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 - March 30, 1998
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 March 30, 1998 (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..................................... 3
Fund Expenses............................................. 5
Financial Highlights...................................... 8
The Fund ....................................................... 17
Investment Objectives and Policies........................ 17
Description of Investments................................ 23
Investment Techniques..................................... 26
Investment Restrictions................................... 30
Risks Associated With the Fund's Investment Policies
and Investment Techniques............................ 30
Distribution of Fund Shares............................... 32
Purchases and Redemptions................................. 32
Determination of Net Asset Value.......................... 33
Dividends................................................. 34
Management of the Fund.................................... 34
Tax Considerations........................................ 36
Shareholder Information................................... 37
<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.
PORTFOLIO QUALITY RATINGS
Each Portfolio, other than Emerging Markets, will maintain minimum quality
standards for overall average quality and individual securities.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
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 A A A-2 P-2 B AA (Aa)
Portfolios
Other Portfolios BBB Baa A-2 P-2 B AA (Aa)
</TABLE>
Money Market quality ratings are described below in the Portfolio's investment
policies.
INVESTMENT ADVISER AND SUB-ADVISER
Fischer Francis Trees & Watts, Inc. serves as Investment Adviser to the Fund.
The Investment Adviser, organized in 1972, is a registered investment adviser
that currently manages approximately $27 billion in assets entirely in
portfolios of debt securities for in excess of 100 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 $10 billion in multi-currency fixed
income portfolios for institutional clients. (See MANAGEMENT OF THE FUND)
<PAGE>
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, International Hedged
and Emerging Markets 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, Emerging Markets and International-Hedged
Portfolios may only be purchased on the last Business Day of each month, and on
any other Business Days in which the Investment Adviser approves a purchase at
the net asset value determined on those days.
HOW TO REDEEM SHARES
Shares of each Portfolio may be redeemed, without a transaction
charge, at the net asset value of such Portfolio next
determined after receipt by the Transfer Agent of the
redemption request. (See PURCHASES AND REDEMPTIONS)
RISKS
Prospective investors should consider various risks associated with the
Portfolios prior to investing in any Portfolio, including: (1) each Portfolio
may be influenced by changes in interest rates which generally have an inverse
relationship with corresponding market values; (2) each Portfolio, except Money
Market, 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, except Money Market,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 Portfolio may, at times,
concentrate its investments in bank obligations and may, therefore, have greater
exposure to certain risks associated with the banking industry; and (8) each
Portfolio, other than U.S. Short-Term, is "non-diversified" under the Investment
Company Act of 1940 (the "1940 Act"), which may entail a greater exposure to
credit and market risks than a diversified portfolio. (See RISKS ASSOCIATED WITH
THE FUND'S INVESTMENT POLICIES AND INVESTMENT TECHNIQUES)
FUND EXPENSES
The following table illustrates the expenses and fees that a
shareholder of the Fund can expect to incur. The purpose of this table is to
assist the investor in understanding the various expenses that an investor in
the Fund will bear directly or indirectly.
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
ANNUAL FUND OPERATING EXPENSES (after expense reimbursements,
shown as a percentage of average net assets)
<TABLE>
<S> <C> <C> <C> <C> <C>
12b-1 Administration Other Interest Total
Advisory Fees Fees (1) Fees (2) Expenses (7) Expense Expenses
------------- -------- -------- ------------ ------- --------
U.S. Fixed Income
Portfolios
Money Market Portfolio 0.10% None 0.05% 0.10% 0.00% 0.25% (5)
U.S. Short-Term Portfolio 0.15% (3) None 0.05% 0.05% 0.01% 0.26% (3)
Stable Return Portfolio 0.15% (4) None 0.05% 0.10% 0.30% 0.60% (4)
U.S. Treasury Portfolio 0.30% None 0.05% 0.10% 0.00% 0.45% (5)
Mortgage Total Return 0.10% (9) None 0.05% 0.10% 0.09% 0.34% (5)
Portfolio
Broad Market Portfolio 0.30% None 0.05% 0.10% 0.00% 0.45% (5)
Global and International
Fixed Income Portfolios
Worldwide Portfolio 0.40% None 0.05% 0.15% 0.00% 0.60% (6)
Worldwide-Hedged Portfolio 0.25% (8) None 0.05% 0.15% 0.00% 0.45% (8)
International Portfolio 0.40% None 0.05% 0.15% 0.00% 0.60% (5)
International-Hedged 0.10% (9) None 0.05% 0.15% 0.00% 0.30% (5)
Portfolio
Emerging Markets Portfolio 0.75% None 0.05% 0.23% 0.00% 1.03% (5)
Inflation-Indexed 0.40% None 0.05% 0.15% 0.00% 0.60% (5)
Portfolio
Inflation-Indexed Hedged 0.40% None 0.05% 0.15% 0.00% 0.60% (5)
Portfolio
</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, except in Portfolios
where it is anticipated that it will be earned
(3) Pursuant to the Investment Advisory agreement, total
operating expenses (exclusive of interest expense) are
capped at 0.40% (on an annualized basis) of the
average daily net assets of U.S. Short-Term. All
operating expenses in excess of the cap will be paid
by the Investment Adviser. Effective March 1, 1996 and
until further notice, the Investment Adviser has
voluntarily agreed to lower the advisory fee to 0.15%
from 0.30% (on an annualized basis) and cap total
operating expenses (exclusive of interest expense) at
0.25% (on an annualized basis). The Investment
Adviser will not attempt to recover prior period
reimbursements in the event that expenses fall below
the cap. Without such voluntary and contractual caps,
the total operating expenses excluding interest
expense would be 0.43% of U.S. Short-Term's average daily net assets.
(4) Effective March 1, 1996 and until further notice, the
Investment Adviser has voluntarily agreed to lower the
advisory fee to 0.15% from 0.35% (on an annualized
basis) and cap total operating expenses (exclusive of
interest expense) at 0.30% (on an annualized basis).
The Investment Adviser will not attempt to recover
prior period reimbursements in the event that expenses
fall below the cap. Without such cap and waiver, the
total operating expenses excluding interest expense
would be 0.61% of Stable Return's average daily net
assets.
(5) The Investment Adviser has voluntarily agreed to cap
the total operating expenses (exclusive of interest
expense) at 0.25% (on an annualized basis) of each of
Money Market's and Mortgage Total Return's average
daily net assets, at 0.30% (on an annualized basis) of
International-Hedged's average daily net assets, at
0.45% (on an annualized basis) of each of U.S.
Treasury's and Broad Market's average daily net
assets, at 0.60% (on an annualized basis) of each of
International'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 excluding interest expense (on an annualized
basis) for Money Market, Mortgage Total Return,
International and International-Hedged would be 0.46%,
0.45%, 0.70% and 0.58% respectively, of their average
daily net assets. The U.S. Treasury, Broad Market,
Inflation-Indexed and Inflation-Indexed Hedged
Portfolios have not commenced investment operations as
yet.
(6) Pursuant to the Investment Advisory agreement, total
operating expenses (exclusive of interest expense) are
capped at 0.60% (on an annualized basis) of the
average daily net assets of Worldwide. All operating
expenses in excess of the cap will be paid by the
Investment Adviser. The Investment Adviser will not
attempt to recover prior period reimbursements in the
event that expenses fall below the cap. Without such
cap, the total operating expenses excluding interest
expense for Worldwide would be 0.62% of its average
daily net assets.
(7) "Other Expenses" are based on estimated expenses for the
current fiscal year.
(8) Pursuant to the Investment Advisory agreement, total
operating expenses (exclusive of interest expense) are
capped at 0.60% (on an annualized basis) of the
average daily net assets of Worldwide-Hedged. All
operating expenses in excess of the cap will be paid
by the Investment Adviser. Effective July 1, 1995 and
until further notice, the Investment Adviser has
voluntarily agreed to lower the advisory fee to 0.25%
from 0.40%(on an annualized basis) and cap total
operating expenses (exclusive of interest expense) at
0.45% (on an annualized basis). The Investment
Adviser will not attempt to recover prior period
reimbursements in the event that expenses fall below
the cap. Without such voluntary and contractual caps,
the total operating expenses excluding interest expense
would be 0.65% of Worldwide-Hedged's average daily net assets.
(9) The Investment Adviser has voluntarily agreed to lower the advisory fee
until further notice for Mortgage Total Return to 0.10% from 0.30% and
for International Hedged to 0.10% from 0.40% effective October 1, 1997
and September 1, 1997, respectively.
<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
<TABLE>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
U.S. Fixed Income Portfolios
Money Market $3 $8 $14 $32
U.S. Short-Term $3 $8 $15 $33
Stable Return $6 $19 $33 $75
U.S. Treasury $5 $14
Mortgage Total Return $3 $11 $19 $43
Broad Market $5 $14
Global and International Fixed Income Portfolios
Worldwide $6 $19 $33 $75
Worldwide-Hedged $5 $17 $25 $59
International $6 $19 $33 $75
International-Hedged $3 $10 $17 $38
Emerging Markets $11 $33
Inflation-Indexed $6 $19
Inflation-Indexed Hedged $6 $19
</TABLE>
These examples should not be considered a representation of
future expenses or performance. Actual operating expenses and annual returns may
be greater or lesser than those shown.
Each Portfolio's active management approaches could lead to
higher portfolio transaction expenses as a result of a higher volume of such
transactions. These transaction expenses are not fully reflected in the expenses
subject to the cap described above. See "Investment Techniques - Portfolio
Turnover". The Investment Adviser, at its discretion, may waive any portion of
the advisory fees in any Portfolio.
FINANCIAL HIGHLIGHTS
The financial information in the following tables has been
audited in conjunction with the audit of the financial statements of the Fund by
Ernst & Young LLP, independent auditors. The audited financial statements for
the year ended December 31,1997 are incorporated by reference in the Statement
of Additional Information. The financial information should be read in
conjunction with the financial statements which can be obtained upon request.
The Money Market Portfolio, previously the AMT Capital Fund, Inc. - Money Market
Portfolio (the "AMT Capital Portfolio"), commenced operations on November 1,
1993. Effective as of the close of business on April 29, 1997, the AMT Capital
Portfolio merged into the Money Market Portfolio pursuant to shareholder
approval of the reorganization on April 28, 1997. The financial information for
the periods ended December 31, 1996, December 31, 1995, December 31, 1994 and
December 31, 1993 in the following table have been audited in conjunction with
the audit of the financial statements of the AMT Capital Portfolio by Ernst &
Young LLP, independent auditors.
<PAGE>
===============================================================================
Financial Highlights
Money Market Portfolio
===============================================================================
<TABLE>
<S> <C> <C> <C> <C> <C>
Period From
Year Ended Nov. 1, 1993*
---------------------------------------------------------------------
For a share outstanding Dec. 31, Dec. 31, Dec. 31, Dec. 31, to
Throughout the period: 1997 1996 1995 1994 Dec. 31, 1993
- ------------------------------------------------------------------------------------------------------------------------------
Per Share Data
Net asset value, beginning of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Increase From
Investment Operations
Investment income, net 0.05 0.05 0.06 0.04 0.00**
Net realized gain on investments - 0.00 ** 0.00** 0.00 -
---------------- -------------- -------------- -------------- --------------
Total from investment operations 0.05 0.05 0.06 0.04 0.00
---------------- -------------- -------------- -------------- --------------
Less Distributions
From investment income, net 0.05 0.05 0.06 0.04 0.00 **
From net realized gain on - 0.00 ** - - -
investments
In excess of net realized gain on
investments - - - 0.00 ** -
---------------- -------------- -------------- -------------- --------------
Total distributions 0.05 0.05 0.06 0.04 0.00
---------------- -------------- -------------- -------------- --------------
Net asset value, end of period
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
================ ============== ============== ============== ==============
Total Return 5.46% 5.18% 5.74% 4.13% 0.44% (c)
- ------------
Ratios/Supplemental Data
Net assets, end of period (000's) $ 26,152 $ 25,047 $ 25,870 $22,006 $ 2,336
Ratio of operating expenses to
average net assets (a) 0.30% 0.40% 0.40% 0.40% 0.40% (b)
Ratio of investment income, net to
average net assets (a) 5.33% 5.05% 5.58% 4.16% 2.67% (b)
Decrease in above expense ratios
due to waiver of investment
advisory and administration fees
and reimbursement of other expenses 0.16% 0.30% 0.37% 0.64% 25.54% (b)
</TABLE>
- -------------------------------------------------------------------------------
(a) Net of waivers and reimbursements (b) Annualized (c) Not annualized *
Commencement of Operations ** Rounds to less than $.01
===============================================================================
Financial Highlights (continued)
U.S. Short-Term Portfolio
==============================================================================
<TABLE>
<S> <C> <C> <C> <C> <C>
Year Ended
-------------------------------------------------------------------
For a share outstanding Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
throughout the period: 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
Per Share Data
Net asset value, beginning of period $ 9.85 $ 9.88 $ 9.89 $ 9.98 $ 10.00
----------- ----------- ----------- ----------- -----------
Increase (Decrease) From
Investment Operations
Investment income, net 0.57 0.55 0.56 0.44 0.32
Net realized and unrealized (loss) on investments,
financial futures and options
contracts, and foreign currency-
related transactions (0.08) (0.03) (0.01) (0.08) (0.03)
----------- ----------- ----------- ----------- -----------
Total from investment operations 0.49 0.52 0.55 0.36 0.29
----------- ----------- ----------- ----------- -----------
Less Distributions
From investment income, net 0.57 0.55 0.56 0.45 0.31
In excess of investment income, net - - 0.00 * 0.00 * -
----------- ----------- ----------- ----------- -----------
Total distributions 0.57 0.55 0.56 0.45 0.31
----------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 9.77 $ 9.85 $ 9.88 $ 9.89 $ 9.98
=========== =========== =========== =========== ===========
Total Return 5.09% 5.45% 5.71% 3.71% 2.88%
- ------------
Ratios/Supplemental Data
Net assets, end of period (000's) $ 486,906 $ 355,257 $ 457,425 $290,695 $ 417,728
Ratio of operating expenses to average
net assets, exclusive of interest
expense (a)
0.25% 0.27% 0.40% 0.40% 0.40%
Ratio of operating expenses to average
net assets, inclusive of interest expense (a) 0.26% 0.40% 0.51% 0.43% 0.48%
Ratio of investment income, net to
average net assets (a) 5.78% 5.62% 5.64% 4.14% 3.28%
Decrease in above expense ratios due to
waiver of investment advisory fees 0.18% 0.05% 0.07% 0.08% 0.03%
</TABLE>
- -------------------------------------------------------------------------------
(a) Net of waivers
* Rounds to less than $0.01
<PAGE>
===============================================================================
Financial Highlights (continued)
U.S. Short-Term Portfolio
===============================================================================
<TABLE>
<S> <C> <C> <C> <C>
For a share outstanding throughout the Three
period: Year Months Year Period From
Ended Ended Ended Dec. 6, 1989*
Dec. 31, Dec. 31, Sept. 31, to Sept. 30,
1992 1991 1991 1990
- -----------------------------------------------------------------------------------------------------------------
Per Share Data
Net asset value, beginning of period $ 10.00 $ 10.00 $ 10.00 10.00
----------- ----------- ----------- --------------
Increase (Decrease) From
Investment Operations
Investment income, net 0.34 0.12 0.63 0.62
Net realized and unrealized (loss) on investments,
financial futures and options
contracts, and foreign currency-related
transactions 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
In excess of investment income, net 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 (000's) $ 682,513 $ 365,311 $ 269,115 $ 111,957
Ratio of operating expenses to average
net assets, exclusive of interest
expense(a) 0.40% 0.40%(b) 0.40% 0.50% (b)
Ratio of operating expenses to average
net assets, inclusive of interest
expense (a) 0.43% 0.40%(b) 0.43% 0.50% (b)
Ratio of investment income, net to
average net assets (a) 3.37% 4.67% (b) 5.99% 8.23% (b)
Decrease in above expense ratios due to
waiver of investment advisory fees - 0.03% (b) 0.11% 0.86% (b)
</TABLE>
- -------------------------------------------------------------------------------
(a) Net of waivers
(b) Annualized
* Commencement of Operations
<PAGE>
=============================================================================
Financial Highlights (continued)
Stable Return Portfolio
=============================================================================
<TABLE>
<S> <C> <C> <C> <C> <C>
Period From
Year Ended July 26,
1993*
-------------------------------------------------------------------
For a share outstanding Dec. 31, Dec. 31, Dec. 31, Dec. 31, To
throughout the period: 1997 1996 1995 1994 Dec. 31, 1993
- ----------------------------------------------------------------------------------------------------------------------------
Per Share Data
Net asset value, beginning of
period $ 9.93 $ 10.00 $ 9.55 $ 9.95 $ 10.00
Increase (Decrease) From
Investment Operations
Investment income, net 0.62 0.55 0.60 0.43 0.14
Net realized and unrealized
gain (loss) on investments,
financial futures
contracts and foreign
currency-related transactions 0.08 (0.04) 0.45 (0.40) 0.05
-------------- -------------- -------------- -------------- --------------
Total from investment operations 0.70 0.51 1.05 0.03 0.19
-------------- -------------- -------------- -------------- --------------
Less Distributions
From investment income, net 0.62 0.55 0.60 0.43 0.14
In excess of investment income, net - 0.00 ** - - -
From net realized gain on
investments, financial futures
contracts and foreign
currency-related transactions 0.08 0.03 - - 0.03
In excess of net realized gain on
investments, financial futures
contracts and foreign
currency-related transactions - - - - 0.07
-------------- -------------- -------------- -------------- --------------
Total distributions 0.70 0.58 0.60 0.43 0.24
-------------- -------------- -------------- -------------- --------------
Net asset value, end of period
$ 9.93 $ 9.93 $ 10.00 $ 9.55 $ 9.95
============== ============== ============== ============== ==============
Total Return 7.21% 5.29% 11.26% 0.29% 1.78% (c)
- ------------
Ratios/Supplemental Data
Net assets, end of period (000's) $ 40,029 $ 42,100 $ 5,080 $ 4,338 $ 3,482
Ratio of operating expenses to average
net assets, exclusive of interest
expense (a) 0.30% 0.31% 0.50% 0.50% 0.50% (b)
Ratio of operating expenses to average
net assets, inclusive of interest
expense (a) 0.60% 0.49% 1.41% 1.74% 0.50% (b)
Ratio of investment income,
net to average net assets (a) 6.10% 5.79% 6.09% 4.43% 3.68% (b)
Decrease in above expense ratios
due to waiver of investment
advisory fees
and reimbursement of other expenses 0.31% 0.15% 0.53% 0.57% 1.46% (b)
Portfolio turnover 1,292% 1,387% 1,075% 343% 1,841%
</TABLE>
- -------------------------------------------------------------------------------
(a) Net of waivers and reimbursements (b) Annualized (c) Not annualized *
Commencement of Operations ** Rounds to less than $.01
.
<PAGE>
============================================================================
Financial Highlights (continued)
Mortgage Total Return Portfolio
============================================================================
<TABLE>
<S> <C> <C>
Period From
For a share outstanding Year Ended April 29, 1996*
throughout the period: Dec. 31, 1997 to Dec. 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------
Per Share Data
Net asset value, beginning of period $ 10.16 $ 10.00
Increase From Investment Operations
Investment income, net 0.68 0.41
Net realized and unrealized gain on investments, short sales,
and financial futures and options contracts 0.32 0.23
------------------ ------------------
Total from investment operations 1.00 0.64
------------------ ------------------
Less Distributions
From investment income, net 0.63 0.41
In excess of investment income, net 0.05 0.06
From net realized gain on investments, short sales,
and financial futures and options contracts 0.18 0.01
------------------ ------------------
Total distributions 0.86 0.48
------------------ ------------------
Net asset value, end of period $ 10.30 $ 10.16
================== ==================
Total Return 10.19% 6.54% (c)
- ------------
Ratios/Supplemental Data
Net assets, end of period (000's) $ 655,271 $ 220,990
Ratio of operating expenses to average net assets, exclusive of interest expense 0.38% 0.45% (b)
(a)
Ratio of operating expenses to average net assets, inclusive of interest expense 0.47% 0.88% (b)
(a)
Ratio of investment income, net to average net assets (a) 6.07% 7.61% (b)
Decrease in above expense ratios due to waiver of investment
advisory fees and reimbursement of other expenses 0.07% 0.10% (b)
Portfolio turnover 3,396% 590%
</TABLE>
- -------------------------------------------------------------------------------
(a) Net of waivers and reimbursements
(b) Annualized
(c) Not annualized
* Commencement of Operations
<PAGE>
============================================================================
Financial Highlights (continued)
Worldwide Portfolio
============================================================================
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year Ended
----------------------------------------------------------------------------------
From Apr.
