FFTW FUNDS, INC.
200 Park Avenue, 46th Floor
New York, New York 10166
(212) 681-3000
Distributed by:
AMT CAPITAL SERVICES, INC.
600 Fifth Avenue, 26th Floor
New York, New York 10020
(212) 332-5211
(800) 762-4848 (outside New York City)
Prospectus - April 30, 1997
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 thirteen separate
Portfolios (each a "Portfolio"), each of which is an actively-managed
portfolio and, other than Emerging Markets Portfolio, invests 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 thirteen Portfolios are: (1) U.S. Fixed Income Portfolios
- - Money Market, U.S. Short-Term, Stable Return, U.S. Treasury, Mortgage
Total Return and Broad Market (the "U.S. Portfolios") and (2) Global and
International Fixed Income Portfolios - Worldwide, Worldwide-Hedged,
International, International-Hedged, Emerging Markets, Inflation-Indexed
and Inflation-Indexed Hedged (the "Global and International
Portfolios").
No assurance can be given that a Portfolio's investment objectives will be
attained. Investments in the Money Market Portfolio are neither guaranteed
nor insured by the United States Government. There is also no assurance
that the Money Market Portfolio will maintain a stable net asset value of
$1.00 per share.
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 30, 1997 (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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
Prospectus Highlights 3
Fund Expenses 5
Financial Highlights 8
The Fund 17
Investment Objectives and Policies 17
Description of Investments 23
Investment Techniques 26
Investment Restrictions 30
Risks Associated With the Fund's Investment Policies
and Investment Techniques 30
Distribution of Fund Shares 32
Purchases and Redemptions 32
Determination of Net Asset Value 33
Dividends 34
Management of the Fund 34
Tax Considerations 36
Shareholder Information 37
PROSPECTUS HIGHLIGHTS
THE FUND
FFTW Funds, Inc. is a no-load, open-end management investment company
consisting of thirteen different Portfolios, each of which, other than
Emerging Markets Portfolio, invests primarily in high-quality debt
securities. The Fund is primarily designed to provide pension and
profit sharing plans, employee benefit trusts, endowments, foundations,
other institutions, corporations, and high net worth individuals with
access to the professional investment management services of Fischer
Francis Trees & Watts, Inc., the Fund's Investment Adviser. (See The
Fund)
THE PORTFOLIOS - INVESTMENT OBJECTIVES
The thirteen Portfolios and their investment objectives are (see
INVESTMENT OBJECTIVES AND POLICIES):
U.S. FIXED INCOME PORTFOLIOS
Money Market Portfolio ("Money Market") seeks to attain current income,
liquidity, and the maintenance of a stable net asset value per share
through investments in high quality, short-term obligations.
U.S. Short-Term Portfolio ("U.S. Short-Term") seeks 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 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.
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.
Mortgage Total Return Portfolio ("Mortgage Total Return") seeks to
attain a high level of total return as may be consistent with the
preservation of capital by investing primarily in mortgage-related
securities, maintaining an average U.S. dollar-weighted duration in the
range of two to six years.
Broad Market 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.
GLOBAL AND INTERNATIONAL FIXED INCOME PORTFOLIOS
Worldwide 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
eight years.
Worldwide-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 eight years and by actively utilizing currency hedging
techniques.
International 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 eight years.
International-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
eight years and by actively utilizing currency hedging techniques.
Emerging Markets Portfolio ("Emerging Markets") seeks to attain a high
level of total return as may be consistent with the preservation of capital
by investing primarily in fixed income securities from bond markets in
emerging markets countries, denominated in local currencies or currencies
of OECD countries, with an average U.S. dollar-weighted duration of less
than eight years.
Inflation-Indexed Portfolio ("Inflation-Indexed") seeks to attain a high
level of return in excess of inflation as may be consistent with the
preservation of capital by investing primarily in securities with a
coupon rate or principal amount or both linked to the inflation rate
from bond markets worldwide, denominated in both U.S. dollars and
foreign currencies.
Inflation-Indexed Hedged Portfolio ("Inflation-Indexed Hedged") seeks to
attain a high level of return in excess of inflation as may be
consistent with the preservation of capital by investing primarily in
securities with a coupon rate or principal amount or both linked to the
inflation rate from bond markets worldwide, denominated in both U.S.
dollars and foreign currencies and by actively utilizing currency
hedging techniques.
Each of Worldwide, International, Emerging Markets and Inflation-Indexed
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, International-Hedged
and Inflation-Indexed Hedged Portfolios will, as a fundamental policy,
seek to hedge at least 65% of its foreign currency-denominated assets
against foreign currency risks to the extent feasible.
PORTFOLIO QUALITY RATINGS
Each Portfolio, other than Emerging Markets, will maintain minimum
quality standards for overall average quality and individual securities.
Portfolio S&P Moody's S&P Moody's Thompson Average
(Corp.) (Corp.) (Short- (Short- Bankwatch Portfolio
Term) Term) Quality
U.S. Treasury AAA Aaa A-1 P-1 A AAA
(Aaa)
Emerging
Markets none none none none none none
Inflation-
Indexed
Portfolios A A A-2 P-2 B AA (Aa)
Other
Portfolios BBB Baa A-2 P-2 B AA (Aa)
Money Market quality ratings are described below in the Portfolio's
investment policies.
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 $23 billion in
assets entirely in portfolios of debt securities for in excess of 90
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 $200 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 $6
billion in multi-currency fixed income portfolios for institutional
clients. (See MANAGEMENT OF THE FUND)
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 activity (see MANAGEMENT OF THE
FUND). AMT Capital also serves as the exclusive distributor of shares
of each of the Fund's Portfolios. (See DISTRIBUTION OF FUND SHARES)
HOW TO INVEST
Shares of each Portfolio, other than Mortgage Total Return, 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, which may be waived at the discretion of the Investment
Adviser or Distributor. There is no minimum amount for subsequent
investments. There are no sales commissions (loads) or 12b-1 fees.
(See PURCHASES AND REDEMPTIONS)
Shares of the Mortgage Total Return Portfolio may only be purchased on
the last Business Day of each month, and on any other Business Days in
which the Investment Adviser approves a purchase at the net asset value
determined on those days.
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. (See PURCHASES AND
REDEMPTIONS)
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
may invest a portion of its assets in derivatives including futures and
options which entail certain costs and risks, including imperfect
correlation between the value of the securities held by the Portfolio
and the value of the particular derivative instrument, and the risk that
a portfolio could not close out a futures or options position when it
would be most advantageous to do so; (5) each of Mortgage Total Return,
Inflation-Indexed and Inflation-Indexed Hedged Portfolios may make short
sales, the potential loss from which is unlimited unless accompanied by
the purchase of an option; (6) the Emerging Markets Portfolio will
primarily invest in debt securities from emerging markets countries
which are rated below investment grade quality and carry the risk of
default of payment of interest and principal or decline in the local
currency relative to the U.S. dollar; (7) each Portfolios may, at times,
concentrate its investments in bank obligations and may, therefore, have
greater exposure to certain risks associated with the banking industry;
and (8) each Portfolio, other than U.S. Short-Term, is "non-diversified"
under the Investment Company Act of 1940 (the "1940 Act"), which may
entail a greater exposure to credit and market risks than a diversified
portfolio. (See RISKS ASSOCIATED WITH THE FUND'S INVESTMENT POLICIES
AND INVESTMENT TECHNIQUES)
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 Administration Other Interest Total
Fees Fees(1) Fees(2) Expenses Expense(9) Expenses
U.S. Fixed
Income
Portfolios
Money Market
Portfolio 0.10% None 0.06% 0.09% 0.00% 0.25% (5)
U.S. Short-
Term
Portfolio 0.15%(3) None 0.06% 0.04% 0.12% 0.37% (3)
Stable Return
Portfolio 0.15%(4) None 0.06% 0.09% 0.18% 0.48% (4)
U.S. Treasury
Portfolio 0.30% None 0.06% 0.09%(7) 0.00% 0.45% (5)
Mortgage Total
Return
Portfolio 0.30% None 0.06% 0.09% 0.43% 0.88% (5)
Broad Market
Portfolio 0.30% None 0.06% 0.09%(7) 0.00% 0.45% (5)
Global and
International
Fixed Income
Portfolios
Worldwide
Portfolio 0.40% None 0.06% 0.14% 0.00% 0.60% (6)
Worldwide-
Hedged
Portfolio 0.25%(8) None 0.06% 0.14% 0.00% 0.45% (8)
International
Portfolio 0.40% None 0.06% 0.14% 0.00% 0.60% (5)
International-
Hedged
Portfolio 0.40% None 0.06% 0.14% 0.00% 0.60% (5)
Emerging
Markets
Portfolio 0.75% None 0.06% 0.69%(7) 0.00% 1.50% (5)
Inflation-
Indexed
Portfolio 0.40% None 0.06% 0.14%(7) 0.00% 0.60% (5)
Inflation-
Indexed
Hedged
Portfolio 0.40% None 0.06% 0.14%(7) 0.00% 0.60% (5)
(1) Pursuant to a Distribution Agreement dated as of February 1, 1995,
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 February 1, 1995, between
the Fund and AMT Capital 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
(exclusive of interest expense) 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. Effective March 1, 1996 and until further
notice, the Investment Adviser has voluntarily agreed to lower the
advisory fee to 0.15% from 0.30% (on an annualized basis) and cap
total operating expenses (exclusive of interest expense) at 0.25%
(on an annualized basis). The Investment Adviser will not attempt
to recover prior period reimbursements in the event that expenses
fall below the cap. Without such contractual and voluntary caps,
the total operating expenses excluding interest expense would be
0.45% of U.S. Short-Term's average daily net assets.
(4) The Investment Adviser has voluntarily agreed to cap the total
operating expenses (exclusive of interest expense) at 0.50% (on an
annualized basis) of Stable Return's average daily net assets.
Effective March 1, 1996 and until further notice, the Investment
Adviser has voluntarily agreed to lower the advisory fee to 0.15%
from 0.35% (on an annualized basis) and cap total operating
expenses (exclusive of interest expense) at 0.30% (on an
annualized basis). The Investment Adviser will not attempt to
recover prior period reimbursements in the event that expenses
fall below the cap. Without such voluntary cap, the total
operating expenses excluding interest expense would be 0.66% of
Stable Return's average daily net assets.
(5) The Investment Adviser has voluntarily agreed to cap the total
operating expenses (exclusive of interest expense) at 0.25% (on an
annualized basis) of Money Market's average daily net assets, at
0.45% (on an annualized basis) of each of U.S. Treasury's, Broad
Market's and Mortgage Total Return's average daily net assets, at
0.60% (on an annualized basis) of each of International's,
International-Hedged's, Inflation-Indexed's and Inflation-Indexed
Hedged's average daily net assets, and at 1.50% (on an annualized
basis) of Emerging Markets' average daily net assets. The
Investment Adviser will not attempt to recover prior period
reimbursements in the event that expenses fall below the cap.
Without such voluntary caps, the total operating expenses
excluding interest expense (on an annualized basis) for Money
Market, Mortgage Total Return, International and International-
Hedged would be 0.55%, 0.55%, 0.92% and 0.66% respectively, of
their average daily net assets. The U.S. Treasury, Broad Market,
Inflation-Indexed, Inflation-Indexed Hedged and Emerging Markets
Portfolios have not commenced investment operations but without
such voluntary caps, the total operating expenses excluding
interest expense (on an annualized basis) for U.S. Treasury, Broad
Market, Inflation-Indexed, Inflation-Indexed Hedged and Emerging
Markets Portfolios are estimated to be 0.50%, 0.50%, 0.65%, 0.65%
and 0.1.45% respectively, of their average daily net assets.
(6) By agreement with the Investment Adviser, total operating expenses
(exclusive of interest expense) are capped at 0.60% (on an
annualized basis) of the average daily net assets of Worldwide.
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 contractual and voluntary caps,
the total operating expenses excluding interest expense for
Worldwide would be 0.65% of its average daily net assets.
(7) "Other Expenses" are based on estimated expenses for the current
fiscal year.
