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 - January 23, 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 January 23, 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.
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Highlights...........................................
Fund Expenses...................................................
Financial Highlights............................................
The Fund........................................................
Investment Objectives and Policies..............................
Description of Investments......................................
Investment Techniques...........................................
Investment Restrictions.........................................
Risks Associated With the Fund's Investment Policies
and Investment Techniques..................................
Distribution of Fund Shares.....................................
Purchases and Redemptions.......................................
Determination of Net Asset Value................................
Dividends.......................................................
Management of the Fund..........................................
Tax Considerations..............................................
Shareholder Information.........................................
<PAGE>
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.
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 $22 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 at the
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 valued 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
<PAGE>
ANNUAL FUND OPERATING EXPENSES (after expense reimbursements and waivers by the
Investment Adviser, shown as a percentage of average net assets)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Adminis-
Advisory 12b-1 stration Other Interest Total
Fees Fees(1) Fees(2) Expense Expenses Expenses
U.S. Fixed Income
Portfolios
Money Market
Portfolio 0.15% None 0.06% 0.04% 0.00 0.25% (5)
U.S. Short-Term
Portfolio 0.15% (3) None 0.06% 0.04% 0.12% 0.25% (3)
Stable Return
Portfolio 0.15% (4) None 0.06% 0.09% 0.58% 0.30% (4)
U.S. Treasury
Portfolio 0.30% None 0.06% 0.09% 0.00% 0.45% (5)
Mortgage Total
Return Portfolio 0.30% None 0.06% 0.09% 0.55% 1.00% (1)
Broad Market
Portfolio 0.30% None 0.06% 0.09% 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% 0.00% 1.50% (5)
Inflation-Indexed
Portfolio 0.40% None 0.06% 0.14% 0.00% 0.60% (5)
Inflation-Indexed
Hedged Portfolio 0.40% None 0.06% 0.14% 0.00% 0.60% (5)
</TABLE>
(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
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 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 cap, the total operating expenses for the fiscal year ending
December 31, 1996 were 0.44% of U.S. Short-Term's average daily net
assets.
(4) The Investment Adviser has voluntarily agreed to cap the total operating
expenses at 0.50% (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 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 cap and waiver, the total
operating expenses for the fiscal year ending December 31, 1996, were
1.04% of Stable Return's average daily net assets.
(5) The Investment Adviser has voluntarily agreed to cap the total operating
expenses 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 caps, the total operating
expenses (on an annualized basis) for Mortgage Total Return,
International and International-Hedged for the fiscal year ending
December 31, 1996 were 1.10%, 0.92% and 0.66% respectively, of
their average daily net assets.
(6) By agreement with the Investment Adviser, total operating expenses
are capped at 0.60% (on an annualized basis) of the average daily net
assets of 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 cap, the total operating expenses
for Worldwide for the fiscal year ending December 31, 1996 were 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
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 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 cap, the total operating expenses for the fiscal year ending
December 31, 1996 were 0.69% of Worldwide-Hedged's average daily net
assets.
(9) The Portfolio may engage in reverse repurchase agreements upon which a
primary or reporting dealer ("dealer") in U.S. Government securities
("securities") purchases securities from the Portfolio in exchange for
an agreed-upon sum of cash and the Portfolio agrees to repurchase the
securities from the dealer at an agreed-upon price and date. The
Portfolio incurs an interest expense, when it engages in these
transactions, which is equal to the coupon rate of interest that the
dealer earns while the securities are in the dealer's possession. These
transactions serve to increase the expense ratio of the Portfolio's that
engage in these investments. The investment adviser will only engage in
these transactions if it believes that it can earn a higher rate of
interest on the securities it purchases with the cash received from the
dealer than the rate of interest it must pay to the dealer. Please note,
however, that the investment adviser may or may not succeed in receiving
a net interest income on these transactions.
<PAGE>
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
U.S. Short-Term $4 $12 $21 $48
Stable Return $9 $28 $50 $113
U.S. Treasury $5 $15
Mortgage Total Return $10 $32 $57 $129
Broad Market $5 $15
Global and International
Fixed Income Portfolios
Worldwide $6 $19 $33
$75
Worldwide-Hedged $5 $15 $25 $58
International $6 $19 $33
$75
International-Hedged $6 $19 $33
$75
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.
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information in the following tables (except where
noted) 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 31,1995 are incorporated by
reference in the Statement of Additional Information. The unaudited financial
statements for the six months ended June 30, 1996 and the periods ended
October 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.
<PAGE>
Financial Highlights
U.S. Short-Term Portfolio
<TABLE>
<S> <C> <C> <C>
<C>
For a share outstanding June 30, 1996 For
the Year Ended
throughout the period: (Unaudited) 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 0.28 0.56
0.44 0.32
Net realized and unrealized
loss on investments, and on
financial futures and
options contracts (0.04) (0.01)
(0.08) (0.03)
Total from investment
operations 0.24 0.55
0.36 0.29
Less Distributions
From investment income, net 0.28 0.56
0.45 0.31
In excess of investment
income, net 0.00 * 0.00 *
0.00 * -
Total distributions 0.28 0.56
0.45 0.31
Net asset value, end
of period $ 9.84 $ 9.88
$ 9.89 $ 9.98
Total Return 2.42% (c) 5.71%
3.71% 2.88%
Ratios/Supplemental Data
Net assets, end
of period $ 703,555,408 $ 457,425,302 $
290,694,868 $ 417,727,821
Ratio of operating
expenses to average
net assets (a) 0.29% (b) 0.40%
0.40% 0.40%
Ratio of investment
income, net to average
net assets 5.64% (b) 5.64% 4.14%
3.28%
Decrease reflected in
above ratios due to
waiver of investment
advisory fees 0.05% (b) 0.07%
0.08% 0.03%
Ratio of interest expense
to average net assets 0.12% (b) 0.11%
0.03% 0.08%
(a) Net of waivers, exclusive of interest expense.
(b) Annualized
(c) Not annualized
* Rounds to less than $0.01 .
</TABLE>
<PAGE>
Financial Highlights (continued)
U.S. Short-Term Portfolio (continued)
<TABLE>
<S> <C> <C> <C>
<C>
Year Three Months Year
Period From
For a share Ended Ended Ended
Dec. 6, 1989* to
outstanding: 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 (a) 0.40% 0.40% (b)
0.40% 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)
Ratio of interest
expense to average
net assets 0.03% -
0.03% -
(a) Net of waivers and reimbursements, exclusive of interest expense.
