FFTW FUNDS, INC.
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Prospectus
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April 30, 1999
Limited Duration Portfolio
The Securities and Exchange Commission has not approved the Limited Duration
Portfolio's shares as an investment or determined whether this Prospectus is
accurate or complete. Anyone who tells you otherwise is committing a crime.
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CONTENTS
Page
Risk/Return Summary 3
Limited Duration Portfolio 4
Principal Investment Risks 5
Potential Year 2000 Risk 5
Risk Return Bar Chart and Table 5
Limited Duration Portfolio 5
Average Annual Total Returns 5
Fee Table 6
Expenses Table Example 6
Fund Management 7
Board of Directors 7
Investment Adviser 7
Portfolio's Payment of Fund Expenses 7
Portfolio Managers 7
Shareholder Information 7
Purchases 7
To Purchase Shares Table 8
Redemptions 8
To Redeem Shares Table 9
Pricing of Portfolio Shares 9
Dividends 9
Voting Rights 9
Tax Considerations 10
Distribution of Fund Shares 11
Investment Information 11
Allowable Investment Strategies and Associated Risks 11
Allowable Investments and Associated Risks 14
Supplemental Investment Policies 19
Portfolio Turnover 19
Financial Highlights Table 20
Limited Duration Portfolio 20
RISK/RETURN SUMMARY
The following is a summary of certain key information about the Limited Duration
Portfolio (the "Portfolio"), including investment objectives, principal
investment strategies and principal investment risks. A more detailed
description of the allowable investment strategies, allowable investments and
their associated risks will follow.
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LIMITED DURATION PORTFOLIO
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Investment Objective: To maintain a level of total return as may be consistent with the preservation of capital.
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Principal Investment The Portfolio invests primarily in high quality debt
securities (rating of AA by S&P, Aa by Strategies: Moody's or a comparable
rating, or higher from a nationally recognized statistical rating
organization), using interest rate hedging as
a stabilizing technique. The performance
objective of the Portfolio is to outperform
the Merrill Lynch 1-2.99 Year Treasury Index.
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Minimum Quality Rating: S&P Moody's Average
S&P: Moody's: (Short Term): (Short Term): Thompson: Portfolio Quality:
BBB- Baa3 A-2 P-2 B AA (Aa)
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Duration: The average U.S. dollar-weighted duration generally is shorter than three years. The average
U.S. dollar-weighted duration will not exceed plus or minus one year around the average
duration of the Merrill Lynch 1-2.99 Treasury Index.
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Investment Policies: At least 65% of the Portfolio's total assets must be invested in U.S. dollar-denominated
securities. For temporary defensive purposes, 100% of the Portfolio's total assets may be
invested in U.S. Government securities, cash or cash equivalent securities. The Portfolio is
non-diversified.
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Principal Investments: o Asset-Backed Securities
(See pages 11-14 of this o Bank Obligations
Prospectus for a more o Corporate Debt Instruments
detailed description of o Mortgage-Backed Securities
allowable investments) o Repurchase and Reverse Repurchase Agreements
o Total Return Swaps
o U.S. Government and Agency Securities
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Principal Risks: A loss of money could occur due to certain risks. These include:
(See pages 14-19 of this o Banking industry o Futures risk o Liquidity risk
Prospectus for a more detailed risk o Hedging risk o Market risk
description of each risk) o Correlation risk o Interest rate risk o Prepayment risk
o Credit risk o Leverage risk
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PRINCIPAL INVESTMENT RISKS
"Risk" is the chance that you may lose on an investment or that it will not earn
as much as you expect. Thus, the greater the risk, the greater the possibility
of losing money.
The Portfolio is affected by changes in the economy, or in securities and other
markets.
The possibility also exists that investment decisions of portfolio managers will
not accomplish what they are designed to achieve. No assurance can be given that
the Portfolio's investment objective will be achieved.
Investments in the Portfolio are subject to certain of the following risks.
