is
warranted. Protection is provided during the life of a put option
because the put gives the Portfolio the right to sell the underlying
currency or security at the put exercise price, regardless of a decline in
the underlying currency's or security's market price below the exercise
price. This right limits the Portfolio's losses from the currency's or
security's possible decline in value below the exercise price of the option
to the premium paid for the option and related transaction costs. If the
market price of the currency or the Portfolio's securities should increase,
however, the profit that the Portfolio might otherwise have realized will
be reduced by the amount of the premium paid for the put option and by
transaction costs.
The value of an option position will reflect, among
other things, the current market price of the underlying currency or
security, the time remaining until expiration, the relationship of the
exercise price to the market price, the historical price volatility of the
underlying currency or security and general market conditions. For this
reason, the successful use of options as a hedging strategy depends upon
the ability of the Investment Adviser or the Sub-Adviser to forecast the
direction of price fluctuations in the underlying currency or securities
market.
Options normally have expiration dates of up to nine
months. The exercise price of the options may be below, equal to or
above the current market values of the underlying securities or currency
at the time the options are written. Options purchased by a Portfolio
that expire unexercised have no value, and therefore a loss will be
realized in the amount of the premium paid (and related transaction
costs). If an option purchased by any Portfolio is in-the-money prior to
its expiration date, unless the Portfolio exercises the option or enters
into a closing transaction with respect to that position, the Portfolio will
not realize any gain on its option position.
A Portfolio's activities in the options market may result
in a higher portfolio turnover rates and additional brokerage costs.
Nevertheless, the Portfolio may also save on commissions and
transaction costs by hedging through such activities rather than buying
or selling securities or foreign currencies in anticipation of market
moves or foreign exchange rate fluctuations.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Futures Contracts. Each Portfolio may enter into
contracts for the purchase or sale for future delivery (a "futures
contract") of fixed-income securities or foreign currencies, or contracts
based on financial indices including any index of U.S. Government
Securities, foreign government securities or corporate debt securities.
U.S. futures contracts have been designed by exchanges which have
been designated as "contracts markets" by the CFTC, and must be
executed through a futures commission merchant, or brokerage firm,
which is a member of the relevant contract market. Futures contracts
trade on a number of exchange markets and, through their clearing
corporations, the exchanges guarantee performance of the contracts as
between the clearing members of the exchange. A Portfolio will enter
into futures contracts that are based on debt securities that are backed
by the full faith and credit of the U.S. Government, such as long-term
U.S. Treasury Bonds, Treasury Notes, GNMA-modified pass-through
mortgage-backed securities and three-month U.S. Treasury Bills. Each
Portfolio may also enter into futures contracts that are based on
securities that would be eligible investments for such Portfolio and that
are denominated in currencies other than the U.S. dollar, including,
without limitation, futures contracts based on government bonds issued
in the United Kingdom, Japan, the Federal Republic of Germany,
France and Australia and futures contracts based on three-month Euro-
deposit contracts in the major currencies.
A Portfolio would purchase or sell futures contracts to
attempt to protect the U.S. dollar-equivalent value of its securities from
fluctuations in interest or foreign exchange rates without actually
buying or selling securities or foreign currency. For example, if a
Portfolio expected the value of a foreign currency to increase against the
U.S. dollar, the Portfolio might enter into futures contracts for the sale
of that currency. Such a sale would have much the same effect as
selling an equivalent value of foreign currency. If the currency did
increase, the value of the securities in the portfolio would decline, but
the value of the futures contracts to the Portfolio would increase at
approximately the same rate, thereby keeping the net asset value of the
Portfolio from declining as much as it otherwise would have.
Although futures contracts by their terms call for the
actual delivery or acquisition of securities or currency, in most cases the
contractual obligation is fulfilled before the date of the contract without
having to make or take delivery of the securities or currency. The
offsetting of a contractual obligation is accomplished by buying (or
selling, as the case may be) on a commodities exchange an identical
futures contract calling for delivery in the same month. Such a
transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities or currency.
Since all transactions in the futures market are made, offset or fulfilled
through a clearinghouse associated with the exchange on which the
contracts are traded, a Portfolio will incur brokerage fees when it
purchases or sells futures contracts.
At the time a futures contract is purchased or sold, the
Portfolio must allocate cash or securities as a deposit payment ("initial
margin"). It is expected that the initial margin on U.S. exchanges may
range from approximately 3% to approximately 15% of the value of the
securities or commodities underlying the contract. Under certain
circumstances, however, such as periods of high volatility, the Portfolio
may be required by an exchange to increase the level of its initial margin
payment. Additionally, initial margin requirements may be increased
generally in the future by regulatory action. An outstanding futures
contract is valued daily and the payment in cash of "variation margin"
may be required, a process known as "marking to the market". Each
day the Portfolio will be required to provide (or will be entitled to
receive) variation margin in an amount equal to any decline (in the case
of a long futures position) or increase (in the case of a short futures
position) in the contract's value since the preceding day.
Futures contracts entail special risks. Among other
things, the ordinary spreads between values in the cash and futures
markets, due to differences in the character of these markets, are subject
to distortions relating to (1) investors' obligations to meet additional
variation margin requirements, (2) decisions to make or take delivery,
rather than entering into offsetting transactions and (3) the difference
between margin requirements in the securities markets and margin
deposit requirements in the futures market. The possibility of such
distortion means that a correct forecast of general market, foreign
exchange rate or interest rate trends by the Investment Adviser or Sub-
Adviser may still not result in a successful transaction.
Although the Investment Adviser believes that use of
such contracts and options thereon will benefit the Portfolios, if the
Investment Adviser's judgment about the general direction of securities
market movements, foreign exchange rates or interest rates is incorrect,
a Portfolio's overall performance would be poorer than if it had not
entered into any such contracts or purchased or written options thereon.
For example, if a Portfolio had hedged against the possibility of an
increase in interest rates which would adversely affect the price of debt
securities held in its portfolio and interest rates decreased instead, the
Portfolio would lose part or all of the benefit of the increased value of
its assets which it had hedged because it would have offsetting losses in
its futures positions. In addition, particularly in such situations, if the
Portfolio has insufficient cash, it may have to sell assets from its
portfolio to meet daily variation margin requirements. Any such sale of
assets may, but will not necessarily, be at increased prices which reflect
the rising market. Consequently, the Portfolio may have to sell assets at
a time when it may be disadvantageous to do so.
A Portfolio's ability to establish and close out positions
in futures contracts and options on futures contracts will be subject to
the development and maintenance of a liquid market. Although a
Portfolio generally will purchase or sell only those futures contracts and
options thereon for which there appears to be a liquid market, there is no
assurance that a liquid market on an exchange will exist for any
particular futures contract or option thereon at any particular time.
Where it is not possible to effect a closing transaction in a contract to do
so at a satisfactory price, the Portfolio would have to make or take
delivery under the futures contract or, in the case of a purchased option,
exercise the option. In the case of a futures contract that a Portfolio has
sold and is unable to close out, the Portfolio would be required to
maintain margin deposits on the futures contract and to make variation
margin payments until the contract is closed.