(b) Annualized
*Commencement of Operation
</TABLE>
<PAGE>
Financial Highlights (continued)
Stable Return Portfolio
<TABLE>
<S> <C> <C> <C>
<C>
Period From
For a share outstanding June 30, 1996 For the Year
Ended July 26, 1993* to
throughout the period: (Unaudited) 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 0.26 0.60
0.43 0.14
Net realized and
unrealized gain (loss)
on investments and
financial futures
contracts (0.10) 0.45
(0.40) 0.05
Total from investment
operations 0.16 1.05
0.03 0.19
Less Distributions
From investment
income, net 0.26 0.60
0.43 0.14
From net realized
gain on investments
and financial futures
contracts - -
- 0.03
In excess of net
realized gain on
investments and
financial futures
contracts - -
- 0.07
Total distributions 0.26 0.60
0.43 0.24
Net asset value,
end of period $ 9.90 $ 10.00
$ 9.55 $ 9.95
Total Return 1.60% (c) 11.26%
0.29% 4.27% (b)
Ratios/Supplemental
Data
Net assets, end
of period $ 27,595,986 $ 5,080,067
$ 4,338,339 $ 3,482,439
Ratio of operating
expenses to average
net assets (a) 0.34% (b) 0.50%
0.50% 0.50% (b)
Ratio of investment
income, net to average
net assets 5.40% (b) 6.09%
4.43% 3.68% (b)
Decrease reflected in
above ratios due to
waiver of investment
advisory fees and
reimbursement of
other expenses 0.26% (b) 0.53%
0.57% 1.46% (b)
Ratio of interest
expense to average
net assets 0.58% (b) 0.91%
1.24% -
Portfolio turnover 966% 1,075%
343% 1,841%
(a) Net of waivers and reimbursements, exclusive of interest expense.
(b) Annualized
(c) Not annualized
*Commencement of Operations
</TABLE>
<PAGE>
Financial Highlights (continued)
Mortgage Total Return Portfolio
Period From
April 29, 1996 *
For a share outstanding to October 31,1996
throughout the period: (Unaudited)
Per Share Data
Net asset value, beginning of period $
10.00
Increase (Decrease) From
Investment Operations
Investment income, net
0.32
Net realized and unrealized gain on
investments, short sales, and on financial
futures and options contracts 0.21
Total from investment operations
0.53
Less Distributions
From investment income, net 0.31
Net asset value, end of period $
10.22
Total Return
5.43% (c)
Ratios/Supplemental Data
Net assets, end of period $
233,382,838
Ratio of operating expenses
to average net assets (a)
0.45% (b)
Ratio of investment income,
net to average net assets
9.22% (b)
Decrease reflected in above ratios
due to waiver of investment
advisory fees
0.16% (b)
Ratio of interest expense
to average net assets 0.55%
(b)
Portfolio turnover 383%
(a) Net of waivers, exclusive of interest expense.
(b) Annualized
(c) Not annualized
* Commencement of Operations
<PAGE>
Financial Highlights (continued)
Worldwide Portfolio
<TABLE>
<S> <C> <C> <C> <C>
<C>
For the Year Ended
Period From
For a share June 30, 1996 Dec. 31, Dec. 31,
Dec. 31, April 15, 1992* to
outstanding: (Unaudited) 1995 1994
1993 Dec. 31, 1992
throughout
the period
Per Share Data
Net asset value,
beginning of period $ 9.83 $ 9.27 $
10.02 $ .98 $ 10.00
Increase (Decrease)
From Investment
Operations
Investment income, net 0.26 0.58
0.50 0.45 0.39
Net realized and
unrealized gain (loss)
on investments,
financial futures and
options contracts and
on foreign currency-
related transactions (0.34) 0.56
(0.74) 1.04 0.53
Total from investment
operations (0.08) 1.14
(0.24) 1.49 0.92
Less Distributions
From investment
income, net 0.26 0.30
0.20 0.45 0.39
In excess of investment
income, net - - 0.01
- -
From capital stock in
excess of par value - 0.28
0.30 - -
From net realized
gain on investments,
financial futures and
options contracts,
and on foreign currency-
related transactions
- - - 0.87 0.55
In excess of net
realized gain on
investments, financial
futures and options
contracts, and on
foreign currency-related
transactions
- - - - 0.13 0.00**
Total distributions 0.26 0.58
0.51 1.45 0.94
Net asset value,
end of period $ 9.49 $ 9.83
$ 9.27 $ 10.02 $ 9.98
Total Return (0.80%) (c) 12.60%
(2.25%) 15.86% 13.46% (b)
Ratios/Supplemental
Data
Net assets, end
of period $119,450,834 $86,186,177
$53,721,481 $217,163,036 $82,757,009
Ratio of operating
expenses to average
net assets (a) 0.60% (b) 0.60%
0.60% 0.59% 0.60% (b)
Ratio of investment
income, net to
average net assets 5.50% (b) 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 0.04% (b) 0.30%
0.02% - 0.72% (b)
Ratio of interest
expense to average
net assets - - 0.03%
0.27% 0.19% (b)
Portfolio turnover 544% 1,401%
1,479% 1,245% 850%
(a) Net of waivers and reimbursements, exclusive of interest expense.
(b) Annualized
(c) Not annualized
* Commencement of Operations
** Rounds to less than $0.01.
</TABLE>
<PAGE>
Financial Highlights (continued)
Worldwide-Hedged Portfolio
<TABLE>
<S> <C> <C>
<C> <C> <C>
For the Year Ended
Period From
For a share outstanding June 30, 1996 Dec. 31, Dec, 31,
Dec. 31, May 19, 1992* to
throughout the period: (unaudited) 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 (Decrease) From
Investment Operations
Investment income, net 0.30 0.45
0.34 0.45 0.32
Net realized and
unrealized gain
on investments, financial
futures and options
contracts, and on
foreign currency-related
transactions (0.09) 0.66
0.43 (c) 0.76 0.25
Total from investment
operations 0.21 1.11
0.77 1.21 0.57
Less Distributions
From investment
income, net 0.30 0.67
0.44 0.45 0.32
In excess of investment
income, net - -
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 0.30 0.67
0.44 0.98 0.72
Net asset value,
end of period $ 10.76 $ 10.85
$ 10.41 $ 10.08 $ 9.85
Total Return 1.94% (d) 11.00%
7.84% 12.89% 9.45% (b)
Ratios/Supplemental
Data
Net assets, end
of period $26,002,345 $28,254,830 $
272,725 $ 41,137,515 $ 21,785,134
Ratio of operating
expenses to average
net assets (a) 0.45% (b) 0.45%
0.60% 0.60% 0.60% (b)
Ratio of investment
income, net to
average net assets 5.58% (b) 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 0.28% (b) 0.54%
0.17% 0.09% 1.01% (b)
Ratio of interest expense
to average net assets - -
0.05% 0.26% 0.23% (b)
Portfolio turnover 468% 500%
1,622% 1,254% 826%
(a) Net of waivers and reimbursements, exclusive of interest expense.
(b) Annualized
(c) Includes the effect of net realized losses prior to significant
decreases in shares outstanding.
(d) Not annualized
* Commencement of Operations
** Rounds to less than $0.01.
</TABLE>
<PAGE>
Financial Highlights (continued)
International Portfolio
Period From
May 9, 1996 *
For a share outstanding to October 31, 1996
throughout the period: (Unaudited)
Per Share Data
Net asset value, beginning of period $
10.00
Increase From
Investment Operations
Investment income, net 0.28
Net realized and unrealized
gain on investments, financial
futures contracts, and on
foreign currency-related transactions 0.30
Total from investment operations 0.58
Less Distributions
From investment income, net 0.28
Net asset value, end of period $
10.30
Total Return 5.92%
(c)
Ratios/Supplemental Data
Net assets, end of period $
27,252,797
Ratio of operating expenses
to average net assets (a) 0.60%
(b)
Ratio of investment income,
net to average net assets 5.89%
(b)
Decrease reflected in above ratios
due to waiver of investment
advisory fees and reimburse-
ment of other expenses 0.42%
(b)
Portfolio turnover 442%
(a) Net of waivers and reimbursements.