Banking industry Investing in bank obligations will expose an investor to
risk: risks associated with the banking industry such
as interest rate and credit risks.
Correlation risk: The Portfolio may experience changes in value as
between the securities held and the value of a particular
derivative instrument.
Credit risk: The risk that a security issuer or a counterparty to
a contract will default or not be able to honor a financial
obligation.
Futures risk: The primary risks inherent in the use of futures
depend on the Investment Adviser's ability to anticipate
correctly movements in the direction of interest rates,
securities prices, and currency markets and the imperfect
correlation between the price of futures contracts and
movements in the prices of the securities being hedged.
Hedging risk: Hedging is commonly used as a buffer against a
perceived investment risk. While it can reduce or eliminate
losses, it can also reduce or eliminate gains if the hedged
investment increases in value.
Interest rate The Portfolio may be influenced by interest rate changes
risk: that generally have an inverse relationship to
corresponding market values. Thus, as interest rates
increase, the value of bonds already issued, decrease.
Leverage risk: Derivatives may include elements of leverage that can
cause greater fluctuations in the Portfolio's net asset
value.
Liquidity risk: Certain securities may be difficult or impossible to sell
at favorable prices.
Market risk: The market value of a security may increase or
decrease over time. Such fluctuations can cause a security
to be worth less than the price originally paid for it or
less than it was worth at an earlier time. Market risk may
affect a single issuer, entire industry or the market as a
whole.
Prepayment risk: The Portfolio may invest in mortgage-backed and other
asset-backed securities. Such securities carry risks of
faster or slower than expected prepayment of principal
which affect the duration and return of the security.
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POTENTIAL Year 2000 risk
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be affected adversely if the computer systems
used by the Investment Advisor, Administrator and/or 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"
("Y2K"). The Investment Advisor and Administrator are taking steps that they
believe are reasonably designed to address the Year 2000 Problem with respect to
their computer systems and in obtaining 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 Y2K
problem will not have an adverse effect on the companies whose securities are
held by the Fund or on global markets or economies, generally.
RISK/RETURN BAR CHART AND TABLE
The charts and tables provided below give some indication of the risks of
investing in the funds by illustrating the changes in the Portfolio's yearly
performance and show how the Portfolio's average returns for 1, 5 and 10 years
compare with a selected index. During the 5 year period shown in the Limited
Duration Portfolio's bar chart, the highest quarterly return was 3.533% (quarter
ending 3/31/95) and the lowest quarterly return was (0.473%) (quarter ending
3/31/94).
Past performance is not indicative of
future performance.
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Average Annual Total Returns (for the periods ending December Past 1 Year Past 5 Years Since Inception*
31, 1998)
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Limited Duration Portfolio 6.79% 5.76% 5.94%
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Merrill Lynch 1-2.99 Year Treasury Index 7.00% 5.59% 5.85%
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*The inception dates of the Portfolio is 7/26/93.
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FEE TABLE
This Table describes the fees and
expenses that you may pay if you buy and
hold shares of the Portfolio.
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Shareholder Transaction Expenses Limited
(Fees Paid Directly By You) Duration*
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Redemption Fees None
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Exchange Fees None
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Contingent Deferred Sales Load None
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Sales Load on Reinvestment Dividends None
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Sales Load on Purchases None
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Annual Fund Operating Expenses
(Fees Paid From Fund Assets)
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Management Fees 0.30%
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Distribution Fees (12b-1) None
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Shareholder Services Fees None
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Other Expenses 0.22%
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Total Annual Fund Operating Expenses 0.52%
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*The Investment Adviser has voluntarily agreed to cap the Net Operating Expenses
at 0.30% (on an annualized basis) of the Portfolio's average daily net assets.