Under certain circumstances, exchanges may establish
daily limits in the amount that the price of a futures contract or related
option contract may vary either up or down from the previous day's
settlement price. Once the daily limit has been reached in a particular
contract, no trades may be made that day at a price beyond that limit.
The daily limit governs only price movements during a particular
trading day and therefore does not limit potential losses because the
limit may prevent the liquidation of unfavorable positions. Futures or
options contract prices could move to the daily limit for several
consecutive trading days with little or no trading and thereby prevent
prompt liquidation of positions and subject some traders to substantial
losses.
Buyers and sellers of foreign currency futures contracts
are subject to the same risks that apply to the use of futures generally.
In addition, there are risks associated with foreign currency futures
contracts and their use as hedging devices similar to those associated
with options on foreign currencies described above. Further, settlement
of a foreign currency futures contract must occur within the country
issuing the underlying currency. Thus, a Portfolio must accept or make
delivery of the underlying foreign currency in accordance with any U.S.
or foreign restrictions or regulations regarding the maintenance of
foreign banking arrangements by U.S. residents and may be required to
pay any fees, taxes or charges associated with such delivery that are
assessed in the country of the underlying currency.
Options on Futures Contracts. The purchase of a call
option on a futures contract is similar in some respects to the purchase
of a call option on an individual security or currency. Depending on the
pricing of the option compared to either the price of the futures contract
upon which it is based or the price of the underlying securities or
currency, it may or may not be less risky than ownership of the futures
contract or the underlying securities or currency. As with the purchase
of futures contracts, when a Portfolio is not fully invested it may
purchase a call option on a futures contract to hedge against a market
advance due to declining interest rates or a change in foreign exchange
rates.
The writing of a call option on a futures contract
constitutes a partial hedge against declining prices of the security or
foreign currency which is deliverable upon exercise of the futures
contract. If the futures price at expiration of the option is below the
exercise price, a Portfolio will retain the full amount of the option
premium which provides a partial hedge against any decline that may
have occurred in the Portfolio's portfolio holdings. The writing of a put
option on a futures contract constitutes a partial hedge against
increasing prices of the security or foreign currency which is deliverable
upon exercise of the futures contract. If the futures price at expiration
of the option is higher than the exercise price, the Portfolio will retain
the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which a Portfolio intends
to purchase. If a put or call option a Portfolio has written is exercised,
the Portfolio will incur a loss that will be reduced by the amount of the
premium it receives. Depending on the degree of correlation between
changes in the value of its portfolio securities and changes in the value
of its futures positions, a Portfolio's losses from existing options on
futures may to some extent be reduced or increased by changes in the
value of portfolio securities.
The purchase of a put option on a futures contract is
similar in some respects to the purchase of protective put options on
portfolio securities. For example, a Portfolio may purchase a put option
on a futures contract to hedge its portfolio against the risk of rising
interest rates.
The amount of risk a Portfolio assumes when it
purchases an option on a futures contract is the premium paid for the
option plus related transaction costs. In addition to the correlation risks
discussed above, the purchase of an option also entails the risk that
changes in the value of the underlying futures contract will not be fully
reflected in the value of the option purchased.
Options on foreign currency futures contracts may
involve certain additional risks. Trading options on foreign currency
futures contracts is relatively new. The ability to establish and close out
positions in such options is subject to the maintenance of a liquid
secondary market. To mitigate this problem, a Portfolio will not
purchase or write options on foreign currency futures contracts unless
and until, in the Investment Adviser's or Sub-Adviser's opinion, the
market for such options has developed sufficiently that the risks in
connection with such options are not greater than the risks in connection
with transactions in the underlying foreign currency futures contracts.
Compared to the purchase or sale of foreign currency futures contracts,
the purchase of call or put options thereon involves less potential risk to
the Portfolio because the maximum amount at risk is the premium paid
for the option (plus transaction costs). However, there may be
circumstances when the purchase of a call or put option on a foreign
currency futures contract would result in a loss, such as when there is
no movement in the price of the underlying currency or futures contract,
when use of the underlying futures contract would not.
OTHER HEDGING TECHNIQUES
Among the other hedging techniques that a Portfolio
may use are interest rate, currency and index swaps and the purchase or
sale of related caps, floors and collars. Each Portfolio may enter into
these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect against
currency fluctuations, as a duration management technique or to protect
against any increase in the price of securities the Portfolio anticipates
purchasing at a later date. Each Portfolio intends to use these
transactions as hedges and not as speculative investments and will not
sell interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Portfolio may be obligated
to pay. Interest rate swaps involve the exchange by a Portfolio with
another party of their respective commitments to pay or receive interest,
for example, an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. A currency
swap is an agreement to exchange cash flows on a notional amount of
two or more currencies based on the relative value differential among
them and an index swap is an agreement to swap cash flows on a
notional amount based on changes in the values of the referenced
indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate
or amount. The purchase of a floor entitles the purchaser to receive
payments on a notional principal amount from the party selling such
floor to the extent that a specified index falls below a predetermined
interest rate or amount. A collar is a combination of a cap and a floor
that preserves a certain return within a predetermined range of interest
rates or values. Segregated accounts may be required when using such
techniques.
INVESTMENT RESTRICTIONS
The Fund has adopted the investment restrictions listed
below relating to the investment of each Portfolio's assets and its
activities. These are fundamental policies that may not be changed
without the approval of the holders of a majority of the outstanding
voting securities of a Portfolio (which for this purpose and under the
1940 Act means the lesser of (i) 67% of the shares represented at a
meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares). None of
the Portfolios may: (1) borrow money except by engaging in reverse
repurchase agreements or dollar roll transactions or from a bank as a
temporary measure for the reasons enumerated in "Supplemental
Investment Techniques - Borrowing", provided that a Portfolio will not
borrow, more than an amount equal to one-third of the value of its
assets, nor will it borrow for leveraging purposes (i.e., a Portfolio will
not purchase securities while temporary bank borrowings in excess of
5% of its total assets are outstanding); (2) issue senior securities (other
than as specified in clause (1)); (3) purchase securities on margin
(although deposits referred to as "margin" will be made in connection
with investments in futures contracts, as explained above, and a
Portfolio may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities); (4) make short sales of
securities; (5) underwrite securities of other issuers; (6) invest in
companies for the purpose of exercising control or management; (7)
purchase or sell real estate (other than marketable securities
representing interests in, or backed by, real estate); or (8) purchase or
sell physical commodities or related commodity contracts.
For the purposes of restriction (1), reverse repurchase
agreements and dollar roll transactions that are covered pursuant to
SEC regulations or staff positions, will not be considered borrowing.
For the purposes of restriction (4), the word "securities" does not
include options, futures, options on futures or forward currency
contracts.
In addition, each Portfolio is prohibited from: 1) the
purchase or retention of the securities of any issuer if the officers,
directors or trustees of the Fund, its advisors, or managers owning
beneficially more than one half of one percent of the securities of an
issuer together own beneficially more than five percent of the securities
of that issuer; 2) the purchase of securities of any issuer if, as to
seventy-five percent (75%) of the assets of the company at the time of
the purchase, more than ten percent of the voting securities of any issuer
would be held by the company; 3) the investment in the securities of
other investment companies, except by purchase in the open market
where no commission or profit to a sponsor or dealer results from the
purchase other than the customary broker's commission, or except when
the purchase is part of a plan of merger, consolidation, reorganization or
acquisition; and 4) the investment of more than fifteen percent (15%) of
the Fund's total assets in the securities of issuers which together with
any predecessors have a record of less than three years continuous
operation or securities of issuers which are restricted as to disposition.