(8) By agreement with the Investment Adviser, total operating expenses
(exclusive of interest expense) are capped at 0.60% (on an
annualized basis) of the average daily net assets of Worldwide-
Hedged. All operating expenses in excess of the cap will be paid
by the Investment Adviser. Effective July 1, 1995 and until
further notice, the Investment Adviser has voluntarily agreed to
lower the advisory fee to 0.25% from 0.40%(on an annualized basis)
and cap total operating expenses (exclusive of interest expense)
at 0.45% (on an annualized basis). The Investment Adviser will
not attempt to recover prior period reimbursements in the event
that expenses fall below the cap. Without such contractual and
voluntary caps, the total operating expenses excluding interest
expense would be 0.84% of Worldwide-Hedged's average daily net
assets.
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. Fixed Income
Portfolios
Money Market $3 $8 $14 $32
U.S. Short-Term $4 $12 $21 $48
Stable Return $5 $16 $27 $62
U.S. Treasury $5 $15
Mortgage Total
Return $9 $28 $50 $113
Broad Market $5 $15
Global and
International
Fixed Income
Portfolios
Worldwide $6 $19 $34 $77
Worldwide-Hedged $5 $15 $25 $58
International $6 $19 $34 $77
International-
Hedged $6 $19 $34 $77
Emerging Markets $15 $48
Inflation-Indexed $6 $19
Inflation-Indexed
Hedged $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.
Each 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". The Investment Adviser, at its
discretion, may waive any portion of the advisory fees in any Portfolio.
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 year ended December 31,1996 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. The Money Market Portfolio,
previously the AMT Capital Fund, Inc. - Money Market Portfolio (the "AMT
Capital Portfolio"), commenced operations on November 1, 1993. Effective
as of the close of business on April 29, 1997, the AMT Capital Portfolio
merged into the Money Market Portfolio pursuant to shareholder approval of
the reorganization on April 28, 1997. The financial information for the
periods ended December 31, 1996, December 31, 1995, December 31, 1994 and
December 31, 1993 in the following table have been audited in conjunction
with the audit of the financial statements of the AMT Capital Portfolio by
Ernst & Young LLP, independent auditors.
Money Market Portfolio
Period From
For a share
outstanding For the Year Ended Nov. 1, 1993* to
throughout the
period: Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
Per Share Data
Net asset value,
beginning of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00
Increase From
Investment
Operations
Investment income,
net 0.05 0.06 0.04 0.00 **
Net realized
gain on
investments 0.00 ** 0.00 ** 0.00(c) -
Total from
investment
operations 0.05 0.06 0.04 0.00
Less Distributions
From investment
income, net 0.05 0.06 0.04 0.00 **
From net realized
gain on investments 0.00 ** - - -
In excess of net
realized gain on
investments - - 0.00 ** -
Total distributions 0.05 0.06 0.04 0.00
Net asset value,
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
Total Return 5.18% 5.74% 4.13% 2.69%(b)
Ratios/Supplemental
Data
Net assets, end of
period $ 25,047,023 $ 25,870,153 $22,006,141 $ 2,335,633
Ratio of operating
expenses to average
net assets (a) 0.40% 0.40% 0.40% 0.40% (b)
Ratio of investment
income, net to
average net assets 5.05% 5.58% 4.16% 2.67% (b)
Decrease reflected in
above ratios due to
waiver of investment
advisory and
administration fees
and reimbursement of
other expenses 0.30% 0.37% 0.64% 25.54% (b)
(a) Net of waivers and reimbursements.
(b) Annualized
(c) Includes the effect of net realized gains prior to significant
increases in shares outstanding.
*Commencement of Operations
** Rounds to less than $0.01
Financial Highlights
U.S. Short-Term Portfolio
For the Year Ended
For a share
outstanding
throughout the
period: Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
Per Share Data
Net asset value,
beginning of period $ 9.88 $ 9.89 $ 9.98 $ 10.00
Increase (Decrease)
From Investment
Operations
Investment income,
net 0.55 0.56 0.44 0.32
Net realized and
unrealized (loss) on
invest-ments, and
financial futures
and options contracts,
and foreign currency-
related transactions (0.03) (0.01) (0.08) (0.03)
Total from investment
operations 0.52 0.55 0.36 0.29
Less Distributions
From investment
income, net 0.55 0.56 0.45 0.31
In excess of
investment income,
net - 0.00 * 0.00 * -
Total distributions 0.28 0.56 0.45 0.31
Net asset value,
end of period $ 9.85 $ 9.88 $ 9.89 $ 9.98
Total Return 5.45% 5.71% 3.71% 2.88%
Ratios/
Supplemental
Data
Net assets,
end of period $ 355,256,714 $ 457,425,302 $290,694,868 $417,727,821
Ratio of operating
expenses to
average net
assets, exclusive
of interest
expense (a) 0.27% 0.40% 0.40% 0.40%
Ratio of operating
expenses to average
net assets,
inclusive of
interest expense (a) 0.40% 0.51% 0.43% 0.48%
Ratio of
investment income,
net to average net
assets 5.62% 5.64% 4.14% 3.28%
Decrease reflected
in above ratios
due to waiver of
investment advisory
fees 0.05% 0.07% 0.08% 0.03%
(a) Net of waivers.
(b) Annualized
* Rounds to less than $0.01.
Financial Highlights
U.S. Short-Term Portfolio (continued)
Year Three Months Year Period From
For a share
outstanding Ended Ended Ended Dec. 6, 1989* to
throughout the
period: Dec. 31, 1992 Dec. 31, 1991 Sept. 31, 1991 Sept. 30, 1990
Per Share
Data
Net asset value,
beginning of
period $ 10.00 $ 10.00 $ 10.00 $ 10.00
Increase From
Investment
Operations
Investment income,
net 0.34 0.12 0.63 0.62
Net realized and
unrealized gain
on investments,
and on financial
futures and options
contracts 0.01 0.02 0.06 0.04
Total from
investment
operations 0.35 0.14 0.69 0.66
Less
Distributions
From investment
income, net 0.34 0.12 0.63 0.62
From net realized
and unrealized gain
on investments,
and on financial
futures and options
contracts 0.01 0.02 0.06 0.04
Total
distributions 0.35 0.14 0.69 0.66
Net asset value,
end of period $ 10.00 $ 10.00 $ 10.00 $ 10.00
Total Return 3.45% 5.67% (b) 7.11% 8.31% (b)
Ratios/
Supplemental
Data
Net assets, end
of period $ 682,513,193 $ 365,310,697 $ 269,114,721 $ 111,956,929
Ratio of
operating
expenses to
average net
assets, exclusive
of interest
expense (a) 0.40% 0.40% (b) 0.40% 0.50% (b)
Ratio of operating
expenses to average
net assets, inclusive
of interest
expense (a) 0.43% 0.40% 0.43% 0.50% (b)
Ratio of investment
income, net to
average net assets 3.37% 4.67% (b) 5.99% 8.23% (b)
Decrease reflected
in above ratios
due to waiver of
investment advisory
fees and reimbursement
of other expenses - 0.03% (b) 0.11% 0.86% (b)
(a) Net of waivers and reimbursements.
(b) Annualized
* Commencement of Operation
Financial Highlights
Stable Return Portfolio
Period From
For a share
outstanding For the Year Ended July 26, 1993* to
throughout the
period: Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
Per Share
Data
Net asset value,
beginning of
period $ 10.00 $ 9.55 $ 9.95 $ 10.00
Increase
(Decrease) From
Investment
Operations
Investment income,
net 0.55 0.60 0.43 0.14
Net realized and
unrealized gain
(loss) on investments,
financial futures
contracts, and
foreign currency-
related
transactions (0.04) 0.45 (0.40) 0.05
Total from
investment
operations 0.51 1.05 0.03 0.19
Less Distributions
From investment
income, net 0.55 0.60 0.43 0.14
In excess of net
of investment
income, net 0.00 ** - - -
From net realized
gain on investments,
financial futures
contracts, and
foreign currency-
related transactions 0.03 - - 0.03
In excess of net
realized gain on
investments and
financial futures
contracts - - - 0.07
Total distributions 0.58 0.60 0.43 0.24
Net asset value,
end of period $9.93 $10.00 $ 9.55 $ 9.95
Total Return 5.29% 11.26% 0.29% 4.27%(b)
Ratios/
Supplemental
Data
Net assets, end
of period $42,100,461 $ 5,080,067 $ 4,338,339 $3,482,439
Ratio of
operating
expenses to
average net
assets, exclusive
of interest
expense (a) 0.31% 0.50% 0.50% 0.50% (b)
Ratio of operating
expenses to average
net assets, inclusive
of interest
expense (a) 0.49% 1.41% 1.74% 0.50% (b)
Ratio of investment
income, net to
average net assets 5.79% 6.09% 4.43% 3.68% (b)
Decrease reflected
in above ratios
due to waiver of
investment advisory
fees and reimbursement
of other expenses 0.15% 0.53% 0.57% 1.46% (b)
Portfolio turnover 1,387% 1,075% 343% 1,841%
(a) Net of waivers and reimbursements,.
(b) Annualized
* Commencement of Operations
** Rounds to less than $0.01
Financial Highlights
Mortgage Total Return Portfolio
Period From
For a share outstanding April 29, 1996 *
throughout the period: to December 31,1996
Per Share Data
Net asset value, beginning of period $ 10.00
Increase (Decrease) From
Investment Operations
Investment income, net 0.41
Net realized and unrealized gain on
investments, short sales, and on financial
futures and options contracts 0.23
Total from investment operations 0.64
Less Distributions
From investment income, net 0.41
In excess of investment income, net 0.06
From net realized gain on investments,
short sales, and financial futures and
options contracts 0.01
Total distributions 0.48
Net asset value, end of period $ 10.16
Total Return 6.54% (c)
Ratios/Supplemental Data
Net assets, end of period $ 220,989,789
Ratio of operating expenses to average net
assets, exclusive of interest expense (a) 0.45% (b)
Ratio of operating expenses to average net
assets, inclusive of interest expense (a) 0.88% (b)
Ratio of investment income,
net to average net assets 7.61% (b)
Decrease reflected in above ratios
due to waiver of investment
advisory fees 0.10% (b)
Portfolio turnover 590%
(a) Net of waivers.
(b) Annualized
(c) Not annualized
* Commencement of Operations
Financial Highlights
Worldwide Portfolio
For the Year Ended Period From
For a share
outstanding Dec. 31, Dec. 31, Dec, 31, Dec. 31, April 15, 1992* to
throughout the
period: 1996 1995 1994 1993 Dec. 31, 1992
Per Share Data
Net asset value,
beginning of
period $ 9.83 $ 9.27 $ 10.02 $ 9.98 $ 10.00
Increase
(Decrease)
From
Investment
Operations
Investment income,
net 0.53 0.58 0.50 0.45 0.39
Net realized and
unrealized gain
(loss) on
investments,
financial futures
and options
contracts, and
foreign currency-
related
transactions 0.01 0.56 (0.74) 1.04 0.53
Total from
investment
operations 0.54 1.14 (0.24) 1.49 0.92
Less Distributions
From investment
income, net 0.53 0.30 0.20 0.45 0.39
In excess of
investment
income, net - - 0.01 - -
From net realized
gain on investments,
financial futures
and options
contracts, and
foreign currency-
related
transactions 0.09 - - 0.87 0.55
In excess of net
realized gain on
investments,
financial futures
and options
contracts, and
foreign currency-
related
transactions - - - 0.13 0.00 **
From capital stock
in excess of par
value 0.11 0.28 0.30 - -
Total distributions 0.73 0.58 0.51 1.45 0.94
Net asset value,
end of period $ 9.64 $ 9.83 $ 9.27 $ 10.02 $ 9.98
Total Return 5.77% 12.60% (2.25%) 15.86% 13.46% (b)
Ratios/
Supplemental
Data Net
assets,
end of
period $ 74,939,437 $ 86,186,177 $ 53,721,481 $217,163,036 $ 82,757,009
Ratio of
operating
expenses to
average net
assets,
exclusive of
interest
expense (a) 0.60% 0.60% 0.60% 0.60% 0.60% (b)
Ratio of
operating
expenses to
average net
assets,
inclusive of
interest
expense (a) 0.60% 0.60% 0.63% 0.86% 0.79% (b)
Ratio of
investment
income, net
to average
net assets 5.52% 6.13% 5.11% 4.48% 5.39% (b)
Decrease
reflected in
above ratios
due to
waiver of
investment
advisory fees
and reimbursement
of other
expenses 0.05% 0.30% 0.02% - 0.72% (b)
Portfolio
turnover 1,126% 1,401% 1,479% 1,245% 850%
(a) Net of waivers and reimbursements.