The Investment Adviser will not attempt to recover prior period waivers should
expenses fall below the cap. For the fiscal year ended 12/31/98, the Investment
Adviser waived fees in the amount of 0.22%. All operating expenses exceeding the
voluntary waiver of fees will be paid by the Investment Adviser. Under an
Administration Agreement effective May 29, 1998 between the Fund and Investors
Capital, Investors Capital provides administrative services to the Fund, for an
incentive fee in the event the Portfolio operates below its expense ratio. This
fee is capped at 0.02% of the Portfolio's average daily net assets.
Expenses Table Example
As an investor, you pay certain fees and expenses in connection with the
Portfolio, as described in the table above. This table is intended to help you
compare the cost of investing in the Fund with the cost of investing in other
mutual funds by presenting the fees and expenses that you may pay if you
purchase and hold shares of the Fund. The yearly numbers below are hypothetical
expenses per $10,000 investment assuming a 5% annual return. Because this
example is hypothetical and for comparison purposes only, your actual costs will
be different.
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Portfolio Name 1 Year 3 Years 5 years 10 Years
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Limited Duration Portfolio $53 $167 $291 $653
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FUND MANAGEMENT
BOARD OF DIRECTORS
The Fund's Board of Directors is responsible for the Fund's overall management
and supervision. The Fund's Directors are Stephen P. 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. serves as Investment Adviser to the Fund. The
Investment Adviser continuously conducts investment research and is responsible
for the purchase, sale or exchange of the Portfolio's assets. Organized in 1972,
the Investment Adviser is registered with the Securities and Exchange Commission
and is a New York corporation currently managing over $30 billion in assets for
numerous fixed-income Portfolio. The Investment Adviser currently advises over
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 also
serves as a 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. The Investment Adviser is directly
wholly-owned by Charter Atlantic Corporation, a New York corporation.
PORTFOLIO MANAGERS
Stewart M. Russell, Managing Director.
Mr. Russell is responsible for management
of the Portfolio. He joined FFTW in 1992
from the short-term proprietary trading
desk in the global markets area of JP
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.
SHAREHOLDER INFORMATION
PURCHASES
Portfolio shares may be purchased directly from the Fund, or obtained by
employing the services of an outside broker or agent. Such broker or agent may
charge a fee for its services. The minimum initial investment in the Portfolio,
if shares are purchased directly from the Fund, is $100,000; such minimum may be
waived at the discretion of the Investment Adviser or Investors Capital
Services, Inc. a branch office of AMT Capital Securities, LLC. Subsequent
investments or redemptions may be of any amount. Initial investments, if
obtained through a broker or agent may be for amounts lower than $100,000. There
are no loads nor 12b-1 fees imposed by the Fund. Shares purchased will begin
accruing dividends.
Purchases may be made on any "Business Day," meaning, Monday through Friday,
with the exception of the holidays declared by the Federal Reserve Banks of New
York or Boston. At the present time, these holidays are: New Year's Day, Dr.
Martin Luther King's Birthday, Presidents' Day, Memorial Day, Fourth of July,
Labor Day, Columbus Day, Veterans Day, Thanksgiving, and Christmas.
WIRING INSTRUCTIONS:
To: Investors Bank & Trust
Company, Boston, Massachusetts.
ABA Number: 011-0010438
Account Name: AMT Capital
Securities, LLC - Purchase Account
Account Number: 933333333
Reference: (Indicate Portfolio
name)
TO Purchase shares
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Portfolio Name When Net Asset When & how shares Procedure for same day Result of late notification or
Value is may be purchased purchases delay in receipt of funds
determined
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o Limited All Business o Any o Purchasers must call Trade not effective on a given
Duration Days Business Day Investors Capital at (800) day:
o Submitted 762-4848 [or (212) o If the Fund is
orders should 332-5211 if within the notified after 4:00 pm EST
include a City of New York] or IBT and the wire is received
completed account at (617) 330-6000 prior to after 4:00 pm EST.
application 4:00 pm Eastern time to
o Federal inform the Fund of the When notice is given before
funds must be incoming wire transfer. 4:00 EST and the wire is
wired to AMT o Purchasers must received after 4:00 EST. the
Capital's "Fund indicate the name of the trade will be effective on the
Purchase Account" Portfolio which is to be day the wire is received
at IBT purchased.
o If Federal funds are Trade effective on next
received by the Fund that business day:
day, the order will be o If wire is received
effective that day. after 4:00 pm EST and no
notice is given.