Whenever an investment policy or limitation states a
maximum percentage of a Portfolio's assets that may be invested in any
security or other asset or sets forth a policy regarding quality standards,
such standard or percentage limitation shall be determined immediately
after and as a result of the Portfolio's acquisition of such security or
other asset. Accordingly, any later increase or decrease in a percentage
resulting from a change in values, net assets or other circumstances will
not be considered when determining whether that investment complies
with the Portfolio's investment policies and limitations.
Each Portfolio's investment objectives and other
investment policies not designated as fundamental in this Statement of
Additional Information are non-fundamental and may be changed at any
time by action of the Board of Directors.
U.S. Short-Term Fixed Income Portfolio
U.S. Short-Term has adopted five additional
fundamental policies that may not be changed without the approval of
the holders of a majority of the shares of the Portfolio. The Portfolio
may not: (1) invest more than 5% of its total assets in the securities of
any issuer (other than U.S. Government Securities and repurchase
agreements); (2) invest more than 25% of its total assets in the securities
of issuers in any industry (other than U.S. Government Securities and
the banking industry); (3) enter into repurchase agreements if, as a
result thereof, more than 25% of its assets would be subject to
repurchase agreements; (4) make loans to other persons, except by (i)
the purchase of a portion of an issue of debt obligations in which a
Portfolio is authorized to invest in accordance with its investment
objectives and (ii) engaging in repurchase agreements; or (5) purchase
or sell commodities or commodity contracts, except that the Portfolio
may utilize up to 5% of its assets as margin and premiums to purchase
and sell futures and options contracts on CFTC-regulated exchanges.
Worldwide Fixed Income and Worldwide Fixed Income-Hedged
Portfolios
Worldwide and Worldwide-Hedged each have adopted
two additional fundamental policies that may not be changed without the
approval of the holders of a majority of the shares of either Portfolio.
Each Portfolio may not: (1) enter into repurchase agreements if, as a
result thereof, more than 25% of its assets would be subject to
repurchase agreements; or (2) purchase or sell commodities or
commodity contracts, except that each Portfolio may utilize up to 5% of
its assets as margin and premiums to purchase and sell futures and
options contracts on CFTC-regulated exchanges.
Illiquid Securities
The staff of the Commission has taken the position that
purchased OTC options and the assets used as cover for written OTC
options are illiquid securities. Therefore, each Portfolio has adopted an
investment policy pursuant to which it generally will not purchase or
sell OTC options if, as a result of such transaction, the sum of the
market value of OTC options currently outstanding that are held by
such Portfolio, the market value of the underlying securities covered by
OTC call options currently outstanding that were sold by such Portfolio
and margin deposits on such Portfolio's existing OTC options on futures
contracts exceed 15% of the net assets of such Portfolio, taken at
market value, together with all other assets of the Portfolio that are
illiquid or are not otherwise readily marketable. This policy as to OTC
options is not a fundamental policy of the Portfolios and may be
amended by the Directors of the Fund without the approval of the
Fund's or a Portfolio's shareholders. However, the Fund will not change
or modify this policy prior to a change or modification by the
Commission staff of its position.
PORTFOLIO TRANSACTIONS
The debt securities in which the Fund invests are traded
primarily in the over-the-counter market by dealers who are usually
acting as principal for their own account. On occasion, securities may
be purchased directly from the issuer. Such securities are generally
traded on a net basis and do not normally involve either brokerage
commissions or transfer taxes. For the periods ending December 31,
1993, U.S. Short-Term, Stable Return, AAA Asset-Backed, Worldwide,
Worldwide-Hedged, International-Hedged and Worldwide Short-Term
paid brokerage commissions of $68,793, $13, $13, $0, $106,448,
$32,026 and $141, respectively. For the periods ending December 31,
1992, U.S. Short-Term, Worldwide and Worldwide-Hedged paid
brokerage commissions of $8,050, $6,633 and $2,191, respectively (all
involving futures transactions). For the three months ending December
31, 1991, and the fiscal year ending September 30, 1991, U.S. Short-
Term did not pay any brokerage commissions. The cost of executing
transactions will consist primarily of dealer spreads. In the markets in
which a Portfolio buys and sells its assets and for the size of the
transactions it will execute, the spread between the bid and asked price
of a security is typically below 1/32 of 1% of the value of the
transaction, and often much less. The spread is not included in the
expenses of a Portfolio and therefore is not subject to the expenses cap;
nevertheless, the incurrence of this spread, ignoring the other intended
positive effects of each such transaction, will decrease the total return of
the Portfolio. However, a Portfolio will buy one asset and sell another
only if the Investment Adviser and/or the Sub-Adviser believes it is
advantageous to do so after considering the effect of the additional
custodial charges and the spread on the Portfolio's total return.
All purchases and sales will be executed with major
dealers and banks on a best net price basis. No trades will be executed
with the Investment Adviser, the Sub-Adviser, their affiliates, officers or
employees acting as principal or agent for others, although such entities
and persons may be trading contemporaneously in the same or similar
securities. To the extent an investment that may be appropriate for one
of the Portfolios is considered for purchase by the Investment Adviser
and/or Sub-Adviser for the account of another Portfolio, client or fund,
the investment opportunity, as well as the expenses incurred in the
transaction, will be allocated in a manner deemed equitable by the
Investment Adviser.
The Global and International Portfolios are expected to
invest substantial portions of their assets in foreign securities. Since
costs associated with transactions in foreign securities are generally
higher than costs associated with transactions in domestic securities, the
operating expense ratios of these Portfolios can be expected to be higher
than that of an investment company investing exclusively in domestic
securities.
TAX CONSIDERATIONS
The following summary of tax consequences, which
does not purport to be complete, is based on U.S. federal tax laws and
regulations in effect on the date of this Statement of Additional
Information, which are subject to change by legislative or administrative
action.
Qualification as a Regulated Investment Company.
Each Portfolio is qualified and intends to qualify for and to elect to be
treated as a regulated investment company ("RIC") under the Internal Revenue
Code of 1986, as amended (the "Code"). To qualify as a RIC, a Portfolio
must, among other things, (a) derive at least 90% of its gross income
each taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of securities
or foreign currencies, or other income (including gains from options,
futures or forward contracts) derived from its business of investing in
securities or foreign currencies (the "Qualifying Income Requirement");
(b) derive less than 30% of its gross income each taxable year from
sales or other dispositions of certain assets (namely, (i) securities; (ii)
options, futures and forward contracts (other than those on foreign
currencies); and (iii) foreign currencies (including options, futures and
forward contracts on such currencies) not directly related to the
Portfolio's principal business of investing in stocks or securities (or
options and futures with respect to stocks or securities) held less than
three months (the "30% Limitation"); (c) diversify its holdings so that,
at the end of each quarter of the Portfolio's taxable year, (i) at least 50%
of the market value of the Portfolio's assets is represented by cash and
cash items (including receivables), U.S. Government Securities,
securities of other RICs and other securities, with such other securities
of any one issuer limited to an amount not greater than 5% of the value
of the Portfolio's total assets and not greater than 10% of the
outstanding voting securities of such issuer and (ii) not more than 25%
of the value of the Portfolio's total assets is invested in the securities of
any one issuer (other than U.S. Government Securities or the securities
of other RICs); and (d) distribute at least 90% of its investment
company taxable income (which includes, among other items, interest
and net short-term capital gains in excess of net long-term capital
losses). The U.S. Treasury Department has authority to promulgate
regulations pursuant to which gains from foreign currency (and options,
futures and forward contracts on foreign currency) not directly related
to a RIC's principal business of investing in stocks and securities would
not be treated as qualifying income for purposes of the Qualifying
Income Requirement. To date, such regulations have not been
promulgated.