(b) Annualized
(c) Not annualized
* Commencement of Operation
<PAGE>
Financial Highlights (continued)
International-Hedged Portfolio
<TABLE>
<S> <S> <S> <S>
<S>
For the Year Ended
Period From
For a share outstanding June 30, 1996
March 25, 1993* to
throughout the period: (Unaudited) Dec. 31, 1995*** Dec.
31, 1994 to 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 0.27 0.19
0.20 0.44
Net realized and
unrealized gain (loss) on
investments, financial
futures and options
contracts, and on foreign
currency-related
transactions (0.18) 0.19
(0.46) 0.78
Total from investment
operations 0.09 0.38
(0.26) 1.22
Less Distributions
From investment
income, net 0.27 0.19
0.20 0.44
In excess of investment
income, net - 0.00 (c)
- - -
From net realized gain
on investments, financial
futures and options
contracts, and on foreign
currency-related
transactions - -
0.50 0.39
Total distributions 0.27 0.19
0.70 0.83
Net asset value,
end of period $ 10.01 $ 10.19
$ 9.43 ** $ 10.39
Total Return 0.87% (d) 13.45% (b)
(2.53%) 16.37% (b)
Ratios/Supplemental
Data
Net assets,
end of period $ 55,426,443 $ 34,004,887
$ - $ 17,866,568
Ratio of operating
expenses to average
net assets (a) 0.60% (b) 0.60% (b)
0.57% 0.60% (b)
Ratio of investment
income, net to average
net assets 5.31% (b) 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 0.11% (b) 0.17% (b)
0.49% 0.28% (b)
Portfolio turnover 599% 764%
1,282% 855%
(a) Net of waivers and reimbursements.
(b) Annualized
(c) Rounds to less than $0.01.
(d) Not annualized
* 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.
</TABLE>
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 of debt securities, 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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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 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.
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 appropriate high-grade debt securities having an aggregate
value at least equal to the amount of such commitments to repurchase,
including accrued interest, until payment is made. Repurchase and reverse
repurchase agreements will generally be restricted to those that mature within
seven days. The Portfolios will engage in such transactions with parties
selected on the basis of such party's creditworthiness. U.S. Short-Term,
Worldwide, and Worldwide-Hedged may not enter into a repurchase agreement or
reverse repurchase agreement if, as a result thereof, more than 25% of each
such Portfolio's 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.
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. 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
<PAGE>
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 proxy
hedging. Each Portfolio may also cross-hedge currencies by entering into
forward contracts to sell one or more currencies that are expected to decline
in value relative to other currencies to which the Portfolio has or in which
the Portfolio expects to have portfolio exposure. Except when a Portfolio
enters into a forward contract for the purchase or sale of a security
denominated in a particular currency, where a corresponding forward currency
contract will require no segregation, a currency contract which obligates a
Portfolio to buy or sell currency will generally require the Portfolio to hold
an amount of that currency or liquid securities denominated in that currency
equal to the Portfolio's obligations or to segregate cash, U.S. Government
securities or other appropriate high-grade debt obligations equal to the
amount
of the Portfolio's obligations.
As a result of hedging techniques, the net exposure of each
Portfolio to any one currency may be different from that of its total assets
denominated in such currency. Each of Worldwide-Hedged, 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 appropriate high-grade debt obligations in an
amount at least equal to the market value of the securities or foreign
currency underlying the option. When a Portfolio writes a put option, this
means that the Portfolio will maintain with the Fund's custodian in a
segregated account cash, U.S. Government Securities or other appropriate high-
grade debt obligations in an amount at least equal to the exercise price of
the option.
All futures and forward currency contracts purchased or sold for
non-hedging purposes by a Portfolio are also required to be covered. When a
Portfolio purchases a futures or forward currency contract for non-hedging
purposes, this means that the Portfolio will deposit an amount of cash, U.S.
Government Securities or other appropriate high-grade debt obligations in a
segregated account with the Fund's custodian so that the amount so segregated,
plus the amount of initial and variation margin held in the account of its
broker, if applicable, equals the market value of the futures or forward
currency contract.
When a Portfolio sells a futures or forward currency contract for
non-hedging purposes, this means that during the life of the futures or
forward currency contract the Portfolio will own or have the contractual right
to acquire the securities or foreign currency subject to the futures or
forward currency contract, or will maintain with the Fund's custodian in a
segregated account cash, U.S. Government Securities or other appropriate high-
grade debt obligations in an amount at least equal to the market value of the
securities or foreign currency underlying the futures or forward currency
contract.
If the market value of the contract moves adversely to the
Portfolio, or if the value of the securities in the segregated account
declines, the Portfolio will be required to deposit additional cash or
securities in the segregated account at a time when it may be disadvantageous
to do so.
Restrictions on Use of Futures Transactions. Regulations of the
Commodity Futures Trading Commission (the "CFTC") applicable to the Fund
require that all of a Portfolio's futures and options on futures transactions
constitute bona fide hedging transactions and that the Portfolio not enter
into such transactions if immediately thereafter, the sum of the amount of
initial margin deposits on the Portfolio's existing futures positions and
premiums paid for related options would exceed 5% of the market value of the
Portfolio's total assets. Each Portfolio is also permitted to engage in
transactions in futures contracts, and options thereon, incidental to such
Portfolio's activities in the securities markets. Under applicable CFTC
regulations, the value of the assets underlying futures positions is not
allowed to exceed the sum of cash set aside in an identifiable manner or
short-term U.S. Government or other U.S. dollar-denominated high-grade
short-term debt obligations segregated for this purpose.
<PAGE>
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 appropriate high-grade debt
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.
<PAGE>
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 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 and liquid, high grade debt 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.
<PAGE>
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
<PAGE>
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.
These securities may not have the benefit of any security interest
in the underlying assets and recoveries on repossessed collateral may not, in
some cases, be available to support payments on these securities. The
Portfolios will only invest in asset-backed securities that the Investment
Adviser believes are liquid.
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.
<PAGE>
Zero Coupon Securities. Because they do not pay interest until
maturity, zero coupon securities tend to be subject to greater interim
fluctuation of market value in response to changes in interest rates than
interest-paying securities of similar maturities. Additionally, for tax
purposes, zero coupon securities accrue income daily even though no cash
payments are received which may require a Portfolio to sell securities that
would not ordinarily be sold to provide cash for the Portfolio's required
distributions.
Concentration in Bank Obligations. Each Portfolio may, at times,
invest in excess of 25% of its assets in Bank Obligations, as defined above.
By concentrating investments in the banking industry, a Portfolio may have a
greater exposure to certain risks associated with the banking industry. In
particular, economic or regulatory developments in or related to the banking
industry will affect the value of and investment return on a Portfolio's
shares. As discussed above, each Portfolio will seek to minimize its exposure
to such risks by investing only in debt securities that are determined by the
Investment Adviser or Sub-Adviser to be of high quality.