(b) Annualized
* Commencement of Operations
** Rounds to less than $0.01
Financial Highlights
Worldwide-Hedged Portfolio
For the Year Ended Period From
For a share
outstanding Dec. 31, Dec. 31, Dec, 31, Dec. 31, May 19, 1992* to
throughout
the period: 1996 1995 1994 1993 Dec. 31, 1992
Per Share Data
Net asset value,
beginning of
period $ 10.85 $ 10.41 $ 10.08 $ 9.85 $ 10.00
Increase From
Investment
Operations
Investment
income, net 0.62 0.45 0.34 0.45 0.32
Net realized
and unrealized
gain on
investments,
financial futures
and options
contracts, and
foreign currency-
related
transactions 0.43 0.66 0.43(c) 0.76 0.25
Total from
investment
operations 1.05 1.11 0.77 1.21 0.57
Less Distributions
From investment
income, net 0.62 0.67 0.44 0.45 0.32
In excess of
investment
income, net 0.37 - 0.00 ** - -
From net
realized gain
on investments,
financial futures
and options
contracts, and on
foreign currency-
related
transactions - - - 0.53 0.40
Total
distributions 0.99 0.67 0.44 0.98 0.72
Net asset
value, end
of period $ 10.91 $ 10.85 $ 10.41 $10.08 $ 9.85
Total Return 10.03% 11.00% 7.84% 12.89% 9.45% (b)
Ratios/
Supplemental
Data
Net assets,
end of
period $ 30,023,657 $ 28,254,830 $ 272,725 $ 41,137,515 21,785,134
Ratio of
operating
expenses to
average net
assets,
exclusive of
interest
expense (a) 0.45% 0.45% 0.60% 0.60% 0.60% (b)
Ratio of
operating
expenses to
average net
assets,
inclusive of
interest
expense (a) 0.45% 0.45% 0.65% 0.86% 0.83% (b)
Ratio of
investment income,
net to average
net assets 5.71% 5.84% 4.72% 4.49% 5.13% (b)
Decrease reflected
in above ratios
due to waiver of
investment
advisory fees
and reimbursement
of other expenses 0.24% 0.54% 0.17% 0.09% 1.01% (b)
Portfolio turnover 1,087% 500% 1,622% 1,254% 826%
(a) Net of waivers and reimbursements.
(b) Annualized
(c) Includes the effect of net realized losses prior to significant
decreases in shares outstanding.
* Commencement of Operations
** Rounds to less than $0.01.
Financial Highlights
International Portfolio
Period From
For a share outstanding May 9, 1996 *
throughout the period: to December 31, 1996
Per Share Data
Net asset value, beginning of period $ 10.00
Increase From
Investment Operations
Investment income, net 0.38
Net realized and unrealized gain on investments,
financial futures contracts, and foreign currency-
related transactions 0.28
Total from investment operations 0.66
Less Distributions
From investment income, net 0.38
From net realized gain on investments, financial
futures contracts, and foreign currency-related
transactions 0.08
Total distributions 0.46
Net asset value, end of period $ 10.20
Total Return 6.66% (c)
Ratios/Supplemental Data
Net assets, end of period $ 35,745,937
Ratio of operating expenses
to average net assets (a) 0.60% (b)
Ratio of investment income,
net to average net assets 5.73% (b)
Decrease reflected in above ratios due to waiver of
investment advisory fees 0.32% (b)
Portfolio turnover 5.39%
(a) Net of waivers.
(b) Annualized
(c) Not annualized
* Commencement of Operation
Financial Highlights
International-Hedged Portfolio
For the Year Ended Period From
For a share
outstanding March 25, 1993* to
throughout the
period:
Dec. 31, 1996 Dec. 31, 1995*** Dec. 31, 1994 Dec. 31, 1993
Per Share
Data
Net asset
value,
beginning
of period $ 10.19 $ 10.00 $ 10.39 $ 10.00
Increase
(Decrease)
From
Investment
Operations
Investment
income, net 0.47 0.19 0.20 0.44
Net realized
and unrealized
gain (loss) on
investments,
financial
futures and
options
contracts,
and foreign
currency-
related
transactions (0.15) 0.19 (0.46) 0.78
Total from
investment
operations 0.32 0.38 (0.26) 1.22
Less
Distributions
From investment
income, net 0.47 0.19 0.20 0.44
In excess of
investment
income, net - 0.00 (c) - -
From net
realized gain
on investments,
financial
futures
contracts, and
foreign currency-
related
transactions 0.05 - 0.50 0.39
In excess of net
realized gain
on investments,
financial
futures
contracts, and
foreign currency-
related
transactions 0.09 - - -
From capital
stock in excess
of par value 0.10 - - -
Total
distributions 0.71 0.19 0.70 0.83
Net asset value,
end of period $ 9.80 $ 10.19 $ 9.43 ** $ 10.39
Total Return 3.18% 13.45% (b) (2.53%) 16.37%(b)
Ratios/
Supplemental
Data
Net assets, end
of period $126,645,111 $34,004,887 $ - $ 17,866,568
Ratio of
operating
expenses
to average
net assets (a) 0.60% 0.60% (b) 0.57% 0.60% (b)
Ratio of
investment
income, net
to average
net assets 4.65% 6.12% (b) 2.87% 5.86% (b)
Decrease reflected
in above ratios
due to waiver of
investment
advisory fees and
reimbursement of
other expenses 0.06% 0.17% (b) 0.49% 0.28% (b)
Portfolio turnover 784% 764% 1,282% 855%
(a) Net of waivers and reimbursements.
(b) Annualized
(c) Rounds to less than $0.01.
* Commencement of Operations
** Represents net asset value per share at December 30, 1994.
The Portfolio was fully liquidated on December 30, 1994 based on
this net asset value.
*** The Portfolio recommenced operations on September 14, 1995
THE FUND
The Fund is a no-load, open-end management investment
company organized as a Maryland corporation. The Fund currently
consists of thirteen Portfolios, each with its own investment objectives
and policies: (1) U.S. Fixed Income Portfolios - Money Market, U.S.
Short-Term, Stable Return, U.S. Treasury, Mortgage Total Return and
Broad Market and (2) Global and International Fixed Income Portfolios -
Worldwide, Worldwide-Hedged, International, International-Hedged,
Emerging Markets, Inflation-Indexed and Inflation-Indexed Hedged.
INVESTMENT OBJECTIVES AND POLICIES
Each Portfolio seeks a high or stable level of total return
as may be consistent with the preservation of capital. The total
return sought by each Portfolio will consist of current income, capital
appreciation, or a combination of capital appreciation and current
income, depending on whether the Investment Adviser believes that
current and anticipated levels of interest rates, exchange rates and
other factors affecting domestic and foreign investments generally favor
emphasizing one element or another in seeking maximum total return.
There can be no assurance that the investment objectives of any
Portfolio will be achieved.
Each Portfolio will invest only in debt securities that are
rated per the following table by Standard & Poor's Corporation ("S&P")
or Moody's Investors Services, Inc. ("Moody's"), or by Thomson Bankwatch
in the case of bank obligations, or similarly rated by IBCA Ltd.
("IBCA") in the case of foreign bank obligations, or determined by the
Investment Adviser (or the Sub-Adviser to the Global and International
Portfolios) to be of similar creditworthiness. The minimum allowable
quality rating is indicated.
Portfolio S&P Moody's S&P Moody's Thompson Average
(Corp.) (Corp.) (Short- (Short- Bankwatch Portfolio
Term) Term) Quality
U.S. Treasury AAA Aaa A-1 P-1 A AAA
(Aaa)
Emerging Markets none none none none none none
Inflation-Indexed
Portfolios A A A-2 P-2 B AA (Aa)
Other Portfolios BBB Baa A-2 P-2 B AA (Aa)
Money Market quality ratings are described below in the Portfolio's
investment 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.
In the case of Mortgage Total Return, Inflation-Indexed and Inflation-
Indexed Hedged Portfolios, short positions as a result of short selling
have an equivalent negative impact to duration.
The Investment Adviser or Sub-Adviser may exceed the stated
duration cap of a Portfolio for temporary defensive purposes.
U.S. FIXED INCOME PORTFOLIOS
Each of the U.S. Portfolios will invest at least 65% of its
total assets in U.S. dollar-denominated debt securities. Each of the
U.S. Portfolios, other than U.S. Treasury and Money Market, may invest
up to 35% of its total 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
total assets in such securities.
MONEY MARKET PORTFOLIO
The investment objective of Money Market is to provide the
maximum current income that is consistent with the preservation of
capital and liquidity through investments in money market securities.
Money Market seeks to attain its objective by investing at
least 80% of its total assets in the following high quality, short-term
instruments:
(a) obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities;
(b) commercial paper, loan participation interests, medium term
notes, asset-backed securities and other promissory notes, including
floating or variable rate obligations;
(c) domestic, Yankeedollar (U.S. branches or subsidiaries of foreign
depository institutions) and Eurodollar (foreign branches or
subsidiaries of U.S. depository institutions) certificates of
deposit, time deposits, bankers' acceptances, commercial paper,
bearer deposit notes and other promissory notes including floating
or variable rate obligations issued by U.S. or foreign bank holding
companies and their bank subsidiaries, branches and agencies; and
(d) repurchase and reverse repurchase agreements.
Money Market will invest only in issuers or instruments that
at the time of purchase:
(a) are issued or guaranteed by the U.S. Government, its agencies,
or instrumentalities;
(b) have received the highest short-term rating by at least two
nationally recognized statistical rating organizations ("NRSROs")
such as "A-1" by Standard & Poor's and "P-1" by Moody's, or are
single rated and have received the highest short-term rating by the
NRSRO ("First Tier Securities");
(c) are rated by two NRSROs in the second highest category, or rated
by one agency in the highest category and by another agency in the
second highest category or by one agency in the second highest
category ("Second Tier Securities"), provided that Second Tier
Securities are limited in total to 5% of the Portfolio's total
assets and on a per issuer basis, to no more than the greater of 1%
of the Portfolio's total assets or $1,000,000; or
(d) are unrated, but are determined to be of comparable quality by
the Investment Adviser and sub-adviser pursuant to guidelines
approved by the Board of Directors.
Single rated and unrated securities are subject to
ratification by the Board of Directors. See "Descriptions of Investments"
and the Statement of Additional Information for definitions of the
foregoing instruments and rating systems.
Portfolio investments in Money Market are valued based on the
amortized cost valuation technique pursuant to Rule 2a-7 under the 1940
Act. See the Statement of Additional Information for an explanation of the
amortized cost valuation method. All obligations in which Money Market
invests generally have remaining maturities of 397 days or less, although
obligations subject to repurchase agreements and certain variable and
floating rate obligations may bear longer final maturities.
U.S. SHORT-TERM 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 at least 65% of its total
assets 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 total 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).
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 at least 65% of its total assets 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 total 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 total assets in U.S. dollar- or foreign currency-
denominated debt securities and instruments of the same type as U.S.
Short-Term.
MORTGAGE TOTAL RETURN PORTFOLIO
The investment objective of Mortgage Total Return 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, and other mortgage-related securities, maintaining an average
U.S. dollar-weighted duration in the range of two to six years.
Mortgage Total Return seeks to attain its objective by
investing at least 65% of its total assets in mortgage- and asset-
backed, and other mortgage-related debt obligations of U.S. and foreign
issuers. Mortgage Total Return may also invest up to 35% of its total
assets in debt securities and instruments of the same type as U.S.
Short-Term. The Portfolio may, for temporary defensive purposes, invest
up to 100% of its total assets in short-term U.S. Government securities
and money market instruments.
BROAD MARKET 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 at least 65% of its total assets 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 total 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 total 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 total assets in debt securities of issuers from at
least three different countries, excluding the United States. Each of
Inflation-Indexed and Inflation-Indexed Hedged are not required to
invest any minimum percentage of assets in debt securities of issuers
located outside the United States, nor in any minimum number of
countries or currencies. Each of the Portfolios may, for temporary
defensive purposes, invest up to 100% of its total assets in short-term
U.S. Government securities and money market instruments.