If for any taxable year a Portfolio does not qualify as a
RIC, all of its taxable income will be taxed to the Portfolio at corporate
rates. For each taxable year that the Portfolio qualifies as a RIC, it will
not be subject to federal income tax on that part of its investment
company taxable income and net capital gains (the excess of net long-
term capital gain over net short-term capital loss) that it distributes to
its shareholders. In addition, to avoid a nondeductible 4% federal excise
tax, the Portfolio must distribute during each calendar year an amount at least
equal to the sum of 98% of its ordinary income (not taking into account any
capital gains or losses), determined on a calendar year basis, 98% of its
capital gains in excess of capital losses, determined in general on an October
31 year-end basis, and any undistributed amounts from previous years.
Each Portfolio intends to distribute all of its net income and gains by
automatically reinvesting such income and gains in additional shares of
the Portfolio. The 30% Limitation may require that a Portfolio defer
closing out certain positions beyond the time when it otherwise would be
advantageous to do so, in order not to be disqualified as a RIC. Each
Portfolio will monitor its compliance with all of the rules set forth in the
preceding paragraph.
Distributions. Each Portfolio's automatic reinvestment
of its ordinary income, net short-term capital gains and net long-term
capital gains in additional shares of the Portfolio and distribution of
such shares to shareholders will be taxable to the Portfolio's
shareholders. In general, such shareholders will be treated as if such
income and gains had been distributed to them by the Portfolio and then
reinvested by them in shares of the Portfolio, even though no cash
distributions have been made to shareholders. The automatic
reinvestment of ordinary income and net realized short-term capital
gains of the Portfolio will be taxable to the Portfolio's shareholders as
ordinary income. Each Portfolio's automatic reinvestment of any net
long-term capital gains designated by the Portfolio as capital gain
dividends will be taxable to the shareholders as long-term capital gain,
regardless of how long they have held their Portfolio shares. None of
the amounts treated as distributed to a Portfolio's shareholders will be
eligible for the corporate dividends received deduction. A distribution
will be treated as paid on December 31 of the current calendar year if it
is declared by a Portfolio in October, November or December with a
record date in such a month and paid by the Portfolio during January of
the following calendar year. Such distributions will be taxable to
shareholders in the calendar year in which the distributions are declared,
rather than in the calendar year in which the distributions are received.
Each Portfolio will inform shareholders of the amount and tax status of
all amounts treated as distributed to them not later than 60 days after
the close of each calendar year.
Sale of Shares. Upon the sale or other disposition of
shares of a Portfolio, or upon receipt of a distribution in complete
liquidation of a Portfolio, a shareholder generally will realize a capital
gain or loss which will be long-term or short-term, generally depending
upon the shareholder's holding period for the shares. Any loss realized
on the sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including shares acquired pursuant to a
dividend reinvestment plan) within a period of 61 days beginning 30
days before and ending 30 days after disposition of the shares. In such
a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by the shareholder on a disposition of
Portfolio shares held by the shareholder for six months or less will be
treated as a long-term capital loss to the extent of any distributions of
net capital gains deemed received by the shareholder with respect to
such shares.
Zero Coupon Securities. Investments by a Portfolio in
zero coupon securities will result in income to the Portfolio equal to a
portion of the excess of the face value of the securities over their issue
price (the "original issue discount") each year that the securities are
held, even though the Portfolio receives no cash interest payments. This
income is included in determining the amount of income which the
Portfolio must distribute to maintain its status as a RIC and to avoid the
payment of Federal income tax and the 4% excise tax.
Hedging Transactions. Certain options, futures and
forward contracts in which a Portfolio may invest are "section 1256
contracts." Gains and losses on section 1256 contracts are generally
treated as 60 percent long-term and 40 percent short-term capital gains
or losses ("60/40 treatment"), regardless of the Portfolio's actual holding
period for the contract. Also, a section 1256 contract held by a
Portfolio at the end of each taxable year (and generally, for the purposes
of the 4% excise tax, on October 31 of each year) must be treated as if
the contract had been sold at its fair market value on that day ("mark to
market treatment"), and any deemed gain or loss on the contract is
subject to 60/40 treatment. Foreign currency gain or loss (discussed
below) arising from section 1256 contracts may, however, be treated as
ordinary income or loss.
The hedging transactions undertaken by a Portfolio
may result in "straddles" for federal income tax purposes. The straddle
rules may affect the character of gains or losses realized by the
Portfolio. In addition, losses realized by a Portfolio on positions that
are part of a straddle may be deferred under the straddle rules rather
than being taken into account in calculating the taxable income for the
taxable year in which such losses are realized. Further, a Portfolio may
be required to capitalize, rather than deduct currently, any interest
expense on indebtedness incurred or continued to purchase or carry any
positions that are part of a straddle. Because only a few regulations
implementing the straddle rules have been implemented, the tax
consequences to the Portfolios of engaging in hedging transactions are
not entirely clear. Hedging transactions may increase the amount of
short-term capital gain realized by the Portfolios which is taxed as
ordinary income when distributed to shareholders.
A Portfolio may make one or more of the elections
available under the Code that are applicable to straddles. If a Portfolio
makes any of the elections, the amount, character and timing of the
recognition of gains or losses from the affected straddle positions will be
determined under rules that vary according to the election(s) made. The
rules applicable under certain of the elections may accelerate the
recognition of gains or losses from the affected straddle positions.
Because the straddle rules may affect the amount,
character and timing of gains or losses from the positions that are part
of a straddle, the amount of Portfolio income that is distributed to
shareholders and that is taxed to them as ordinary income or long-term
capital gain may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.
The 30% limitation and the distribution requirements
applicable to each Portfolio's assets may limit the extent to which each
Portfolio will be able to engage in transactions in options, futures and
forward contracts.
Foreign Currency-Related Transactions. Gains or
losses attributable to fluctuations in exchange rates that occur between
the time a Portfolio accrues interest or other receivables, or accrues
expenses or other liabilities, denominated in a foreign currency and the
time the Portfolio actually collects such receivables, or pays such
liabilities, generally are treated as ordinary income or ordinary loss.
Similarly, gains or losses on disposition of certain options, futures and
forward contracts and, on disposition of debt securities denominated in a
foreign currency, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or
contract and the date of disposition also are treated as ordinary gain or
loss. These gains or losses, referred to under the Code as "section 988"
gains or losses, may increase or decrease the amount of a Portfolio's
investment company taxable income to be distributed to shareholders as
ordinary income.