15, 1992*
For a share outstanding throughout Dec. 31, Dec. Dec. 31, Dec. 31, Dec. 31, to Dec.
the period: 1997 31, 1996 1995 1994 1993 31, 1992
- -------------------------------------- ----------------------------------------------------------------------------
Per Share Data
Net asset value, beginning of period $ 9.64 $ 9.83 $ 9.27 $ 10.02 $ 9.98 $ 10.00
---------- ---------- ---------- --------- ---------- ------------
Increase (Decrease) From
Investment Operations
Investment income, net 0.49 0.53 0.58 0.50 0.45 0.39
Net realized and unrealized gain
(loss) on investments, financial
futures contracts
And foreign currency-related
transactions (0.22) 0.01 0.56 (0.74) 1.04 0.53
---------- ---------- ---------- --------- ---------- ------------
Total from investment operations 0.27 0.54 1.14 (0.24) 1.49 0.92
---------- ---------- ---------- --------- ---------- ------------
Less Distributions
From investment income, net 0.19 0.53 0.30 0.20 0.45 0.39
In excess of investment income, net 0.11 - - 0.01 - -
From net realized gain on
investments, financial futures
contracts and foreign
currency-related transactions - 0.09 - - 0.87 0.55
In excess of net realized gain on
investments, financial futures
contracts and foreign
currency-related transactions - - - - 0.13 0.00 **
From capital stock in excess of par value 0.19 0.11 0.28 0.30 - -
---------- ---------- ---------- --------- ---------- ------------
Total distributions 0.49 0.73 0.58 0.51 1.45 0.94
---------- ---------- ---------- --------- ---------- ------------
Net asset value, end of period $ 9.42 $ 9.64 $ 9.83 $ 9.27 $10.02 $ 9.98
========== ========== ========== ========= ========== ============
Total Return 2.93% 5.77% 12.60% (2.25%) 15.86% 13.46% (b)
- ------------
Ratios/Supplemental Data
Net assets, end of period (000's) $ 82,236 $ 74,939 $ 86,186 $ 53,721 $ 217,163 $ 82,757
Ratio of operating expenses to
average net assets, exclusive of
interest expense (a) 0.60% 0.60% 0.60% 0.60% 0.59% 0.60% (b)
Ratio of operating expenses to
average net assets, inclusive of
interest expense (a) 0.60% 0.60% 0.60% 0.63% 0.86% 0.79% (b)
Ratio of investment income, net to
average net assets (a) 5.21% 5.52% 6.13% 5.11% 4.48% 5.39% (b)
Decrease in above expense ratios due
to waiver of investment advisory
fees and reimbursement of other 0.02% 0.05% 0.30% 0.02% - 0.72% (b)
expenses
Portfolio turnover 713% 1,126% 1,401% 1,479% 1,245% 850%
</TABLE>
- -------------------------------------- --------------------------------------
(a) Net of waivers and reimbursements (b) Annualized * Commencement of
Operations **Rounds to less than $0.01
===============================================================================
Financial Highlights (continued)
Worldwide-Hedged Portfolio
===============================================================================
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year Ended
--------------------------------------------------------------------------------
Period From
For a share outstanding throughout Dec. 31, Dec. Dec. Dec. Dec. 31, May 19, 1992*
the period: 1997 31, 1996 31, 1995 31, 1994 1993 to Dec. 31,
1992
- -------------------------------------- ----------------------------------------------------------------------------------
Per Share Data
Net asset value, beginning of period $ 10.91 $ 10.85 $ 10.41 $ 10.08 $ 9.85 $ 10.00
---------- ---------- ---------- ---------- ---------- --------------
Increase From
Investment Operations
Investment income, net 0.53 0.62 0.45 0.34 0.45 0.32
Net realized and unrealized gain on
investments, financial futures
contracts
and foreign currency-related
transactions 0.80 0.43 0.66 0.43 0.76 0.25
---------- ---------- ---------- ---------- ---------- -------------
Total from investment operations 1.33 1.05 1.11 0.77 1.21 0.57
---------- ---------- ---------- ---------- ---------- --------------
Less Distributions
From investment income, net 0.59 0.62 0.67 0.44 0.45 0.32
In excess of investment income, net - 0.37 - 0.00* - -
From net realized gain on
investments, financial futures
contracts, and foreign
currency-related transactions 0.42 - - - 0.53 0.40
---------- ---------- ---------- ---------- ---------- --------------
Total distributions 1.01 0.99 0.67 0.44 0.98 0.72
---------- ---------- ---------- ---------- ---------- -------------
Net asset value, end of period 11.23 10.91 10.85 10.41 10.08 9.85
========== ========== ========== ========== ========== ===============
Total Return 12.60% 10.03% 11.00% 7.84% 12.89% 9.45% (b)
- ------------
Ratios/Supplemental Data
Net assets, end of period (000's) 80,390 30,024 28,255 $ 273 41,138 21,785
Ratio of operating expenses to
average net assets, exclusive of
interest expense (a) 0.45% 0.45% 0.45% 0.60% 0.60% 0.60% (b)
Ratio of operating expenses to
average net assets, inclusive of
interest expense (a) 0.45% 0.45% 0.45% 0.65% 0.86% 0.83% (b)
Ratio of investment income, net to
average net assets (a) 5.29% 5.71% 5.84% 4.72% 4.49% 5.13% (b)
Decrease in above expense ratios due
to waiver of investment advisory
fees and reimbursement of other expenses 0.20% 0.24% 0.54% 0.17% 0.09% 1.01% (b)
Portfolio Turnover 704% 1,087% 500% 1,622% 1,254% 826%
</TABLE>
- ------------------------------------------------------------------------------
(a) Net of waivers and reimbursements (b) Annualized * Commencement of
Operations ** Rounds to less than $0.01
<PAGE>
==============================================================================
Financial Highlights (continued)
International Portfolio
==============================================================================
<TABLE>
<S> <C> <C>
Period from
Year Ended May 9, 1996* to
For a share outstanding December 31, December 31, 1996
Throughout the period: 1997
- ----------------------------------------------------------------------------------------------------------------------------
Per Share Data
Net asset value, beginning of period $ 10.20 $ 10.00
Increase (Decrease) From
Investment Operations
Investment income, net 0.50 0.38
Net realized and unrealized gain (loss) on investments, financial futures
Contracts and foreign currency-related transactions (0.56) 0.28
------------------ ------------------
Total from investment operations (0.06) 0.66
------------------ ------------------
Less Distributions
From investment income, net 0.14 0.38
From net realized gain on investments, financial futures contracts
And foreign currency-related transactions 0.14 0.08
From capital stock in excess of par value 0.36 -
------------------ ------------------
Total distributions 0.64 0.46
------------------ ------------------
Net asset value, end of period
$ 9.50 $ 10.20
================== ==================
Total Return (0.43%) 6.66% (c)
- ------------
Ratios/Supplemental Data
Net assets, end of period (000's) $ 67,653 $ 35,746
Ratio of operating expenses to average net assets (a) 0.60% 0.60% (b)
Ratio of investment income, net to average net assets (a) 5.19% 5.73% (b)
Decrease in above expense ratios due to waiver of investment advisory fees 0.10% 0.32% (b)
Portfolio Turnover 809% 539%
</TABLE>
- -------------------------------------------------------------------------------
(a) Net of waivers
(b) Annualized
(c) Not annualized
* Commencement of Operations
<PAGE>
===============================================================================
Financial Highlights (continued)
International-Hedged Portfolio
===============================================================================
<TABLE>
<S> <C> <C> <C> <C> <C>
Year Ended
--------------------------------------------------------------------------------
Period from
For a share outstanding throughout the Dec. 31, Dec. 31, Dec. 31, Dec. 31, Mar. 25, 1993*
period: 1997 1996 1995 1994 to Dec. 31,
1993
- -----------------------------------------------------------------------------------------------------------------------------
Per Share Data
Net asset value, beginning of period $ 9.80 10.19 10.00 *** 10.39 10.00
Increase (Decrease) From
Investment Operations
Investment income, net 0.41 0.47 0.19 0.20 0.44
Net realized and unrealized gain (loss) on
invest-ments, financial futures, options
and swap con-tracts, and foreign
currency-related transactions 0.43 (0.15) 0.19 (0.46) 0.78
------------- ------------ ------------ ----------- ---------------
Total from investment operations 0.84 0.32 0.38 (0.26) 1.22
------------- ------------ ------------ ----------- ---------------
Less Distributions
From investment income, net 0.36 0.47 0.19 0.20 0.44
In excess of investment income, net 0.17 - 0.00 (c) - -
From net realized gain on investments,
financial futures, options and swap
contracts, and foreign currency-related 0.06 0.05 - 0.50 0.39
transactions
In excess of net realized gain on
investments,
financial futures, options and swap
contracts, and
foreign currency-related transactions - 0.09 - - -
From capital stock in excess of par value - 0.10 - - -
------------- ------------ ------------ ----------- ---------------
Total distributions 0.59 0.71 0.19 0.70 0.83
------------- ------------ ------------ ----------- ---------------
Net asset value, end of period $ 10.05 $ 9.80 $ 10.19 $ 9.43** $ 10.39
============= ============ ============ =========== ===============
Total Return 8.77% 3.18% 13.45% (b) (2.53%) 16.37% (b)
- ------------
Ratios/Supplemental Data
Net assets, end of period (000's) $ 283,005 $126,645 $ 34,005 $ - $ 17,867
Ratio of operating expenses
to average net assets (a) 0.42% 0.60% 0.60% (b) 0.57% 0.60% (b)
Ratio of investment income,
net to average net assets (a) 3.67% 4.65% 6.12% (b) 2.87% 5.86% (b)
Decrease in above expense ratios due to
waiver of investment advisory fees and
reimbursement of other expenses 0.16% 0.06% 0.17% (b) 0.49% 0.28% (b)
Portfolio Turnover 712% 784% 764% 1,282% 855%
</TABLE>
- -------------------------------------------------------------------------------
(a) Net of waivers and reimbursements (b) Annualized (c) Rounds to less than
$0.01 * Commencement of Operations
** Represents net asset value per share at December 30, 1994. The Portfolio
was fully liquidated on December 30, 1994 based on this net asset value.
*** The Portfolio recommenced operations on September 14, 1995.
<PAGE>
===============================================================================
Financial Highlights (continued)
Emerging Markets Portfolio
===============================================================================
<TABLE>
<S> <C>
Period from
For a share outstanding August 12, 1997* to
throughout the period: December 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
Per Share Data
Net asset value, beginning of period $ 10.00
Increase (Decrease) From
Investment Operations
Investment income, net 0.29
Net realized and unrealized (loss) on investments, financial futures
contracts and foreign currency-related transactions (0.41)
--------------------
Total from investment operations (0.12)
--------------------
Less Distributions
From investment income, net 0.29
--------------------
Net asset value, end of period $ 9.59
====================
Total Return (1.20)% (b)
Ratios/Supplemental Data
Net assets, end of period (000's) $ 111,043
Ratio of operating expenses to average net assets 1.03% (a)
Ratio of investment income, net to average net assets 7.87% (a)
Portfolio Turnover 16%
</TABLE>
- -------------------------------------------------------------------------------
(a) Annualized
(b) Not annualized
* Commencement of Operations
THE FUND
The Fund is a no-load, open-end management investment company
organized as a Maryland corporation. The Fund currently consists of thirteen
Portfolios, each with its own investment objectives and policies: (1) U.S. Fixed
Income Portfolios - Money Market, U.S. Short-Term, Stable Return, U.S. Treasury,
Mortgage Total Return and Broad Market and (2) Global and International Fixed
Income Portfolios - Worldwide, Worldwide-Hedged, International,
International-Hedged, Emerging Markets, Inflation-Indexed and Inflation-Indexed
Hedged.
INVESTMENT OBJECTIVES AND POLICIES
Each Portfolio seeks a high or stable level of total return as
may be consistent with the preservation of capital. The total return sought by
each Portfolio will consist of current income, capital appreciation, or a
combination of capital appreciation and current income, depending on whether the
Investment Adviser believes that current and anticipated levels of interest
rates, exchange rates and other factors affecting domestic and foreign
investments generally favor emphasizing one element or another in seeking
maximum total return. There can be no assurance that the investment objectives
of any Portfolio will be achieved.
Each Portfolio will invest only in debt securities that are
rated per the following table by Standard & Poor's Corporation ("S&P") or
Moody's Investors Services, Inc. ("Moody's"), or by Thomson Bankwatch in the
case of bank obligations, or similarly rated by IBCA Ltd. ("IBCA") in the case
of foreign bank obligations, or determined by the Investment Adviser (or the
Sub-Adviser to the Global and International Portfolios) to be of similar
creditworthiness. The minimum allowable quality rating is indicated.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
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 A A A-2 P-2 B AA (Aa)
Portfolios
Other Portfolios BBB Baa A-2 P-2 B AA (Aa)
</TABLE>
Money Market quality ratings are described below in the Portfolio's investment
policies.
Each Portfolio seeks to achieve its investment objective by
investing in debt securities of varying durations. Duration incorporates a
bond's yield, coupon interest payments, final maturity and call features into
one measure. Duration is a measure of the expected life of a debt security on a
present value basis. It takes the length of the time intervals between the
present time and the time that the interest and principal payments are scheduled
or, in the case of a callable bond, expected to be received, and weights them by
the present values of the cash to be received at each future point in time. For
any debt security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. In general, for the same
maturity, the lower the stated or coupon rate of interest of a debt security,
the longer the duration of the security; conversely, the higher the stated or
coupon rate of interest of a debt security, the shorter the duration of the
security.
Futures, options and options on futures have durations which,
in general, are closely related to the duration of the securities that underlie
them. Holding long futures or call options (backed by a segregated account of
cash and cash equivalents) will lengthen a Portfolio's duration by approximately
the same amount that holding an equivalent amount of the underlying securities
would. Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie those positions, and have the
effect of reducing portfolio duration by approximately the same amount that
selling an equivalent amount of the underlying securities would. In the case of
Mortgage Total Return, Inflation-Indexed and Inflation-Indexed Hedged
Portfolios, short positions as a result of short selling have an equivalent
negative impact to duration.
The Investment Adviser or Sub-Adviser may exceed the stated
duration cap of a Portfolio for temporary defensive purposes.
U.S. FIXED INCOME PORTFOLIOS
Each of the U.S. Portfolios will invest at least 65% of its
total assets in U.S. dollar-denominated debt securities. Each of the U.S.
Portfolios, other than U.S. Treasury and Money Market, may invest up to 35% of
its total assets in foreign currency-denominated (non-U.S. dollar) debt
securities, although it is not currently expected that any of the U.S.
Portfolios will invest more than a minor portion of their total assets in such
securities.
MONEY MARKET PORTFOLIO
The investment objective of Money Market is to provide the
maximum current income that is consistent with the preservation of capital and
liquidity through investments in money market securities.
Money Market seeks to attain its objective by investing at
least 80% of its total assets in the following high quality, U.S.
dollar-denominated, short-term instruments:
(a) obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities;
(b) commercial paper, loan participation interests, medium term notes,
asset-backed securities and other promissory notes, including floating
or variable rate obligations;
(c) domestic, Yankeedollar (U.S. branches or subsidiaries of foreign
depository institutions) and Eurodollar (foreign branches or
subsidiaries of U.S. depository institutions) certificates of deposit,
time deposits, bankers' acceptances, commercial paper, bearer deposit
notes and other promissory notes including floating or variable rate
obligations issued by U.S. or foreign bank holding companies and their
bank subsidiaries, branches and agencies; and
(d) repurchase and reverse repurchase agreements.
Money Market will invest only in issuers or instruments that
at the time of purchase:
(a) are issued or guaranteed by the U.S. Government,
its agencies, or instrumentalities;
(b) have received the highest short-term rating by at least two
nationally recognized statistical rating organizations ("NRSROs") such
as "A-1" by Standard & Poor's and "P-1" by Moody's, or are single rated
and have received the highest short-term rating by the NRSRO ("First
Tier Securities");
(c) are rated by two NRSROs in the second highest category, or rated by
one agency in the highest category and by another agency in the second
highest category or by one agency in the second highest category
("Second Tier Securities"), provided that Second Tier Securities are
limited in total to 5% of the Portfolio's total assets and on a per
issuer basis, to no more than the greater of 1% of the Portfolio's
total assets or $1,000,000; or
(d) are unrated, but are determined to be of comparable quality by the
Investment Adviser and sub-adviser pursuant to guidelines approved by
the Board of Directors.
Single rated and unrated securities are subject to
ratification by the Board of Directors. See "Descriptions of Investments" and
the Statement of Additional Information for definitions of the foregoing
instruments and rating systems.
Portfolio investments in Money Market are valued based on the
amortized cost valuation technique pursuant to Rule 2a-7 under the 1940 Act. See
the Statement of Additional Information for an explanation of the amortized cost
valuation method. All obligations in which Money Market invests generally have
remaining maturities of 397 days or less, although obligations subject to
repurchase agreements and certain variable and floating rate obligations may
bear longer final maturities.
U.S. SHORT-TERM PORTFOLIO
The investment objective of U.S. Short-Term is to attain a
high level of total return as may be consistent with the preservation of capital
and to maintain liquidity by investing at least 65% of its total assets in
high-quality fixed income securities with an average U.S. dollar-weighted
duration of less than one year.
U.S. Short-Term seeks to attain its objectives by investing
in: debt securities of U.S. and foreign issuers, including securities issued or
guaranteed by the U.S. Government and its agencies or instrumentalities;
municipal obligations; obligations issued or guaranteed by a foreign government
or any of its political subdivisions, authorities, agencies or instrumentalities
or by supranational organizations; obligations of domestic or foreign
corporations or other entities; obligations of domestic or foreign banks; and
mortgage- and asset-backed securities. The Portfolio may also engage in
repurchase and reverse repurchase agreements. These investments are described
below under "Description of Investments". In addition, U.S. Short-Term may
utilize up to 5% of its total assets as margin and premiums to purchase and sell
options, futures and options on futures contracts. U.S. Short-Term may not
invest more than 5% of its total assets in the securities of any issuer (other
than the U.S. Government and its agencies).
The shares of U.S. Short-Term are not
guaranteed by the U.S. Government. U.S. Short-Term is not a
"money market fund" and may make investments that are not
permitted by money market funds under applicable regulations.
For example, U.S. Short-Term may have a dollar-weighted average
maturity in excess of ninety days. Except for temporary
defensive purposes, U.S. Short-Term will not have a
dollar-weighted average maturity in excess of three years.
STABLE RETURN PORTFOLIO
The investment objective of Stable Return is to maintain a
stable level of total return as may be consistent with the preservation of
capital by investing at least 65% of its total assets in high-quality debt
securities with an average U.S. dollar-weighted duration of less than three
years and by using interest rate hedging as a stabilizing technique.
Stable Return seeks to attain its objective by investing in
debt securities and instruments of the same type as U.S. Short-Term. Stable
Return will generally purchase securities included in the Merrill Lynch 1-2.99
Year Treasury Index, which has historically maintained stable returns from
quarter to quarter, relative to longer-term securities. (See "Appendix" in the
Statement of Additional Information.) The price and yield of securities in the 1
to 3 year duration range are generally less volatile than those of securities
with a longer duration. Stable Return will seek to match the average duration of
the Index but cannot guarantee that it will do so. At no time will the average
duration of the Portfolio be more than one year in excess of the average
duration of the Index.
Stable Return is suitable as an investment option for defined
contribution and retirement plans. Stable Return will be managed by the
Investment Adviser in a manner designed to produce returns similar to those of a
guaranteed investment contract ("GIC"). However, unlike a GIC, Stable Return is
not guaranteed by an insurer.
U.S. TREASURY PORTFOLIO
The investment objective of U.S. Treasury is to attain a high
level of total return as may be consistent with the preservation of capital and
to avoid credit quality risk by investing primarily in securities issued by the
U.S. Treasury with an average U.S. dollar-weighted duration of less than five
years which will provide investors in most jurisdictions with income exempt from
state and local tax. (Check with a tax adviser to determine if your state and
local tax laws exempt income derived from U.S. Treasury mutual fund portfolios.)
U.S. Treasury seeks to attain its objective
by investing at least 95% of its total assets in U.S.
dollar-denominated obligations issued by the U.S. Treasury, and
repurchase and reverse repurchase agreements collateralized by
such obligations. U.S. Treasury may invest up to 5% of its
total assets in U.S. dollar- or foreign currency-denominated
debt securities and instruments of the same type as U.S.
Short-Term.
MORTGAGE TOTAL RETURN PORTFOLIO
The investment objective of Mortgage Total Return is to attain
a high level of total return as may be consistent with the preservation of
capital by investing primarily in mortgage- and asset-backed, and other
mortgage-related securities, maintaining an average U.S. dollar-weighted
duration in the range of two to six years.