WORLDWIDE 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 at least 65% of its total assets 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 eight years.
Worldwide 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 may utilize up to
5% of its total assets as margin and premiums to purchase and sell
options, futures and options on futures contracts. 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 expectations of changes in the exchange rates
among foreign currencies, in an effort to enhance total return.
WORLDWIDE-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 at least 65% of its total assets 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 eight 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.
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 total assets
against foreign currency risks to the extent feasible. Worldwide-Hedged
may also enter into transactions in foreign currencies and related
instruments, based on expectations of changes in the exchange rates
among foreign currencies, in an effort to enhance total return.
INTERNATIONAL 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 at least 65% of its total assets 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 eight years.
International will seek to attain its objective by investing
in foreign currency-denominated debt securities and instruments of the
same type as Worldwide. Up to 35% of the balance of its total 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 expectations of changes in the exchange
rates among foreign currencies, in an effort to enhance total return.
INTERNATIONAL-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 at least 65% of its total assets 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 eight years and by actively utilizing currency
hedging techniques.
International-Hedged seeks to attain its objective by
investing in foreign currency-denominated debt securities and
instruments of the same type as Worldwide. Up to 35% of the balance of
its total assets may be invested in U.S. dollar-denominated securities
of the same type.
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 total
assets against foreign currency risks to the extent feasible. Hedging
techniques may at times include the purchase of an interest rate swap
pursuant to which the Portfolio agrees to pay the return on a specified
global index in exchange for a fixed interest payment. The effect of
such a hedge is to exchange the market exposure imbedded in the index
for a fixed interest return, while retaining on behalf of the Portfolio
any incremental return achieved in excess of the index return. This
type of transaction also serves to hedge the Portfolio's currency
exposure. International-Hedged may also enter into transactions in
foreign currencies and related instruments, based on expectations of
changes in the exchange rates among foreign currencies, in an effort to
enhance total return.
EMERGING MARKETS PORTFOLIO
The investment objective of Emerging Markets is to attain a
high level of total return as may be consistent with the preservation of
capital by investing at least 65% of its total assets in fixed income
securities from bond markets in emerging markets countries, denominated in
local currencies or currencies of OECD countries, with an average U.S.
dollar-weighted duration of less than eight years.
Emerging Markets seeks to attain its objective by investing
in debt securities of foreign issuers from emerging markets countries
(see below), including obligations issued or guaranteed by a foreign
government, or any of its political subdivisions, authorities, agencies
or instrumentalities or by supranational organizations; obligations of
foreign corporations or other entities; obligations of foreign banks;
Brady Bonds; Eurobonds; and Yankee Bonds. Up to 35% of the balance of
its total assets may be invested in securities of the same type as
Worldwide. The Portfolio may also engage in repurchase and reverse
repurchase agreements. The Portfolio may also invest in loan
participation instruments from major bank lenders to emerging market
countries. Each of these investments are described below under
"Descriptions of Investments". In addition, Emerging Markets may utilize
up to 5% of its total assets as margin and premiums to purchase and sell
options, futures and options on futures contracts. The Adviser or Sub-
Adviser intends to actively manage the Portfolio and the allocations of
the Portfolio's investment assets among various emerging 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.
The management of the Portfolio will employ a combination of
fundamental economic analysis as well as internally developed models to
screen out credit or default risk and to highlight potentially risky
currencies of emerging markets countries.
The Portfolio primarily invests in the following emerging
markets: 1) Latin America - Argentina, Brazil, Chile, Colombia, Costa
Rica, Ecuador, Jamaica, Mexico, Panama, Peru and Venezuela; 2) Asia -
China, India, Indonesia, Malaysia, Philippines and Thailand; 3) Africa -
Morocco, Nigeria and South Africa; and 4) Europe - Bulgaria, Czech
Republic, Greece, Hungary, Poland, Portugal, Russia and Turkey. Other
countries may be added in the future.
At the Investment Adviser's or Sub-Adviser's discretion,
Emerging Markets may at times seek to hedge all or part of its foreign
currency-denominated assets against foreign currency risks. Emerging
Markets may also enter into transactions in foreign currencies and
related instruments, based on expectations of changes in the exchange
rates among foreign currencies, in an effort to enhance total return.
INFLATION-INDEXED PORTFOLIO
The investment objective of Inflation-Indexed is to attain a
high level of return in excess of inflation as may be consistent with
the preservation of capital by investing at least 65% of its total
assets in securities with a coupon rate or principal amount or both
linked to the inflation rate from bond markets worldwide, denominated in
both U.S. dollars and foreign currencies.
Inflation-Indexed 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. At least 65% of these
securities will be linked to the inflation rate in the applicable market
of the issuer. The Portfolio may also engage in repurchase and reverse
repurchase agreements. Each of these investments are described below
under "Descriptions of Investments". In addition, Inflation-Indexed may
utilize up to 5% of its total assets as margin and premiums to purchase
and sell options, futures and options on futures contracts. 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.
At the Investment Adviser's or Sub-Adviser's discretion,
Inflation-Indexed may at times seek to hedge all or part of its foreign
currency-denominated assets against foreign currency risks. Inflation-
Indexed may also enter into transactions in foreign currencies and
related instruments, based on expectations of changes in the exchange
rates among foreign currencies, in an effort to enhance total return.
INFLATION-INDEXED HEDGED PORTFOLIO
The investment objective of Inflation-Indexed Hedged is to
attain a high level of return in excess of inflation as may be
consistent with the preservation of capital by investing at least 65% of
its total assets in securities with a coupon rate or principal amount or
both linked to the inflation rate from bond markets worldwide,
denominated in both U.S. dollars and foreign currencies and by actively
utilizing currency hedging techniques.
Inflation-Indexed Hedged seeks to attain its objective by
investing in debt securities and instruments of the same type as
Inflation-Indexed. 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.
Inflation-Indexed 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 total
assets against foreign currency risks to the extent feasible.
Inflation-Indexed Hedged may also enter into transactions in foreign
currencies and related instruments, based on expectations of changes in
the exchange rates among foreign currencies, in an effort to enhance
total return.
DESCRIPTION OF INVESTMENTS
The following briefly describes some of the different types
of securities in which the thirteen 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 (in particular, Money
Market and U.S Short-Term) may, from time to time, concentrate more than
25% of its total assets in such Bank Obligations.
Zero Coupon Securities. Each Portfolio may invest in zero
coupon securities, which are securities that make no periodic interest
payments but instead are sold at a deep discount from their face value.
The buyer of these securities receives a rate of return by the gradual
appreciation of the security, which results from the fact that it will
be redeemed at face value on a specified maturity date. There are many
kinds of zero coupon securities. Some are issued in zero-coupon form,
including stripped U.S. Government Securities issued through the U.S.
Treasury. Others are created by brokerage firms that strip (separate)
the coupons (unmatured interest payments) off of interest-paying bonds
and sell the principal and the coupons separately.
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.
For each reverse repurchase agreement, the Fund will
maintain for a Portfolio a segregated custodial account containing cash,
U.S. Government Securities or other liquid, unencumbered 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 total 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, and
Mortgage Total Return Portfolio primarily will, purchase securities that
are secured or backed by mortgages or other mortgage-related assets.
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"). 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.
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.
Some CMOs are directly supported by other CMOs, which in
turn are supported by mortgage pools. Investors typically receive
payments out of the interest and principal on the Underlying Assets.
The portions of these payments the investors receive, as well as the
priority of their rights to receive payments, are determined by the
specific terms of the CMO class. CMOs involve special risks, and
evaluating them required special knowledge.
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. 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.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. However, the underlying assets are not
first lien mortgage loans or interests therein, but include assets such
as motor vehicle installment sale contracts, other installment sale
contracts, home equity loans, leases of various types of real and
personal property, and receivables from revolving credit (credit card)
agreements. Such assets are securitized through the use of trusts or
special purpose corporations. Payments or distributions of principal
and interest may be guaranteed up to a certain amount and for a certain
period of time by a letter of credit or pool insurance issued by a
financial institution unaffiliated with the issuer, or other credit
enhancements may be present. Each Portfolio will only purchase
asset-backed securities that the Investment Adviser determines to be
liquid.
Foreign Securities. Each Portfolio may, and 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, other than Emerging
Markets, 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.
Brady Bonds. Emerging Markets, subject to limitations, may
invest in "Brady Bonds" which are debt securities issued or guaranteed by
foreign governments in exchange for existing external commercial bank
indebtedness under a plan announced by former U.S. Treasury Secretary
Nicholas F. Brady in 1989. To date, over $154 billion (face amount) of
Brady Bonds have been issued by the governments of thirteen countries, the
largest proportion having been issued by Argentina, Brazil, Mexico and
Venezuela. Brady Bonds have been issued only recently, and accordingly,
they do not have a long payment history. Brady Bonds may be collateralized
or uncollateralized, are issued in various currencies (primarily the U.S.
dollar) and are actively traded in the over-the-counter secondary market.
The Portfolio may invest in either collateralized or
uncollateralized Brady Bonds. U.S. dollar-denominated, collateralized
Brady Bonds, which may be fixed rate par bonds or floating rate discount
bonds, are collateralized in full as to principal by U.S. Treasury zero
coupon bonds having the same maturity as the bonds. Interest payments on
such bonds generally are collateralized by cash or securities in an amount
that, in the case of fixed rate bonds, is equal to at least one year of
rolling interest payments or, in the case of floating rate bonds, initially
is equal to at least one year's rolling interest payments based on the
applicable interest rate at the time and is adjusted at regular intervals
thereafter. Brady Bonds which have been issued to date are rated BB or B by
S&P or Ba or B by Moody's or, in cases in which a rating by S&P or Moody's
has not been assigned, are generally considered by the Adviser to be of
comparable quality.
Indexed Notes, Currency Exchange-Related Securities and
Similar Securities. Each Portfolio may, and generally Inflation-Indexed
and Inflation-Indexed Hedged will, 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.
Inflation-Indexed Securities. Each Portfolio may, and
generally Inflation-Indexed and Inflation-Indexed Hedged will, invest in
securities with a nominal return linked to the inflation rate from bond
markets worldwide such as the U.S. Treasury Department's recently
announced "inflation-protection" issues. The initial issues are ten-
year notes which are issued quarterly. Other maturities will be added
at a later date. The principal is adjusted for inflation (payable at
maturity) and the semi-annual interest payments equal a fixed percentage
of the inflation-adjusted principal amount. The inflation adjustments
are based upon the Consumer Price Index for Urban Consumers ("CPI-U").
These securities are also be eligible for coupon stripping under the
U.S. Treasury "STRIPS" program.
In addition to the U.S. Treasury's issues, the Portfolios
may also purchase inflation-indexed securities from other countries such
as Australia, Canada, New Zealand, Sweden and the United Kingdom, or
other inflation-indexed securities that may be issued in the future.
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 . 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.
Other Portfolios. Turnover of the assets of each of Stable
Return, U.S. Treasury, Mortgage Total Return, Broad Market, Worldwide,
Worldwide-Hedged, International, International-Hedged, Emerging Markets,
Inflation-Indexed and Inflation-Indexed 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.
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, and 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 synthetic 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 liquid, unencumbered securities 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,
International-Hedged and Inflation-Indexed Hedged intends to hedge its
currency exchange risk to the extent practicable, but there can be no
assurance that all of the assets of each Portfolio denominated in
foreign currencies will be hedged at any time, or that any such hedge
will be effective. Each of Worldwide, International, Emerging Markets
and Inflation-Indexed may at times, at the discretion of the Investment
Adviser and the Sub-Adviser, hedge all or part of its currency exchange
risk.
The Global and International Portfolios 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 liquid, unencumbered securities 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 liquid, unencumbered
securities 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 liquid, unencumbered
securities 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 liquid, unencumbered securities 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 obligations segregated
for this purpose.