Backup Withholding. A Portfolio may be required to
withhold U.S. federal income tax at the rate of 31% of all amounts
deemed to be distributed as a result of the automatic reinvestment by the
Portfolio of its income and gains in additional shares of the Portfolio
and all redemption payments made to shareholders who fail to provide
the Portfolio with their correct taxpayer identification number or to
make required certifications, or who have been notified by the Internal
Revenue Service that they are subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld will be
credited against a shareholder's U.S. federal income tax liability.
Corporate shareholders and certain other shareholders are exempt from
such backup withholding.
Foreign Shareholders. U.S. taxation of a shareholder
who, as to the United States, is a non-resident alien individual, a foreign
trust or estate, foreign corporation, or foreign partnership ("foreign
shareholder") depends on whether the income from the Portfolio is
"effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from a Portfolio is not "effectively
connected" with a U.S. trade or business carried on by the foreign
shareholder, deemed distributions by the Portfolio of investment
company taxable income will be subject to a U.S. tax of 30% (or lower
treaty rate), which tax is generally withheld from such distributions.
Deemed distributions of capital gain dividends and any gain realized
upon redemption, sale or exchange of shares will not be subject to U.S.
tax at the rate of 30% (or lower treaty rate) unless the foreign
shareholder is a nonresident alien individual who is physically present in
the U.S. for more than 182 days during the taxable year and meets
certain other requirements. However, this 30% tax on capital gains of
non-resident alien individuals who are physically present in the United
States for more than the 182-day period only applies in exceptional
cases because any individual present in the United States for more than
182 days during the taxable year is generally treated as a resident for
U.S. federal income tax purposes. In that case, he or she would be
subject to U.S. federal income tax on his or her worldwide income at the
graduated rates applicable to U.S. citizens, rather than the 30% U.S.
tax. In the case of a foreign shareholder who is a non-resident alien
individual, the Portfolio may be required to withhold U.S. federal
income tax at a rate of 31% of deemed distributions of net capital gains
unless the foreign shareholder certifies his or her non-U.S. status under
penalties of perjury or otherwise establishes an exemption. See
"Backup Withholding" above.
If the income from a Portfolio is effectively connected
with a U.S. trade or business carried on by a foreign shareholder, then
deemed distributions of investment company taxable income and capital
gain dividends and any gain realized upon the redemption, sale or
exchange of shares of the Portfolio will be subject to U.S. Federal
income tax at the graduated rates applicable to U.S. citizens or domestic
corporations. Such shareholders may also be subject to the branch
profits tax at a 30% rate.
The tax consequences to a foreign shareholder entitled
to claim the benefits of an applicable tax treaty may be different from
those described herein. Foreign shareholders are advised to consult their
own advisers with respect to the particular tax consequences to them of
an investment in a Portfolio.
U.S. Short-Term Fixed Income Portfolio
As a result of its expected high portfolio turnover rate,
U.S. Short-Term may recognize more short-term capital gains which
must be distributed to shareholders than mutual funds with turnover
rates that are lower than that of U.S. Short-Term. In addition, U.S.
Short-Term may realize a greater amount of gains subject to the 30%
Limitation described above than it would realize if its portfolio turnover
rate were lower.
U.S. Short-Term has adopted the Full Payout Method
for paying dividends. Under the full payout method it is possible that
shareholders may receive distributions in excess of their ratable share of
U.S. Short-Term's earnings and profits from time to time. Such
distributions might result, for example, if U.S. Short-Term had
substantial unrealized capital gains. Such distributions will be first
applied to reduce shareholders' tax basis in their shares, and then will be
treated as gain from the sale or exchange of such shares. To the extent
a distribution reduces basis, it is a non-taxable return of capital;
however, a reduction in basis will generally increase capital gain or
decrease capital loss realized when the shares are sold.
It is also possible that Full Payout Income may be
negative if realized and unrealized capital losses plus expenses exceed
realized and unrealized capital gains plus investment income. See
"Dividends" in the Prospectus. In such a case, the number of shares
held by a shareholder will be reduced through a contribution of capital,
and the shareholder may have greater taxable income than the net
increase in shares in the shareholder's account at the end of the month in
which the contribution to capital occurred. A shareholder's basis in
shares of U.S. Short-Term may be adjusted to reflect the contribution to
capital, which would affect the amount of capital gain or loss realized
when the shares are sold.
Global and International Portfolios
Income received by a Portfolio from sources within
foreign countries may be subject to withholding and other taxes imposed
by such countries. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes. The amount of
foreign tax cannot be predicted in advance because the amount of a
Portfolio's assets that may be invested in a particular country is subject
to change.
If more than 50% of the value of the total assets of a
Portfolio at the end of its taxable year consists of securities of foreign
corporations, as the Global and International Portfolios more than likely
may be, such Portfolio will be eligible and may elect to "pass through"
to such Portfolio's shareholders the amount of foreign income and
similar taxes paid by such Portfolio. Pursuant to this election, a
shareholder will be required to include in gross income (in addition to
taxable dividends actually received) a pro rata share of the foreign taxes
paid by such Portfolio, and will be entitled either to deduct (as an
itemized deduction) that amount in computing taxable income or to use
that amount as a foreign tax credit against U.S. federal income tax
liability. The amount of foreign taxes for which a shareholder can claim
a credit in any year will be subject to limitations set forth in the Code,
including a separate limitation for "passive income," which includes,
among other items, dividends, interest and certain foreign currency
gains. Shareholders not subject to U.S. federal income tax on income
from a Portfolio may not claim such a deduction or credit. Each
shareholder of the Global and International Portfolios will be notified
within 60 days after the close of such Portfolio's taxable year whether
the foreign taxes paid by such Portfolio will "pass through" for the year.
Other Taxes
A Portfolio may be subject to state, local or foreign
taxes in any jurisdiction in which the Portfolio may be deemed to be
doing business. In addition, shareholders of a Portfolio may be subject
to state, local or foreign taxes on distributions from the Portfolio. In
many states, Portfolio distributions which are derived from interest on
certain U.S. Government obligations may be exempt from taxation.
Shareholders should consult their own tax advisers concerning these
matters.
SHAREHOLDER INFORMATION
Certificates representing shares of a particular Portfolio
will not be issued to shareholders. Investors Bank & Trust Company,
the Fund's Transfer Agent, will maintain an account for each
shareholder upon which the registration and transfer of shares are
recorded, and any transfers shall be reflected by bookkeeping entry,
without physical delivery. Detailed confirmations of each purchase or
redemption are sent to each shareholder. Monthly statements of account
are sent which include shares purchased as a result of a reinvestment of
Portfolio distributions.
The Transfer Agent will require that a shareholder
provide requests in writing, accompanied by a valid signature guarantee
form, when changing certain information in an account (i.e., wiring
instructions, telephone privileges, etc.). None of the Fund, AMT
Capital or the Transfer Agent will be responsible for the validity of
written or telephonic requests.