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REDEMPTIONS
All Fund shares (fractional and full) will be redeemed upon shareholder request.
The redemption price will be the net asset value per share, determined once the
Transfer Agent receives proper notice of redemption (see table below). Shares
redeemed receive dividends declared up to, and including the day preceding the
day of the redemption payment.
Shares may be redeemed by employing the services of an outside broker or agent
or may be redeemed directly from the Fund. Such broker or agent may charge a fee
for its services. There are no loads nor 12b-1 fees imposed by the Fund. No
charge is imposed by the Fund to redeem shares, however, a shareholder's bank
may impose its own wire transfer fee for receipt of the wire. The Fund may
execute redemptions in any amount requested by the shareholder up to the amount
the shareholder has invested in the Fund.
A telephone redemption option is made available to shareholders on the Fund's
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.
If a shareholder designates an authorized agent on the Account Application, he
may change his authorized agent or the account designated to receive redemption
proceeds at any time. Such changes must be made in writing and sent to the
Transfer Agent with an appropriate signature guarantee. Further documentation
may be required when deemed appropriate by the Transfer Agent.
In an attempt to reduce expenses, the Fund may redeem shares of any shareholder
whose Portfolio account has a net asset value lower than $100,000. A
shareholder's account may be involuntarily redeemed by the Fund should its
account value fall below minimum investment requirements. An involuntary
redemption will not occur when drops in investment value are the sole result of
adverse market conditions. The Fund will give 60 days prior written notice to
shareholders whose shares are being redeemed to allow them to purchase
sufficient additional shares of the Portfolio to avoid such redemption. The Fund
also may redeem shares in a shareholder's account as reimbursement for loss due
to the failure of a check or wire to clear in payment of shares purchased.
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To Redeem Shares
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1. Shareholders must provide the following information:
a. The dollar or share amount to be redeemed;
b. The account to which the redemption proceeds should be wired (this
account will have been previously designated by the shareholder on its
Account Application Form);
c. The name of the shareholder; and
d. The shareholder's account number
2. Shareholders should call the Transfer Agent at (800) 247-0473 or
Investors Capital Services at (800) 762-4848 to request a redemption.
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Portfolio Name When redemption effective Result of late notification of redemption
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o Limited Duration If notice is received by the
Transfer Agent by 4:00 pm If notice is received on a
non-business EST on any Business Day, the redemption
will be day or after 4:00 pm EST, the redemption
effective and payment will be made within seven
calendar notice will be deemed received as of the
days, but generally on the day following receipt of
such next Business Day.
notice. Price of shares is based on the next
calculation of the NAV after the order is placed.
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PRICING OF PORTFOLIO SHARES
Your price for Portfolio shares is the Portfolio's net asset value per share.
Portfolio net asset value is calculated by: (1) adding the market value of all
the Portfolio's assets, (2) subtracting all of the Portfolio's liabilities, and
then (3) dividing by the number of shares outstanding and adjusting to the
nearest cent.
Net Asset Value is calculated by the Fund's Accounting Agent as of 4:00 pm EST
on each Business Day.
DIVIDENDS
If desired, shareholders must request to receive dividends in cash (payable on
the first business day of the following month) on the Account Application Form.
Absent such notice, all dividends will be automatically reinvested in additional
shares on the last Business Day of each month at the share's net asset value. In
the unlikely event that the Portfolio realizes net short- or long-term capital
gains (i.e., with respect to assets held more than one year), the Portfolio will
distribute such gains by automatically reinvesting (unless a shareholder has
elected to receive cash) them in additional Portfolio shares.