Mortgage Total Return seeks to attain its objective by
investing at least 65% of its total assets in mortgage- and asset-backed, and
other mortgage-related debt obligations of U.S. and foreign issuers. Mortgage
Total Return may also invest up to 35% of its total assets in debt securities
and instruments of the same type as U.S. Short-Term. The Portfolio may, for
temporary defensive purposes, invest up to 100% of its total assets in
short-term U.S. Government securities and money market instruments.
BROAD MARKET PORTFOLIO
The investment objective of Broad Market is to attain a high
level of total return as may be consistent with the preservation of capital by
investing at least 65% of its total assets in high-quality fixed income
securities reflective of the broad spectrum of the U.S. bond market with an
average U.S. dollar-weighted duration of less than eight years.
Broad Market seeks to attain its objective by investing in
debt securities and instruments of the same type as U.S. Short-Term. The broad
market of fixed income securities includes all investment grade fixed income
securities in the corporate, U.S. Government and mortgage- and asset-backed
markets with durations of greater than one year. The allocation among markets
will vary based upon the issuance of new securities and the retirement of
outstanding securities. The current market allocation is comprised of
approximately 20% in corporate securities, 50% in U.S. Government securities and
30% in mortgage- and asset-backed securities. The Investment Adviser will manage
Broad Market to approximate broad market allocations by purchasing and selling
representative securities in each market, but Broad Market cannot guarantee that
it will match such broad market allocations. The Portfolio may, for temporary
defensive purposes, invest up to 100% of its total assets in short-term U.S.
Government securities and money market instruments.
GLOBAL AND INTERNATIONAL PORTFOLIOS
Each of the Worldwide Portfolios will invest at least 65% of
its total assets in debt securities of issuers from at least three different
countries, including the United States, with a significant portion of its assets
in debt securities of issuers located outside the United States. Each of the
International Portfolios will invest at least 65% of its total assets in debt
securities of issuers from at least three different countries, excluding the
United States. Each of Inflation-Indexed and Inflation-Indexed Hedged are not
required to invest any minimum percentage of assets in debt securities of
issuers located outside the United States, nor in any minimum number of
countries or currencies. Each of the Portfolios may, for temporary defensive
purposes, invest up to 100% of its total assets in short-term U.S. Government
securities and money market instruments.
WORLDWIDE PORTFOLIO
The investment objective of Worldwide is to attain a high
level of total return as may be consistent with the preservation of capital by
investing at least 65% of its total assets in high-quality fixed income
securities from bond markets worldwide, denominated in both U.S. dollars and
foreign currencies, with an average U.S. dollar-weighted duration of less than
eight years.
Worldwide seeks to attain its objective by investing in debt
securities of U.S. and foreign issuers, including securities issued or
guaranteed by the U.S. Government and its agencies or instrumentalities;
municipal obligations; obligations issued or guaranteed by a foreign government,
or any of its political subdivisions, authorities, agencies or instrumentalities
or by supranational organizations; obligations of domestic or foreign
corporations or other entities; obligations of domestic or foreign banks; and
mortgage- and asset-backed securities. The Portfolio may also engage in
repurchase and reverse repurchase agreements. Each of these investments are
described below under "Descriptions of Investments". In addition, Worldwide may
utilize up to 5% of its total assets as margin and premiums to purchase and sell
options, futures and options on futures contracts. The Adviser or Sub-Adviser
intends to actively manage the Portfolio and the allocations of the Portfolio's
investment assets among various world bond markets (and currencies) are not
expected to be comparable to, or as diverse as, the allocations accorded to such
markets (and currencies) by the major bond market indices. The Portfolio will
maintain investments in debt securities of issuers from at least three different
countries, including the United States.
At the Investment Adviser's or Sub-Adviser's discretion,
Worldwide may at times seek to hedge all or part of its foreign
currency-denominated assets against foreign currency risks. Worldwide may also
enter into transactions in foreign currencies and related instruments, based on
expectations of changes in the exchange rates among foreign currencies, in an
effort to enhance total return.
WORLDWIDE-HEDGED PORTFOLIO
The investment objective of Worldwide-Hedged is to attain a
high level of total return as may be consistent with the preservation of capital
by investing at least 65% of its total assets in high-quality fixed income
securities from bond markets worldwide, denominated in both U.S. dollars and
foreign currencies, with an average U.S. dollar-weighted duration of less than
eight years and by actively utilizing currency hedging techniques.
Worldwide-Hedged seeks to attain its objective by investing in
debt securities and instruments of the same type as Worldwide. The Adviser or
Sub-Adviser intends to actively manage the Portfolio and the allocations of the
Portfolio's investment assets among various world bond markets are not expected
to be comparable to, or as diverse as, the allocations accorded to such markets
by the major bond market indices. The Portfolio will maintain investments in
debt securities of issuers from at least three different countries, including
the United States.
Worldwide-Hedged, as a fundamental policy of the Portfolio,
which may only be changed by a vote of shareholders, will attempt to hedge at
least 65% of its foreign currency-denominated total assets against foreign
currency risks to the extent feasible. Worldwide-Hedged may also enter into
transactions in foreign currencies and related instruments, based on
expectations of changes in the exchange rates among foreign currencies, in an
effort to enhance total return.
INTERNATIONAL PORTFOLIO
The investment objective of International is to attain a high
level of total return as may be consistent with the preservation of capital by
investing at least 65% of its total assets in high-quality fixed income
securities from bond markets worldwide, denominated in foreign currencies, with
an average U.S. dollar-weighted duration of less than eight years.
International will seek to attain its objective by investing
in foreign currency-denominated debt securities and instruments of the same type
as Worldwide. Up to 35% of the balance of its total assets may be invested in
U.S. dollar-denominated securities of the same type.
At the Investment Adviser's or Sub-Adviser's discretion,
International may at times seek to hedge all or part of its foreign
currency-denominated assets against foreign currency risks. International may
also enter into transactions in foreign currencies and related instruments,
based on expectations of changes in the exchange rates among foreign currencies,
in an effort to enhance total return.
<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 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, except Money Market, may purchase debt obligations
issued or guaranteed by foreign governments or their subdivisions, agencies and
instrumentalities, and debt obligations issued or guaranteed by international
agencies and supranational entities.
Bank Obligations. Each Portfolio may invest in obligations of
domestic and foreign banks, including time deposits, certificates of deposit,
bankers' acceptances, bank notes, deposit notes, Eurodollar time deposits,
Eurodollar certificates of deposit, variable rate notes, loan participations,
variable amount master demand notes and custodial receipts ("Bank Obligations").
Each Portfolio (in particular, Money Market and U.S Short-Term) may, from time
to time, concentrate more than 25% of its total assets in such Bank Obligations.
Zero Coupon Securities. Each Portfolio may invest in zero
coupon securities, which are securities that make no periodic interest payments
but instead are sold at a deep discount from their face value. The buyer of
these securities receives a rate of return by the gradual appreciation of the
security, which results from the fact that it will be redeemed at face value on
a specified maturity date. There are many kinds of zero coupon securities. Some
are issued in zero-coupon form, including stripped U.S. Government Securities
issued through the U.S. Treasury. Others are created by brokerage firms that
strip (separate) the coupons (unmatured interest payments) off of
interest-paying bonds and sell the principal and the coupons separately.
Corporate Debt Instruments. Each Portfolio
may purchase commercial paper, notes and other obligations of
U.S. and foreign corporate issuers meeting the Portfolio's
credit quality standards (including medium-term and variable
rate notes).
Repurchase and Reverse Repurchase Agreements. Each Portfolio
may enter into repurchase agreements under which a bank or securities firm (that
is a dealer in U.S. Government Securities reporting to the Federal Reserve Bank
of New York) agrees, upon entering into the contract, to sell U.S. Government
Securities to a Portfolio and repurchase such securities from the Portfolio at a
mutually agreed-upon price and date. Each Portfolio may enter into reverse
repurchase agreements under which a primary or reporting dealer in U.S.
Government Securities purchases U.S. Government Securities from a Portfolio and
the Portfolio agrees to repurchase the securities at an agreed-upon price and
date.
For each reverse repurchase agreement, the Fund will maintain
for a Portfolio a segregated custodial account containing cash, U.S. Government
Securities or other appropriate 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, except Money Market,
may enter into dollar roll transactions with selected banks and broker-dealers.
Dollar roll transactions are treated as reverse repurchase agreements for
purposes of a Portfolio's borrowing restrictions and consist of the sale by the
Portfolio of mortgage-backed securities, together with a commitment to purchase
similar, but not identical, securities at a future date, at the same price. In
addition, the Portfolio is paid a fee as consideration for entering into the
commitment to purchase. Dollar rolls may be renewed after cash settlement and
initially involve only a firm commitment agreement by the Portfolio to buy a
security.
Mortgage-Backed Securities. Each Portfolio may, and Mortgage
Total Return Portfolio primarily will, purchase securities that are secured or
backed by mortgages or other mortgage-related assets. Mortgage-backed securities
are securities which represent ownership interests in, or are debt obligations
secured entirely or primarily by, "pools" of residential or commercial mortgage
loans or other mortgage-backed securities (the "Underlying Assets"). Such
securities may be issued by such entities as the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA"), the
Federal Home Loan Mortgage Corporation ("FHLMC"), commercial banks, savings and
loan associations, mortgage banks or by issuers that are affiliates of or
sponsored by such entities.
Mortgage-backed securities may take a variety of forms, but
the two most common are mortgage pass-through securities, which represent
ownership interests in the Underlying Assets, and collateralized mortgage
obligations ("CMOs"), which are debt obligations collateralized by the
Underlying Assets.
Some CMOs are directly supported by other CMOs, which in turn
are supported by mortgage pools. Investors typically receive payments out of the
interest and principal on the Underlying Assets. The portions of these payments
the investors receive, as well as the priority of their rights to receive
payments, are determined by the specific terms of the CMO class. CMOs involve
special risks, and evaluating them required special knowledge.
Mortgage-backed securities are often backed by a pool of
Underlying Assets representing the obligations of a number of different parties.
To lessen the effect of failures by obligors on Underlying Assets to make
payments, such securities may contain elements of credit support. Such credit
support falls into two categories: (i) liquidity protection; and (ii) protection
against losses resulting from ultimate default by an obligor on the Underlying
Assets. Liquidity protection refers to the provision of advances, generally by
the entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection against
losses resulting from ultimate default ensures ultimate payment of obligations
on at least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. A Portfolio will not
pay any additional fees for such credit support, although the existence of
credit support may increase the price of a security.
The Investment Adviser expects that governmental,
government-related and private entities may create new types of mortgage-backed
securities offering asset pass-through and asset-collateralized investments in
addition to those described above. As such new types of mortgage-related
securities are developed and offered to investors, the Investment Adviser will,
consistent with each Portfolio's investment objectives, policies and quality
standards, consider whether it would be appropriate for such Portfolio to make
investments in them.
The duration of a mortgage-backed security, for purposes of a
Portfolio's average duration restrictions, will be computed based upon the
expected average life of that security.
Other Asset-Backed Securities. Each Portfolio may also
purchase securities that are secured or backed by assets other than
mortgage-related assets, such as automobile and credit card receivables, and
that are sponsored by such institutions as finance companies, finance
subsidiaries of industrial companies and investment banks. Asset-backed
securities have structural characteristics similar to mortgage-backed
securities. However, the underlying assets are not first lien mortgage loans or
interests therein, but include assets such as motor vehicle installment sale
contracts, other installment sale contracts, home equity loans, leases of
various types of real and personal property, and receivables from revolving
credit (credit card) agreements. Such assets are securitized through the use of
trusts or special purpose corporations. Payments or distributions of principal
and interest may be guaranteed up to a certain amount and for a certain period
of time by a letter of credit or pool insurance issued by a financial
institution unaffiliated with the issuer, or other credit enhancements may be
present. Each Portfolio will only purchase asset-backed securities that the
Investment Adviser determines to be liquid.
Foreign Securities. Each Portfolio, except Money Market, 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. Brady Bonds have been issued only recently, and accordingly,
they do not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (primarily the U.S. dollar)
and are actively traded in the over-the-counter secondary market.
The Portfolio may invest in either collateralized or
uncollateralized Brady Bonds. U.S. dollar-denominated, collateralized Brady
Bonds, which may be fixed rate par bonds or floating rate discount bonds, are
collateralized in full as to principal by U.S. Treasury zero coupon bonds having
the same maturity as the bonds. Interest payments on such bonds generally are
collateralized by cash or securities in an amount that, in the case of fixed
rate bonds, is equal to at least one year of rolling interest payments or, in
the case of floating rate bonds, initially is equal to at least one year's
rolling interest payments based on the applicable interest rate at the time and
is adjusted at regular intervals thereafter. Brady Bonds which have been issued
to date are rated BB or B by S&P or Ba or B by Moody's or, in cases in which a
rating by S&P or Moody's has not been assigned, are generally considered by the
Adviser to be of comparable quality.
Indexed Notes, Currency Exchange-Related Securities and
Similar Securities. Each Portfolio may, and generally Inflation-Indexed and
Inflation-Indexed Hedged will, purchase notes, the principal amount of which
and/or the rate of interest payable on which is determined by reference to an
index, which may be (i) the rate of exchange between the specified currency for
the note and one or more other currencies or composite currencies; (ii) the
difference in the price or prices of one or more specified commodities on
specified dates; or (iii) the difference in the level of one or more specified
stock indices on specified dates. Each Portfolio may also purchase principal
exchange rate linked securities, performance-indexed paper and foreign currency
warrants. See "Supplemental Descriptions of Investments" in the Statement of
Additional Information.
Inflation-Indexed Securities. Each Portfolio may, and
generally Inflation-Indexed and Inflation-Indexed Hedged will, invest in
securities with a nominal return linked to the inflation rate from bond markets
worldwide such as the U.S. Treasury Department's recently announced
"inflation-protection" issues. The initial issues are ten-year notes which are
issued quarterly. Other maturities will be added at a later date. The principal
is adjusted for inflation (payable at maturity) and the semi-annual interest
payments equal a fixed percentage of the inflation-adjusted principal amount.
The inflation adjustments are based upon the Consumer Price Index for Urban
Consumers ("CPI-U"). These securities are also be eligible for coupon stripping
under the U.S. Treasury "STRIPS" program.
In addition to the U.S. Treasury's issues, the Portfolios may
also purchase inflation-indexed securities from other countries such as
Australia, Canada, New Zealand, Sweden and the United Kingdom, or other
inflation-indexed securities that may be issued in the future.
Securities Denominated in Multi-National Currency Units or
More Than One Currency. Each Portfolio, except Money Market, 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, except Money Market, 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, except Money Market,
may, and generally the Global and International Portfolios will, enter into
forward foreign currency exchange contracts and may purchase and sell exchange
traded and OTC options on currencies, foreign currency futures contracts and
options on foreign currency futures contracts to hedge the currency exchange
risk associated with its assets or obligations denominated in foreign
currencies. A Portfolio may also engage in synthetic hedging. Synthetic hedging
entails entering into a forward contract to sell a currency whose changes in
value are generally considered to be linked to a currency or currencies in which
some or all of the Portfolio's securities are or are expected to be denominated,
and to buy U.S. dollars. (The amount of the contract will not exceed the value
of the Portfolio's holdings in linked currencies.) There is the risk that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that a Portfolio is engaging in synthetic
hedging. Each Portfolio may also cross-hedge currencies by entering into forward
contracts to sell one or more currencies that are expected to decline in value
relative to other currencies to which the Portfolio has or in which the
Portfolio expects to have portfolio exposure. Except when a Portfolio enters
into a forward contract for the purchase or sale of a security denominated in a
particular currency, where a corresponding forward currency contract will
require no segregation, a currency contract which obligates a Portfolio to buy
or sell currency will generally require the Portfolio to hold an amount of that
currency or liquid securities denominated in that currency equal to the
Portfolio's obligations or to segregate cash, U.S. Government securities or
other appropriate 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 securities in an amount at least equal to the
market value of the securities or foreign currency underlying the option. When a
Portfolio writes a put option, this means that the Portfolio will maintain with
the Fund's custodian in a segregated account cash, U.S. Government Securities or
other appropriate securities in an amount at least equal to the exercise price
of the option.
All futures and forward currency contracts purchased or sold
for non-hedging purposes by a Portfolio are also required to be covered. When a
Portfolio purchases a futures or forward currency contract for non-hedging
purposes, this means that the Portfolio will deposit an amount of cash, U.S.
Government Securities or other appropriate securities in a segregated account
with the Fund's custodian so that the amount so segregated, plus the amount of
initial and variation margin held in the account of its broker, if applicable,
equals the market value of the futures or forward currency contract.
When a Portfolio sells a futures or forward currency contract
for non-hedging purposes, this means that during the life of the futures or
forward currency contract the Portfolio will own or have the contractual right
to acquire the securities or foreign currency subject to the futures or forward
currency contract, or will maintain with the Fund's custodian in a segregated
account cash, U.S. Government Securities or other appropriate securities in an
amount at least equal to the market value of the securities or foreign currency
underlying the futures or forward currency contract.
If the market value of the contract moves adversely to the
Portfolio, or if the value of the securities in the segregated account declines,
the Portfolio will be required to deposit additional cash or securities in the
segregated account at a time when it may be disadvantageous to do so.
Restrictions on Use of Futures Transactions. Regulations of
the Commodity Futures Trading Commission (the "CFTC") applicable to the Fund
require that all of a Portfolio's futures and options on futures transactions
constitute bona fide hedging transactions and that the Portfolio not enter into
such transactions if immediately thereafter, the sum of the amount of initial
margin deposits on the Portfolio's existing futures positions and premiums paid
for related options would exceed 5% of the market value of the Portfolio's total
assets. Each Portfolio, except Money Market, is also permitted to engage in
transactions in futures contracts, and options thereon, incidental to such
Portfolio's activities in the securities markets. Under applicable CFTC
regulations, the value of the assets underlying futures positions is not allowed
to exceed the sum of cash set aside in an identifiable manner or short-term U.S.
Government or other U.S. dollar-denominated obligations segregated for this
purpose.
ILLIQUID SECURITIES
Although mutual fund portfolios are allowed to invest up to
15% (10% in the case of the Money Market Portfolio) of the value of their net
assets in illiquid assets, it is not expected that any Portfolio will invest a
significant portion of its assets in illiquid securities. All OTC options;
repurchase agreements, time deposits and dollar roll transactions maturing in
more than seven days; and loan participations are treated as illiquid assets.
Illiquid securities are securities which may not be sold or disposed of in the
ordinary course of business within seven days at approximately the value at
which a Portfolio has valued the investments, and include securities with legal
or contractual restrictions on resale, time deposits, repurchase agreements
having maturities longer than seven days and securities that do not have readily
available market quotations. In addition, a Portfolio may invest in securities
that are sold in private placement transactions between their issuers and their
purchasers and that are neither listed on an exchange nor traded over-the
counter. These factors may have an adverse effect on the Portfolio's ability to
dispose of particular securities and may limit a Portfolio's ability to obtain
accurate market quotations for purposes of valuing securities and calculating
net asset value and to sell securities at fair value. If any privately placed
securities held by a Portfolio are required to be registered under the
securities laws of one or more jurisdictions before being resold, the Portfolio
may be required to bear the expenses of registration. A Portfolio may also
purchase securities that are not registered under the Securities Act of 1933, as
amended (the "1933 Act"), but which can be sold to qualified institutional
buyers in accordance with Rule 144A under that Act ("Rule 144A securities").
Rule 144A securities generally must be sold to other qualified institutional
buyers. A Portfolio may also invest in commercial obligations issued in reliance
on the so-called "private placement" exemption from registration afforded by
Section 4(2) of the 1933 Act ("Section 4(2) paper"). Section 4(2) paper is
restricted as to disposition under the federal securities laws, and generally is
sold to institutional investors such as the Portfolio who agree that they are
purchasing the paper for investment and not with a view to public distribution.
Any resale by the purchaser must be in an exempt transaction. Section 4(2) paper
normally is resold to other institutional investors like the Portfolio through
or with the assistance of the issuer or investment dealers who make a market in
the Section 4(2) paper, thus providing liquidity. If a particular investment in
Rule 144A securities, Section 4(2) paper or private placement securities is not
determined to be liquid, that investment will be included within the 15% (or
10%) limitation on investment in illiquid securities. The ability to sell Rule
144A securities to qualified institutional buyers is a recent development and it
is not possible to predict how this market will mature. The Investment Adviser
or Sub-Adviser will monitor the liquidity of such restricted securities under
the supervision of the Board of Directors.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Each Portfolio may purchase when-issued securities and other
securities that meet the investment criteria of such Portfolio on a forward
commitment basis at fixed purchase terms at a future date beyond customary
settlement time. The purchase will be recorded on the date a Portfolio enters
into the commitment, and the value of the security will thereafter be reflected
in the calculation of the Portfolio's net asset value. The value of the security
on the delivery date may be more or less than its purchase price. No interest
generally will accrue to the Portfolio until settlement. The Fund will maintain
for each Portfolio a segregated custodial account containing cash, U.S.