The Fund reserves the right, if conditions exist which
make cash payments undesirable, to honor any request for redemption
of a Portfolio by making payment in whole or in part in readily
marketable securities chosen by the Fund and valued as they are for
purposes of computing the Portfolio's net asset value (redemption-in-
kind). If payment is made in securities, a shareholder may incur
transaction expenses in converting theses securities to cash. The Fund
has elected, however, to be governed by Rule 18f-1 under the
Investment Company Act of 1940 as a result of which the Fund is
obligated to redeem shares, with respect to any one shareholder during
any 90-day period, solely in cash up to the lesser of $250,000 or 1% of
the net asset value of a Portfolio at the beginning of the period.
CALCULATION OF PERFORMANCE DATA
The Fund may, from time to time, include the yield and
total return of a Portfolio in reports to shareholders or prospective
investors. Quotations of yield for a Portfolio of the Fund will be based
on all investment income per share during a particular 30-day (or one
month) period (including dividends and interest), less expenses accrued
during the period ("net investment income"), and are computed by
dividing net investment income by the maximum, offering price per
share on the last day of the period, according to the following formula
which is prescribed by the Commission:
YIELD = 2[( a - b + 1)^6 - 1]
cd
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 of a Portfolio outstanding
during the period that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the
period.
The yield as defined above for the Fund's Portfolios for the 30-day period
ended December 31, 1994 were as follows:
U.S. Portfolios
U.S. Short-Term Fixed In 5.29%
Stable Return 6.55%
AAA Asset-Backed -
Global and International Portfolios
Worldwide Short-Term Fix 5.52%
Worldwide Fixed Income 6.52%
Worldwide Fixed Income-H -
International Fixed Inco -
Quotations of average annual total return will
be expressed in terms of the average annual compounded rate of return
of a hypothetical investment in a Portfolio of the Fund over periods of 1,
5 and 10 years (up to the life of the Portfolio), calculated pursuant to
the following formula which is prescribed by the SEC:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period.
All total return figures assume that all dividends are
reinvested when paid.
The total return as defined above for the Fund's
Portfolios for the 1 year and 5 year periods ended December 31, 1994
and since the commencement of operations of each Portfolio to
December 31, 1994 are as follows:
One YearFive YeaLife of Portfolio
U.S. Portfolios
U.S. Short-Term Fixed Income 3.71% 4.99% 5.02%*
Stable Return 0.29% n/a 1.49%*
AAA Asset-Backed n/a n/a n/a
Global and International Portfolios
Worldwide Short-Term Fixed Incom 2.72% n/a 2.80%*
Worldwide Fixed Income -2.25% n/a 8.29%*
Worldwide Fixed Income-Hedged 7.84% n/a 10.36%*
International Fixed Income-Hedge n/a n/a n/a
* Annualized
FINANCIAL STATEMENTS
The Fund's audited Financial Statements for the year
ended December 31, 1994 and the Financial Highlights for each of the
periods appearing in the Annual Report to Shareholders and the report
thereon of Ernst & Young LLP, independent auditors, appearing therein are
hereby incorporated by reference in this Statement of Additional
Information. The Annual Report to Shareholders is delivered with this
Statement of Additional Information to shareholders requesting this
Statement.
APPENDIX
MERRILL LYNCH 1-2.99 YEAR TREASURY INDEX1
Quarterly Returns: December 1983 - December 1994
Quarter-End Return Quarter-End Return
Mar-84 1.81% Mar-89 1.24%
Jun-84 0.62 Jun-89 4.98
Sep-84 4.86 Sep-89 1.46
Dec-84 5.92 Dec-89 2.82
Mar-85 2.17 Mar-90 0.89
Jun-85 5.41 Jun-90 2.8
Sep-85 2.09 Sep-90 2.38
Dec-85 3.65 Dec-90 3.32
Mar-86 3.62 Mar-91 2.2
Jun-86 1.99 Jun-91 1.97
Sep-86 2.6 Sep-91 3.36
Dec-86 1.77 Dec-91 3.68
Mar-87 1.25 Mar-92 0.16
Jun-87 0.65 Jun-92 2.88
Sep-87 0.18 Sep-92 2.98
Dec-87 3.48 Dec-92 0.18
Mar-88 2.64 Mar-93 2.21
Jun-88 1.04 Jun-93 1.08
Sep-88 1.45 Sep-93 1.43
Dec-88 0.96 Dec-93 0.59
Mar-94 -0.5
Jun-94 0.08
Sep-94 0.99
Dec-94 0.01
1Time-weighted rates of return, unannualized.
QUALITY RATING DESCRIPTIONS
Standard & Poors Corporation
AAA. Bonds rated AAA are highest grade debt obligations.
This rating indicates an extremely strong capacity to pay principal and
interest.
AA. Bonds rated AA also qualify as high-quality obligations.
Capacity to pay principal and interest is very strong, and in the majority
of instances they differ from AAA issues only in small degree.
A. Bonds rated A have a strong capacity to pay principal and
interest, although they are more susceptible to the adverse effects of
changes in circumstances and economic conditions.
The ratings AA and A may be modified by the addition of a
plus or minus sign to show relative standing within the major rating
categories.
Municipal notes issued since July 29, 1984 are designated "SP-
1", "SP-2", and "SP-3". The designation SP-1 indicates a very strong
capacity to pay principal and interest. A "+" is added to those issues
determined to possess overwhelming safety characteristics.
A-1. Standard & Poor's Commercial Paper ratings are current
assessments of the likelihood of timely payments of debts having
original maturity of no more than 365 days. The A-1 designation
indicates the degree of safety regarding timely payment is very strong.
Moody's Investors Service, Inc.
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 edge". 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 fluctuations of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than the Aaa securities.
A. Bonds which are rated A possess many favorable investment
attributes and may be 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 sometime in the future.
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.
Moody's ratings for state and municipal and other short-term
obligations will be designated Moody's Investment Grade ("MIG").
This distinction is in recognition of the differences between short-term
credit risk and long-term risk. Factors affecting the liquidity of the
borrower are uppermost in importance in short-term borrowing, while
various factors of the first importance in long-term borrowing risk are
of lesser importance in the short run.
MIG-1. Notes bearing this designation are of the best quality
enjoying strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both.
P-1. Moody's Commercial Paper ratings are opinions of the
ability of issuers to repay punctually promissory obligations not having
an original maturity in excess of nine months. The designation "Prime-
1" or "P-1" indicates the highest quality repayment capacity of the rated
issue.
Thomson Bankwatch, Inc.
A. Company possess an exceptionally strong balance sheet and
earnings record, translating into an excellent reputation and
unquestioned access to its natural money markets. If weakness or
vulnerability exists in any aspect of the company's business, it isis
entirely mitigated by the strengths of the organization.
A/B. Company is financially very solid with a favorable track
record and no readily apparent weakness. Its overall risk profile, while
low, is not quite as favorable as companies in the highest rating
category.
IBCA Limited
A1. Short-term obligations rated A1 are supported by a very
strong capacity for timely repayment. A plus sign is added to those
issues determined to possess the highest capacity for timely payment.
Part C OTHER INFORMATION
Item 24.Financial Statements and Exhibits
(a) Financial Statements and Schedules:
Part A -Financial Highlights.
Part B: The financial statements, notes to financial
statements and reports set forth below are fled
herewith by the Registrant, and are specifically
incorporated by reference in Part B.