DISTRIBUTION OF FUND SHARES
Shares of the Fund are distributed by AMT Capital Services, Inc.
pursuant to a Distribution Agreement (the "Distribution Agreement") dated as
of 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, Patriot's 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
<PAGE>
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.
<PAGE>
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 $22 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. Over
$9 billion of the amount managed is made up of short-term assets constituting
institutional reserves. The Investment Adviser is also the sub-adviser to
three portfolios of two other open-end management investment companies. The
Investment Adviser's offices are located at 200 Park Avenue, New York, New
York 10166.
<PAGE>
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. Fixed Income 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 Fixed Income 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.
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.
<PAGE>
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.
<PAGE>
FEDERAL INCOME TAXES
Each active Portfolio has qualified for and intends to continue to
qualify to be treated as a regulated investment company ("RIC") under the
Internal Revenue Code of 1986, as amended. To qualify, a Portfolio must meet
certain income, distribution and diversification requirements. In any year in
which a Portfolio qualifies as a RIC and distributes all of its taxable income
on a timely basis, the Portfolio will not pay U.S. federal income or excise
tax. Each Portfolio intends to distribute all of its taxable income by
automatically reinvesting such amount in additional shares of the Portfolio
and distributing those shares to its shareholders, unless a shareholder
elects, on the Account Application Form, to receive cash payments for such
distributions.
Dividends paid by a Portfolio are taxable to shareholders even
though the dividends are automatically reinvested in additional shares of a
Portfolio. Dividends paid by a Portfolio from its investment company taxable
income (including interest and net short-term capital gains) will be taxable
to a U.S. shareholder as ordinary income. Distributions of net capital gains
(the excess of net long-term capital gains over net short-term capital
losses), if any, designated as capital gains dividends are taxable to
shareholders as long-term capital gain, regardless of how long they have held
their Portfolio shares. None of the amounts treated as distributed to a
Portfolio's shareholders will be eligible for the corporate dividends received
deduction.
A distribution will be treated as paid on December 31 of the
current calendar year if it is declared by a Portfolio in October, November or
December with a record date in any such month and paid by the Portfolio during
January of the following calendar year. Such distributions will be taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received. Each
Portfolio will inform shareholders of the amount and tax status of all amounts
treated as distributed to them not later than 60 days after the close of each
calendar year.
Any gain or loss realized by a shareholder upon the sale or other
disposal of shares of a Portfolio, or upon receipt of a distribution in a
complete liquidation of the Portfolio, generally will be a capital gain or
loss which will be long-term or short-term, generally depending upon the
shareholder's holding period for the shares.
Each Portfolio may be required to withhold U.S. federal income tax
at the rate of 31% of all taxable distributions payable to shareholders who
fail to provide the Portfolio with their correct taxpayer identification
number or to make required certifications, or who have been notified by the
IRS that they are subject to backup withholding. Backup 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.
<PAGE>
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 December 31, 1996, Fischer Francis Trees & Watts, Inc. had
discretionary investment advisory agreements with shareholders of the Fund
that represent 63.7% 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.
<PAGE>
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 January
22,
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 January
23, 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.
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
Senior Vice President and Principal of AMT Capital Advisers, Inc. since
January
1992. Ms. Dearing was a former Vice President of Morgan Stanley & Co., where
she worked from June 1984 to August 1986 and from November 1988 to January
1992.
William E. Vastardis, 600 Fifth Avenue, New York, NY. Assistant
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 $15,000 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 benefits From
Registrant
Accrued Upon and Fund
As Part of Retirement Complex Paid
Fund to Directors
Expenses
- ------------------------------------------------------------------------------
- --
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 December 31, 1996.
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 2/7/96 4/3/91
Stable Return 2/7/96 2/18/93
U.S. Treasury 11/6/96 1/21/97
Mortgage Total Return 2/7/96 1/2/96
Broad Market 11/6/96 1/21/97
Worldwide 2/7/96 12/31/92
Worldwide-Hedged 2/7/96 12/31/92
International 2/7/96 2/18/93
International-Hedged 2/7/96 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 2/7/96 12/31/92
Worldwide-Hedged 2/7/96 12/31/92
International 2/7/96 2/18/93
International-Hedged 2/7/96 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
.15%
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
Periods 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 December 31, 1996, 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
Percent of
Beneficial Owner Beneficial
Portfolio
Common Stock, State Street Bank & Direct Ownership 12.04%
$.001 per Share Trust Co.,
Trustee for Bull HN
Information Systems Inc.,
One Enterprise Drive SW 5C,
North Quincy, MA 02171
Common Stock, State Street Bank & Direct Ownership
11.17%
$.001 per Share Trust Co.,
Trustee for Pacific Gas
& Electric Co. Short-Term
Liquidity Portfolio,
One Enterprise Drive W6A,
North Quincy, MA 02171
Common Stock, U.S. Trust Co., Direct Ownership 10.56%
$.001 per Share Trustee for
Corning, Inc.,
777 Broadway, 10th Floor,
New York, NY 10003-9598
Common Stock, Share Markey Direct Ownership
10.25%
$.001 per Share Charitable Trust,
3250 Mary Street, #405,
Miami, FL 33133-5255
Common Stock, Wachovia Bank of North Direct Ownership
7.89%
$.001 per Share Carolina, Trustee for
R.J.R. Nabisco -
Defined Benefit Plan,
P.O. Box 3099,
Winston-Salem,
NC 27150-3099
Common Stock, Philip Morris Direct Ownership 6.80%
$.001 per Share Companies, Inc.,
120 Park Avenue,
New York 10017-5523
Common Stock, State Street Bank & Direct Ownership 6.11%
$.001 per Share Trust Co.,
Trustee for Pacific Gas
& Electric Co.