ILLIQUID SECURITIES
Although mutual fund portfolios are allowed to invest up to
15% (10% in the case of the Money Market Portfolio) 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. Illiquid securities are
securities which may not be sold or disposed of in the ordinary course
of business within seven days at approximately the value at which a
Portfolio has valued the investments, and include securities with legal
or contractual restrictions on resale, time deposits, repurchase
agreements having maturities longer than seven days and securities that
do not have readily available market quotations. In addition, a
Portfolio may invest in securities that are sold in private placement
transactions between their issuers and their purchasers and that are
neither listed on an exchange nor traded over-the counter. These factors
may have an adverse effect on the Portfolio's ability to dispose of
particular securities and may limit a Portfolio's ability to obtain
accurate market quotations for purposes of valuing securities and
calculating net asset value and to sell securities at fair value. If any
privately placed securities held by a Portfolio are required to be
registered under the securities laws of one or more jurisdictions before
being resold, the Portfolio may be required to bear the expenses of
registration. A Portfolio may also purchase securities that are not
registered under the Securities Act of 1933, as amended (the "1933
Act"), but which can be sold to qualified institutional buyers in
accordance with Rule 144A under that Act ("Rule 144A securities").
Rule 144A securities generally must be sold to other qualified
institutional buyers. A Portfolio may also invest in commercial
obligations issued in reliance on the so-called "private placement"
exemption from registration afforded by Section 4(2) of the 1933 Act
("Section 4(2) paper"). Section 4(2) paper is restricted as to
disposition under the federal securities laws, and generally is sold to
institutional investors such as the Portfolio who agree that they are
purchasing the paper for investment and not with a view to public
distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) paper normally is resold to other
institutional investors like the Portfolio through or with the
assistance of the issuer or investment dealers who make a market in the
Section 4(2) paper, thus providing liquidity. If a particular
investment in Rule 144A securities, Section 4(2) paper or private
placement securities is not determined to be liquid, that investment
will be included within the 15% (or 10%) limitation on investment in
illiquid securities. The ability to sell Rule 144A securities to
qualified institutional buyers is a recent development and it is not
possible to predict how this market will mature. The Investment Adviser
or Sub-Adviser will monitor the liquidity of such restricted securities
under the supervision of the Board of Directors.
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 liquid, unencumbered securities having a value at least equal
to the aggregate amount of a Portfolio's forward commitments.
TBA (TO BE ANNOUNCED) TRANSACTIONS
The typical mortgage-related security transaction, called a
TBA (to be announced) transaction, in which the type of mortgage-related
securities to be delivered is specified at the time of trade but the
actual pool numbers of the securities that will be delivered are not
known at the time of the trade. For example, in a TBA transaction, an
investor could purchase $1 million 30 year FNMA 9's and receive up to
three pools on the settlement date. The pool numbers of the pools to
be delivered at settlement will be announced shortly before settlement
takes place. Generally, agency pass-through mortgage-backed securities
are traded on a TBA basis.
SHORT SELLING
Mortgage Total Return, Inflation-Indexed and Inflation-
Indexed Hedged Portfolios may make short sales, which are transactions
in which a Portfolio sells a security it does not own in anticipation of
a decline in the market value of that security. Short selling provides
the Investment Adviser with flexibility to: (1) reduce certain risks of
the Portfolio's holdings; and (2) increase the Portfolio's total return.
To complete a short sales transaction, the Portfolio must borrow the
security to make delivery to the buyer. The Portfolio then is obligated
to replace the borrowed security, which generally entails purchasing it
at the market price at the time of replacement. Until the security is
replaced, the Portfolio is required to pay to the lender amounts equal
to any dividends or interest which accrue during the period of the loan.
The Portfolio also may be required to pay a premium to borrow the
security. The proceeds of the short sale will be retained by the broker,
to the extent necessary to meet margin requirements, until the short
position is closed out. To the extent that the Portfolio has sold
securities short, it will maintain a daily segregated account,
containing cash or U.S. Government or other liquid, unencumbered
securities, at such a level that (a) the amount deposited in the account
plus the amount deposited with the broker as collateral will equal the
current value of the security sold short and (b) the amount deposited in
the segregated account plus the amount deposited with the broker as
collateral will not be less than the market value of the security at the
time it was sold short. Each of Mortgage Total Return, Inflation-
Indexed and Inflation-Indexed Hedged may not enter into short sales
exceeding 25% of the net equity of the Portfolio and may not acquire
short positions in securities of a single issuer if the value of such
positions exceeds 2% of the securities of any class of any issuer. The
foregoing restrictions do not apply to the sale of securities if the
Portfolio contemporaneously owns or has the right to obtain securities
equivalent in kind and amount to those sold.
CURRENCY AND MORTGAGE SWAPS, AND INTEREST RATE SWAPS, CAPS, FLOORS
AND
COLLARS
Each Portfolio may enter into currency swaps for hedging
purposes and may also enter into mortgage and interest rate swaps and
interest rate caps and floors for hedging purposes or to seek to enhance
total return. Interest rate swaps involve the exchange by a Portfolio
with another party of their respective commitments to pay or receive
interest, such as an exchange of fixed rate payments for floating rate
payments. Mortgage swaps are similar to interest rate swaps in that
they represent commitments to pay and receive funds, the amount of which
is determined by reference to an underlying mortgage security. The
notional principal amount, however, is tied to a reference pool or pools
of mortgages. Currency swaps involve the exchange of their respective
rights to make or receive payments in specified currencies. The purchase
of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive
payment of interest on a notional principal amount from the party
selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below
a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling the interest rate
floor.
A Portfolio will usually enter into interest rate and
mortgage swaps on a net basis, which means that the two payment streams
are netted out, with the Portfolio receiving or paying, as the case may
be, only the net amount of the two payments. Interest rate and mortgage
swaps usually do not involve the delivery of securities, other
underlying assets or principal. Accordingly, the risk of loss with
respect to interest rate and mortgage swaps is limited to the net amount
of interest payments that the Portfolio is contractually obligated to
make. If the other party to an interest rate or mortgage swap defaults,
the Portfolio's risk of loss consists of the net amount of interest
payments that the Portfolio is contractually entitled to receive. In
contrast, currency swaps usually involve the delivery of a gross payment
stream in one designated currency in exchange for the gross payment
stream in another designated currency. Therefore, the entire payment
stream under a currency swap is subject to the risk that the other party
to the swap will default on its contractual delivery obligations. To
the extent that the net amount payable by the Portfolio under an
interest rate or mortgage swap and the entire amount of the payment
stream payable by the Portfolio under a currency swap or an interest
rate floor, cap or collar are held in a segregated account consisting of
cash or other liquid, unencumbered securities. The Portfolio and the
Investment Adviser (or Sub-Adviser) believe that swaps do not constitute
senior securities under the Act and, accordingly, will not treat them as
being subject to the Portfolio's borrowing restriction.
A Portfolio will not enter into currency swap, interest rate
swap, mortgage swap, cap or floor transactions unless the unsecured
commercial paper, senior debt or claims paying ability of the other
party is rated either A or A-1 or better by S&P or A or P-1 or better by
Moody's or, if unrated by such rating organizations, determined to be of
comparable quality by the Investment Adviser or Sub-Adviser.
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 each Portfolio, other than Mortgage Total Return, Inflation-Indexed
and Inflation-Indexed Hedged Portfolios, may not engage in short sales
of securities; and (iii) that a Portfolio may not invest for the purpose
of exercising control of management. Mortgage Total Return, Inflation-
Indexed and Inflation-Indexed Hedged Portfolios may engage in short
sales, providing that acquisitions of short positions in the securities
of a single issuer (other than the U.S. government, its agencies and
instrumentalities), as measured by the amounts needed to close such
positions, not exceed 2% of the Portfolio's total assets.
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".
Emerging Markets Securities. The risks of investing in
foreign securities may be intensified in the case of investments in issuers
domiciled or doing substantial business in emerging markets or countries
with limited or developing capital markets. Security prices in emerging
markets can be significantly more volatile than in the more developed
nations of the world, reflecting the greater uncertainties of investing in
less established markets and economies. In particular, countries with
emerging markets may have relatively unstable governments, present the risk
of sudden adverse government action and even nationalization of businesses,
restrictions on foreign ownership, or prohibitions of repatriation of
assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be
predominantly based on only a few industries, may be highly vulnerable to
changes in local or global trade conditions, and may suffer from extreme
and volatile debt burdens or inflation rates. Local securities markets may
trade a small number of securities and may be unable to respond effectively
to increases in trading volume, potentially making prompt liquidation of
substantial holdings difficult or impossible at times. Transaction
settlement procedures may be less reliable in emerging markets than in
developed markets. Securities of issuers located in countries with
emerging markets may have limited marketability and may be subject to more
abrupt or erratic price movements.
High Yield/High Risk Securities. Emerging Markets may invest
its assets in debt securities rated lower than "BBB" by S&P or "Baa" by
Moody's, or "B" by Thomson Bankwatch in the case of bank obligations, or
"A-2" by S&P or "Prime-2" by Moody's in the case of commercial paper, or
similarly rated by IBCA in the case of foreign bank obligations, or
determined by the Investment Adviser (or the Sub-Adviser) to be of
similar creditworthiness (commonly referred to as "junk bonds"). Such
investments are regarded as speculative by the major rating agencies.
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, International-Hedged and Inflation-Indexed 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, 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.
Generally, prepayments on fixed-rate mortgage loans will
increase during a period of falling interest rates and decrease during a
period of rising interest rates. Mortgage- and asset-backed securities
may also decrease in value as a result of increases in interest rates
and, because of prepayments, may benefit less than other fixed-income
securities from declining interest rates. Reinvestment of prepayments
may occur at lower interest rates than the original investment, thus
adversely affecting a Portfolio's yield. Actual prepayment experience
may cause the yield of mortgage-backed securities to differ from what
was assumed when the Portfolio purchased the security.
The market for privately issued mortgage- and asset-backed
securities is smaller and less liquid than the market for U.S.
Government mortgage- and asset-backed securities. CMO classes may be
specially structured in a manner that provides any of a wide variety of
investment characteristics, such as yield, effective maturity and
interest rate sensitivity. As market conditions change, however, and
especially during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of some CMO classes and the ability
of the structure to provide the anticipated investment characteristics
may be significantly reduced. These changes can result in volatility in
the market value, and in some instances reduced liquidity, of the CMO
class.
Certain classes of CMOs are structured in a manner that
makes them extremely sensitive to changes in prepayment rates.
Interest-only ("IO") and principal-only ("PO") classes are examples of
this. IOs are entitled to receive all or a portion of the interest, but
none (or only a nominal amount) of the principal payments, from the
underlying mortgage assets. If the mortgage assets underlying an IO
experience greater than anticipated principal prepayments, than the
total amount of interest payments allocable to the IO class, and
therefore the yield to investors, generally will be reduced. In some
instances, an investor in an IO may fail to recoup all of his or her
initial investment, even if the securities is government guaranteed or
considered to be of the highest quality (rated AAA or the equivalent).
Conversely, PO classes are entitled to receive all or a portion of the
principal payments, but none of the interest, from the underlying
mortgage assets. PO classes are purchased at substantial discounts from
par, and the yield to investors will be reduced if principal prepayments
are slower than expected. Some IOs and POs, as well as other CMO
classes, are structured to have special protections against the effect
of prepayments. These structural protections, however, normally are
effective only within certain ranges of prepayments rates and thus will
not protect investors in all circumstances.
Inverse floating rate CMO classes also may be extremely
volatile. These classes pay interest at a rate that decreases when a
specified index of market rates increases.
During 1994, the value and liquidity of many mortgage-backed
securities declined sharply due primarily to increases in interest
rates. There can be no assurance that such declines will not recur.
The market value of certain mortgage-backed securities, including IO and
PO class of mortgage-backed securities, can be extremely volatile and
these securities may become illiquid. The Investment Adviser will seek
to manage the Portfolio's investments in mortgage-backed securities so
that the volatility of a portfolio's investments, taken as a whole, is
consistent with the Portfolio's investment objective. If market
interest rates or other factors that affect the volatility of securities
held by a Portfolio change in ways that the Investment Adviser does not
anticipate, the Portfolio's ability to meet its investment objective may
be reduced.
Non-mortgage related asset-backed 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.