- Report of Independent Auditors dated February 24, 1995.
- Statements of Net Assets dated December 31, 1994.
- Statements of Operations for the year ended December 31, 1994.
- Statements of Changes in Net Assets for the
year ended December 31, 1994 and periods ended December 31, 1993.
- Notes to Financial Statements.
- Financial Highlights of U.S. Short-Term for the
period December 6, 1989 (commencement of
operations) to September 30, 1990, for the year
ended September 30, 1991, for the three months
ended December 31, 1991, for the year ended
December 31, 1992, for the year ended December 31,
1993, and for the year ended December 31, 1994; of
Stable Return for the period July 26, 1993
(commencement of operations) to December 31, 1993,
and for the year ended December 31, 1994; of
Worldwide Short-Term for the period December 13,
1993 (commencement of operations) to December 31,
1993, and for the year ended December 31, 1994; of
Worldwide for the period April 15, 1992
(commencement of operations) to December 31, 1992,
for the year ended December 31, 1993, and for the
year ended December 31, 1994; and of Worldwide-
Hedged for the period May 19, 1992 (commencement
of operations) to December 31, 1992, for the year
ended December 31, 1993, and for the year ended
December 31, 1994.
(b) Exhibits
The following exhibits are incorporated herein by
reference, are not required to be filed or are filed herewith
(as indicated):
(1) Articles of Incorporation, dated February 23,
1989, filed as Exhibit 1 to Registrant's
Registration Statement on Form N-1A.
(1a) Articles of Amendment, dated July 1, 1991, filed
as Exhibit 1(a) to Post-Effective Amendment No. 4
to Registrant's Registration Statement on Form N-
1A.
(1b) Articles of Amendment, dated July 26, 1991, filed
as Exhibit 1(a) to Post-Effective Amendment No. 5
to Registrant's Registration Statement on Form N-
1A.
(1c) Articles Supplementary, dated February 16, 1993,
filed as Exhibit 1(c) to Post-Effective Amendment
No. 10 to Registrant's Registration Statement on
Form N-1A.
(2) By-laws, filed as Exhibit 2 to Registrant's
Registration Statement on Form N-1A.
(2a) Amended By-laws, filed as Exhibit 2 to Post-
Effective Amendment No. 2 to Registrant's
Registration Statement on Form N-1A.
(2b) Amendment to By-laws, filed as Exhibit 2(a) to
Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form N-1A.
(3) Not Applicable.
(4) Specimen of Stock Certificate, filed as Exhibit 4
to Registrant's Registration Statement on Form N-
1A.
(5) Management Agreement between the Registrant and
Fischer Francis Trees & Watts, Inc., dated
November 30, 1989, filed as Exhibit 5 to Pre-
Effective Amendment No. 3 to Registrant's
Registration Statement on Form N-1A.
(5a) Amendment to Management Agreement between the
Registrant and Fischer Francis Trees & Watts,
Inc., dated September 25, 1990, filed as Exhibit 5
to Post-Effective Amendment No. 2 to Registrant's
Registration Statement on Form N-1A.
(5b) Amended and Restated Management Agreement between
the Registrant and Fischer Francis Trees & Watts,
Inc., dated August 31, 1991, filed as Exhibit 5 to
Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form N-1A.
(5c) Sub-Advisory Agreement between Fischer Francis
Trees & Watts, Inc. and Fischer Francis Trees and
Watts, dated August 31, 1991, filed as Exhibit
5(a) to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A.
(5d) Advisory Agreement between the Registrant (for the
Stable Return Portfolio) and Fischer Francis Trees
& Watts, Inc., dated February 18, 1993, filed as
Exhibit 5(d) to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A.
(5e) Advisory Agreement between the Registrant (for the
U.S. Treasury Portfolio) and Fischer Francis Trees
& Watts, Inc., dated February 18, 1993, filed as
Exhibit 5(e) to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A.
(5f) Advisory Agreement between the Registrant (for the
AAA Asset-Backed Portfolio) and Fischer Francis
Trees & Watts, Inc., dated February 18, 1993,
filed as Exhibit 5(f) to Post-Effective Amendment
No. 10 to Registrant's Registration Statement on
Form N-1A.
(5g) Advisory Agreement between the Registrant (for the
Broad Market Fixed Income Portfolio) and Fischer
Francis Trees & Watts, Inc., dated February 18,
1993, filed as Exhibit 5(g) to Post-Effective
Amendment No. 10 to Registrant's Registration
Statement on Form N-1A.
(5h) Advisory Agreement between the Registrant (for the
Worldwide Short-Term Fixed Income Portfolio) and
Fischer Francis Trees & Watts, Inc., dated
February 18, 1993, filed as Exhibit 5(h) to Post-
Effective Amendment No. 10 to Registrant's
Registration Statement on Form N-1A.
(5i) Advisory Agreement between the Registrant (for the
International Fixed Income Portfolio) and Fischer
Francis Trees & Watts, Inc., dated February 18,
1993 filed, as Exhibit 5(i) to Post-Effective
Amendment No. 10 to Registrant's Registration
Statement on Form N-1A.
(5j) Advisory Agreement between the Registrant (for the
International Fixed Income-Hedged Portfolio) and
Fischer Francis Trees & Watts, Inc., dated
February 18, 1993, filed as Exhibit 5(j) to Post-
Effective Amendment No. 10 to Registrant's
Registration Statement on Form N-1A.
(5k) Sub-Advisory Agreement (for the Worldwide Short-
Term Fixed Income Portfolio) between Fischer
Francis Trees & Watts, Inc. and Fischer Francis
Trees & Watts, dated February 18, 1993, filed as
Exhibit 5(k) to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A.
(5l) Sub-Advisory Agreement (for the International
Fixed Income Portfolio) between Fischer Francis
Trees & Watts, Inc. and Fischer Francis Trees &
Watts, dated February 18, 1993, filed as Exhibit
5(l) to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A.
(5m) Sub-Advisory Agreement (for the International
Fixed Income-Hedged Portfolio) between Fischer
Francis Trees & Watts, Inc. and Fischer Francis
Trees & Watts, dated February 18, 1993, filed as
Exhibit 5(m) to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A.
(6) Distribution Agreement between the Registrant and
AMT Capital Services, Inc., dated September 21,
1992, filed as Exhibit 6 to Post-Effective
Amendment No. 8 to Registrant's Registration
Statement on Form N-1A.
(7) Not Applicable.
(8) Custodian Agreement between Registrant and State
Street Bank & Trust Company, dated November 21,
1989, filed as Exhibit 8 to Pre-Effective
Amendment No. 1 to Registrant's Registration
Statement on Form N-1A.
(8a) Custodian Agreement between Registrant and State
Street Bank & Trust Company, dated October 22,
1991, filed as Exhibit 8 to Post-Effective
Amendment No. 5 to Registrant's Registration
Statement on Form N-1A.
(8b) Transfer Agency and Service Agreement between
Registrant and State Street Bank & Trust Company,
dated October 22, 1991, filed as Exhibit 8(a) to
Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form N-1A.
(8c) Transfer Agency and Service Agreement between
Registrant and Investors Bank & Trust Company,
dated November 27, 1992, filed as Exhibit 8(c) to
Post-Effective Amendment No. 9 to Registrant's
Registration Statement on Form N-1A.