Post-Retirement
Medical Trust,
One Enterprise Drive W6A,
North Quincy, MA 02171
Common Stock, Cascade Investments LLC, Direct Ownership 5.25%
$.001 per Share c/o Fischer Francis Trees
& Watts, Inc.,
200 Park Avenue, 46th Floor,
New York, NY 10166
As of December 31, 1996, the following persons held 5 percent or more of
the outstanding shares of Stable Return:
Title of Class Name and Address of Nature of
Percent of
Beneficial Owner Beneficial
Portfolio
Ownership
Common Stock, Northern Trust Co., Direct Ownership
49.06%
$.001 per Share Trustee FBO Sandoz
Investment Plan,
P.O. Box 92956,
Chicago, IL 60675
Common Stock, The Dow Chemical Company Direct Ownership
37.16%
$.001 per Share Foundation,
Dorinco 100,
Midland, MI 48674
Common Stock, Corporation for Supportive Direct Ownership
13.19%
$.001 per Share Housing,
342 Madison Avenue,
Suite 505,
New York, NY 10173
As of December 31, 1996, 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 Percent
of
Beneficial Owner Beneficial
Portfolio
Ownership
Common Stock, International Business Direct Ownership
35.69%
$.001 per Share Machines Corp.,
c/o Fischer Francis Trees
& Watts, Inc.,
200 Park Avenue,
46th Floor,
New York, NY 10166
Common Stock, International Bank for Direct Ownership
17.00%
$.001 per Share Reconstruction and
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
15.48%
$.001 per Share Reconstruction and
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 13.29%
$.001 per Share Terrace Hill,
Ithaca, NY 14853-0001
Common Stock, Bankers Trust Co., Direct Ownership
9.59%
$.001 per Share Trustee for
Premark International
Master Defined Benefit
Trust 105884-99,
Exchange Place,
Jersey City, NJ 07302
Common Stock, Bankers Trust Co., Direct Ownership
7.31%
$.001 per Share Trustee for
Henry J. Kaiser Family
Foundation,
Exchange Place,
Jersey City, NJ 07302
As of December 31, 1996, the following persons held 5 percent or more of
the outstanding shares of Worldwide:
Title of Class Name and Address of Nature of
Percent of
Beneficial Owner Beneficial
Portfolio
Ownership
Common Stock, Northern Trust Co., Direct Ownership
23.79%
$.001 per Share Trustee for GATX
Master Retirement Trust,
500 W. Monroe St.,
44th Floor,
Chicago, IL 60661
Common Stock, Bob & Co., Direct Ownership
18.65%
$.001 per Share c/o Bank of Boston,
P.O. Box 1809,
Boston, MA 02105
Common Stock, Community Foundation For Direct Ownership
12.38%
$.001 per Share Southeastern Michigan,
333 West Fort St.,
Suite 2010,
Detroit, MI 48226
Common Stock, Bentley College, Direct Ownership
8.44%
$.001 per Share 175 Forest St.,
Waltham, MA 02154
Common Stock, Geneva Regional Health Direct Ownership
7.75%
$.001 per Share System Inc.,
196 North St.,
Geneva, NY 14456
Common Stock, Key Trust Co., Direct Ownership
7.11%
$.001 per Share Trustee FBO
Millard Fillmore Hospital's
Master Trust #32320439,
P.O. Box 94870,
Cleveland, OH 44101-4870
Common Stock, Liva & Co., Direct Ownership
5.20%
$.001 per Share P.O. Box 1412,
Rochester, NY 14603
As of December 31, 1996, the following persons held 5 percent or more of
the outstanding shares of Worldwide-Hedged:
Title of Class Name and Address of Nature of
Percent of
Beneficial Owner Beneficial
Portfolio
Ownership
Common Stock, Northern Trust Co. Direct Ownership
50.07%
$.001 per Share Trustee for
Mars Benefit Trust,
P.O. Box 92956,
Attn: Mutual Funds,
Chicago, IL 60675
Common Stock, Law School Admission Direct Ownership
43.36%
$.001 per Share Council Inc.,
P.O. Box 40,
Newtown, PA 18940-0040
Common Stock, London Life Insurance Company Direct Ownership
6.49%
$.001 per Share Staff Pension Fund
As of December 31, 1996, the following persons held 5 percent or more of
the outstanding shares of International:
Title of Class Name and Address of Nature of
Percent of
Beneficial Owner Beneficial
Portfolio
Ownership
Common Stock, Colonial Williamsburg Direct Ownership
29.82%
$.001 per Share Foundation,
P.O. Box 1776,
Williamsburg, VA 23187-1776
Common Stock, David & Company, Direct Ownership
20.40%
$.001 per Share P.O. Box 188,
Murfreesboro, TN 37133-0188
Common Stock, HF Investment LP, Direct Ownership
20.21%
$.001 per Share 1700 Old Deerfield Road,
Highland Park, IL 60035
Common Stock, Mac & Co., Direct Ownership
17.64%
$.001 per Share Mellon Trust,
P.O. Box 3198,
Pittsburgh, PA 15230-3198
Common Stock, State Street Bank & Trust, Direct Ownership
11.93%
$.001 per Share Trustee FBO Retirement
Income Plan For Employees of
Colonial Williamsburg,
P.O. Box 1776,
Williamsburg, VA 23187-1776
As of December 31, 1996, the following persons held 5 percent or more of
the outstanding shares of International-Hedged:
Title of Class Name and Address of Nature of
Percent of
Beneficial Owner Beneficial
Portfolio
Ownership
Common Stock, Northrop Corporation Employee Direct Ownership
20.05%
$.001 per Share Benefit Plan,
1840 Century Park West,
Los Angeles, CA 90067-2101
Common Stock, U.S. Trust Co., Direct Ownership
17.64%
$.001 per Share Trustee for Corning, Inc.,
777 Broadway, 10th Floor,
New York, NY 10003-9598
Common Stock, International Business Direct Ownership
14.00%
$.001 per Share Machines Corp.
Retirement Plan,
3001 Summer Street,
Stamford, CT 06905
Common Stock, Henry J. Kaiser Family Direct Ownership
13.91%
$.001 per Share Foundation,
c/o Bankers Trust Co.,
34 Exchange Place,
2nd Floor,
Jersey City, NJ 07302
Common Stock, Northern Trust Co. Direct Ownership
9.70%
$.001 per Share Trustee for Monsanto
Defined Contribution,
P.O. Box 92956,
Attn: Mutual Funds,
Chicago, IL 60675
Common Stock, Chase Manhattan Bank NA, Direct Ownership
9.18%
$.001 per Share Trustee for Amoco
Corporation Master
Trust Employee Pension Plan,
3 Chase Metrotech Center,
7th Floor, Brooklyn, NY 11245
Common Stock, Pension Fund of the Retirement Direct Ownership
5.76%
$.001 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
appropriate high-grade debt securities having an aggregate value at least
equal
to the amount of such commitments to repurchase, including accrued interest,
until payment is made. Reverse repurchase agreements create leverage, a
speculative factor, but will be not considered as borrowings for the purposes
of
limitations on borrowings.
In addition, repurchase and reverse repurchase agreements may also
involve the securities of certain foreign governments in which there is an
active repurchase market. The Investment Adviser expects that such repurchase
and reverse repurchase agreements will primarily involve government securities
of countries belonging to the Organization for Economic Cooperation and
Development ("OECD"). Transactions in foreign repurchase and reverse
repurchase
agreements may involve additional risks.
Dollar Roll Transactions. "Dollar roll" transactions consist of the
sale by a Portfolio to a bank or broker-dealer (the "counterparty") of GNMA
certificates or other mortgage-backed securities together with a commitment to
purchase from the counterparty similar, but not identical, securities at a
future date, at the same price. The counterparty receives all principal and
interest payments, including prepayments, made on the security while it is the
holder. The Portfolio receives a fee from the counterparty as consideration
for
entering into the commitment to purchase. Dollar rolls may be renewed over a
period of several months with a new purchase and repurchase price fixed and a
cash settlement made at each renewal without physical delivery of securities.
Moreover, the transaction may be preceded by a firm commitment agreement
pursuant to which the Portfolio agrees to buy a security on a future date.
A Portfolio will not use such transactions for leverage purposes
and, accordingly, will segregate cash, U.S. Government securities or other
high
grade debt obligations in an amount sufficient to meet its purchase
obligations
under the transactions.
Dollar rolls are similar to reverse repurchase agreements because
they involve the sale of a security coupled with an agreement to repurchase.