Government Securities or other appropriate securities having a value at least
equal to the aggregate amount of a Portfolio's forward commitments.
TBA (TO BE ANNOUNCED) TRANSACTIONS
In a typical mortgage-related security transaction, called a
TBA (to be announced) transaction, the type of mortgage-related
securities to be delivered is specified at the time of trade but the actual pool
numbers of the securities that will be delivered are not known at the time of
the trade. For example, in a TBA transaction, an investor could purchase $1
million 30 year FNMA 9's and receive up to three pools on the settlement date.
The pool numbers of the pools to be delivered at settlement will be announced
shortly before settlement takes place. Generally, agency pass-through
mortgage-backed securities are traded on a TBA basis.
SHORT SELLING
Mortgage Total Return, Inflation-Indexed and Inflation-Indexed
Hedged Portfolios may make short sales, which are transactions in which a
Portfolio sells a security it does not own in anticipation of a decline in the
market value of that security. Short selling provides the Investment Adviser
with flexibility to: (1) reduce certain risks of the Portfolio's holdings; and
(2) increase the Portfolio's total return. To complete a short sales
transaction, the Portfolio must borrow the security to make delivery to the
buyer. The Portfolio then is obligated to replace the borrowed security, which
generally entails purchasing it at the market price at the time of replacement.
Until the security is replaced, the Portfolio is required to pay to the lender
amounts equal to any dividends or interest which accrue during the period of the
loan. The Portfolio also may be required to pay a premium to borrow the
security. The proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is closed
out. To the extent that the Portfolio has sold securities short, it will
maintain a daily segregated account, containing cash or U.S. Government or other
appropriate 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.
CURRENCY AND MORTGAGE SWAPS, AND INTEREST RATE SWAPS, CAPS,
FLOORS AND COLLARS
Each Portfolio, except Money Market, 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. The Portfolio and the Investment Adviser (or
Sub-Adviser) believe that swaps do not constitute senior securities under the
Act and, accordingly, will not treat them as being subject to the Portfolio's
borrowing restriction.
A Portfolio will not enter into currency swap, interest rate
swap, mortgage swap, cap or floor transactions unless the unsecured commercial
paper, senior debt or claims paying ability of the other party is rated either A
or A-1 or better by S&P or A or P-1 or better by Moody's or, if unrated by such
rating organizations, determined to be of comparable quality by the Investment
Adviser or Sub-Adviser.
INVESTMENT RESTRICTIONS
The Fund has adopted certain
fundamental investment restrictions for each Portfolio which may only be changed
with approval of a majority vote (as defined in the 1940 Act 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.
RISKS ASSOCIATED WITH THE FUND'S INVESTMENT POLICIES
AND INVESTMENT TECHNIQUES
A more detailed discussion of the risks associated with the
investment policies and investment techniques of the Portfolios appears in the
Statement of Additional Information.
Changes in Interest Rates. The returns that the Portfolios
provide to investors will be influenced by changes in prevailing interest rates.
In addition, changes in market yields will affect a Portfolio's net asset value
since the prices of portfolio debt securities generally increase when interest
rates decline and decrease when interest rates rise. Prices of shorter-term
securities generally fluctuate less in response to interest rate changes than do
longer-term securities.
Foreign Investments. Securities issued by foreign governments,
foreign corporations, international agencies and obligations of foreign banks
involve risks not associated with securities issued by U.S. entities. With
respect to certain foreign countries, there is the possibility of expropriation
of assets, confiscatory taxation and political or social instability or
diplomatic developments that could affect investment in those countries. There
may be less publicly available information about a foreign financial instrument
than about a United States instrument and foreign entities may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those of United States entities. A Portfolio could encounter
difficulties in obtaining or enforcing a judgment against the issuer in certain
foreign countries. In addition, certain foreign investments may be subject to
foreign withholding or other taxes, although the Fund will seek to minimize such
withholding taxes whenever practicable. Investors may be able to deduct such
taxes in computing their taxable income or to use such amounts as credits
against their United States income taxes if more than 50% of a Portfolio's total
assets at the close of any taxable year consist of stock or securities of
foreign corporations. See "Tax Considerations".
Emerging Markets Securities. The risks of investing in foreign
securities may be intensified in the case of investments in issuers domiciled or
doing substantial business in emerging markets or countries with limited or
developing capital markets. Security prices in emerging markets can be
significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of sudden adverse government
action and even nationalization of businesses, restrictions on foreign
ownership, or prohibitions of repatriation of assets, and may have less
protection of property rights than more developed countries. The economies of
countries with emerging markets may be predominantly based on only a few
industries, may be highly vulnerable to changes in local or global trade
conditions, and may suffer from extreme and volatile debt burdens or inflation
rates. Local securities markets may trade a small number of securities and may
be unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of substantial holdings difficult or impossible at
times. Transaction settlement procedures may be less reliable in emerging
markets than in developed markets. Securities of issuers located in countries
with emerging markets may have limited marketability and may be subject to more
abrupt or erratic price movements.
High Yield/High Risk Securities. Emerging Markets may invest
its assets in debt securities rated lower than "BBB" by S&P or "Baa" by Moody's,
or "B" by Thomson Bankwatch in the case of bank obligations, or "A-2" by S&P or
"Prime-2" by Moody's in the case of commercial paper, or similarly rated by IBCA
in the case of foreign bank obligations, or determined by the Investment Adviser
(or the Sub-Adviser) to be of similar creditworthiness (commonly referred to as
"junk bonds"). Such investments are regarded as speculative by the major rating
agencies.
Currency Exchange Risks. Changes in foreign currency exchange
rates may affect the value of investments of a Portfolio, especially the Global
and International Portfolios. While Worldwide-Hedged, International-Hedged and
Inflation-Indexed Hedged will, to the fullest extent practicable, and the other
Portfolios may, hedge their assets against foreign currency risk, no assurance
can be given that currency values will change as predicted, and a Portfolio may
suffer losses as a result of this investment strategy. As a result of hedging
techniques, the net exposure of each such Portfolio to any one currency may be
different from that of its total assets denominated in such currency. The
foreign currency markets can be highly volatile and subject to sharp price
fluctuations, and a high degree of leverage is typical of the foreign currency
instruments in which each Portfolio may invest. Since each Portfolio, may invest
in such instruments in an effort to enhance total return, each such Portfolio
will be subject to additional risks in connection with the volatile nature of
these markets to which the other Portfolios are not subject.
Mortgage and Other Asset-Backed Securities. The yield
characteristics of mortgage- and other asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligation generally may be prepaid at any time because the underlying
assets (i.e., loans) generally may be prepaid at any time. As a result, if an
asset-backed security is purchased at a premium, a prepayment rate that is
faster than expected will reduce yield to maturity, while a prepayment rate that
is slower than expected will have the opposite effect of increasing yield to
maturity. Conversely, if an asset-backed security is purchased at a discount,
faster than expected prepayments will increase, while slower than expected
prepayments will decrease yield to maturity.
Generally, prepayments on fixed-rate mortgage loans will
increase during a period of falling interest rates and decrease during a period
of rising interest rates. Mortgage- and asset-backed securities may also
decrease in value as a result of increases in interest rates and, because of
prepayments, may benefit less than other fixed-income securities from declining
interest rates. Reinvestment of prepayments may occur at lower interest rates
than the original investment, thus adversely affecting a Portfolio's yield.
Actual prepayment experience may cause the yield of mortgage-backed securities
to differ from what was assumed when the Portfolio purchased the security.
The market for privately issued mortgage- and asset-backed
securities is smaller and less liquid than the market for U.S. Government
mortgage- and asset-backed securities. CMO classes may be specially structured
in a manner that provides any of a wide variety of investment characteristics,
such as yield, effective maturity and interest rate sensitivity. As market
conditions change, however, and especially during periods of rapid or
unanticipated changes in market interest rates, the attractiveness of some CMO
classes and the ability of the structure to provide the anticipated investment
characteristics may be significantly reduced. These changes can result in
volatility in the market value, and in some instances reduced liquidity, of the
CMO class.
Certain classes of CMOs are structured in a manner that makes
them extremely sensitive to changes in prepayment rates. Interest-only ("IO")
and principal-only ("PO") classes are examples of this. IOs are entitled to
receive all or a portion of the interest, but none (or only a nominal amount) of
the principal payments, from the underlying mortgage assets. If the mortgage
assets underlying an IO experience greater than anticipated principal
prepayments then the total amount of interest payments allocable to the IO
class, and therefore the yield to investors, generally will be reduced. In some
instances, an investor in an IO may fail to recoup all of his or her initial
investment, even if the securities are government guaranteed or considered to be
of the highest quality (rated AAA or the equivalent). Conversely, PO classes are
entitled to receive all or a portion of the principal payments, but none of the
interest, from the underlying mortgage assets. PO classes are purchased at
substantial discounts from par, and the yield to investors will be reduced if
principal prepayments are slower than expected. Some IOs and POs, as well as
other CMO classes, are structured to have special protections against the effect
of prepayments. These structural protections, however, normally are effective
only within certain ranges of prepayment rates and thus will not protect
investors in all circumstances.
Inverse floating rate CMO classes also may be extremely
volatile. These classes pay interest at a rate that decreases when a specified
index of market rates increases.
During 1994, the value and liquidity of many mortgage-backed
securities declined sharply due primarily to increases in interest rates. There
can be no assurance that such declines will not recur. The market value of
certain mortgage-backed securities, including IO and PO class of mortgage-backed
securities, can be extremely volatile and these securities may become illiquid.
The Investment Adviser will seek to manage the Portfolio's investments in
mortgage-backed securities so that the volatility of a portfolio's investments,
taken as a whole, is consistent with the Portfolio's investment objective. If
market interest rates or other factors that affect the volatility of securities
held by a Portfolio change in ways that the Investment Adviser does not
anticipate, the Portfolio's ability to meet its investment objective may be
reduced.
Non-mortgage related asset-backed securities may not have the
benefit of any security interest in the underlying assets and recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities. The Portfolios will only invest in asset-backed securities
that the Investment Adviser believes are liquid.
Short Selling. Each of Mortgage Total Return,
Inflation-Indexed and Inflation-Indexed Hedged Portfolios will incur a loss as a
result of a short sale if the price of the security increases between the date
of the short sale and the date on which the Portfolio replaces the borrowed
security. The amount of any loss will be increased by the amount of any premium
or amounts in lieu of interest the Portfolio may be required to pay in
connection with a short sale. Unlike long positions, where the potential loss is
limited to the purchase price, the potential loss from a short sale transaction
is unlimited unless accompanied by the purchase of an option to buy the security
at a specified price.
Non-Diversified Portfolios. U.S. Short-Term is "diversified"
under the Investment Company Act of 1940, while the other twelve Portfolios are
each "non-diversified" for purposes of such Act and so, other than the Money
Market Portfolio, are subject only to the diversification requirements necessary
for treatment as a "regulated investment company" under the Internal Revenue
Code of 1986 (the "Code"). Under the Code, with respect to 50% of its total
assets, a Portfolio may invest up to 25% of its total assets in the obligations
of an individual issuer (except that this limitation does not apply to U.S.
Government Securities, as defined above), and with respect to the remaining 50%
of its total assets may not invest more than 5% of its total assets in the
obligations of an individual issuer (other than U.S. Government Securities).
Money Market is subject to the diversification requirements of Rule 2a-7 under
the 1940 Act. Because a "non-diversified" portfolio may invest a larger
percentage of its assets in individual issuers than a diversified portfolio, its
exposure to credit and market risks associated with such investments is
increased.
Hedging Transactions. The use of hedging techniques involves
the risk of imperfect correlation in movements in the price of the hedge and
movements in the price of the securities that are the subject of the hedge. In
addition, if interest or currency exchange rates do not move in the direction
against which a Portfolio has hedged, the Portfolio will be in a worse position
than if a hedging strategy had not been pursued, because it will lose part or
all of the benefit of the favorable rate movement due to the cost of the hedge
or offsetting positions. Moreover, hedging transactions that are not entered
into on a U.S. or foreign exchange may subject a Portfolio to exposure to the
credit risk of its counterparty.
Repurchase Agreements. In the event the other party to a
repurchase agreement or a reverse repurchase agreement becomes subject to a
bankruptcy or other insolvency proceeding or such party fails to satisfy its
obligations thereunder, a Portfolio could (i) experience delays in recovering
cash or the securities sold (and during such delay the value of the underlying
securities may change in a manner adverse to the Portfolio) or (ii) lose all or
part of the income, proceeds or rights in the securities to which the Portfolio
would otherwise be entitled.
Dollar Roll Transactions. If the broker-dealer to whom a
Portfolio sells the security underlying a dollar roll transaction becomes
insolvent, the Portfolio's right to purchase or repurchase the security may be
restricted; the value of the security may change adversely over the term of the
dollar roll, the security which the Portfolio is required to repurchase may be
worth less than a security which the Portfolio originally held, and the return
earned by the Portfolio with the proceeds of a dollar roll may not exceed
transaction costs.
Zero Coupon Securities. Because they do not pay interest until
maturity, zero coupon securities tend to be subject to greater interim
fluctuation of market value in response to changes in interest rates than
interest-paying securities of similar maturities. Additionally, for tax
purposes, zero coupon securities accrue income daily even though no cash
payments are received which may require a Portfolio to sell securities that
would not ordinarily be sold to provide cash for the Portfolio's required
distributions.
Concentration in Bank Obligations. Each Portfolio may, at
times, invest in excess of 25% of its assets in Bank Obligations, as defined
above. By concentrating investments in the banking industry, a Portfolio may
have a greater exposure to certain risks associated with the banking industry.
In particular, economic or regulatory developments in or related to the banking
industry will affect the value of and investment return on a Portfolio's shares.
As discussed above, each Portfolio will seek to minimize its exposure to such
risks by investing only in debt securities that are determined by the Investment
Adviser or Sub-Adviser to be of high quality.
Counterparties. The Portfolios may be exposed to the risk of
insolvency of another party with which a Portfolio enters into a transaction,
such as a repurchase agreement or a dollar-roll transaction. Subject to Board
supervision, the Investment Adviser monitors and evaluates the creditworthiness
of these counterparties to help minimize those risks.
DISTRIBUTION OF FUND SHARES
Shares of the Fund are distributed by AMT Capital Services,
Inc. pursuant to a Distribution Agreement (the "Distribution Agreement") dated
as of February 1, 1995 between the Fund and AMT Capital. No fees are payable by
the Fund pursuant to the Distribution Agreement, and AMT Capital bears the
expense of its distribution activities.
PURCHASES AND REDEMPTIONS
PURCHASES
There is no sales charge imposed by the Fund. The minimum
initial investment in any Portfolio of the Fund is $100,000; additional
purchases or redemptions may be of any amount.
The offering of shares of each Portfolio of the Fund, other
than Mortgage Total Return, International-Hedged and Emerging Markets, is
continuous and purchases of shares of the Fund may be made Monday through
Friday, except for the holidays declared by the Federal Reserve Banks of New
York or Boston. At the present time, these holidays are: New Year's Day, Martin
Luther King's Birthday, Presidents' Day, Memorial Day, Fourth of July, Labor
Day, Columbus Day, Veterans Day, Thanksgiving, and Christmas. These Portfolios
offer shares at a public offering price equal to the net asset value next
determined after a purchase order becomes effective. Mortgage Total Return,
International-Hedged and Emerging Markets offer shares at a public offering
price equal to the net asset value determined on the last Business Day of each
month and on any other Business Days in which the Investment Adviser approves a
purchase at the net asset value determined on those days.
Purchases of shares must be made by wire transfer of Federal
funds. Subject to the above offering dates, initial share purchase orders are
effective on the date when AMT Capital receives a completed Account Application
Form (and other required documents) and Federal funds become available to the
Fund in the Fund's account with the Transfer Agent as set forth below. The
shareholder's bank may impose a charge to execute the wire transfer.
In order to purchase shares on a particular Business Day,
subject to the offering dates described above, a purchaser must call AMT Capital
at (800) 762-4848 [or within the City of New York, (212) 332-5211] prior to 4:00
p.m. Eastern time (12:00 p.m. Eastern Time in the case of the Money Market
Portfolio) to inform the Fund of the incoming wire transfer and must clearly
indicate which Portfolio is to be purchased. If Federal funds are received by
the Fund that same day, the order will be effective on that day. If the Fund
receives notification after 4:00 p.m. Eastern time (12:00 p.m. Eastern Time in
the case of the Money Market Portfolio), or if Federal funds are not received by
the Transfer Agent, such purchase order shall be executed as of the date that
Federal funds are received. Shares purchased will begin accruing dividends on
the day Federal funds are received.
REDEMPTIONS
The Fund will redeem all full and fractional shares of the
Fund upon request of shareholders. The redemption price is the net asset value
per share next determined after receipt by the Transfer Agent of proper notice
of redemption as described below. If such notice is received by the Transfer
Agent by 4:00 p.m. Eastern time (12:00 p.m. Eastern Time in the case of the
Money Market Portfolio) on any Business Day, the redemption will be effective
and payment will be made (i) in the case of Money Market and U.S. Short-Term, on
such Business Day; (ii) in the case of all other U.S. Portfolios, within seven
calendar days, but generally on the day following receipt of such notice; and
(iii) in the case of the Global and International Portfolios, within seven
calendar days, but generally two business days following receipt of such notice.
If the notice is received on a day that is not a Business Day or after 4:00 p.m.
Eastern time (12:00 p.m. Eastern Time in the case of the Money Market
Portfolio), the redemption notice will be deemed received as of the next
Business Day.
There is no charge imposed by the Fund to redeem shares of the
Fund; however, a shareholder's bank may impose its own wire transfer fee for
receipt of the wire. Redemptions may be executed in any amount requested by the
shareholder up to the amount such shareholder has invested in the Fund.
To redeem shares, a shareholder or any authorized agent (so
designated on the Account Application Form) must provide the Transfer Agent with
the dollar or share amount to be redeemed, the account to which the redemption
proceeds should be wired (which account shall have been previously designated by
the shareholder on its Account Application Form), the name of the shareholder
and the shareholder's account number. Shares redeemed receive dividends declared
up to and including the day preceding the day of the redemption payment.
A shareholder may change its authorized agent or the account
designated to receive redemption proceeds at any time by writing to the Transfer
Agent with an appropriate signature guarantee. Further documentation may be
required when deemed appropriate by the Transfer Agent.
A shareholder may request redemption by calling the Transfer
Agent at (800) 247-0473. Telephone redemption is made available to shareholders
of the Fund on the Account Application. The Fund or the Transfer Agent may
employ procedures designed to confirm that instructions communicated by
telephone are genuine. If the Fund does not employ such procedures, it may be
liable for losses due to unauthorized or fraudulent instructions. The Fund or
the Transfer Agent may require personal identification codes and will only wire
funds through pre-existing bank account instructions. No bank instruction
changes will be accepted via telephone.
In an attempt to reduce the expenses of the Portfolios, each
Portfolio may redeem all of the shares of any shareholder whose account in any
Portfolio has a net asset value of less than $100,000. Involuntary redemptions
will not be implemented if the value of a shareholder's account falls below the
minimum required investment solely as a result of market conditions. The Fund
will give 60 day's prior written notice to shareholders whose shares are being
redeemed to allow them to purchase sufficient additional shares of the
applicable Portfolio to avoid such redemption. The Fund may also redeem shares
in an account of the shareholder as reimbursement for loss due to the failure of
a check or wire to clear in payment of shares purchased.
EXCHANGE PRIVILEGE
Shares of a Portfolio may be exchanged for shares of any other
of the Fund's Portfolios or for other funds distributed by AMT Capital based on
the respective net asset values of the shares involved in the exchange, assuming
that shareholders wishing to exchange shares reside in states where these mutual
funds are qualified for sale. The Fund's Portfolio minimum amounts of $100,000
would still apply. An exchange order is treated the same as a redemption
followed by a purchase. Investors who wish to make exchange requests should
telephone AMT Capital or the Transfer Agent.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Portfolio is determined
by adding the market value of all the assets of the Portfolio, subtracting all
of the Portfolio's liabilities, dividing by the number of shares outstanding and
adjusting to the nearest cent. The net asset value is calculated by the Fund's
Accounting Agent as of 4:00 p.m. Eastern time on each Business Day for each
Portfolio, other than Mortgage Total Return, International-Hedged, Emerging
Markets and Money Market. The net asset value of Mortgage Total Return,
International-Hedged and Emerging Markets 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 value, securities
are valued by the "amortized cost" method of valuation, which does not take into
account unrealized gains or losses. This involves valuing an instrument at its
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value based on amortized cost is higher or
lower than the price a Portfolio would receive if it sold the instrument.