Net investment income (including accrued but unpaid interest, amortization of
original issue and market discount or premium) of the Portfolio will be declared
as dividends payable daily to the respective shareholders of record as of the
close of each Business Day.
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Director elections and
other shareholder voting matters. The Fund is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Fund's or the Portfolio's operation and for the election of
Directors under certain circumstances. Directors may be removed by shareholders
at a special meeting. The directors shall call a special meeting of the Fund
upon written request of shareholders owning at least 10% of the Fund's
outstanding shares.
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 the Portfolio, including the status of distributions from the
Portfolio under applicable state or local law.
Federal Income Taxes
The Portfolio will distribute all of its taxable income by automatically
reinvesting such income in additional Portfolio shares and distributing those
shares to its shareholders, unless a shareholder elects on the Account
Application Form to receive cash payments for such distributions. Shareholders
receiving distributions from the Fund in the form of additional shares will be
treated for federal income tax purposes as receiving a distribution in an amount
equal to the fair market value of the additional shares on the date of such a
distribution.
Dividends the Portfolio pays from its investment company taxable income
(including interest and net short-term capital gains) will be taxable to U.S.
shareholders as ordinary income, whether received in cash or in additional Fund
shares. Designated distributions of net capital gains (the excess of net
long-term capital gains over net short-term capital losses) are generally
taxable to shareholders at the applicable long-term capital gains rates,
regardless of how long they have held their Portfolio shares. If a portion of
the Portfolio's income consists of dividends paid by U.S. corporations, a
portion of the dividends paid by the Portfolio may 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 the 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. The 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.
If a shareholder holds shares through a tax-deferred account, such as a
retirement plan, income and gains will not be taxable each year. Instead, the
taxable portion of amounts held in a tax-deferred account generally will be
subject to tax only when a distribution is made from that account.
A shareholder who sells or redeems Fund shares will generally realize a capital
gain or loss, which will be long-term or short term, generally depending upon
the shareholder's holding for the shares. An exchange of shares may be treated
as a sale.
As with all mutual funds, a Fund may be required to withhold U.S. federal income
tax at the rate of 31% of all taxable distributions payable to shareholders who:
1. fail to provide the Fund with a correct taxpayer identification number, or 2.
fail to make required certifications, or 3. have been notified by the IRS that
they are subject to backup withholding. Backup withholding is not an additional
tax; rather, it is a way in which the IRS ensures it will collect taxes
otherwise due. Any amount withheld may be credited against U.S. federal income
tax liability.
The foregoing discussion is only a brief summary of the important federal tax
considerations generally affecting the Fund and its shareholders. As noted
above, IRAs receive special tax treatment. No attempt is made to present a
detailed explanation of the federal, state or local income tax treatment of the
Fund or its shareholders, and this discussion is not intended as a substitute
for careful tax planning. Accordingly, potential investors in the Fund should
consult their tax advisers with specific reference to their own tax situation.
State and Local Taxes
The 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. Portfolio
distributions 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 possible state and local income tax exclusions for
dividend portions paid by the Portfolio, which are attributable to interest from
obligations of the U.S. Government, its agencies, authorities and
instrumentalities.
DISTRIBUTION OF FUND SHARES
Shares of the Fund are distributed by Investors Capital, Inc., a branch office
of AMT Capital, pursuant to a Distribution Agreement dated as of May 29, 1998
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.
INVESTMENT INFORMATION
ALLOWABLE INVESTMENT STRATEGIES AND
ASSOCIATED RISKS
The Limited Duration will utilize the following investment strategies:
Dollar Roll Transactions, Duration
Management, Hedging, TBA Transactions, and
When Issued & Forward Commitment
Securities.