(8d) Custodian Agreement between Registrant and
Investors Bank & Trust Company, dated January 10,
1994 (filed herewith).
(9) Administration Agreement between the Registrant
and AMT Capital Services, Inc., dated September
21, 1992, filed as Exhibit 9 to Post-Effective
Amendment No. 8 to Registrant's Registration
Statement on Form N-1A.
(9a) Sales Incentive Fee Agreement between Fischer
Francis Trees & Watts, Inc. and AMT Capital
Services, Inc., dated September 21, 1992, filed as
Exhibit 9(a) to Post-Effective Amendment No. 8 to
Registrant's Registration Statement on Form N-1A.
(10) Opinion and Consent of Counsel, dated June 28,
1989, filed as Exhibit 10 to Pre-Effective
Amendment No. 1 to Registrant's Registration
Statement on Form N-1A.
(11) Consent of Independent Auditors (filed herewith).
(12) Not Applicable.
(13) Purchase Agreement for Initial Capital between
Registrant and Fischer Francis Trees & Watts,
Inc., dated November 17, 1989, filed as Exhibit 13
to Pre-Effective Amendment No. 3 to Registrant's
Registration Statement on Form N-1A.
(14) Not Applicable.
(15) Not Applicable.
(16) Performance Information Schedule.
Item 25.Persons Controlled by or Under Common Control with Registrant
None.
Item 26.Number of Holders of Secruities
As of March 31, 1995, there
were 26 record holders of
Capital Stock of U.S. Short-
Term, 4 record holders of
Stable Return, 4 record
holders of Worldwide Short-
Term, 14 record holders of
Worldwide and 2 record holders
of Worldwide-Hedged.
Item 27.Indemnification
The Registrant shall indemnify
directors, officers, employees
and agents of the Registrant
against judgments, fines,
settlements and expenses to
the fullest extent allowed,
and in the manner provided, by
applicable federal and
Maryland law, including
Section 17(h) and (i) of the
Investment Company Act of
1940. In this regard, the
Registrant undertakes to abide
by the provisions of
Investment Company Act
Releases No. 11330 and 7221
until amended or superseded by
subsequent interpretation of
legislative or judicial
action.
Insofar as indemnification for
liabilities arising under the
Securities Act of 1933 (the
"Act") may be permitted to
directors, officers and
controlling persons of the
Registrant pursuant to the
foregoing provisions, or
otherwise, the Registrant has
been advised that in the
opinion of the Securities and
Exchange Commission such
indemnification is against
public policy as expressed in
the Act and is, therefore,
unenforceable. In the event
that a claim for
indemnification against such
liabilities (other than the
payment by the Registrant of
expenses incurred or paid by a
director, officer or
controlling person of the
Registrant in the successful
defense of any action, suit or
proceeding) is asserted by
such director, officer or
controlling person in
connection with the securities
being registered, the
Registrant will, unless in the
opinion of its counsel the
matter has been settled by
controlling precedent, submit
to a court of appropriate
jurisdiction the question
whether such indemnification
by it is against public policy
as expressed in the Act and
will be governed by the final
adjudication of such issue.
Item 28.Business and Other Connections of Investment Advisor
The business and other
connections of Fischer Francis
Trees & Watts, Inc. (the
Investment Adviser) and
Fischer Francis Trees & Watts
(the Sub-Adviser) are on the
Uniform Application for
Investment Adviser
Registration ("Form ADV") of
each as currently on file with
the Commission (File Nos. 801-
10577 and 801-37205,
respectively) the text of
which are hereby incorporated
by reference.
Item 29.Principal Underwriters
(a) AMT Capital Services,
Inc. does not act as
principal underwriter,
depositor or investment
adviser for any
investment company (other
than the Fund).
(b) For each director or
officer of AMT Capital
Services, Inc.:
Name and Positions and Positions and
principal busineoffices with offices with
address underwriter registrant
Alan M. Trager Director, PresidNone
430 Park Avenue and Treasurer
17th floor
New York, NY 10022
Carla E. DearingManaging Assistant
430 Park Avenue Director, Treasurer
17th floor Director
New York, NY 10022
Richard Fischer Director None
Charter Atlantic Corp.
717 Fifth Avenue
14th floor
New York, NY 10022
Ruth L. Lansner Secretary None
Gilbert, Segall & Young
430 Park Avenue
11th floor
New York, NY 10022
(c) No commissions or other
compensation was paid to
the principal underwriter
during the registrant's
last fiscal year.
Item 30.Location of Accounts and Records
All accounts, book and other
documents required to be
maintained by Section 31(a) of
an Investment Company Act of
1940 and the Rules (17 CFR
270.32a-l to 3la-3)
promulgated thereunder will be
maintained by the following:
Accounting and Custodial
Records - Investors Bank
& Trust Company, P.O. Box
1537, Boston,
Massachusetts 02205-1537
Dividend Disbursing Agent
and Transfer Agent -
Investors Bank & Trust
Company, P.O. Box 1537,
Boston, Massachusetts
02205-1537.
Balance of Accounts and
Records: AMT Capital
Services, Inc., 430 Park
Avenue, 17th Floor, New
York, New York 10022 and
Fischer Francis Trees &
Watts, Inc., 717 Fifth
Avenue, New York, New
York 10022.
Item 31.Management Services
None.
Item 32.Undertakings
The Registrant undertakes to
file a post-effective
amendment with financial
statements for U.S. Treasury,
Broad Market Fixed Income and
International Fixed Income
Portfolios within four to six
months of their respective
commencement dates of
operation.
SIGNATURES
Pursuant to the requirements of the
Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant
certifies that it meets all of the
requirements for effectiveness of this
Post-Effective Amendment No. 15 to its
Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933.
Pursuant to the requirements of the
Securities Act of 1933 and the
Investment Company Act of 1940, the
Registrant has duly caused this Post-
Effective Amendment to the Registration
Statement to be signed on its behalf by
the undersigned, thereunto duly
authorized, in the City of New York,
State of New York on the 31st day of
March, 1995.
FFTW FUNDS, INC.
By: \s\ Onder John Olcay
Onder John Olcay, Chief Executive Officer
Pursuant to the requirements of the
Securities Act of 1933, this
Post-Effective Amendment to the
Registration Statement has been signed
below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
\s\Stephen J. ConstantinPresident & Director 3/31/95
Stephen J. Constantine
\s\ Onder John Olcay Chairman of the Board, 3/31/95
Onder John Olcay Chief Executive Officer
\s\ John C Head III Director 3/31/95
John C Head III
\s\ Lawrence B. Krause Director 3/31/95
Lawrence B. Krause
\s\ Paul Meek Director 3/31/95
Paul Meek
\s\ Stephen P. Casper Treasurer 3/31/95
Stephen P. Casper
EXHIBIT INDEX
Exhibit No. Exhibit
(11) Consent of Independent Auditors
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors" and to the incorporation by reference
of our report dated February 24, 1995 in this Registration Statement
(Form N-1A 33-27896) of FFTW Funds, Inc.
Ernst & Young LLP
ERNST & YOUNG LLP
New York, New York
April 28,1995