The use of amortized cost and the maintenance of the
Portfolio's per share net asset value at $1.00 is based on its election to
operate under the provisions of Rule 2a-7 under the 1940 Act. As conditions of
operating under Rule 2a-7, the Money Market Portfolio must maintain a
dollar-weighted average portfolio maturity of 90 days of less, purchase only
instruments having remaining maturities of thirteen months or less and invest
only in U.S. dollar-denominated securities which are determined by the Board of
Directors to present minimal credit risks and which are of eligible quality as
determined under the Rule.
The following methods are used to calculate the value of the
other Portfolio's assets: (1) all portfolio securities for which
over-the-counter market quotations are readily available (including certain
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. Casper, John C Head III, Lawrence B. Krause, 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 $27 billion in assets entirely in fixed-income portfolios for in
excess of 100 major institutional clients including banks, central banks,
pension funds and other institutional clients. The average size of a client
relationship with the Investment Adviser is in excess of $200 million. The
Investment Adviser is also the sub-adviser to three portfolios of two other
open-end management investment companies. The Investment Adviser's offices are
located at 200 Park Avenue, New York, New York 10166.
SUB-ADVISER
Fischer Francis Trees & Watts, a corporate partnership
organized under the laws of the United Kingdom and an affiliate of the
Investment Adviser, is the foreign sub-adviser to the Global and International
Portfolios. Organized in 1989, the Sub-Adviser is a U.S.-registered investment
adviser and currently manages approximately $10 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.
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.
TAX CONSIDERATIONS
The following discussion is for general information only. An
investor should consult with his or her own tax adviser as to the tax
consequences of an investment in a Portfolio, including the status of
distributions from each Portfolio under applicable state or local law.
FEDERAL INCOME TAXES
Each active Portfolio has qualified for and intends to
continue to qualify to be treated as a regulated investment company ("RIC")
under the Internal Revenue Code of 1986, as amended. To qualify, a Portfolio
must meet certain income, distribution and diversification requirements. In any
year in which a Portfolio qualifies as a RIC and distributes all of its taxable
income on a timely basis, the Portfolio will not pay U.S. federal income or
excise tax. Each Portfolio intends to distribute all of its taxable income by
automatically reinvesting such amount in additional shares of the Portfolio and
distributing those shares to its shareholders, unless a shareholder elects, on
the Account Application Form, to receive cash payments for such distributions.
Dividends paid by a Portfolio are taxable to shareholders even
though the dividends are automatically reinvested in additional shares of a
Portfolio. Dividends paid by a Portfolio from its investment company taxable
income (including interest and net short-term capital gains) will be taxable to
a U.S. shareholder as ordinary income. Distributions of net capital gains (the
excess of net long-term capital gains over net short-term capital losses), if
any, designated as capital gains dividends are taxable to shareholders as
long-term capital gain, regardless of how long they have held their Portfolio
shares. Long-term capital gains are taxed at a maximum rate of 28% (20% if held
for more than 18 months). 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.
POTENTIAL YEAR 2000 PROBLEM
Like other mutual funds, financial and business organizations
and individuals around the world, the Fund could be adversely affected if the
computer systems used by the advisor/administrator and other service providers
do not properly process and calculate date-related information and data from and
after January 1, 2000. This is commonly known as the "Year 2000 Problem." The
advisor/administrator are taking steps that they believe are reasonably designed
to address the Year 2000 Problem with respect to computer systems that they use
and to obtain reasonable assurances that comparable steps are being taken by the
Fund's other major service providers. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact to the
Fund nor can there be any assurance that the Year 2000 Problem will not have an
adverse effect on the companies whose securities are held by the Fund or on
global markets or economies, generally.
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 February 28, 1998, Fischer Francis Trees & Watts, Inc.
had discretionary investment advisory agreements with shareholders of the Fund
that represent 77% of the Fund's total net assets and therefore, may be deemed a
control person.
PERFORMANCE INFORMATION
From time to time the Fund may advertise a Portfolio's "yield"
and "total return". A Portfolio's yield for any 30-day (or one month) period is
computed by dividing the net investment income per share earned during such
period by the maximum public offering price per share on the last day of the
period, and then annualizing such 30-day (or one month) yield in accordance with
a formula prescribed by the Commission which provides for compounding on a
semiannual basis. Advertisements of a Portfolio's total return may disclose its
average annual compounded total return for the period since the Portfolio's
inception. A Portfolio's total return for such period is computed by finding,
through use of a formula prescribed by the Commission, the average annual
compounded rate of return over the period that would equate an assumed initial
amount invested to the value of the investment at the end of the period. For
purposes of computing total return, dividends and capital gains distributions
paid on shares are assumed to have been reinvested when received. As described
above, the Fund imposes no sales charges applicable to purchases and
redemptions. Total return and yield figures are based on a Portfolio's
historical performance and are not intended to indicate future performance. The
value of an investment in a Portfolio will fluctuate and the shares in an
investor's account, when redeemed, may be worth more or less than their original
cost.
From time to time the Money Market Portfolio may advertise its
"current yield" and "effective yield." Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
"current yield" refers to the income generated by an investment in a Portfolio
over a seven calendar-day period (which period will be stated in the
advertisement). This income is then "annualized." That is, the amount of income
generated by the investment during that week is assumed to be generated each
week over a one-year period and is shown as a percentage of the investment. The
"effective yield" is calculated similarly but, when annualized, the income
earned by an investment in the Portfolio is assumed to be reinvested. The
"effective yield" will be slightly higher than the "current yield" because of
the compounding effect of this assumed reinvestment.
CUSTODIAN AND ACCOUNTING AGENT
Investors Bank & Trust Company, P.O. Box
1537, Boston, Massachusetts 02205-1537, is Custodian and
Accounting Agent for the Fund.
TRANSFER AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, P.O. Box 1537, Boston,
Massachusetts 02205-1537, is Transfer Agent for the shares of the Fund, and
Dividend Disbursing Agent for the Fund.
LEGAL COUNSEL
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C.
20005-1208, is legal counsel for the Fund.
INDEPENDENT AUDITORS
Ernst & Young LLP, 787 Seventh Avenue, New York, New York
10019, is the independent auditor for the Fund. Ernst & Young LLP also renders
auditing 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 March 30, 1998 (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 March 30, 1998.
<PAGE>
TABLE OF CONTENTS
Page
History of the Fund............................................. 3
Organization of the Fund........................................ 3
Management of the Fund.......................................... 3
Board of Directors and Officers..................... 3
Investment Adviser and Sub-Adviser.................. 5
Administrator....................................... 7
Principal Holders of Securities................................. 7
Distribution of Fund Shares..................................... 12
Supplemental Descriptions of Investments........................ 12
Supplemental Investment Techniques........ ..................... 16
Supplemental Discussion of Risks Associated With the
Fund's Investment Policies and Investment Techniques.......... 16
Supplemental Techniques to Hedge Interest Rate and Foreign
Currency Risks and Other Foreign Currency Strategies...... .. 19
Forward Foreign Currency Exchange Contracts
and Associated Risks.............................. 19
Options............................................. 20
Futures Contracts and Options on Futures Contracts.. 23
Investment Restrictions......................................... 26
Portfolio Transactions.......................................... 27
Tax Considerations.............................................. 29
Shareholder Information......................................... 32
Calculation of Performance Data................................. 33
Financial Statements............................................ 34
Appendix ................................................................
Merrill Lynch 1-2.99 Year Treasury Index............ 35
Quality Rating Descriptions......................... 35
<PAGE>
HISTORY OF THE FUND
From its inception on February 23, 1989 to September 27,
1989, the name of the Fund was "FFTW Institutional Reserves Fund, Inc.". The
Fund commenced operations on December 6, 1989. From September 27, 1989 to July
22, 1991 the name of the Fund was "FFTW Reserves, Inc." On July 22, 1991 the
name of the Fund was changed to its present name, "FFTW Funds, Inc." The U.S.
Short-Term Portfolio which commenced operations on December 6, 1989, Worldwide
Portfolio which commenced operations on April 15, 1992, and Worldwide-Hedged
Portfolio which commenced operations on May 19, 1992, were known as Short-Term
Series (and prior to September 18, 1991 as FFTW Institutional Reserves Fund),
Worldwide Series and Worldwide Hedged Series, respectively. The Board of
Directors recently approved a name change for several Portfolios, eliminating
"Fixed Income" from their name.
ORGANIZATION OF THE FUND
The authorized capital stock of the Fund consists of
1,000,000,000 shares with $.001 par value, allocated as follows: (i) 200,000,000
shares each to Money Market and U.S. Short-Term; (ii) 100,000,000 shares to
Mortgage Total Return; and (iii) 50,000,000 shares to each of the other
Portfolios. Each share of each Portfolio has equal voting rights as to each
share of such Portfolio. Shareholders have one vote for each share held. All
shares issued and outstanding are fully paid and non-assessable, transferable,
and redeemable at net asset value at the option of the shareholder. Shares have
no preemptive or conversion rights.
The shares of the Fund have non-cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election of Directors can elect 100% of the Directors if they choose to do so,
and, in such event, the holders of the remaining less than 50% of the shares
voting for the election of Directors will not be able to elect any person or
persons to the Board of Directors.
No Portfolio of the Fund shall be liable for the
obligations of any other Portfolio.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS AND OFFICERS
The Fund is managed by its Board of Directors. The
individuals listed below are the officers and directors of the Fund. An asterisk
(*) has been placed next to the name of each director who is an "interested
person" of the Fund, as such term is defined in the Investment Company Act of
1940, as amended (the "1940 Act"), by virtue of his affiliation with the Fund or
the Investment Adviser.
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.
*Onder John Olcay, 200 Park Avenue, New York, NY. Chairman
of the Board and President 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.
Director of the Fund. Mr. Casper has been a shareholder, and Managing
Director and Chief Financial Officer of the Investment Adviserfor the last
five years.
Paul A. Brook, 600 Fifth Avenue, New York, NY. Treasurer
of the Fund. Mr. Brook serves as Managing Director of AMT Capital Services
since August 1997. Prior to August 1997, Mr. Brook served as an audit
partner at the accounting firm of Ernst & Young LLP.
Carla E. Dearing, 600 Fifth Avenue, New York, NY.
Assistant Treasurer of the Fund. Ms. Dearing serves as President, Principal,
and Director of AMT Capital Services since its inception in March 1992. Ms.
Dearing is also Managing Director and Principal of AMT Capital Advisers, Inc.
since January 1992. Ms. Dearing was a former Vice President of Morgan
Stanley & Co., where she worked from June 1984 to August 1986 and from November
1988 to January 1992.
William E. Vastardis, 600 Fifth Avenue, New York, NY.
Secretary of the Fund. Mr. Vastardis serves as Managing Director and
administrator of the Fund on behalf of AMT Capital Services. Prior to April
1992, Mr. Vastardis served as Vice President and head of the Vanguard Group
Inc.'s private label administration unit for seven years, after six years in
Vanguard's fund accounting operations.
No employee of the Investment Adviser nor AMT Capital
Services receives any compensation from the Fund for acting as an officer or
director of the Fund. The Fund pays each director who is not a director, officer
or employee of the Investment Adviser or AMT Capital Services or any of their
affiliates, a fee of $1,000 for each meeting attended, and each of the Directors
receive an annual retainer of $20,000 which is paid in quarterly installments.
Director's Compensation Table
Fiscal Year Ended December 31, 1997
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------- -------------------------------------- --------------------- ----------------------------
Director Aggregate Compensation From Pension or Retirement Estimated Annual Total Compensation From
Registrant Benefits Accrued As Part of benefits Upon Registrant and Fund
Fund Expenses Retirement Complex Paid to Directors
- --------------------------- --------------------- ----------------------------- --------------------- ----------------------------
- ----------------------------------------- ----------------------- ------------- --------------------- ----------------------------
Stephen J. Constantine* $0 $0 $0 $0
- ----------------------------------------- ----------------------------------------------------------- ----------------------------
- ----------------------------------------- ------------------------------------ ---------------------- ----------------------------
Stephen P. Casper $0 $0 $0 $0
- ----------------------------------------- ------------------------------------ - ------------------- ----------------------------
- ----------------------------------------- ------------------------------------ ------ -------------- ----------------------------
John C Head III $24,750 $0 $0 $24,750
- ----------------------------------------- ------------------------------------ ---------------------- ----------------------------
- ----------------------------------------- ------------------------------------ -- ------------------- ----------------------------
Lawrence B. Krause $24,750 $0 $0 $24,750
- ----------------------------------------- ------------------------------------ ---------------------- ----------------------------
- ----------------------------------------- ------------------------------------ -- ------------------ ----------------------------
Paul Meek * $18,750 $0 $0 $18,750
- ----------------------------------------- ------------------------------------ ---------------------- ----------------------------
- ----------------------------------------- ------------------------------------ ---------------------- ----------------------------
Onder John Olcay $0 $0 $0 $0
- ----------------------------------------- ------------------------------------ --- ---------------- ----------------------------
</TABLE>
Mr. Contantine and Mr. Meek resigned from the Board of Directors effective
November 12, 1997 and August 13, 1997, respectively.
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, 1997.
INVESTMENT ADVISER AND SUB-ADVISER
The Fund has two sets of advisory agreements, one for U.S.
Short-Term, Worldwide and Worldwide-Hedged (the "original" agreement), and one
for each of the other ten Portfolios (the "new" agreements). The Fund also has
two sets of sub-advisory agreements, one for Worldwide and Worldwide-Hedged, and
one for each of International, International-Hedged, Emerging Markets,
Inflation-Indexed and Inflation-Indexed Hedged.
Pursuant to their terms, the advisory agreements between
the Fund and the Investment Adviser (the "Advisory Agreements") and the
sub-advisory agreements (the "Sub-Advisory Agreements") between the Investment
Adviser and its affiliate Fischer Francis Trees & Watts (the "Sub-Adviser"), a
corporate partnership organized under the laws of the United Kingdom, remain in
effect for two years following their date of execution and thereafter will
automatically continue for successive annual periods, so long as such
continuance is specifically approved at least annually by (a) the Board of
Directors or (b) the vote of a "majority" (as defined in the 1940 Act) of a
Portfolio's outstanding shares voting as a single class; provided, that in
either event the continuance is also approved by at least a majority of the
Board of Directors who are not "interested persons" (as defined in the 1940 Act)
of the Fund, the Investment Adviser or the Sub-Adviser by vote cast in person at
a meeting called for the purpose of voting on such approval. The following table
highlights the dates in which the Advisory Agreements were last approved by the
Board of Directors and by a majority of shareholders:
<TABLE>
<S> <C> <C>
Portfolio Last Board Approval Last Shareholder Approval
- --------- ------------------- -------------------------
Money Market 2/11/98 1/21/97
U.S. Short-Term 2/11/98 4/3/91
Stable Return 2/11/98 2/18/93
U.S. Treasury 2/11/98 1/21/97
Mortgage Total Return 2/11/98 1/2/96
Broad Market 2/11/98 1/21/97
Worldwide 2/11/98 12/31/92
Worldwide-Hedged 2/11/98 12/31/92
International 2/11/98 2/18/93
International-Hedged 2/11/98 2/18/93
Emerging Markets 2/11/98 1/21/97
Inflation-Indexed 2/11/98 1/21/97
Inflation-Indexed Hedged 2/11/98 1/21/97
</TABLE>
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:
<TABLE>
<S> <C> <C>
Portfolio Last Board Approval Last Shareholder Approval
- --------- ------------------- -------------------------
Worldwide 2/11/98 12/31/92
Worldwide-Hedged 2/11/98 12/31/92
International 2/11/98 2/18/93
International-Hedged 2/11/98 2/18/93
Emerging Markets 2/11/98 1/21/97
Inflation-Indexed 2/11/98 1/21/97
Inflation-Indexed Hedged 2/11/98 1/21/97
</TABLE>
Each Advisory and Sub-Advisory Agreement is terminable
without penalty on not less than 60 days' notice by the Board of Directors or by
a vote of the holders of a majority of the relevant Portfolio's outstanding
shares voting as a single class, or upon not less than 60 days' notice by the
Investment Adviser or the Sub-Adviser. Each Advisory and Sub-Advisory Agreement
will terminate automatically in the event of its "assignment" (as defined in the
1940 Act).
The Investment Adviser pays all of its expenses arising
from the performance of its obligations under the Advisory Agreements, including
all executive salaries and expenses of the directors and officers of the Fund
who are employees of the Investment Adviser or its affiliates and office rent of
the Fund. The Investment Adviser also pays a monthly sales incentive fee to AMT
Capital Services, Inc., the Distributor for the Fund. See "Distribution of Fund
Shares" in the Prospectus. In addition, the Investment Adviser will pay all of
the fees payable to its affiliate as Sub-Adviser. The Sub-Adviser pays all of
its expenses arising from the performance of its obligations under the
Sub-Advisory Agreements. Subject to the expense reimbursement provisions
described in the Prospectus under "Fund Expenses", other expenses incurred in
the operation of the Fund are borne by the Fund, including, without limitation,
investment advisory fees, brokerage commissions, interest, fees and expenses of
independent attorneys, auditors, custodians, accounting agents, transfer agents,
taxes, cost of stock certificates and any other expenses (including clerical
expenses) of issue, sale, repurchase or redemption of shares, expenses of
registering and qualifying shares of the Fund under federal and state laws and
regulations, expenses of printing and distributing reports, notices and proxy
materials to existing shareholders, expenses of printing and filing reports and
other documents filed with governmental agencies, expenses of annual and special
shareholders' meetings, fees and expenses of directors of the Fund who are not
employees of the Investment Adviser or its affiliates, membership dues in the
Investment Company Institute, insurance premiums and extraordinary expenses such
as litigation expenses. Fund expenses directly attributable to a Portfolio are
charged to that Portfolio; other expenses are allocated proportionately among
all the Portfolios in relation to the net assets of each Portfolio.
Both the Investment Adviser and the Sub-Adviser are
directly or indirectly wholly-owned by Charter Atlantic Corporation, a
New York corporation.
As compensation (subject to expense caps as described under
"Fund Expenses" in the Prospectus) for the services rendered by the
Investment Adviser under the Advisory Agreements, each Portfolio pays the
Investment Adviser a monthly advisory fee (each of U.S. Short-Term, Worldwide
and Worldwide-Hedged pays its fees quarterly) calculated by applying the
following annual percentage rates to such Portfolio's average daily net assets
for the month (quarter):
Rate
U.S. Fixed Income Portfolios
Money Market............. .10%
U.S. Short-Term.......... .15%*
Stable Return............ .15%**
U.S. Treasury............ .30%
Mortgage Total Return.... .10%***
Broad Market............. .30%
Global and International Fixed Income
Portfolios
Worldwide ... ......................40%
Worldwide-Hedged.. ..... .25%****
International........... .40%
International-Hedged....... .10%*****
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 October 1, 1997, the Adviser has
voluntarily lowered the advisory fee from .30%. **** Effective July 1, 1995, the
Adviser has voluntarily lowered the advisory fee from .40%. ***** Effective
September 1, 1997, the Adviser has voluntarily lowered the advisory fee from
.40%.
For the years ended December 31, 1997, December 31, 1996 and December 31, 1995,
the amount of advisory fees (net of waivers and reimbursements) paid by each
Portfolio were as follows:
<TABLE>
<S> <C> <C> <C>
----------------------------------------------------- ----------------------- ----------------------- -------------------------
Year Ended December Year Ended December Year Ended December 31,
Portfolio 31, 1997 31, 1996 1995
----------------------------------------------------- ----------------------- ----------------------- -------------------------
Money Market Portfolio $ 7,718 $ 0 $ 0
U.S. Short-Term Portfolio 598,652 607,871 867,461
Stable Return Portfolio 10,639 1,711 0
Mortgage Total Return Portfolio (1) 1,286,506 126,822 N/A
Worldwide Portfolio 308,466 334,929 46,819
Worldwide-Hedged Portfolio 112,750 1,647 0
International Portfolio (2) 136,714 12,322 N/A
International-Hedged Portfolio (3) 500,355 180,065 52,860
Emerging Markets Portfolio (4) 191,177 N/A N/A
</TABLE>
(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.
(4) Commencement of Operations was August 12, 1997.