Like all borrowings, a dollar roll involves costs to a Portfolio. For
example,
while a Portfolio receives a fee as consideration for agreeing to repurchase
the
security, the Portfolio may forgo the right to receive all principal and
interest payments while the counterparty holds the security. These payments
to
the counterparty may exceed the fee received by the Portfolio, thereby
effectively charging the Portfolio interest on its borrowing. Further,
although
the Portfolio can estimate the amount of expected principal prepayment over
the
term of the dollar roll, a variation in the actual amount of prepayment could
increase or decrease the cost of the Portfolio's borrowing.
Mortgage-Backed Securities. Mortgage-backed securities are
securities which represent ownership interests in, or are debt obligations
secured entirely or primarily by, "pools" of residential or commercial
mortgage
loans or other mortgage-backed securities (the "Underlying Assets"). In the
case of mortgage-backed securities representing ownership interests in the
Underlying Assets, the principal and interest payments on the underlying
mortgage loans are distributed monthly to the holders of the mortgage-backed
securities. In the case of mortgage-backed securities representing debt
obligations secured by the Underlying Assets, the principal and interest
payments on the underlying mortgage loans, and any reinvestment income
thereon,
provide the funds to pay debt service on such mortgage-backed securities.
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 Periods
Ended
December 31, 1996 December 31, 1995 December 31,
1994
U.S. Short-Term
Portfolio 110,133 $187,185
$35,790
Stable Return
Portfolio 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 intends to continue to qualify 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:
6
YIELD = 2[( a - b + 1) - 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 June 30, 1996 for U.S. Short-Term, Stable Return, Worldwide,
Worldwide-Hedged and International-Hedged; and October 31, 1996 for
International are as follows:
U.S. Portfolios
U.S. Short-Term ....................................... 5.51%
Stable Return ......................................... 5.33%
Global and International Portfolios
Worldwide.............................................
5.81%
Worldwide-Hedged....................................... 5.85%
International ......................................... 4.54%
International-Hedged ................................... 5.34%
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:
365/7
Effective Yield = [(Base Period Return + 1) ] - 1
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:
n
P(1 + T) = 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 June 30, 1996, for U.S. Short-Term, Stable
Return, Worldwide, Worldwide-Hedged and International-Hedged and since the
commencement of operations of each Portfolio to June 30, 1996 for U.S. Short-
Term, Stable Return, Worldwide, Worldwide-Hedged and International-Hedged; and
October 31, 1996 for Mortgage Total Return and International are as follows:
One Year Five Years Life of
Inception
Portfolio
U.S. Portfolios
U.S. Short-Term 5.16% 4.29%* 5.12%*
12/6/89
Stable Return 5.62% n/a 5.03%*
7/26/93
Mortgage Total Return n/a n/a 5.43%
4/29/96
Global and International Portfolios
Worldwide 3.66% n/a 8.07%*
4/15/92
Worldwide-Hedged 9.74% n/a 9.69%*
5/19/92
International n/a n/a 5.92%
5/9/96
International-Hedged** n/a n/a 4.71%
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
31,1995 are incorporated by reference in the Statement of Additional
Information. The unaudited financial statements for the six months ended June
30, 1996 and the periods ended November 30, 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.
APPENDIX
1
MERRILL LYNCH 1-2.99 YEAR TREASURY INDEX
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
1 Time-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.
Part C OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements and Schedules:
Part A - Financial Highlights.
Part B: The financial statements, notes to
financial statements and reports set forth below are
filed herewith by the Registrant, and are specifically
incorporated by reference in Part B.
- Report of Independent Auditors dated February
23, 1996.
- Statements of Assets and Liabilities dated
December 31, 1995.
- (Unaudited) Statements of Assets and Liabilities
dated
June 30, 1996.
- (Unaudited) Statements of Assets and
Liabilities
dated October 31, 1996, for Mortgage Total Return and
International.
- Statements of Operations for the year ended
December 31, 1995.
- (Unaudited) Statements of Operations for the
period ended
June 30, 1996.
- (Unaudited) Statements of Operations for the
period
ended October 31, 1996, for Mortgage Total Return and
International.
- Statements of Changes in Net Assets for
the years
ended December 31, 1995 and December 31, 1994.
- (Unaudited) Statements of Changes in Net Assets
for
the period ended June 30, 1996.
- (Unaudited) Statements of Changes in Net Assets
for
the period ended October 31, 1996, for Mortgage Total
Return and International.
- Notes to Financial Statements.
- Financial Highlights of U.S. Short-Term for the
period December 6, 1989 (commencement of operations) to
September 30, 1990, for the year ended September 30,
1991, for the three months ended December 31, 1991,
for
the year ended December 31, 1992, for the year ended
December 31, 1993, for the year ended December 31,
1994, for the year ended December 31, 1995, and
(Unaudited) for the period ended June 30, 1996; of
Stable Return for the period July 26, 1993
(commencement
of operations) to December 31, 1993, for the year
ended December 31, 1994, for the year ended December
31, 1995, and (Unaudited) for the period ended June
30, 1996; of Mortgage Total Return (Unaudited) for the
period April 29, 1996 (commencement of
operations) to the period ended October 31, 1996; of
Worldwide for the period April 15, 1992 (commencement
of
operations) to December 31, 1992, for the year ended
December 31, 1993, for the year ended December 31, 1994,
for year ended December 31, 1995, and (Unaudited) for
the period ended June 30, 1996; of Worldwide- Hedged
for the period May 19, 1992 (commencement of
operations) to December 31, 1992, for the year ended
December 31, 1993, for the year ended December 31, 1994,
for the year ended December 31, 1995, and
(Unaudited) for the period ended June 30, 1996; of
International (Unaudited) for the period May 9,
1996 (commencement of operations)
to the period ended October 31, 1996; and of
International-Hedged for the period March 25, 1993
(commencement of operations) to December 31, 1993,
for
the year ended December 31, 1994, for year ended
December 31, 1995, and (Unaudited) for the period
ended June 30, 1996.
(b) Exhibits
The following exhibits are incorporated herein by reference, are
not required to be filed or are filed herewith (as indicated):
(1) Articles of Incorporation, dated February 23,
1989,
filed as Exhibit 1 to Registrant's Registration
Statement on Form N-1A.
(1a) Articles of Amendment, dated July 1, 1991,
filed as
Exhibit 1(a) to Post-Effective Amendment No. 4 to
Registrant's Registration Statement on Form N-1A.
(1b) Articles of Amendment, dated July 26, 1991,
filed as
Exhibit 1(a) to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A.
(1c) Articles Supplementary, dated February 16,
1993, filed
as Exhibit 1(c) to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A.
(1d) Articles of Amendment, dated August 17, 1995, filed
herewith.
(1e) Articles of Amendment, dated December 11, 1996, filed
herewith.
(2) By-laws, filed as Exhibit 2 to Registrant's
Registration
Statement on Form N-1A.
(2a) Amended By-laws, filed as Exhibit 2 to
Post-Effective
Amendment No. 2 to Registrant's Registration Statement
on Form N-1A.
(2b) Amendment to By-laws, filed as Exhibit
2(a) to Post-
Effective Amendment No. 5 to Registrant's Registration
Statement on Form N-1A.