Short Selling. Each of Mortgage Total Return, Inflation-
Indexed and Inflation-Indexed Hedged Portfolios will incur a loss as a
result of a short sale if the price of the security increases between
the date of the short sale and the date on which the Portfolio replaces
the borrowed security. The amount of any loss will be increased by the
amount of any premium or amounts in lieu of interest the Portfolio may
be required to pay in connection with a short sale. Unlike long
positions, where the potential loss is limited to the purchase price,
the potential loss from a short sale transaction is unlimited unless
accompanied by the purchase of an option to buy the security at a
specified price.
Non-Diversified Portfolios. U.S. Short-Term is
"diversified" under the Investment Company Act of 1940, while the other
twelve Portfolios are each "non-diversified" for purposes of such Act
and so, other than the Money Market Portfolio, 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 total assets, a
Portfolio may invest up to 25% of its total assets in the obligations of
an individual issuer (except that this limitation does not apply to U.S.
Government Securities, as defined above), and with respect to the
remaining 50% of its total assets may not invest more than 5% of its
total assets in the obligations of an individual issuer (other than U.S.
Government Securities). Money Market is subject to the diversification
requirements of Rule 2a-7 under the 1940 Act. 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.
Counterparties. The Portfolios may be exposed to the risk
of insolvency of another party with which a Portfolio enters into a
transaction, such as a repurchase agreement or a dollar-roll
transaction. Subject to Board supervision, the Investment Adviser
monitors and evaluates the creditworthiness of these counterparties to
help minimize those risks.
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 February 1, 1995 between the Fund and AMT Capital. No fees
are payable by the Fund pursuant to the Distribution Agreement, and AMT
Capital bears the expense of its distribution activities.
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 each Portfolio of the Fund, other
than Mortgage Total Return, is continuous and purchases of shares of the
Fund may be made Monday through Friday, except for the holidays declared
by the Federal Reserve Banks of New York or Boston. 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. These Portfolios offer
shares at a public offering price equal to the net asset value next
determined after a purchase order becomes effective. Mortgage Total
Return offers shares at a public offering price equal to the net asset
value determined on the last Business Day of each month and on any other
Business Days in which the Investment Adviser approves a purchase at the
net asset value determined on those days.
Purchases of shares must be made by wire transfer of Federal
funds. Subject to the above offering dates, 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,
subject to the offering dates described above, a purchaser must call AMT
Capital at (800) 762-4848 [or within the City of New York, (212) 332-
5211] prior to 4:00 p.m. Eastern time (12:00 p.m. Eastern Time in the
case of the Money Market Portfolio) 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 (12:00 p.m. Eastern Time in the case of the
Money Market Portfolio), 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 (12:00 p.m.
Eastern Time in the case of the Money Market Portfolio) on any Business
Day, the redemption will be effective and payment will be made (i) in
the case of Money Market and 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 (12:00 p.m. Eastern Time in the case of
the Money Market Portfolio), 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 payment.
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.
In an attempt to reduce the expenses of the Portfolios, each
Portfolio may redeem all of the shares of any shareholder whose account
in any Portfolio has a net asset value of less than $100,000.
Involuntary redemptions will not be implemented if the value of a
shareholder's account falls below the minimum required investment solely
as a result of market conditions. The Fund will give 60 day's prior
written notice to shareholders whose shares are being redeemed to allow
them to purchase sufficient additional shares of the applicable
Portfolio to avoid such redemption. The Fund may also redeem shares in
an account of the shareholder as reimbursement for loss due to the
failure of a check or wire to clear in payment of shares purchased.
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 for each Portfolio, other than
Mortgage Total Return and Money Market. The net asset value of Mortgage
Total Return is calculated by the Fund's Accounting Agent as of 4:00
p.m. Eastern time on the last Business Day of each month, on any other
Business Days in which the Investment Adviser approves a purchase, and
on each Business Day for which a redemption order has been placed.
The net asset value per share of the Money Market Portfolio is
calculated as of 12:00 noon Eastern Time on Business Days. The Money
Market Portfolio seeks to maintain a stable net asset value per share of
$1.00. For purposes of calculating the Money Market Portfolio's net asset
values, securities are valued by the "amortized cost" method of valuation,
which does not take into account unrealized gains or losses. This involves
valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which value based on amortized cost is higher or lower than the
price a Portfolio would receive if it sold the instrument.
The use of amortized cost and the maintenance of the
Portfolio's per share net asset value at $1.00 is based on its election to
operate under the provisions of Rule 2a-7 under the 1940 Act. As
conditions of operating under Rule 2a-7, the Money Market Portfolio must
maintain a dollar-weighted average portfolio maturity of 90 days of less,
purchase only instruments having remaining maturities of thirteen months or
less and invest only in U.S. dollar-denominated securities which are
determined by the Board of Directors to present minimal credit risks and
which are of eligible quality as determined under the Rule.
The following methods are used to calculate the value of the
other 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.
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.
The net investment income (including accrued but unpaid
interest and amortization of original issue and market discount or
premium) of each Portfolio, other than Mortgage Total Return, will be
declared as a dividend payable daily to the respective shareholders of
record as of the close of each Business Day. The net investment income
of Mortgage Total Return will be declared as a dividend payable to the
respective shareholders of record as of the last Business Day of each
month. 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 $23 billion in assets entirely in fixed-income portfolios
for in excess of 90 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
$200 million. 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 $6
billion in multi-currency fixed-income portfolios for institutional
clients. The Investment Adviser pays the Sub-Adviser monthly from its
advisory fee. The Sub-Adviser's annual fee is equal to the advisory fee
for each of the Global and International 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, Managing Director. 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, Managing Director. 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,
Managing Director. 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.
Simon G. Hard, General Manager of the Sub-Adviser. Mr. Hard is also
responsible for management of the global and international portfolios.
He joined FFTW in 1989 from Mercury Asset Management, the investment
affiliate of S.G. Warburg & Co., Ltd. His responsibilities there
included the formulation of global bond and currency investment
policies, and the management of interest rate and currency exposures of
the firm's specialist non-dollar portfolios. Mr. Hard was previously
first vice president and London branch manager of Julius Baer Investment
Management, Inc. Mr. Hard has an MA in modern history from Lincoln
College, Oxford University and an MPhil in the history and philosophy of
science from Wolfson College, Cambridge University.
The Emerging Markets Portfolio will hold a diversified
portfolio of local currency bonds. The Investment Adviser will actively
manage the currency holdings in order to avoid currencies with a
significant risk of devaluation. Professor Kenneth A. Froot was
contracted by the Investment Adviser to help develop an analytical
framework designed to provide an early warning of significant currency
devaluations. Professor Froot is The Industrial Bank of Japan Professor
of Finance and Director of Research at Harvard University's Graduate
School of Business, where he teaches courses in International Finance,
Risk Management, and Corporate Finance. Professor Froot may serve as a
paid consultant for the Portfolio on an ad hoc basis.
ADMINISTRATOR
Pursuant to an Administration Agreement dated as of February
2, 1995 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
0.07% of the average daily net assets of the Fund on the first $350
million, 0.05% thereafter up to $3 billion, 0.04% thereafter up to $5
billion, and 0.03% on assets over $5 billion. 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 all Portfolios
intend to qualify in the future 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 withholding 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.
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 thirteen 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.
CONTROL PERSON
As of March 31, 1997, Fischer Francis Trees & Watts, Inc.
had discretionary investment advisory agreements with shareholders of
the Fund that represent 75.13% of the Fund's total net assets and
therefore, may be deemed a control person.
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.
From time to time the Money Market Portfolio may advertise its
"current yield" and "effective yield." Both yield figures are based on
historical earnings and are not intended to indicate future performance.
The "current yield" refers to the income generated by an investment in a
Portfolio over a seven calendar-day period (which period will be stated in
the advertisement). This income is then "annualized." That is, the amount
of income generated by the investment during that week is assumed to be
generated each week over a one-year period and is shown as a percentage of
the investment. The "effective yield" is calculated similarly but, when
annualized, the income earned by an investment in the Portfolio is assumed
to be reinvested. The "effective yield" will be slightly higher than the
"current yield" because of the compounding effect of this assumed
reinvestment.
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., 600 Fifth Avenue, 26th Floor, New York, New York
10020 or by calling AMT Capital at (800) 762-4848 [or (212) 332-5211, if
within New York City].
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
thirteen separate portfolios (each a "Portfolio"): (1) U.S. Fixed
Income Portfolios - Money Market ("Money Market"); U.S. Short-Term
("U.S. Short-Term"); Stable Return ("Stable Return"); U.S. Treasury
("U.S. Treasury"); Mortgage Total Return ("Mortgage Total Return"); and
Broad Market ("Broad Market"); and (2) Global and International Fixed
Income Portfolios - Worldwide ("Worldwide"); Worldwide-Hedged
("Worldwide-Hedged"); International ("International"); International-
Hedged ("International-Hedged"); Emerging Markets ("Emerging Markets");
Inflation-Indexed ("Inflation-Indexed"); and Inflation-Indexed Hedged
("Inflation-Indexed 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 30, 1997 (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.
600 Fifth Avenue, 26th Floor
New York, New York 10020
(212) 332-5211
(800) 762-4848 (outside New York City)
The date of this Statement of Additional Information is April 30, 1997
TABLE OF CONTENTS
Page
History of the Fund
Organization of the Fund
Management of the Fund
Board of Directors and Officers
Investment Adviser and Sub-Adviser
Administrator
Control Persons and Principal Holders of Securities
Distribution of Fund Shares
Supplemental Descriptions of Investments
Supplemental Investment Techniques
Supplemental Discussion of Risks Associated With the
Fund's Investment Policies and Investment Techniques
Supplemental Techniques to Hedge Interest Rate and Foreign
Currency Risks and Other Foreign Currency Strategies
Forward Foreign Currency Exchange Contracts
and Associated Risks
Options
Futures Contracts and Options on Futures Contracts
Other Hedging Techniques
Investment Restrictions
Portfolio Transactions
Tax Considerations
Shareholder Information
Calculation of Performance Data
Financial Statements
Appendix
Merrill Lynch 1-2.99 Year Treasury Index
Quality Rating Descriptions
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." The U.S. Short-Term Portfolio which commenced
operations on December 6, 1989, Worldwide Portfolio which commenced
operations on April 15, 1992, and Worldwide-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),
Worldwide Series and Worldwide Hedged Series, respectively. The Board
of Directors recently approved a name change for several Portfolios,
eliminating "Fixed Income" from their name.
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)
200,000,000 shares each to Money Market and U.S. Short-Term; (ii)
100,000,000 shares to Mortgage Total Return; and (iii) 50,000,000 shares
to each of the other Portfolios. 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, 1330 Avenue of the Americas, New York, New
York 10019-5402. Director of the Fund. Mr. Head has been a Managing
Member of Head & Company L.L.C. (or predecessor firm), a merchant
banking firm providing advice to corporations in the insurance industry,
since 1987. He is Chairman of the Board of Integon Corporation, Vice
Chairman of PartnerRe Ltd. and a director of other privately held
corporations.
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. From 1985 to 1993, Mr. Meek was 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.
Carla E. Dearing, 600 Fifth Avenue, New York, NY. Assistant
Treasurer of the Fund. Ms. Dearing serves as President, Principal, and
Director of AMT Capital Services since its inception in March 1992. Ms.
Dearing is also Managing Director 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, 600 Fifth Avenue, New York, NY.
Secretary of the Fund. Mr. Vastardis serves as Senior Vice President
and 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.
No employee of the Investment Adviser nor AMT Capital
Services receives any compensation from the Fund for acting as an
officer or director of the Fund. The Fund pays each director who is not
a director, officer or employee of the Investment Adviser or AMT Capital
Services or any of their affiliates, a fee of $1,000 for each meeting
attended, and each of the Directors receive an annual retainer of
$20,000 which is paid in quarterly installments.
Director's Compensation Table
Fiscal Year Ended December 31, 1996
Director Aggregate Pension or Estimated Total
Compensation From Retirement Annual Compensation
Registrant Benefits Accrued benefits Upon From Registrant
As Part Retirement and Fund
of Fund Expenses Complex Paid to
Directors
Stephen J.
Constantine $0 $0 $0 $0
John C Head
III $20,000 $0 $0 $20,000
Lawrence B.