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 February 28, 1998, the following person held 5
percent or more of the outstanding shares of Money Market:
<TABLE>
<S> <C> <C> <C>
Name and Address of Nature of Beneficial Percent
Title of Class Beneficial Owner Ownership of Portfolio
-------------- ----------------- ------------
Common Stock, $.001
per Share Cooper Industries, Inc. Direct Ownership 91.96%
1001 Fannin St.
First City Tower
Suite 3900, Houston, TX 77210
</TABLE>
As of February 28, 1998, the following persons held 5 percent or more
of the outstanding shares of U.S. Short-Term:
<TABLE>
<S> <C> <C> <C>
Name and Address of Nature of Beneficial Percent of Portfolio
Title of Class Beneficial Owner Ownership
Common Stock, $.001 Wachovia Bank of North Carolina, Trustee for R.J.R. Direct Ownership 14.49%
per Share Nabisco - Defined Benefit Plan, P.O. Box 3099,
Winston-Salem, NC 27150-3099
Common Stock, $.001 Monsanto Master Trust, c/o Fischer Francis Trees & Direct Ownership 13.17%
per Share Watts, Inc., 200 Park Avenue, New York, NY 10166
Common Stock, $.001 State Street Bank & Trust Co., Trustee for Bull HN Direct Ownership 12.98%
per Share Information Systems Inc., One Enterprise Drive SW
5C, North Quincy, MA 02171
Common Stock, $.001 Bank of America Pension Fund Direct Ownership 9.24%
per Share
Common Stock, $.001 State Street Bank & Trust Co., Trustee for Pacific Direct Ownership 7.34%
per Share Gas & Electric Co. LT Disability for Union
Employees, 77 Beal Street, San Francisco, CA 94105
Common Stock, $.001 State Street Bank & Trust Co., Trustee for Pacific Direct Ownership 5.04%
per Share Gas & Electric Co. Post-Retirement Medical Trust,
One Enterprise Drive W6A, North Quincy, MA 02171
</TABLE>
As of February 28, 1998, the following persons held 5
percent or more of the outstanding shares of Stable Return:
<TABLE>
<S> <C> <C> <C>
Name and Address of Nature of Beneficial Percent
Title of Class Beneficial Owner Ownership of Portfolio
Common Stock, $.001 Sprint Short Intermediate, 2330 Shawnee Mission Direct Ownership 51.92%
per Share Parkway, Westwood, KS 66205-2005
Common Stock, $.001 Barclays Global Investors, Trustee for Mars Direct Ownership 25.45%
per Share Deferred Compensation Plan, Stable Value Master
Fund, 800 Scudders Mill Road, Section 2B,
Plainsboro, NJ 08536
Common Stock, $.001 Corporation for Supportive Housing, 342 Madison Direct Ownership 11.53%
per Share Avenue, Suite 505, New York, NY 10173
Common Stock, $.001 Northern Trust Co., Trustee FBO Sandoz Investment Direct Ownership 7.78%
per Share Plan, P. O. Box 92956, Chicago IL 60675
</TABLE>
As of February 28, 1998, the following persons held 5
percent or more of the outstanding shares of Mortgage Total Return:
<TABLE>
<S> <C> <C> <C>
Name and Address of Nature of Beneficial Percent
Title of Class Beneficial Owner Ownership of Portfolio
- -------------- ------------------- ------------
Common Stock, $.001 Dingle & Co., F/B/O Ford Motor Co., c/o Comerica Direct Ownership 31.66%
per Share
Bank, P. O. Box 7500, Detroit MI 48275-3446
Common Stock, $.001 State Street Bank & Trust Co., Trustee for Bull HN Direct Ownership 13.48%
per Share Information Systems Inc., One Enterprise Drive SW
5C, North Quincy, MA 02171
Common Stock, $.001 Harbor Capital Group Trust for Defined Benefit Direct Ownership 8.13%
per Share Plans, c/o Fischer Francis Trees & Watts, Inc., 200
Park Avenue, 46th Floor, New York, NY 10166
Common Stock, $.001 Northern Trust Co., Trustee for Monsanto Defined Direct Ownership 7.31%
per Share Contribution Plan, P. O. Box 92956, Attn: Mutual
Funds, Chicago IL 60675
Common Stock, $.001 Corning, Inc. Master Trust, c/o U.S. Trust Co., 114 Direct Ownership 7.26%
per Share W. 47th St., 3rd Floor-39, New York, NY 10036-1632
Common Stock, $.001 International Bank for Reconstruction and Direct Ownership 6.12%
per Share Development Staff Benefits Plan, c/o Fischer
Francis Trees & Watts, Inc., 200 Park Avenue, 46th
Floor, New York, NY 10166
Common Stock, $.001 International Bank for Reconstruction and Direct Ownership 5.57%
per Share Development Staff Retirement Plan, c/o Fischer
Francis Trees & Watts, Inc., 200 Park Avenue, 46th
Floor, New York, NY 10166
</TABLE>
As of February 28, 1998, the following persons held 5
percent or more of the outstanding shares of Worldwide:
<TABLE>
<S> <C> <C> <C>
Name and Address of Nature of Beneficial Percent
Title of Class Beneficial Owner Ownership of Portfolio
- -------------- ----------------- ------------
Common Stock, $.001 Northern Trust Co., Trustee for GATX Master Direct Ownership 21.38%
per Share Retirement Trust, 500 W. Monroe St., 44th Floor,
Chicago, IL 60661
Common Stock, $.001 Bob & Co., c/o Bank of Boston, P.O. Box 1809, Direct Ownership 17.05%
per Share Boston, MA 02105
Common Stock, $.001 Administrators of Tulane Educational Fund, Direct Ownership 14.63%
per Share Treasurer's Office, 6401 Freret St., Suite 178,
New Orleans, LA 70118
Common Stock, $.001 Community Foundation For Southeastern Michigan, Direct Ownership 12.20%
per Share 333 West Fort St., Suite 2010, Detroit, MI 48226
Common Stock, $.001 Geneva Regional Health System Inc., 196 North St., Direct Ownership 6.97%
per Share Geneva, NY 14456
Common Stock, $.001 Massachusetts Eye & Ear Infirmary-Pension, 243 Direct Ownership 5.25%
per Share Charles Street, Boston MA 02114
</TABLE>
As of February 28, 1998, the following persons held 5
percent or more of the outstanding shares of Worldwide-Hedged:
<TABLE>
<S> <C> <C> <C>
Name and Address of Nature of Beneficial Percent
Title of Class Beneficial Owner Ownership of Portfolio
- -------------- ----------------- ------------
Common Stock, $.001 Northern Trust Co. Trustee for SIM Global Fixed Direct Ownership 21.48%
per Share Income, 1001 19th Street North, 16th Floor,
Arlington, VA 22209-1722
Common Stock, $.001 Northern Trust Co. Trustee for Mars Benefit Trust, Direct Ownership 18.98%
per Share P.O. Box 92956, Attn: Mutual Funds, Chicago, IL
60675
Common Stock, $.001 Mitra & Co., 1000 N. Water St. 14th Floor, Direct Ownership 18.57%
per Share Milwaukee, WI 53202
Common Stock, $.001 Law School Admission Council Inc., P.O. Box 40, Direct Ownership 16.81%
per Share Newtown, PA 18940-0040
Common Stock, $.001 State Street Bank & Trust Co., Trustee for Goldman Direct Ownership 13.38%
per Share Sachs Pension Plan, 200 Newport Ave., North
Quincy, MA 02171
Common Stock, $.001 The McCallie School, 500 Dodds Ave., Chattanooga, Direct Ownership 7.41%
per Share TN 37404
</TABLE>
As of February 28, 1998, the following persons held 5
percent or more of the outstanding shares of International:
<TABLE>
<S> <C> <C> <C>
Name and Address of Nature of Beneficial Percent
Title of Class Beneficial Owner Ownership of Portfolio
- -------------- ------------------- ------------
Common Stock, $.001 Evelyn & Walter Haas Jr. Fund, IRA, S. Direct Ownership 34.76%
per Share Hirschfield, President/Trustee, One Lombard
Street, Suite 305, San Fransisco, CA 94111
Common Stock, $.001 Colonial Williamsburg Foundation, P.O. Box 1776, Direct Ownership 22.48%
per Share Williamsburg, VA 23187-1776
Common Stock, $.001 Mac & Co., Mellon Trust, P.O. Box 3198, Direct Ownership 18.65%
per Share Pittsburgh, PA 15230-3198
Common Stock, $.001 HF Investment LP, 1700 Old Deerfield Road, Direct Ownership 15.33%
per Share Highland Park, IL 60035
Common Stock, $.001 State Street Bank & Trust, Trustee FBO Retirement Direct Ownership 7.01%
per Share Income Plan For Employees of Colonial
Williamsburg, P.O. Box 1776, Williamsburg, VA
23187-1776
</TABLE>
As of February 28, 1998, the following persons held 5
percent or more of the outstanding shares of International-Hedged:
<TABLE>
<S> <C> <C> <C>
Name and Address of Nature of Beneficial Percent
Title of Class Beneficial Owner Ownership of Portfolio
Common Stock, $.001 Dingle & Co., F/B/O Ford Motor Co., c/o Comerica Direct Ownership 43.51%
per Share Bank, P. O. Box 7500, Detroit MI 48275-3446
Common Stock, $.001 Harbor Capital Group Trust for Defined Benefit Direct Ownership 10.41%
per Share Plans, c/o Fischer Francis Trees & Watts, Inc.,
200 Park Avenue, 46th Floor, New York, NY 10166
Common Stock, $.001 Northrop Corporation Employee Benefit Plan, 1840 Direct Ownership 9.11%
per Share Century Park West, Los Angeles, CA 90067-2101
Common Stock, $.001 U.S. Trust Co., Trustee for Corning, Inc., 777 Direct Ownership 7.03%
per Share Broadway, 10th Floor, New York, NY 10003-9598
Common Stock, $.001 Northern Trust Co. Trustee for Monsanto Defined Direct Ownership 5.94%
per Share Contribution, P.O. Box 92956, Attn: Mutual Funds,
Chicago, IL 60675
Common Stock, $.001 Chase Manhattan Bank NA, Trustee for Amoco Direct Ownership 5.86%
per Share Corporation Master Trust Employee Pension Plan, 3
Chase Metrotech Center, 7th Floor, Brooklyn, NY
11245
</TABLE>
As of February 28, 1998, the following persons held 5
percent or more of the outstanding shares of Emerging Markets:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Name and Address of Nature of Beneficial Percent
Title of Class Beneficial Owner Ownership of Portfolio
Common Stock, $.001 Dingle & Co., F/B/O Ford Motor Co., c/o Comerica Direct Ownership 39.31%
per Share Bank, P. O. Box 7500, Detroit MI 48275-3446
Common Stock, $.001 Ameritech Pension Trust, c/o FFTW, 200 Park Direct Ownership 12.70%
per Share Avenue, 46th Floor, New York, NY 10166
Common Stock, $.001 The 1199 Health Care Employees Pension Plan, c/o Direct Ownership 12.46%
per Share Fischer Francis Trees & Watts, Inc., 200 Park
Avenue, 46th Floor, New York, NY 10166
Common Stock, $.001 Harbor Capital Group Trust for Defined Benefit Direct Ownership 9.05%
per Share Plans, c/o Fischer Francis Trees & Watts, Inc.,
200 Park Avenue, 46th Floor, New York, NY 10166
Common Stock, $.001 Northern Trust Co. Trustee for Monsanto Defined Direct Ownership 7.96%
per Share Contribution, P.O. Box 92956, Attn: Mutual Funds,
Chicago, IL 60675
</TABLE>
DISTRIBUTION OF FUND SHARES
Shares of the Fund are distributed by AMT Capital Services,
Inc. pursuant to a Distribution Agreement (the "Distribution Agreement") dated
as of February 1, 1995 between the Fund and AMT Capital. No fees are payable by
the Fund pursuant to the Distribution Agreement, and AMT Capital bears the
expense of its distribution activities. The Fund and AMT Capital have agreed to
indemnify one another against certain liabilities.
SUPPLEMENTAL DESCRIPTIONS OF INVESTMENTS
The different types of securities in which the Portfolios
may invest, subject to their respective investment objectives, policies and
restrictions, are described in the Prospectus under "Descriptions of
Investments". Additional information concerning the characteristics of certain
of the Portfolio's investments are set forth below.
U.S. Treasury and U.S. Government Agency Securities. U.S.
Government Securities include instruments issued by the U.S. Treasury, including
bills, notes and bonds. These instruments are direct obligations of the U.S.
Government and, as such, are backed by the full faith and credit of the United
States. They differ primarily in their interest rates, the lengths of their
maturities and the dates of their issuances. In addition, U.S. Government
Securities include securities issued by instrumentalities of the U.S.
Government, such as the Government National Mortgage Association ("GNMA"), which
are also backed by the full faith and credit of the United States. U.S.
Government Agency Securities include instruments issued by instrumentalities
established or sponsored by the U.S. Government, such as the Student Loan
Marketing Association ("SLMA"), the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). While these
securities are issued, in general, under the authority of an Act of Congress,
the U.S. Government is not obligated to provide financial support to the issuing
instrumentalities.
Foreign Government and International and Supranational
Agency Securities. Obligations of foreign governmental entities have various
kinds of government support and include obligations issued or guaranteed by
foreign governmental entities with taxing powers or issued or guaranteed by
international or supranational entities. These obligations may or may not be
supported by the full faith and credit of a foreign government or several
foreign governments. Examples of international and supranational entities
include the International Bank for Reconstruction, and Development ("World
Bank"), the European Steel and Coal Community, the Asian Development Bank, the
European Bank for Reconstruction and Development and the Inter-American
Development Bank. The governmental members, or "shareholders", usually make
initial capital contributions to the supranational entity and in many cases are
committed to make additional capital contributions if the supranational entity
is unable to repay its borrowings.
Bank Obligations. The Fund limits its investments in U.S.
bank obligations to obligations of U.S. banks that in the Investment Adviser's
opinion meet sufficient creditworthiness criteria.
The Fund limits its investments in foreign bank obligations
to obligations of foreign banks (including U.S. branches of foreign banks)
that, in the opinion of the Investment Adviser or the Sub-Adviser, are
of an investment quality comparable to obligations of U.S. banks in
which each Portfolio may invest.
Repurchase and Reverse Repurchase Agreements. When
participating in repurchase agreements, a Portfolio buys securities from a
vendor (e.g., a bank or securities firm) with the agreement that the vendor will
repurchase the securities at the same price plus interest at a later date.
Repurchase agreements may be characterized as loans secured by the underlying
securities. Such transactions afford an opportunity for the Portfolio to earn a
return on available cash at minimal market risk, although the Portfolio may be
subject to various delays and risks of loss if the vendor becomes subject to a
proceeding under the U.S. Bankruptcy Code or is otherwise unable to meet its
obligation to repurchase. The securities underlying a repurchase agreement will
be marked to market every business day so that the value of such securities is
at least equal to the value of the repurchase price thereof, including the
accrued interest thereon.
When participating in reverse repurchase agreements, a
Portfolio sells U.S. Government Securities and simultaneously agrees to
repurchase them at an agreed upon price and date. The difference between the
amount the Portfolio receives for the securities and the amount it pays on
repurchase is deemed to be a payment of interest. The Fund will maintain for
each Portfolio a segregated custodial account containing cash, U.S. Government
Securities or other liquid, unencumbered securities having an aggregate value at
least equal to the amount of such commitments to repurchase, including accrued
interest, until payment is made. Reverse repurchase agreements create leverage,
a speculative factor, but will not be considered as borrowings for the purposes
of limitations on borrowings.
In addition, repurchase and reverse repurchase agreements
may also involve the securities of certain foreign governments in which there is
an active repurchase market. The Investment Adviser expects that such repurchase
and reverse repurchase agreements will primarily involve government securities
of countries belonging to the Organization for Economic Cooperation and
Development ("OECD"). Transactions in foreign repurchase and reverse repurchase
agreements may involve additional risks.
Dollar Roll Transactions. "Dollar roll" transactions
consist of the sale by a Portfolio to a bank or broker-dealer (the
"counterparty") of GNMA certificates or other mortgage-backed securities
together with a commitment to purchase from the counterparty similar, but not
identical, securities at a future date, at the same price. The counterparty
receives all principal and interest payments, including prepayments, made on the
security while it is the holder. The Portfolio receives a fee from the
counterparty as consideration for entering into the commitment to purchase.
Dollar rolls may be renewed over a period of several months with a new purchase
and repurchase price fixed and a cash settlement made at each renewal without
physical delivery of securities. Moreover, the transaction may be preceded by a
firm commitment agreement pursuant to which the Portfolio agrees to buy a
security on a future date.
A Portfolio will not use such transactions for leverage
purposes and, accordingly, will segregate cash, U.S. Government securities or
other liquid, unencumbered securities in an amount sufficient to meet its
purchase obligations under the transactions.
Dollar rolls are similar to reverse repurchase agreements
because they involve the sale of a security coupled with an agreement to
repurchase. Like all borrowings, a dollar roll involves costs to a Portfolio.
For example, while a Portfolio receives a fee as consideration for agreeing to
repurchase the security, the Portfolio may forgo the right to receive all
principal and interest payments while the counterparty holds the security. These
payments to the counterparty may exceed the fee received by the Portfolio,
thereby effectively charging the Portfolio interest on its borrowing. Further,
although the Portfolio can estimate the amount of expected principal prepayment
over the term of the dollar roll, a variation in the actual amount of prepayment
could increase or decrease the cost of the Portfolio's borrowing.
Mortgage-Backed Securities. Mortgage-backed securities are
securities which represent ownership interests in, or are debt obligations
secured entirely or primarily by, "pools" of residential or commercial mortgage
loans or other mortgage-backed securities (the "Underlying Assets"). In the case
of mortgage-backed securities representing ownership interests in the Underlying
Assets, the principal and interest payments on the underlying mortgage loans are
distributed monthly to the holders of the mortgage-backed securities. In the
case of mortgage-backed securities representing debt obligations secured by the
Underlying Assets, the principal and interest payments on the underlying
mortgage loans, and any reinvestment income thereon, provide the funds to pay
debt service on such mortgage-backed securities.
Certain mortgaged-backed securities are issued that
represent an undivided fractional interest in the entirety of the Underlying
Assets (or in a substantial portion of the Underlying Assets, with additional
interests junior to that of the mortgage-backed security), and thus have payment
terms that closely resemble the payment terms of the Underlying Assets.
In addition, many mortgage-backed securities are issued in
multiple classes. Each class of such multi-class mortgage-backed securities
("MBS"), often referred to as a "traunche", is issued at a specific fixed or
floating coupon rate and has a stated maturity or final distribution date.
Principal prepayment on the Underlying Assets may cause the MBSs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all or most classes of the MBSs on a periodic
basis, typically monthly or quarterly. The principal of and interest on the
Underlying Assets may be allocated among the several classes of a series of a
MBS in many different ways. In a relatively common structure, payments of
principal (including any principal prepayments) on the Underlying Assets are
applied to the classes of a series of a MBS in the order of their respective
stated maturities so that no payment of principal will be made on any class of
MBSs until all other classes having an earlier stated maturity have been paid in
full.
Other Asset-Backed Securities. The Investment Adviser
expects that other asset-backed securities (unrelated to mortgage loans) will be
developed and offered to investors in the future. Several types of such
asset-backed securities have already been offered to investors, including
securities backed by automobile loans and credit card receivables. Consistent
with each Portfolio's investment objectives and policies, a Portfolio may invest
in other types of asset-backed securities as they become available.
Zero Coupon Securities and Custodial Receipts. Zero coupon
securities include securities issued directly by the U.S. Treasury, and U.S.
Treasury bonds or notes and their unmatured interest coupons and receipts for
their underlying principal (the "coupons") which have been separated by their
holder, typically a custodian bank or investment brokerage firm. A holder will
separate the interest coupons from the underlying principal (the "corpus") of
the U.S. Treasury security. A number of securities firms and banks have stripped
the interest coupons and receipts and then resold them in custodial receipt
programs with a number of different names, including "Treasury Income Growth
Receipts" ("TIGRS") and "Certificate of Accrual on Treasuries" ("CATS"). The
underlying U.S. Treasury bonds and notes themselves are held in book-entry form
at the Federal Reserve Bank or, in the case of bearer securities (i.e.,
unregistered securities which are owned ostensibly by the bearer or holder
thereof), in trust on behalf of the owners thereof. Counsel to the underwriters
of these certificates or other evidences of ownership of the U.S. Treasury
securities have stated that for Federal tax and securities law purposes, in
their opinion, purchasers of such certificates, such as a Portfolio, most likely
will be deemed the beneficial holders of the underlying U.S. Treasury
securities.
Recently, the Treasury has facilitated transfer of
ownership of zero coupon securities by accounting separately for the beneficial
ownership of particular interest coupon and corpus payments on Treasury
securities through the Federal Reserve book-entry record-keeping system. The
Federal Reserve program as established by the Treasury Department is known as
"Separate Trading of Registered Interest and Principal of Securities"
("STRIPS"). Under the STRIPS program, a Portfolio can be able to have its
beneficial ownership of zero coupon securities recorded directly in the
book-entry record-keeping system in lieu of holding certificates or other
evidences of ownership of the underlying U.S.