(3) Not Applicable.
(4) Specimen of Stock Certificate, filed as
Exhibit 4 to
Registrant's Registration Statement on Form N-1A.
(5) Management Agreement between the Registrant and
Fischer
Francis Trees & Watts, Inc., dated November 30, 1989,
filed as Exhibit 5 to Pre-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A.
(5a) Amendment to Management Agreement between
the Registrant
and Fischer Francis Trees & Watts, Inc., dated September
25, 1990, filed as Exhibit 5 to Post-Effective Amendment
No. 2 to Registrant's Registration Statement on Form N-1A.
(5b) Amended and Restated Management Agreement
between the
Registrant and Fischer Francis Trees & Watts, Inc.,
dated August 31, 1991, filed as Exhibit 5 to Post-
Effective Amendment No. 5 to Registrant's Registration
Statement on Form N-1A.
(5c) Sub-Advisory Agreement between Fischer
Francis Trees &
Watts, Inc. and Fischer Francis Trees and Watts, dated
August 31, 1991, filed as Exhibit 5(a) to Post-Effective
Amendment No. 5 to Registrant's Registration Statement
on Form N-1A.
(5d) Advisory Agreement between the Registrant
(for the
Stable Return Portfolio) and Fischer Francis Trees &
Watts, Inc., dated February 18, 1993, filed as Exhibit
5(d) to Post-Effective Amendment No. 10 to Registrant's
Registration Statement on Form N-1A.
(5e) Advisory Agreement between the Registrant
(for the U.S.
Treasury Portfolio) and Fischer Francis Trees & Watts,
Inc., dated February 18, 1993, filed as Exhibit 5(e) to
Post-Effective Amendment No. 10 to Registrant's
Registration Statement on Form N-1A.
(5g) Advisory Agreement between the Registrant
(for the Broad
Market Fixed Income Portfolio) and Fischer Francis Trees
& Watts, Inc., dated February 18, 1993, filed as Exhibit
5(g) to Post-Effective Amendment No. 10 to Registrant's
Registration Statement on Form N-1A.
(5i) Advisory Agreement between the Registrant
(for the
International Fixed Income Portfolio) and Fischer
Francis Trees & Watts, Inc., dated February 18, 1993
filed, as Exhibit 5(i) to Post-Effective Amendment No.
10 to Registrant's Registration Statement on Form N-1A.
(5j) Advisory Agreement between the Registrant
(for the
International Fixed Income-Hedged Portfolio) and Fischer
Francis Trees & Watts, Inc., dated February 18, 1993,
filed as Exhibit 5(j) to Post-Effective Amendment No. 10
to Registrant's Registration Statement on Form N-1A.
(5l) Sub-Advisory Agreement (for the
International Fixed
Income Portfolio) between Fischer Francis Trees & Watts,
Inc. and Fischer Francis Trees & Watts, dated February
18, 1993, filed as Exhibit 5(l) to Post-Effective
Amendment No. 10 to Registrant's Registration Statement
on Form N-1A.
(5m) Sub-Advisory Agreement (for the
International Fixed
Income-Hedged Portfolio) between Fischer Francis Trees &
Watts, Inc. and Fischer Francis Trees & Watts, dated
February 18, 1993, filed as Exhibit 5(m) to Post-
Effective Amendment No. 10 to Registrant's Registration
Statement on Form N-1A.
(5n) Advisory Agreement between the Registrant
(for the
Mortgage Total Return Portfolio) and Fischer Francis
Trees & Watts, Inc., dated January 2, 1996, filed as
Exhibit 5(n) to Post-Effective Amendment No. 19 to
Registrant's Registration Statement on Form N-1A.
(5o) Advisory Agreement between the Registrant (for the
Emerging Markets Portfolio) and Fischer Francis Trees &
Watts, Inc., dated October 30, 1996, filed herewith.
(5p) Advisory Agreement between the Registrant (for the
Inflation-Indexed Portfolio) and Fischer Francis Trees &
Watts, Inc., dated October 30, 1996, filed herewith.
(5q) Advisory Agreement between the Registrant (for the
Inflation-Indexed Hedged Portfolio) and Fischer Francis
Trees & Watts, Inc., dated October 30, 1996, filed
herewith.
(5r) Advisory Agreement between the Registrant (for the Money
Market Portfolio) and Fischer Francis Trees & Watts,
Inc., dated October 30, 1996, filed herewith.
(5s) Sub-Advisory Agreement (for the Emerging Markets
Portfolio) between Fischer Francis Trees & Watts, Inc.
and Fischer Francis Trees & Watts, dated October 30,
1996 filed herewith.
(5t) Sub-Advisory Agreement (for the Inflation-Indexed
Portfolio) between Fischer Francis Trees & Watts, Inc.
and Fischer Francis Trees & Watts, dated October 30,
1996 filed herewith.
(5u) Sub-Advisory Agreement (for the Inflation Indexed-Hedged
Portfolio) between Fischer Francis Trees & Watts, Inc.
and Fischer Francis Trees & Watts, dated October 30,
1996 filed herewith.
(5v) Amendment to Management Agreement (for the Broad Market
Portfolio) between the Registrant and Fischer Francis
Trees & Watts, Inc., dated October 30, 1996, filed
herewith.
(5w) Amendment to Management Agreement (for the U.S. Treasury
Portfolio) between the Registrant and Fischer Francis
Trees & Watts, Inc., dated October 30, 1996, filed herewith.
(6) Distribution Agreement between the Registrant
and AMT
Capital Services, Inc., dated September 21, 1992, filed
as Exhibit 6 to Post-Effective Amendment No. 8 to
Registrant's Registration Statement on Form N-1A.
(6a) Distribution Agreement between the
Registrant and AMT
Capital Services, Inc., dated February 1, 1995 filed as
Exhibit 6a to Post-Effective Amendment No. 16 to
Registrant's Registration Statement on Form N-1A.
(7) Not Applicable.
(8) Custodian Agreement between Registrant and
State Street
Bank & Trust Company, dated November 21, 1989, filed as
Exhibit 8 to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A.
(8a) Custodian Agreement between Registrant and
State Street
Bank & Trust Company, dated October 22, 1991, filed as
Exhibit 8 to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A.
(8b) Transfer Agency and Service Agreement
between Registrant
and State Street Bank & Trust Company, dated October 22,
1991, filed as Exhibit 8(a) to Post-Effective Amendment
No. 5 to Registrant's Registration Statement on Form N-1A.
(8c) Transfer Agency and Service Agreement between
Registrant
and Investors Bank & Trust Company, dated November 27,
1992, filed as Exhibit 8(c) to Post-Effective Amendment
No. 9 to Registrant's Registration Statement on Form N-1A.
(8d) Custodian Agreement between Registrant and
Investors
Bank & Trust Company, dated January 10, 1994, filed as
Exhibit 8(d) to Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form N-1A.
(9) Administration Agreement between the
Registrant and AMT
Capital Services, Inc., dated September 21, 1992, filed
as Exhibit 9 to Post-Effective Amendment No. 8 to
Registrant's Registration Statement on Form N-1A.