Krause $20,000 $0 $0 $20,000
Paul Meek $20,000 $0 $0 $20,000
Onder John
Olcay $0 $0 $0 $0
By virtue of the responsibilities assumed by the Investment Adviser and
AMT Capital Services and their affiliates under their respective
agreements with the Fund, the Fund itself requires no employees in
addition to its officers.
Directors and officers of the Fund collectively owned less
than 1% of the Fund's outstanding shares as of March 31, 1997.
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 ten 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 International, International-
Hedged, Emerging Markets, Inflation-Indexed and Inflation-Indexed
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.
The following table highlights the dates in which the Advisory
Agreements were last approved by the Board of Directors and by a
majority of shareholders:
Portfolio Last Board Approval Last Shareholder Approval
Money Market 11/6/96 1/21/97
U.S. Short-Term 2/12/97 4/3/91
Stable Return 2/12/97 2/18/93
U.S. Treasury 2/12/97 1/21/97
Mortgage Total Return 2/12/97 1/2/96
Broad Market 2/12/97 1/21/97
Worldwide 2/12/97 12/31/92
Worldwide-Hedged 2/12/97 12/31/92
International 2/12/97 2/18/93
International-Hedged 2/12/97 2/18/93
Emerging Markets 11/6/96 1/21/97
Inflation-Indexed 11/6/96 1/21/97
Inflation-Indexed Hedged 11/6/96 1/21/97
The following table highlights the dates in which the Sub-
Advisory Agreements were last approved by the Board of Directors and by
a majority of shareholders:
Portfolio Last Board Approval Last Shareholder Approval
Worldwide 2/12/97 12/31/92
Worldwide-Hedged 2/12/97 12/31/92
International 2/12/97 2/18/93
International-Hedged 2/12/97 2/18/93
Emerging Markets 11/6/96 1/21/97
Inflation-Indexed 11/6/96 1/21/97
Inflation-Indexed Hedged 11/6/96 1/21/97
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):
Rate
U.S. Fixed Income Portfolios
Money Market .10%
U.S. Short-Term .15%*
Stable Return .15%**
U.S. Treasury .30%
Mortgage Total Return .30%
Broad Market .30%
Global and International Fixed Income Portfolios
Worldwide .40%
Worldwide-Hedged .25%***
International .40%
International-Hedged .40%
Emerging Markets .75%
Inflation-Indexed .40%
Inflation-Indexed Hedged .40%
* Effective March 1, 1996, the Adviser has voluntarily lowered the
advisory fee from .30%.
** Effective March 1, 1996, the Adviser has voluntarily lowered the
advisory fee from .35%.
*** Effective July 1, 1995, the Adviser has voluntarily lowered the
advisory fee from .40%.
For the years ended December 31, 1996, December 31, 1995 and December
31, 1994, the amount of advisory fees (net of waivers and
reimbursements) paid by each Portfolio were as follows:
Portfolio Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1995 1994
U.S. Short-Term
Portfolio $607,871 $867,461 $625,321
Stable Return
Portfolio 1,711 0 0
Mortgage Total
Return
Portfolio (1) 126,822 0 0
Worldwide
Portfolio 334,929 46,819 517,489
Worldwide-Hedged
Portfolio 1,647 0 35,809
International
Portfolio (2) 12,322 0 0
International-
Hedged
Portfolio (3) 180,065 52,860 0
(1) Commencement of Operations was April 29, 1996.
(2) Commencement of Operations was May 9, 1996.
(3) The Portfolio was fully liquidated on December 30, 1994, and
recommenced operations on September 14, 1995.
ADMINISTRATOR
Pursuant to its terms, the Administration Agreement between
the Fund and AMT Capital Services, Inc., a Delaware corporation will
automatically continue for successive annual periods subject to the
approval of the Fund's Board of Directors. 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.
PRINCIPAL HOLDERS OF SECURITIES
As of March 31, 1997, the following persons held 5 percent
or more of the outstanding shares of Money Market:
Title of Class Name and Address of Nature of Beneficial Percent
Beneficial Owner Ownership of Portfolio
Common Stock, Cooper Industries, Inc. Direct Ownership 91.21%
$.001 per 1001 Fannin Street
Share First City Tower
Suite 3900,
Houston, TX 77210
Common Stock, ESI Securities Co. Direct Ownership 5.96%
$.001 per 1221 Avenue of the
Share Americas, 30th Fl.
New York, NY 10020
As of March 31, 1997, the following persons held 5 percent
or more of the outstanding shares of U.S. Short-Term:
Title of Class Name and Address of Nature of Beneficial Percent of
Beneficial Owner Ownership of Portfolio
Common Stock,
$.001
per Share Philip Morris Direct Ownership 13.58%
Companies, Inc., 120
Park Avenue, New
York 10017-5523
Common Stock, Monsanto Reserve Cash Direct Ownership 11.70%
$.001 c/o Fischer Francis
per Share Trees & Watts, Inc., 200
Park Avenue, New
York, NY 10166
Common Stock, The Dow Chemical Direct Ownership 11.36%
$.001 Company Employees
per Share Retirement Plan,
Dorinco 100,
Midland, MI 48674-0000
Common Stock, Markey Charitable Trust Direct Ownership 6.65%
$.001 3250 Mary Street, #405
per Share Miami, FL 33133-5255
Common Stock, State Street Bank & Direct Ownership 6.29%
$.001 Trust Co., Trustee
per Share for Pacific Gas &
Electric Co. Post-
Retirement Medical
Trust, One
Enterprise Drive
W6A, North Quincy,
MA 02171
Common Stock, State Street Bank & Direct Ownership 6.19%
$.001 for Bull HN Information
per Share Systems Inc., One
Enterprise Drive SW 5C,
North Quincy, MA 02171
Common Stock, Cascade Investments Direct Ownership 5.68%
$.001 LLC, c/o Fischer
per Share Francis Trees & Watts
Inc., 200 Park Avenue,
46th Floor, New York, NY
10166
Common Stock, Wachovia Bank of North Direct Ownership 5.27%
$.001 Carolina, Trustee for
per Share R.J.R. Nabisco - Defined
Benefit Plan, P.O.
Box 3099, Winston-
Salem, NC 27150-3099
As of March 31, 1997, the following persons held 5 percent
or more of the outstanding shares of Stable Return:
Title of Class Name and Address of Nature of Beneficial Percent
Beneficial Owner Ownership of Portfolio
Common Stock, The Dow Chemical Direct Ownership 44.89%
$.001 per Company Foundation,
Share Dorinco 100, Midland,
MI 48674
Common Stock, Northern Trust Co. Direct Ownership 34.51%
$.001 per Trustee FBO Sandoz
Share Investment Plan
P.O. Box
92956, Chicago, IL
60675
Common Stock, Corporation for Direct Ownership 19.72%
$.001 per Supportive Housing,
Share 342 Madison Avenue,
Suite 505, New York,
NY 10173
As of March 31, 1997, the following persons held 5 percent
or more of the outstanding shares of Mortgage Total Return:
Title of Class Name and Address of Nature of Beneficial Percent of
Common Stock, State Street Bank & Direct Ownership 25.49%
$.001 per Trust Co., Trustee
Share for Bull HN Information
Systems Inc., One
Enterprise Drive
SW 5C, North
Quincy, MA 02171
Common Stock, Corning, Inc. Master Direct Ownership 19.99%
$.001 per Trust, c/o U.S. Trust
Share Co., 114 W. 47th St.
3rd Floor-39, New
York, NY 10036-1632
Common Stock, International Business Direct Ownership 18.24%
$.001 per Machines Corp., c/o
Share Fischer Francis Trees &
Watts, Inc., 200
Park Avenue, 46th
Floor, New York,
NY 10166
Common Stock, International Bank for Direct Ownership 8.69%
$.001 per Reconstruction and
Share Development Staff
Benefits Plan, c/o
Fischer Francis Trees &
Watts, Inc., 200
Park Avenue, 46th
Floor, New York,
NY 10166
Common Stock, International Bank for Direct Ownership 7.91%
$.001 per Reconstruction and
Share Development Staff
Retirement
Plan, c/o Fischer
Francis Trees &
Watts, Inc., 200
Park Avenue, 46th
Floor, New York,
NY 10166
Common Stock, Cornell University, Direct Ownership 6.79%
$.001 per Terrace Hill, Ithaca
Share NY 14853-0001
As of March 31, 1997, the following persons held 5 percent
or more of the outstanding shares of Worldwide:
Title of Class Name and Address of Nature of Beneficial Percent
Beneficial Owner Ownership of Portfolio
Common Stock, Northern Trust Co., Direct Ownership 21.78%
$.001 per Trustee for GATX
Share Master Trust,
500 W. Monroe St.,
44th Floor,
Chicago, IL 60661
Common Stock, Bob & Company, c/o Direct Ownership 16.86%
$.001 per Bank of Boston, P.O.
Share Box 1809, Boston
MA 02105
Common Stock, Administrators of Direct Ownership 14.91%
$.001 per Tulane Educational
Share Fund, Treasurer's
Office, 6401
Freret St., Suite
178, New Orleans,
LA 70118
Common Stock, Community Foundation Direct Ownership 11.50%
$.001 per for Southeastern
Share Michigan, 333 West
Fort St., Suite
2010, Detroit, MI
48226
Common Stock, Bentley College Direct Ownership 7.73%
$.001 per 175 Forest St.,
Share Waltham, MA 02154
Common Stock, Geneva Regional Direct Ownership 7.10%
$.001 per Health System, Inc.
Share 196 North St.
Geneva, NY 14456
As of March 31, 1997, the following persons held 5 percent
or more of the outstanding shares of Worldwide-Hedged:
Title of Class Name and Address Nature of Beneficial Percent
of Beneficial Owner Ownership of Portfolio
Common Stock, Northern Trust Co. Direct Ownership 32.34%
$.001 per Trustee for Mars
Share Benefit Trust,
P.O. Box 92956,
Attn: Mutual
Funds, Chicago, IL
60675
Common Stock, Law School Admission Direct Ownership 28.01%
$.001 per Council, Inc., P.O
Share Box 40, Newtown.
PA 18940-0040
Common Stock, State Street Bank & Direct Ownership 23.86%
$.001 per Trust Co., Trustee for
Share Goldman Sachs Pension
Plan, 200 Newport Ave.,
North Quincy, MA 02171
Common Stock, The McCallie School Direct Ownership 11.33%
$.001 per 500 Dodds Ave.,
Share Chattanooga, TN 37404
As of March 31, 1997, the following persons held 5 percent
or more of the outstanding shares of International:
Title of Class Name and Address Nature of Beneficial Percent
of Beneficial Owner Ownership of Portfolio
Common Stock, Colonial Williamsburg Direct Ownership 33.46%
$.001 per Foundation, P.O. Box
Share 1776, Williamsburg
VA 23187-1776
Common Stock, HF Investment LP, Direct Ownership 22.81%
$.001 per 1700 Old Deerfield
Share Road, Highland
Park, IL 60035
Common Stock, David & Company Direct Ownership 17.84%
$.001 per P.O. Box 188,
Share Murfreesboro, TN
37133-0188
Common Stock, Mac & Co., Mellon Direct Ownership 15.45%
$.001 per Trust, P.O. Box
Share 3198, Pittsburgh
PA 15230-3198
Common Stock, State Street Bank Direct Ownership 10.43%
$.001 per & Trust, Trustee
Share FBO Retirement
Income Plan For
Employees of
Colonial
Williamsburg, P.O.
Box 1776,
Williamsburg, VA
23187-1776
As of March 31, 1997, the following persons held 5 percent or more of
the outstanding shares of International-Hedged:
Title of Class Name and Address Nature of Beneficial Percent
of Beneficial Owner Ownership of Portfolio
Common Stock, Northrop Corporation Direct Ownership 20.06%
$.001 per Employee Benefit Plan,
Share 1840 Century Park
West, Los Angeles, CA
90067-2101
Common Stock, International Business Direct Ownership 18.69%
$.001 per Machines Corp.
Share Retirement
Plan, 3001 Summer
Street, Stamford,
CT 06905
Common Stock, U.S. Trust Co., Trustee Direct Ownership 17.66%
$.001 per for Corning, Inc., 777
Share Broadway, 10th
Floor, New York,
NY 10003-9598
Common Stock, Northern Trust Co. Direct Ownership 9.71%
$.001 per Trustee for
Share Monsanto Defined
Contribution, P.O.