Treasury securities.
When U.S. Treasury obligations have been stripped of their
unmatured interest coupons by the holder, the principal or corpus is sold at a
deep discount because the buyer receives only the right to receive a future
fixed payment on the security and does not receive any rights to periodic
interest (cash) payments. Once stripped or separated, the corpus and coupons may
be sold separately. Typically, the coupons are sold separately or grouped with
other coupons with like maturity dates and sold in such bundled form. Purchasers
of stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself.
Loan Participations. A loan participation is an interest
in a loan to a U.S. corporation (the "corporate borrower") which is administered
and sold by an intermediary bank. The borrower of the underlying loan will be
deemed to be the issuer of the participation interest except to the extent the
Portfolio derives its rights from the intermediary bank who sold the loan
participation. Such loans must be to issuers in whose obligations a Portfolio
may invest. Any participation purchased by a Portfolio must be issued by a bank
in the United States with assets exceeding $1 billion. See "Supplemental
Discussion of Risks Associated With the Fund's Investment Policies and
Investment Techniques".
Variable Amount Master Demand Notes. Variable amount
master demand notes permit the investment of fluctuating amounts at varying
rates of interest pursuant to direct arrangements between a Portfolio (as
lender) and the borrower. These notes are direct lending arrangements between
lenders and borrowers, and are generally not transferable, nor are they
ordinarily rated by either Moody's or S&P.
Currency-Indexed Notes. In selecting the two currencies
with respect to which currency-indexed notes are adjusted, the Investment
Adviser and the Sub-Adviser will consider the correlation and relative yields of
various currencies. Each Portfolio may purchase a currency-indexed obligation
using the currency in which it is denominated and, at maturity, will receive
interest and principal payments thereon in that currency. The amount of
principal payable by the issuer at maturity, however, will vary (i.e., increase
or decrease) in response to the change (if any) in the exchange rate between the
two specified currencies during the period from the date the instrument is
issued to its maturity date. The potential for realizing gains as a result of
changes in foreign currency exchange rates may enable a Portfolio to hedge the
currency in which the obligation is denominated (or to effect cross-hedges
against other currencies) against a decline in the U.S. dollar value of
investments denominated in foreign currencies while providing an attractive
market rate of return. Each Portfolio will purchase such indexed obligations to
generate current income or for hedging purposes and will not speculate in such
obligations.
Principal Exchange Rate Linked Securities. Principal
exchange rate linked securities (or "PERLs") are debt obligations, the principal
on which is payable at maturity in an amount that may vary based on the exchange
rate between the U.S. dollar and a particular foreign currency at or about that
time. The return on "standard" principal exchange rate linked securities is
enhanced if the foreign currency to which the security is linked appreciates
against the U.S. dollar, and is adversely affected by increases in the foreign
exchange value of the U.S. dollar; "reverse" principal exchange rate linked
securities are like the "standard" securities, except that their return is
enhanced by increases in the value of the U.S. dollar and adversely impacted by
increases in the value of the foreign currency. Interest payments on the
securities are generally made in U.S. dollars at rates that reflect the degree
of foreign currency risk assumed or given up by the purchaser of the notes.
Performance Indexed Paper. Performance indexed paper (or
"PIPs") is U.S. dollar-denominated commercial paper, the yield of which is
linked to certain foreign exchange rate movements. The yield to the investor on
performance indexed paper is established at maturity as a function of spot
exchange rates between the U.S. dollar and a designated currency as of that
time. The yield to the investor will be within a range stipulated at the time of
purchase of the obligation, generally with a guaranteed minimum rate of return
that is below, and a potential maximum rate of return that is above, market
yields on U.S. dollar-denominated commercial paper, with both the minimum and
maximum rates of return on the investment corresponding to the minimum and
maximum values of the spot exchange rate two business days prior to maturity.
Other Foreign Currency Exchange-Related Securities.
Securities may be denominated in the currency of one nation although issued by a
governmental entity, corporation or financial institution of another nation. For
example, a Portfolio may invest in a British pound sterling-denominated
obligation issued by a United States corporation. Such investments involve
credit risks associated with the issuer and currency risks associated with the
currency in which the obligation is denominated.
The Investment Adviser or the Sub-Adviser bases its
decision for a Portfolio to invest in any foreign currency exchange-related
securities that may be offered in the future on the same general criteria
applicable to the Investment Adviser's or Sub-Adviser's decision for such
Portfolio to invest in any debt security, including the Portfolio's minimum
ratings and investment quality criteria, with the additional element of foreign
currency exchange rate exposure added to the Investment Adviser's or
Sub-Adviser's analysis of interest rates, issuer risk and other factors.
Securities Denominated in Multi-National Currency Units or
More Than One Currency. An illustration of a multi-national currency unit is the
European Currency Unit (the "ECU"), which is a "basket" consisting of specified
amounts of the currencies of the member states of the European Community, a
Western European economic cooperative organization. The specific amounts of
currencies comprising the ECU may be adjusted by the Council of Ministers of the
European Community to reflect changes in relative values of the underlying
currencies. The Investment Adviser does not believe that such adjustments will
adversely affect holders of ECU-denominated obligations or the marketability of
such securities. European supranational entities, in particular, issue
ECU-denominated obligations.
Foreign Currency Warrants. Foreign currency warrants such
as currency exchange warrants ("CEWs") are warrants that entitle the holder to
receive from their issuer an amount of cash (generally, for warrants issued in
the United States in U.S. dollars) which is calculated pursuant to a
predetermined formula and based on the exchange rate between a specified foreign
currency and the U.S. dollar as of the exercise date of the warrant. Foreign
currency warrants generally are exercisable upon their issuance and expire as of
a specified date and time. Foreign currency warrants have been issued in
connection with U.S. dollar-denominated debt offerings by major corporate
issuers in an attempt to reduce the foreign currency exchange risk which, from
the point of view of prospective purchasers of the securities, is inherent in
the international fixed income marketplace. The formula used to determine the
amount payable upon exercise of a foreign currency warrant may make the warrant
worthless unless the applicable foreign currency exchange rate moves in a
particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). In addition, foreign currency warrants are subject to other risks
associated with foreign securities, including risks arising from complex
political or economic factors.
Municipal Instruments. Municipal notes may include such
instruments as tax anticipation notes, revenue anticipation notes, and bond
anticipation notes. Municipal notes are issued by state and local governments
and public authorities as interim financing in anticipation of tax collections,
revenue receipts or bond sales. Municipal bonds, which may be issued to raise
money for various public purposes, include general obligation bonds and revenue
bonds. General obligation bonds are backed by the taxing power of the issuing
municipality and are considered the safest type of bonds. Revenue bonds are
backed by the revenues of a project or facility such as the tolls from a toll
bridge. Industrial development revenue bonds are a specific type of revenue bond
backed by the credit and security of a private user. Revenue bonds are generally
considered to have more potential risk than general obligation bonds.
Municipal obligations can have floating, variable or fixed
rates. The value of floating and variable rate obligations generally is more
stable than that of fixed rate obligations in response to changes in interest
rate levels. Variable and floating rate obligations usually carry rights that
permit a Portfolio to sell them at par value plus accrued interest upon short
notice. The issuers or financial intermediaries providing rights to sell may
support their ability to purchase the obligations by obtaining credit with
liquidity supports. These may include lines of credit, which are conditional
commitments to lend, letters of credit, which will ordinarily be irrevocable,
both issued by domestic banks or foreign banks which have a branch, agency or
subsidiary in the United States. When considering whether an obligation meets a
Portfolio's quality standards, the Investment Adviser will look at the
creditworthiness of the party providing the right to sell as well as to the
quality of the obligation itself.
Municipal securities may be issued to finance private
activities, the interest from which is an item of tax preference for purposes of
the federal alternative minimum tax. Such "private activity" bonds might include
industrial development revenue bonds, and bonds issued to finance such projects
as solid waste disposal facilities, student loans or water and sewage projects.
SUPPLEMENTAL INVESTMENT TECHNIQUES
Borrowing. Each Portfolio may borrow money temporarily
from banks when (i) it is advantageous to do so in order to meet redemption
requests, (ii) a Portfolio fails to receive transmitted funds from a shareholder
on a timely basis, (iii) the custodian of the Fund fails to complete delivery of
securities sold or (iv) a Portfolio needs cash to facilitate the settlement of
trades made by the Portfolio. In addition, each Portfolio may, in effect, lend
securities by engaging in reverse repurchase agreements and/or dollar roll
transactions and may, in effect, borrow money by doing so. Securities may be
borrowed by engaging in repurchase agreements. See "Investment Restrictions" and
"Supplemental Descriptions of Investments".
Securities Lending. Each Portfolio, except U.S.
Short-Term, is authorized to lend securities from its investment portfolios,
with a value not exceeding 33 1/3% of its total assets, to banks, brokers and
other financial institutions if it receives collateral in cash, U.S. Government
Securities or irrevocable bank stand-by letters of credit which will be
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. The loans will be terminable at any time
by the Fund and the relevant Portfolio will then receive the loaned securities
within five days. During the period of such a loan, the Portfolio receives the
income on the loaned securities and a loan fee and may thereby increase its
total return.
SUPPLEMENTAL DISCUSSION OF RISKS ASSOCIATED WITH THE FUND'S INVESTMENT POLICIES
AND INVESTMENT TECHNIQUES
The risks associated with the different types of securities
in which the Portfolios may invest are described in the Prospectus under "Risks
Associated With the Fund's Investment Policies and Investment Techniques".
Additional information concerning risks associated with certain of the
Portfolio's investments is set forth below.
Foreign Investments. Foreign financial markets, while
growing in volume, have, for the most part, substantially less volume than
United States markets, and securities of many foreign companies are less liquid
and their prices more volatile than securities of comparable domestic companies.
The foreign markets also have different clearance and settlement procedures, and
in certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Delivery of securities may not occur at the same time
as payment in some foreign markets. Delays in settlement could result in
temporary periods when a portion of the assets of a Portfolio is uninvested and
no return is earned thereon. The inability of a Portfolio to make intended
security purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to a
Portfolio due to subsequent declines in value of the portfolio security or, if
the Portfolio has entered into a contract to sell the security, could result in
possible liability to the purchaser. There is generally less government
supervision and regulation of exchanges, financial institutions and issuers in
foreign countries than there is in the United States. In addition, a foreign
government may impose exchange control regulations which may have an impact on
currency exchange rates.
Foreign Bank Obligations. Obligations of foreign banks
involve somewhat different investment risks than those affecting obligations of
United States banks, including the possibilities that their liquidity could be
impaired because of future political and economic developments, that their
obligations may be less marketable than comparable obligations of United States
banks, that a foreign jurisdiction might impose withholding taxes on interest
income payable on those obligations, that foreign deposits may be seized or
nationalized, that foreign governmental restrictions such as exchange controls
may be adopted that might adversely affect the payment of principal and interest
on those obligations and that the selection of those obligations may be more
difficult because there may be less publicly available information concerning
foreign banks or the accounting, auditing and financial reporting standards,
practices and requirements applicable to foreign banks may differ from those
applicable to United States banks. Foreign banks are not generally subject to
examination by any United States government agency or instrumentality. Also,
investments in commercial banks located in several foreign countries are subject
to additional risks due to the combination in such banks of commercial banking
and diversified securities activities.
Dollar Roll Transactions. The entry into dollar rolls
involves potential risks of loss which are different from those related to the
securities underlying the transactions. For example, if the counterparty becomes
insolvent, a Portfolio's right to purchase from the counterparty might be
restricted. Additionally, the value of such securities may change adversely
before the Portfolio is able to purchase them. Similarly, a Portfolio may be
required to purchase securities in connection with a dollar roll at a higher
price than may otherwise be available on the open market. Since, as noted above
under "Supplemental Descriptions of Investments", the counterparty is required
to deliver a similar, but not identical, security to a Portfolio, the security
which the Portfolio is required to buy under the dollar roll may be worth less
than an identical security. Finally, there can be no assurance that a
Portfolio's use of cash that it receives from a dollar roll will provide a
return that exceeds borrowing costs.
Mortgage and Other Asset-Backed Securities. Prepayments on
securitized assets such as mortgages, automobile loans and credit card
receivables ("Securitized Assets") generally increase with falling interest
rates and decrease with rising interest rates; furthermore, prepayment rates are
influenced by a variety of economic and social factors. In general, the
collateral supporting non-mortgage asset-backed securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. In addition to prepayment risk, borrowers on the underlying
Securitized Assets may default in their payments creating delays or loss of
principal.
Non-mortgage asset-backed securities involve certain risks
that are not presented by mortgage-backed securities. Primarily, these
securities do not have the benefit of a security interest in assets underlying
the related mortgage collateral. Credit card receivables are generally unsecured
and the debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due. Most
issuers of automobile receivables permit the servicers to retain possession of
the underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have an effective security interest in all of the
obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
Some forms of asset-backed securities are relatively new
forms of investments. Although each Portfolio will only invest in asset-backed
securities that the Investment Adviser believes are liquid, because the market
experience in certain of these securities is limited, the market's ability to
sustain liquidity through all phases of a market cycle may not have been tested.
Forward Commitments. Each Portfolio may purchase
securities on a when-issued or forward commitment basis, which involves a risk
of loss if the value of the securities to be purchased increases prior to the
settlement date and the counterparty to the trade fails to execute the
transaction. If this were to occur, the net asset value of a Portfolio, which
includes any appreciation or depreciation of a security purchased on a forward
basis, would decline by the amount of such unrealized appreciation.
Loan Participations. Because the issuing bank of a loan
participation does not guarantee the participation in any way, it is subject to
the credit risks generally associated with the underlying corporate borrower. In
addition, because it may be necessary under the terms of the loan participation
for a Portfolio to assert through the issuing bank such rights as may exist
against the underlying corporate borrower, in the event that the underlying
corporate borrower should fail to pay principal and interest when due, the
Portfolio could be subject to delays, expenses and risks which are greater than
those which would have been involved if the Portfolio had purchased a direct
obligation (such as commercial paper) of the borrower. Moreover, under the terms
of the loan participation, the purchasing Portfolio may be regarded as a
creditor of the issuing bank (rather than of the underlying corporate borrower),
so that the Portfolio also may be subject to the risk that the issuing bank may
become insolvent. Further, in the event of the bankruptcy or insolvency of the
corporate borrower, the loan participation might be subject to certain defenses
that can be asserted by a borrower as a result of improper conduct by the
issuing bank. The secondary market, if any, for these loan participation
interests is limited, and any such participation purchased by a Portfolio will
be treated as illiquid, until the Board of Directors determines that a liquid
market exists for such participations. Loan participations will be valued at
their fair market value, as determined by procedures approved by the Board of
Directors.
High Yield/High Risk Debt Securities. Emerging Markets
will invest its net assets in debt securities which are rated below
investment-grade - that is, rated below Baa by Moody's or BBB by S&P and in
unrated securities judged to be of equivalent quality by the Investment Adviser
or Sub-Adviser. Below investment grade securities carry a high degree of risk
(including the possibility of default or bankruptcy of the issuers of such
securities), generally involve greater volatility of price and risk of principal
and income, and may be less liquid, than securities in the higher rating
categories and are considered speculative. The lower the ratings of such debt
securities, the greater their risks render them like equity securities. See
"Quality Ratings Descriptions" in this Statement of Additional Information for a
more complete description of the ratings assigned by ratings organizations and
their respective characteristics.
Economic downturns have in the past, and could in the
future, disrupted the high yield market and impaired the ability of issuers to
repay principal and interest. Also, an increase in interest rates would have a
greater adverse impact on the value of such obligations than on comparable
higher quality debt securities. During an economic downturn or period of rising
interest rates, highly leveraged issues may experience financial stress which
would adversely affect their ability to service their principal and interest
payment obligations. Prices and yields of high yield securities will fluctuate
over time and, during periods of economic uncertainty, volatility of high yield
securities may adversely affect the Portfolio's net asset value. In addition,
investments in high yield zero coupon or pay-in-kind bonds, rather than
income-bearing high yield securities, may be more speculative and may be subject
to greater fluctuations in value due to changes in interest rates.
The trading market for high yield securities may be thin to
the extent that there is no established retail secondary market or because of a
decline in the value of such securities. A thin trading market may limit the
ability of the Portfolio to accurately value high yield securities in the
Portfolio's portfolio and to dispose of those securities. Adverse publicity and
investor perceptions may decrease the values and liquidity of high yield
securities. These securities may also involve special registration
responsibilities, liabilities and costs.
Credit quality in the high yield securities market can
change suddenly and unexpectedly, and even recently issued credit ratings may
not fully reflect the actual risks posed by a particular high-yield security.
For these reasons, it is the policy of the Investment Adviser and Sub-Adviser
not to rely exclusively on ratings issued by established credit rating agencies,
but to supplement such ratings with its own independent and on-going review of
credit quality. The achievement of the Portfolio's investment objective by
investment in such securities may be more dependent on the Investment Adviser's
or Sub-Adviser's credit analysis than is the case for higher quality bonds.
Should the rating of a portfolio security be downgraded, the Investment Adviser
or Sub-Adviser will determine whether it is in the best interest of the
Portfolio to retain or dispose of such security.
Prices for below investment-grade securities may be
affected by legislative and regulatory developments.
SUPPLEMENTAL TECHNIQUES TO HEDGE INTEREST RATE AND FOREIGN CURRENCY RISKS AND
OTHER FOREIGN CURRENCY STRATEGIES
Each of the Portfolios may enter into forward foreign
currency contracts (a "forward contract") and may purchase and write (on a
covered basis) exchange-traded or over-the-counter ("OTC") options on
currencies, foreign currency futures contracts and options on foreign currency
futures contracts primarily to protect against a decrease in the U.S. Dollar
equivalent value of its foreign currency portfolio securities or the payments
thereon that may result from an adverse change in foreign currency exchange
rates. Under normal circumstances, each of Worldwide-Hedged,
International-Hedged and Inflation-Indexed Hedged intends to hedge its currency
exchange risk to the extent feasible, but there can be no assurance that all of
the assets of each Portfolio denominated in foreign currencies will be hedged at
any time, or that any such hedge will be effective. Each of the other Portfolios
may at times, at the discretion of the Investment Adviser and the Sub-Adviser,
hedge all or some portion of its currency exchange risk.
Conditions in the securities, futures, options and foreign
currency markets will determine whether and under what circumstances the Fund
will employ any of the techniques or strategies described below. The Fund's
ability to pursue certain of these strategies may be limited by applicable
regulations of the Commodity Futures Trading Commission ("CFTC") and the federal
tax requirements applicable to regulated investment companies. See "Restrictions
on the Use of Futures Transactions" under "Investment Techniques - Hedging
Strategies" in the Prospectus, and "Tax Considerations" below.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND ASSOCIATED RISKS
Each Portfolio, except Money Market, 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 to correctly 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 to correctly
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 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 or allow it to expire. 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, 1997, December 31, 1996 and December 31, 1995,
the amount of brokerage commissions (associated with financial futures and
options contracts) paid by each Portfolio were as follows:
<TABLE>
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---------------------------------------------------- ---------------------------------------------------------------------
Year Ended Year Ended Year Ended
Portfolio December 31,997 December 31, 1996 December 31, 1995
---------------------------------------------------- ---------------------------------------------------------------------
U.S. Short-Term Portfolio $126,108 $110,133 $187,185
Stable Return Portfolio 3,649 0 27,616
Mortgage Total Return Portfolio (1) 463,651 30,152 N/A
Worldwide Portfolio 21,065 10,254 15,268
Worldwide-Hedged Portfolio 11,724 2,719 3,083
International Portfolio (2) 13,040 2,707 N/A
International-Hedged Portfolio (3) 127,213 12,342 15,643
---------------------------------------------------- ------------------- -------------------- ---------------
Emerging Markets Portfolio (4) 7,697 N/A N/A
---------------------------------------------------- -------------------- -------------------- ----------------
</TABLE>
(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.
(4) Commencement of Operations was August 12, 1997.
The cost of executing transactions will consist primarily
of dealer spreads. The spread is not included in the expenses of a Portfolio and
therefore is not subject to the expenses cap; nevertheless, the incurrence of
this spread, ignoring the other intended positive effects of each such
transaction, will decrease the total return of the Portfolio. However, a
Portfolio will buy one asset and sell another only if the Investment Adviser
and/or the Sub-Adviser believes it is advantageous to do so after considering
the effect of the additional custodial charges and the spread on the Portfolio's
total return.