(9a) Sales Incentive Fee Agreement between
Fischer Francis
Trees & Watts, Inc. and AMT Capital Services, Inc.,
dated September 21, 1992, filed as Exhibit 9(a) to Post-
Effective Amendment No. 8 to Registrant's Registration
Statement on Form N-1A.
(9b) Administration Agreement between the
Registrant and AMT
Capital Services, Inc., dated February 1, 1995, filed as
Exhibit 9b to Post-Effective Amendment No. 16 to
Registrant's Registration Statement on Form N-1A.
(10) Opinion and Consent of Counsel, dated June 28, 1989,
filed as Exhibit 10 to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A.
(10a) Opinion and Consent of Counsel, dated
December 28, 1995,
filed as Exhibit 10a to Post-Effective Amendment No. 17
to Registrant's Registration Statement on Form N-1A.
(11) Consent of Independent Auditors, filed herewith.
(12) Not Applicable.
(13a) Purchase Agreement for Initial Capital between
Registrant and Fischer Francis Trees & Watts, Inc.,
dated November 17, 1989, filed as Exhibit 13 to Pre-
Effective Amendment No. 3 to Registrant's Registration
Statement on Form N-1A.
(14) Not Applicable.
(15) Not Applicable.
(16) Performance Information Schedule, filed
herewith.
Item 25. Persons Controlled by or Under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
As of December 31, 1996, there were 29 record holders of Capital
Stock of U.S. Short-Term, 6 record holders of Stable Return, 7
record holders of Mortgage Total Return, 22 record holders of
Worldwide, 5 record holders of Worldwide-Hedged, 5 record holders of
International and 10 record holders of International-Hedged.
Item 27. Indemnification
The Registrant shall indemnify directors, officers,
employees and
agents of the Registrant against judgments, fines, settlements and
expenses to the fullest extent allowed, and in the manner provided,
by applicable federal and Maryland law, including Section 17(h) and
(i) of the Investment Company Act of 1940. In this regard, the
Registrant undertakes to abide by the provisions of Investment
Company Act Releases No. 11330 and 7221 until amended or superseded
by subsequent interpretation of legislative or judicial action.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
The business and other connections of Fischer Francis Trees
& Watts,
Inc. (the Investment Adviser) and Fischer Francis Trees & Watts (the
Sub-Adviser) are on the Uniform Application for Investment Adviser
Registration ("Form ADV") of each as currently on file with the
Commission (File Nos. 801-10577 and 801-37205, respectively) the
text of which are hereby incorporated by reference.
Item 29. Principal Underwriters
(a) AMT Capital Services, Inc. does not act as principal
underwriter, depositor or investment adviser for any
investment company (other than the Fund).
(b) For each director or officer of AMT Capital Services,
Inc.:
Name and Positions and
Positions and
principal business offices with offices
with
address underwriter
registrant
Alan M. Trager Director None
600 Fifth Avenue and Treasurer
26th floor
New York, NY 10020
Carla E. Dearing Director and President Assistant
600 Fifth Avenue Treasurer
26th floor
New York, NY 10020
William E. Vastardis Senior Vice
Assistant
600 Fifth Avenue President Secretary
26th floor
New York, NY 10020
Ruth L. Lansner Secretary None
Gilbert, Segall & Young
430 Park Avenue
11th floor
New York, NY 10022
(c) No commissions or other compensation was paid to the
principal
underwriter during the registrant's last fiscal year.
Item 30. Location of Accounts and Records
All accounts, book and other documents required to be
maintained by
Section 31(a) of an Investment Company Act of 1940 and the Rules (17
CFR 270.32a-l to 3la-3) promulgated thereunder will be maintained by
the following:
Accounting and Custodial Records - Investors
Bank & Trust
Company, P.O. Box 1537, Boston, Massachusetts 02205-1537.
Dividend Disbursing Agent and Transfer Agent -
Investors Bank
& Trust Company, P.O. Box 1537, Boston, Massachusetts 02205-
1537.
Balance of Accounts and Records: AMT Capital
Services, Inc.,
600 Fifth Avenue, 26th Floor, New York, New York 10020 and
Fischer Francis Trees & Watts, Inc., 200 Park Avenue, 46th
Floor, New York, New York 10166.
Item 31. Management Services
None.
Item 32. Undertakings
The Registrant undertakes to file a post-effective amendment with
financial statements for the Emerging Markets Portfolio, Inflation-
Indexed Portfolio, Inflation-Indexed Hedged Portfolio and Money
Market Portfolio within four to six months of their respective
commencement dates of operation.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment to the Registration Statement to be signed on its behalf
by
the undersigned, thereunto duly authorized, in the City of New York, State of
New York on the 21st day of January, 1997.
FFTW
FUNDS, INC.
By /s/
Onder John Olcay
Onder John Olcay
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title
Date
/s/ Stephen E. Constantine President and Director January
21, 1997
Stephen J. Constantine
/s/ Onder John Olcay Chairman of the Board, January 21,
1997
Onder John Olcay Chief Executive Officer
/s/ John C Head III Director
January 21, 1997
John C Head III
/s/ Lawrence B. Krause Director January 21,
1997
Lawrence B. Krause
/s/ Paul Meek Director
January 21, 1997
Paul Meek
/s/ Stephen P. Casper Treasurer January 21,
1997
Stephen P. Casper
EXHIBIT INDEX
Exhibit No. Exhibit
(1d) Articles of Amendment, dated August 17, 1995.
(1e) Articles of Amendment, dated December 11, 1996.
(5o) Advisory Agreement between the Registrant (for
the
Emerging Markets Portfolio) and Fischer Francis Trees &
Watts, Inc., dated October 30, 1996.
(5p) Advisory Agreement between the Registrant (for
the
Inflation-Indexed Portfolio) and Fischer Francis Trees &
Watts, Inc., dated October 30, 1996.
(5q) Advisory Agreement between the Registrant (for
the
Inflation-Indexed Hedged Portfolio) and Fischer Francis
Trees & Watts, Inc., dated October 30, 1996.
(5r) Advisory Agreement between the Registrant (for
the Money
Market Portfolio) and Fischer Francis Trees & Watts,
Inc., dated October 30, 1996.
(5s) Sub-Advisory Agreement (for the Emerging Markets
Portfolio) between Fischer Francis Trees & Watts, Inc.
and Fischer Francis Trees & Watts, dated October 30, 1996.
(5t) Sub-Advisory Agreement (for the Inflation
Indexed
Portfolio) between Fischer Francis Trees & Watts, Inc.
and Fischer Francis Trees & Watts, dated October 30, 1996.
(5u) Sub-Advisory Agreement (for the Inflation
Indexed-Hedged
Portfolio) between Fischer Francis Trees & Watts, Inc.
and Fischer Francis Trees & Watts, dated October 30, 1996.
(5v) Amendment to Management Agreement (for the Broad
Market
Portfolio) between the Registrant and Fischer Francis
Trees & Watts, Inc., dated October 30, 1996.
(5w) Amendment to Management Agreement (for the U.S.
Treasury
Portfolio) between the Registrant and Fischer Francis
Trees & Watts, Inc., dated October 30, 1996.
(11) Consent of Independent Auditors
(16) Performance Information Schedule