Box 92956, Attn:
Mutual Funds,
Chicago, IL 60675
Common Stock, Chase Manhattan Bank Direct Ownership 9.19%
$.001 per NA, Trustee for Amoco
Share Corporation Master
Trust Employee
Pension Plan, 3
Chase Metrotech
Center, 7th Floor,
Brooklyn, NY 11245
Common Stock, Henry J. Kaiser Direct Ownership 7.60%
$.001 per Family Foundation
Share c/o Bankers Trust
Co., 34 Exchange
Place, 2nd Floor,
Jersey City, NJ
07302
Common Stock, Bankers Trust Co. Direct Ownership 6.77%
$.001 per FBO Premark
Share International
Defined Benefit
Trust, 34 Exchange
Place, 2nd Floor,
Jersey City, NJ
07302
Common Stock, Pension Fund of Direct Ownership 5.76%
$.001 per the Retirement
Share Plan of Northern
Southern
Corporation, 110
Franklin Rd., S.E.
Roanoke, VA
24042-0040
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 February 1, 1995 between the Fund and AMT Capital. 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.
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.
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 liquid,
unencumbered 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 liquid, unencumbered securities 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.
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 "traunche", 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.
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.
High Yield/High Risk Debt Securities. Emerging Markets will
invest its net assets in debt securities which are rated below investment-
grade - that is, rated below Baa by Moody's or BBB by S&P and in unrated
securities judged to be of equivalent quality by the Investment Adviser or
Sub-Adviser. Below investment grade securities carry a high degree of risk
(including the possibility of default or bankruptcy of the issuers of such
securities), generally involve greater volatility of price and risk of
principal and income, and may be less liquid, than securities in the higher
rating categories and are considered speculative. The lower the ratings of
such debt securities, the greater their risks render them like equity
securities. See "Quality Ratings Descriptions" in this Statement of
Additional Information for a more complete description of the ratings
assigned by ratings organizations and their respective characteristics.
Economic downturns have in the past, and could in the future,
disrupted the high yield market and impaired the ability of issuers to
repay principal and interest. Also, an increase in interest rates would
have a greater adverse impact on the value of such obligations than on
comparable higher quality debt securities. During an economic downturn or
period of rising interest rates, highly leveraged issues may experience
financial stress which would adversely affect their ability to service
their principal and interest payment obligations. Prices and yields of
high yield securities will fluctuate over time and, during periods of
economic uncertainty, volatility of high yield securities may adversely
affect the Portfolio's net asset value. In addition, investments in high
yield zero coupon or pay-in-kind bonds, rather than income-bearing high
yield securities, may be more speculative and may be subject to greater
fluctuations in value due to changes in interest rates.
The trading market for high yield securities may be thin to
the extent that there is no established retail secondary market or because
of a decline in the value of such securities. A thin trading market may
limit the ability of the Portfolio to accurately value high yield
securities in the Portfolio's portfolio and to dispose of those securities.
Adverse publicity and investor perceptions may decrease the values and
liquidity of high yield securities. These securities may also involve
special registration responsibilities, liabilities and costs.
Credit quality in the high yield securities market can change
suddenly and unexpectedly, and even recently issued credit ratings may not
fully reflect the actual risks posed by a particular high-yield security.
For these reasons, it is the policy of the Investment Adviser and Sub-
Adviser not to rely exclusively on ratings issued by established credit
rating agencies, but to supplement such ratings with its own independent
and on-going review of credit quality. The achievement of the Portfolio's
investment objective by investment in such securities may be more dependent
on the Investment Adviser's or Sub-Adviser's credit analysis than is the
case for higher quality bonds. Should the rating of a portfolio security
be downgraded, the Investment Adviser or Sub-Adviser will determine whether
it is in the best interest of the Portfolio to retain or dispose of such
security.
Prices for below investment-grade securities may be affected
by legislative and regulatory developments.
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, International-Hedged and Inflation-Indexed
Hedged intends to hedge its currency exchange risk to the extent
feasible, but there can be no assurance that all of the assets of each
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, and generally the Global and
International 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 the Global and International Portfolios.
The Global and International Portfolios may use forward contracts to
hedge the value of portfolio securities against changes in exchange
rates. Each of the Portfolios 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 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.
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, except for Mortgage Total Return, Inflation-Indexed and
Inflation-Indexed Hedged; (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.
Money Market Portfolio
Money Market may not (although, not as a fundamental policy):
(1) invest more than 5% of its total assets in the securities of any one
issuer or subject to puts from any one issuer, except U.S. Government
securities, provided that the Portfolio may invest more than 5% of its
total assets in first tier securities of any one issuer for a period of up
to three business days or, in unrated securities that have been determined
to be of comparable quality by the Investment Adviser; or (2) invest more
than 5% of its total assets in second tier securities, or in unrated
securities determined by the Investment Adviser to be of comparable
quality.
U.S. Short-Term 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 total 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 total assets as margin and premiums to purchase
and sell futures and options contracts on CFTC-regulated exchanges.
Worldwide and Worldwide-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 total 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 total
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% (10% for Money Market) 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. The Fund enters into financial futures
and options contracts which normally involve brokerage commissions.
For the years ended December 31, 1996, December 31, 1995 and December
31, 1994, the amount of brokerage commissions (associated with financial
futures and options contracts) paid by each Portfolio were as follows:
Portfolio Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
U.S. Short-Term
Portfolio $110,133 $187,185 $35,790
Stable Return
Portfolio 0 27,616 0
Mortgage Total
Return
Portfolio (1) $30,152 0 0
Worldwide Portfolio $10,254 15,268 47,983
Worldwide-Hedged
Portfolio $2,719 3,083 13,547
International
Portfolio (2) $2,707 0 0
International-Hedged
Portfolio (3) $12,342 15,643 1,581
(1) Commencement of Operations was April 29, 1996.
(2) Commencement of Operations was May 9, 1996.
(3) The Portfolio was fully liquidated on December 30, 1994, and
recommenced operations on September 14, 1995.
The cost of executing transactions will consist primarily of
dealer spreads. 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
active Portfolio has qualified and all Portfolios intend to qualify in
the future 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.
Short Sales. Each of Mortgage Total Return, Inflation-
Indexed and Inflation-Indexed Hedged will not realize gain or loss on
the short sale of a security until it closes the transaction by
delivering the borrowed security to the lender. Pursuant to Code
section 1233, all or a portion of any gain arising from a short sale may
be treated as short-term capital gain, regardless of the period for
which the Portfolio held the security used to close the short sale. In
addition, the Portfolio's holding period for any security which is
substantially identical to that which is sold short may be reduced or
eliminated as a result of the short sale. The 30% limitation and the
distribution requirements applicable to the Portfolio's assets may limit
the extent to which each Portfolio will be able to engage in short sales
and transactions in options, futures and forward contracts.
U.S. Short-Term 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.
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 he 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, 1996 for U.S. Short-Term, Stable
Return, Worldwide, Worldwide-Hedged, International and International-
Hedged are as follows:
U.S. Portfolios
U.S. Short-Term 5.33%
Stable Return 5.75%
Global and International Portfolios
Worldwide 5.66%
Worldwide-Hedged 6.03%
International 5.10%
International-Hedged 5.20%
The Money Market Portfolio may, from time to time, include the
"yield" and "effective yield" in advertisements or reports to shareholders
or prospective investors.
The yield is calculated by determining the net change over a 7-calendar day
period, exclusive of capital changes, in the value of a hypothetical
preexisting account having a balance of one share at the beginning of the
period, divided by the value of the account at the beginning of the base
period to obtain the base period return. The yield is annualized by
multiplying the base period return by 365/7. The yield is stated to the
nearest hundredth of one percent. The effective yield is calculated by the
same method as yield except that the base period return is compounded by
adding 1, raising the sum to a power equal to 365/7, and subtracting 1 from
the result, according to the following formula:
Effective Yield = [(Base Period Return + 1)365/7] - 1
Money Market Portfolio's yield and effective yield for the
seven-day period ended December 31, 1996 are 5.04% and 5.17%,
respectively.
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, 1996, for Money
Market, U.S. Short-Term, Stable Return, Worldwide, Worldwide-Hedged,
International and International-Hedged and since the commencement of
operations of each Portfolio (annualized) to December 31, 1997 are as
follows:
One Year Five Years Life of Portfolio Inception
U.S. Portfolios
Money Market 5.18% n/a 4.89%* 11/1/93
U.S. Short-Term 5.45% 4.25%* 5.18%* 12/6/89
Stable Return 5.29% n/a 5.36%* 7/26/93
Mortgage Total
Return n/a n/a 6.54% 4/29/96
Global and
International
Portfolios
Worldwide 5.77% n/a 8.64%* 4/15/92
Worldwide-Hedged 10.03% n/a 10.31%* 5/19/92
International n/a n/a 6.66% 5/9/96
International-
Hedged** 3.18% n/a 5.42%* 9/14/95
* Annualized
** The Portfolio redeemed all of its assets on December 30, 1994, and
began selling shares again on September 14, 1995. The total return (on
an annualized basis) from its original inception of March 25, 1993
through December 30, 1994, was 5.39%.
FINANCIAL STATEMENTS
The audited financial statements for the year ended December
31,1996 are incorporated by reference in the Statement of Additional
Information. The Money Market Portfolio, previously the AMT Capital
Fund, Inc. - Money Market Portfolio (the "AMT Capital Portfolio"),
commenced operations on November 1, 1993. Effective as of the close of
business on April 29, 1997, the AMT Capital Portfolio merged into the Money
Market Portfolio pursuant to shareholder approval of the reorganization on
April 28, 1997
APPENDIX
MERRILL LYNCH 1-2.99 YEAR TREASURY INDEX1
Quarterly Returns: June 1984 - December 1996
Quarter-End Return Quarter-End Return
9/84 4.86% 9/90 2.38%
12/84 5.92 12/90 3.32
3/85 2.17 3/91 2.20
6/85 5.41 6/91 1.97
9/85 2.09 9/91 3.36
12/85 3.65 12/91 3.68
3/86 3.62 3/92 0.16
6/86 1.99 6/92 2.88
9/86 2.60 9/92 2.98
12/86 1.77 12/92 0.18
3/87 1.25 3/93 2.21
6/87 0.65 6/93 1.08
9/87 0.18 9/93 1.43
12/87 3.48 12/93 0.59
3/88 2.64 3/94 (0.50)
6/88 1.04 6/94 0.08
9/88 1.45 9/94 0.99
12/88 0.96 12/94 0.01
3/89 1.24 3/95 3.36
6/89 4.98 6/95 3.21
9/89 1.46 9/95 1.51
12/89 2.82 12/95 2.51
3/90 0.89 3/96 0.34
6/90 2.80 6/96 1.01
9/96 1.65
12/96 1.91
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.
BBB. Bonds rated BBB are regarded as having adequate capacity to
pay interest or principal. Although these bonds normally exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and principal.
BB and Lower. Bonds rated BB, B, CCC, CC, C and D are regarded, on
balance, as predominately speculative with respect to the issuer's capacity
to pay interest and principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and D the
highest degree of speculation. While such bonds may have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
The ratings AA to D 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.
A-2. Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for
issues designated A-1.
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.
Baa. Baa rated bonds are considered medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba. Bonds which are rated Ba are judged to have speculative
elements because their future cannot be considered as well assured.
Uncertainty of position characterizes bonds in this class, because the
protection of interest and principal payments may be very moderate and not
well safeguarded.
B and Lower. Bonds which are rated B generally lack characteristics
of a desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the security over any long period of time
may be small. Bonds which are rated Caa are of poor standing. Such
securities may be in default of there may be present elements of danger
with respect to principal or interest. Bonds which are rated Ca represent
obligations which are speculative in a high degree. Such issues are often
in default or have other marked shortcomings. Bonds which are rated C are
the lowest rated class of bonds and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
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.
MIG-2. Notes bearing this designation are of favorable quality, with
all security elements accounted for, but lacking the undeniable strength of
the previous grade. Market access for refinancing, in particular, is
likely to be less well established.
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.
P-2. Issuers have a strong capacity for repayment of short-term
promissory obligations.
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.