All purchases and sales will be executed with major
dealers and banks on a best net price basis. No trades will be executed with the
Investment Adviser, the Sub-Adviser, their affiliates, officers or employees
acting as principal or agent for others, although such entities and persons may
be trading contemporaneously in the same or similar securities. To the extent an
investment that may be appropriate for one of the Portfolios is considered for
purchase by the Investment Adviser and/or Sub-Adviser for the account of another
Portfolio, client or fund, the investment opportunity, as well as the expenses
incurred in the transaction, will be allocated in a manner deemed equitable by
the Investment Adviser.
The Global and International Portfolios are expected to
invest substantial portions of their assets in foreign securities. Since costs
associated with transactions in foreign securities are generally higher than
costs associated with transactions in domestic securities, the operating expense
ratios of these Portfolios can be expected to be higher than that of an
investment company investing exclusively in domestic securities.
TAX CONSIDERATIONS
The following summary of tax consequences, which does not
purport to be complete, is based on U.S. federal tax laws and regulations in
effect on the date of this Statement of Additional Information, which are
subject to change by legislative or administrative action.
Qualification as a Regulated Investment Company. Each
active Portfolio has qualified and all Portfolios intend to qualify in the
future to be treated as a regulated investment company ("RIC") under the
Internal Revenue Code of 1986, as amended (the "Code"). To qualify as a RIC, a
Portfolio must, among other things, (a) derive at least 90% of its gross income
each taxable year from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of securities or foreign
currencies, or other income (including gains from options, futures or forward
contracts) derived from its business of investing in securities or foreign
currencies (the "Qualifying Income Requirement"); (b) 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 (c) 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. 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.
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.
Global and International Portfolios
Income received by a Portfolio from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. The amount of foreign tax cannot be predicted in
advance because the amount of a Portfolio's assets that may be invested in a
particular country is subject to change.
If more than 50% of the value of the total assets of a
Portfolio at the end of its taxable year consists of securities of foreign
corporations, as the Global and International Portfolios more than likely may
be, such Portfolio will be eligible and may elect to "pass through" to such
Portfolio's shareholders the amount of foreign income and similar taxes paid by
such Portfolio. Pursuant to this election, a shareholder will be required to
include in gross income (in addition to taxable dividends actually received) a
pro rata share of the foreign taxes paid by such Portfolio, and will be entitled
either to deduct (as an itemized deduction) that amount in computing taxable
income or to use that amount as a foreign tax credit against U.S. federal income
tax liability. The amount of foreign taxes for which a shareholder can claim a
credit in any year will be subject to limitations set forth in the Code,
including a separate limitation for "passive income," which includes, among
other items, dividends, interest and certain foreign currency gains.
Shareholders not subject to U.S. federal income tax on income from a Portfolio
may not claim such a deduction or credit. Each shareholder of the Global and
International Portfolios will be notified within 60 days after the close of such
Portfolio's taxable year whether the foreign taxes paid by such Portfolio will
"pass through" for the year.
Other Taxes
A Portfolio may be subject to state, local or foreign taxes
in any jurisdiction in which the Portfolio may be deemed to be doing business.
In addition, shareholders of a Portfolio may be subject to state, local or
foreign taxes on distributions from the Portfolio. In many states, Portfolio
distributions which are derived from interest on certain U.S. Government
obligations may be exempt from taxation. Shareholders should consult their own
tax advisers concerning these matters.
SHAREHOLDER INFORMATION
Certificates representing shares of a particular Portfolio
will not be issued to shareholders. Investors Bank & Trust Company, the Fund's
Transfer Agent, will maintain an account for each shareholder upon which the
registration and transfer of shares are recorded, and any transfers shall be
reflected by bookkeeping entry, without physical delivery. Detailed
confirmations of each purchase or redemption are sent to each shareholder.
Monthly statements of account are sent which include shares purchased as a
result of a reinvestment of Portfolio distributions.
The Transfer Agent will require that a shareholder provide
requests in writing, accompanied by a valid signature guarantee form, when
changing certain information in an account (i.e., wiring instructions, telephone
privileges, etc.). None of the Fund, AMT Capital or the Transfer Agent will be
responsible for the validity of written or telephonic requests.
The Fund reserves the right, if conditions exist which make
cash payments undesirable, to honor any request for redemption of a Portfolio by
making payment in whole or in part in readily marketable securities chosen by
the Fund and valued as they are for purposes of computing the Portfolio's net
asset value (redemption-in-kind). If payment is made in securities, a
shareholder may incur transaction expenses in converting theses securities to
cash. The Fund has elected, however, to be governed by Rule 18f-1 under the
Investment Company Act of 1940 as a result of which the Fund is obligated to
redeem shares, with respect to any one shareholder during any 90-day period,
solely in cash up to the lesser of $250,000 or 1% of the net asset value of a
Portfolio at the beginning of the period.
CALCULATION OF PERFORMANCE DATA
The Fund may, from time to time, include the yield and
total return of a Portfolio in reports to shareholders or prospective investors.
Quotations of yield for a Portfolio of the Fund will be based on all investment
income per share during a particular 30-day (or one month) period (including
dividends and interest), less expenses accrued during the period ("net
investment income"), and are computed by dividing net investment income by the
maximum, offering price per share on the last day of the period, according to
the following formula which is prescribed by the Commission:
YIELD = 2[( a - b + 1)6 - 1]
cd
Where a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares of a
Portfolio outstanding during the period that
were entitled to receive dividends, and d =
the maximum offering price per share on the
last day of the period.
The yield as defined above for the Fund's Portfolios
(except Money Market and Mortgage Total Return) for the 30-day period ended
December 31, 1997 were as follows:
U.S. Portfolios
U.S. Short-Term ............... 5.61%
Stable Return ............... 5.91%
Global and International Portfolios
Worldwide ..........................5.51%
Worldwide-Hedged ..........................5.23%
International ............... 5.32%
International-Hedged ..........................4.72%
Emerging Markets....................... 9.00%
The Money Market Portfolio may, from time to time, include
the "yield" and "effective yield" in advertisements or reports to shareholders
or prospective investors.
The yield is calculated by determining the net change over a 7-calendar day
period, exclusive of capital changes, in the value of a hypothetical preexisting
account having a balance of one share at the beginning of the period, divided by
the value of the account at the beginning of the base period to obtain the base
period return. The yield is annualized by multiplying the base period return by
365/7. The yield is stated to the nearest hundredth of one percent. The
effective yield is calculated by the same method as yield except that the base
period return is compounded by adding 1, raising the sum to a power equal to
365/7, and subtracting 1 from the result, according to the following formula:
Effective Yield = [(Base Period Return + 1)365/7] - 1
Money Market Portfolio's yield and effective yield for the
seven-day period ended December 31, 1997 were 5.76% and 5.93%, respectively.
Quotations of average annual total return will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in a Portfolio of the Fund over periods of 1, 5 and 10 years (up to
the life of the Portfolio), calculated pursuant to the following formula which
is prescribed by the SEC:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the
beginning of the period.
All total return figures assume that all dividends are
reinvested when paid.
The total return as defined above for the Fund's
Portfolios for the 1 year and 5 year periods ended December 31, 1997, and
since the commencement of operations of each Portfolio (annualized) to
December 31, 1997 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
One Year Five Years* Life of Portfolio Inception
U.S. Portfolios
Money Market 5.46% n/a 5.02%* 11/1/93
U.S. Short-Term 5.09% 4.58% 5.17%* 12/6/89
Stable Return 7.21% n/a 5.76%* 7/26/93
Mortgage Total Return 10.19% n/a 10.06%* 4/29/96
Global and International
Portfolios
Worldwide 2.93% 6.78% 7.62%* 4/15/92
Worldwide-Hedged 12.60% 10.85% 10.71%* 5/19/92
International (0.43%) n/a 3.73%* 5/9/96
International-Hedged** 8.77% n/a 6.87%* 9/14/95
Emerging Markets n/a n/a (1.20%) 8/12/97
</TABLE>
* 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 31,1997 are incorporated by reference in the Statement of Additional
Information. The Money Market Portfolio, previously the AMT Capital Fund, Inc.
Money Market Portfolio (the "AMT Capital Portfolio"), commenced operations on
November 1, 1993. Effective as of the close of business on April 29, 1997, the
AMT Capital Portfolio merged into the Money Market Portfolio pursuant to
shareholder approval of the reorganization on April 28, 1997
APPENDIX
MERRILL LYNCH 1-2.99 YEAR TREASURY INDEX1
Quarterly Returns: June 1984 - December 1996
<TABLE>
<S> <C> <C> <C>
Quarter-End Return Quarter-End Return
----------- ------ ----------- ------
9/90 2.38%
12/90 3.32
3/91 2.20
6/91 1.97
9/91 3.36
12/91 3.68
3/92 0.16
6/92 2.88
9/92 2.98
12/92 0.18
3/93 2.21
6/93 1.08
9/93 1.43
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
3/97 0.66
6/97 2.20
9/97 1.96
12/97 1.68
</TABLE>
1Time-weighted rates of return, unannualized.
QUALITY RATING DESCRIPTIONS
Standard & Poors Corporation
AAA. Bonds rated AAA are highest grade debt obligations. This rating
indicates an extremely strong capacity to pay principal and interest.
AA. Bonds rated AA also qualify as high-quality obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A. Bonds rated A have a strong capacity to pay principal and
interest, although they are more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB. Bonds rated BBB are regarded as having adequate capacity to pay
interest or principal. Although these bonds normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and principal.
BB and Lower. Bonds rated BB, B, CCC, CC, C and D are regarded, on
balance, as predominately speculative with respect to the issuer's capacity to
pay interest and principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and D the highest degree of
speculation. While such bonds may have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
The ratings AA to D may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Municipal notes issued since July 29, 1984 are designated "SP-1",
"SP-2", and "SP-3". The designation SP-1 indicates a very strong capacity to pay
principal and interest. A "+" is added to those issues determined to possess
overwhelming safety characteristics.
A-1. Standard & Poor's Commercial Paper ratings are current
assessments of the likelihood of timely payments of debts having original
maturity of no more than 365 days. The A-1 designation indicates the degree of
safety regarding timely payment is very strong.
A-2. Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
Moody's Investors Service, Inc.
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than the Aaa
securities.
A. Bonds which are rated A possess many favorable investment
attributes and may be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa. Baa rated bonds are considered medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements
because their future cannot be considered as well assured. Uncertainty of
position characterizes bonds in this class, because the protection of interest
and principal payments may be very moderate and not well safeguarded.
B and Lower. Bonds which are rated B generally lack characteristics
of a desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the security over any long period of time may be
small. Bonds which are rated Caa are of poor standing. Such securities may be in
default of there may be present elements of danger with respect to principal or
interest. Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings. Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Moody's ratings for state and municipal and other short-term
obligations will be designated Moody's Investment Grade ("MIG"). This
distinction is in recognition of the differences between short-term credit risk
and long-term risk. Factors affecting the liquidity of the borrower are
uppermost in importance in short-term borrowing, while various factors of the
first importance in long-term borrowing risk are of lesser importance in the
short run.
MIG-1. Notes bearing this designation are of the best quality
enjoying strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both.
MIG-2. Notes bearing this designation are of favorable quality, with
all security elements accounted for, but lacking the undeniable strength of the
previous grade. Market access for refinancing, in particular, is likely to be
less well established.
P-1. Moody's Commercial Paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months. The designation "Prime-1" or "P-1" indicates
the highest quality repayment capacity of the rated issue.
P-2. Issuers have a strong capacity for repayment of short-term
promissory obligations.
Thomson Bankwatch, Inc.
A. Company possess an exceptionally strong balance sheet and
earnings record, translating into an excellent reputation and unquestioned
access to its natural money markets. If weakness or vulnerability exists in any
aspect of the company's business, it is 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 27, 1998.
- Statements of Assets
and Liabilities dated December 31, 1997.
- Statements of Operations for
the year ended December 31,
1997.
- Statements of Changes
in Net Assets for the years ended December
December 31, 1996, and December 31, 1997.
- 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, for the year ended December 31,
1996, and for the year ended December 31, 1997; 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, for the year ended December 31, 1996, and
for the year ended December
31, 1997; of Mortgage Total Return for the
period April 29, 996 (commencement of operations) to December 31,
1996, and for the year ended December 31, 1997; 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 for the year ended December 31, 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, for the year ended December 31, 1996, and for
the year ended December 31, 1997; of International for the period
May 9, 1996 (commencement of operations) to December 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, for the
year ended December 31, 1996, and for the year ended December 31,
1997; of Emerging Markets for the period August 12, 1997
(commencement of operations) to December 31,1997 and of Money
Market Portfolio for the year ended December 31, 1997.
- Financial Highlights for AMT
Capital Fund, Inc. - Money
Market
Portfolio for the period
November 1, 1993
(commencement of
operations) to December 31,
1993, for the year ended
December 31,
1994, for the year ended
December 31, 1995, for the
year ended
December 31, 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 as
Exhibit 1(d) to
Post-Effective Amendment No.
20 to Registrant's
Registration Statement on
Form N-1A.
(1e) Articles of Amendment, dated
December 11, 1996, filed as
Exhibit 1(e) to
Post-Effective Amendment No.
20 to Registrant's
Registration Statement on
Form N-1A.
(2) By-laws, filed as Exhibit 2
to Registrant's Registration
Statement on Form N-1A.
(2a) Amended By-laws, filed as
Exhibit 2 to Post-Effective
Amendment No. 2 to
Registrant's Registration
Statement on Form N-1A.
(2b) Amendment to By-laws, filed
as Exhibit 2(a) to
Post-Effective Amendment No.
5 to Registrant's
Registration Statement on
Form N-1A.
(3) Not Applicable.
(4) Specimen of Stock
Certificate, filed as Exhibit
4 to Registrant's
Registration Statement on
Form N-1A.
(5) Management Agreement between
the Registrant and Fischer
Francis Trees & Watts, Inc.,
dated November 30, 1989,
filed as Exhibit 5 to
Pre-Effective Amendment No. 3
to Registrant's Registration
Statement on Form N-1A.
(5a) Amendment to Management
Agreement between the
Registrant and Fischer
Francis Trees & Watts, Inc.,
dated September 25, 1990,
filed as Exhibit 5 to
Post-Effective Amendment No.
2 to Registrant's
Registration Statement on
Form N-1A.
(5b) Amended and Restated
Management Agreement between
the Registrant and Fischer
Francis Trees & Watts, Inc.,
dated August 31, 1991, filed
as Exhibit 5 to
Post-Effective Amendment No.
5 to Registrant's
Registration Statement on
Form N-1A.
(5c) Sub-Advisory Agreement
between Fischer Francis Trees
& Watts, Inc. and Fischer
Francis Trees and Watts,
dated August 31, 1991, filed
as Exhibit 5(a) to
Post-Effective Amendment No.
5 to Registrant's
Registration Statement on
Form N-1A.
(5d) Advisory Agreement between
the Registrant (for the
Stable Return Portfolio) and
Fischer Francis Trees &
Watts, Inc., dated February
18, 1993, filed as Exhibit
5(d) to Post-Effective
Amendment No. 10 to
Registrant's Registration
Statement on Form N-1A.
(5e) Advisory Agreement between
the Registrant (for the U.S.
Treasury Portfolio) and
Fischer Francis Trees &
Watts, Inc., dated February
18, 1993, filed as Exhibit
5(e) to Post-Effective
Amendment No. 10 to
Registrant's Registration
Statement on Form N-1A.
(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 as Exhibit
5(o) to Post-Effective
Amendment No. 20 to
Registrant's Registration
Statement on Form N-1A.
(5p) Advisory Agreement between
the Registrant (for the
Inflation-Indexed Portfolio)
and Fischer Francis Trees &
Watts, Inc., dated October
30, 1996, filed as Exhibit
5(p) to Post-Effective
Amendment No. 20 to
Registrant's Registration
Statement on Form N-1A.
(5q) Advisory Agreement between
the Registrant (for the
Inflation-Indexed Hedged
Portfolio) and Fischer
Francis Trees & Watts, Inc.,
dated October 30, 1996, filed
as Exhibit 5(q) to
Post-Effective Amendment No.
20 to Registrant's
Registration Statement on
Form N-1A.
(5r) Advisory Agreement between
the Registrant (for the Money
Market Portfolio) and Fischer
Francis Trees & Watts, Inc.,
dated October 30, 1996, filed
as Exhibit 5(r) to
Post-Effective Amendment No.
20 to Registrant's
Registration Statement on
Form N-1A.
(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 as Exhibit 5(s)
to Post-Effective Amendment
No. 20 to Registrant's
Registration Statement on
Form N-1A.
(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 as Exhibit 5(t)
to Post-Effective Amendment
No. 20 to Registrant's
Registration Statement on
Form N-1A.
(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 as Exhibit 5(u)
to Post-Effective Amendment
No. 20 to Registrant's
Registration Statement on
Form N-1A.
(5v) Amendment to Management
Agreement (for the Broad
Market Portfolio) between the
Registrant and Fischer
Francis Trees & Watts, Inc.,
dated October 30, 1996, filed
as Exhibit 5(v) to
Post-Effective Amendment No.
20 to Registrant's
Registration Statement on
Form N-1A.
(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
as Exhibit 5(w) to
Post-Effective Amendment No.
20 to Registrant's
Registration Statement on
Form N-1A.
(6) Distribution Agreement
between the Registrant and
AMT Capital Services, Inc.,
dated September 21, 1992,
filed as Exhibit 6 to
Post-Effective Amendment No.
8 to Registrant's
Registration Statement on
Form N-1A.
(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
Schedules, filed herewith.
Item 25. Persons Controlled by or Under Common Control with
Registrant
None.
Item 26. Number of Holders of Securities
As of February 27, 1998, there were 10 record
holders of Capital Stock of Money Market, there
were 37 record holders of Capital Stock of U.S.
Short-Term, 7 record holders of Stable Return, 17
record holders of Mortgage Total Return, 21 record
holders of Worldwide, 15 record holders of
Worldwide-Hedged, 9 record holders of
International, 14 record holders of
International-Hedged, and 11 record holders of
Emerging Markets .
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) In addition to Registrant, AMT Capital
Services, Inc. currently acts as distributor to AMT Capital Fund, Inc.,
TIFF Investment Program, Inc., Holland Series Fund, Inc., SAMCO Fund,
Inc. and Harding, Loevner Funds, Inc. AMT Capital Services, Inc. is
registered with the Securities and Exchange Commission as a
broker/dealer and is a member of the National Association of Securities
Dealers, Inc.
(b) The information required by this Item 29(b)
with respect to each director, officer or partner of AMT Capital
Services, Inc. is incorporated herein by reference to Schedule A of
Form BD filed by AMT Capital Services, Inc. pursuant to the Securities
Act of 1934 (SEC File No.8-44718).
(c) Not applicable.
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 Broad
Market, U.S. Treasury, Inflation-Indexed Portfolio
and Inflation-Indexed Hedged 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 certifies that it meets
all of the requirements for effectiveness of this Post-Effective
Amendment No. 21 to its Registration Statement pursuant to Rule 485(b)
under the Securities Act of 1933. Pursuant to the requirements of the
Securities Act of 1933 and the Investment Company Act of 1940, the
Registrant has duly caused this Post-Effective Amendment to the
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York
on the 30th day of March, 1998.
FFTW FUNDS, INC.
By \s\ Onder John Olcay
Onder John Olcay
President
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 P. Casper Director March 30, 1998
Stephen P. Casper
\s\ Onder John Olcay Chairman of the Board, March 30, 1998
Onder John Olcay President
\s\ John C Head III Director March 30, 1998
John C Head III
\s\ Lawrence B. Krause Director March 30, 1998
Lawrence B. Krause
\s\ Paul Meek Director March 30, 1998
Paul Meek
\s\ Paul A. Brook__________ Treasurer March 30, 1998
Paul A. Brook
EXHIBIT INDEX
Exhibit No.
(11) Consent of Independent Auditors
(16) Performance Information Schedule
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<NET-CHANGE-IN-ASSETS> (2071)
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> MORTGAGE TOTAL RETURN PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
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<PERIOD-END> DEC-31-1997
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> WORLDWIDE PORTFOLIO
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<S> <C>
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<PERIOD-END> DEC-31-1997
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<ACCUMULATED-NET-GAINS> (8691)
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> WORLDWIDE-HEDGED PORTFOLIO
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<S> <C>
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 9
<NAME> INTERNATIONAL PORTFOLIO
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<S> <C>
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<PERIOD-END> DEC-31-1997
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> INTERNATIONAL-HEDGED PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> EMERGING MARKETS PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 5-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
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<ACCUMULATED-NET-GAINS> (993)
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<ACCUM-APPREC-OR-DEPREC> (1499)
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<NET-INVESTMENT-INCOME> 2005
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</TABLE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors" and to the incorporation by reference of
our report on dated February 27, 1998 in this
Registration Statement ( Form N-1A No. 33-27896) of FFTW Funds, Inc.
/s/ Ernst & Young LLP
Ernst & Young LLP
New York, NY
March 26, 1998