Dollar Roll Transactions Dollar roll transactions consist of the sale of
mortgage-backed securities, with a commitment to purchase similar, but not
identical securities at a future date, and at the same price. The Portfolio will
maintain a segregated custodial account for dollar roll transactions. The
segregated accounts may contain 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 the securities under the dollar roll
transaction (including accrued interest).
Risks: Should the broker-dealer to whom the Portfolio sells an
underlying security of a dollar roll transaction become insolvent, the
Portfolio's right to purchase or repurchase the security may be
restricted, or the price of the security may change adversely over the
term of the dollar roll transaction.
Duration Management
Duration measures a bond's price volatility, incorporating the following
factors:
a. the bond's yield,
b. coupon interest payments,
c. final maturity,
d. call features, and
e. prepayment assumptions.
Duration measures the expected life of a debt security on a present value basis.
It incorporates 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 weighs 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 closely related to the
duration of the securities underlying them. Holding long futures or call options
will lengthen the 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
duration by approximately the same amount that selling an equivalent amount of
the underlying securities would. The market price of a bond with a duration of
two years would be expected to decline 2% if interest rates rose 1%. If a bond
has an effective duration of three years, a 1% increase in general interest
rates would be expected to cause the bond's value to decline by about 3%.
Risks: Changes in weighted average duration of the Portfolio's holdings
are not likely to be so large as to cause them to fall outside the
ranges specified above. There is no assurance that deliberate changes
in the Portfolio's weighted average duration will enhance its return
relative to more static duration policies or Portfolio structures. In
addition, it may detract from its relative return.
Hedging
Hedging techniques are used to offset certain investment risks. Such risks
include: changes in interest rates, changes in foreign currency exchange rates
and changes in securities and commodity prices. Hedging techniques are commonly
used to minimize a given instrument's risks of future gain or loss. Hedging
techniques include:
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a. engaging in swaps; d. purchasing and selling futures contracts; and
b. purchasing and selling caps, floors and collars; e. purchasing and selling options.
c. purchasing or selling forward exchange contracts;
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All hedging instruments described below constitute commitments by the Portfolio
and therefore require the Fund to segregate cash (in any applicable currency),
U.S. Government securities or other liquid and unencumbered securities (in any
applicable currency) equal to the amount of the Portfolio's obligations in a
separate custody account.
When the Portfolio purchases a futures or forward currency contract for
non-hedging purposes, the sum of the segregated assets plus the amount of
initial and variation margin held in the broker's account, if applicable, must
equal the market value of the futures or forward currency contract.
When the Portfolio sells a futures or
forward currency contract for non-hedging
purposes, the Portfolio will have the
contractual right to acquire:
1. the securities,
2. the foreign currency subject to the futures,
3. the forward currency contract, or
4. will segregate assets, in an amount at least equal to the market
value of the securities or foreign currency underlying the futures
or forward currency contract.
Should the market value of the contract move 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.
The Portfolio will not enter into any swaps, caps or floors unless the unsecured
commercial paper, senior debt or claims paying ability of the counterparty is
rated either A or A-1 or better by S&P or A or P-1 or better by Moody's. If
unrated, it must be determined to be of comparable quality by the Investment
Adviser.
Risks: Hedging involves risks of imperfect correlation in price
movements of the hedge and movements in the price of the hedged
security. If interest or currency exchange rates do not move in the
direction of the hedge, the Portfolio will be in a worse position than
if hedging had not been employed. As a result, the Portfolio will lose
all or part of the benefit of the favorable rate movement due to the
cost of the hedge or offsetting positions. Hedging transactions not
entered into on a U.S. or foreign exchange may subject the Portfolio to
exposure to the credit risk of its counterparty. Futures and Options
transactions entail special risks. In particular, the variable degree
of correlation between price movements of futures contracts and price
movements in the related Portfolio position could create the
possibility that losses will be greater than gains in the value of the
Portfolio's position. Other risks include the risk that the Portfolio
could not close out a futures or options position when it would be most
advantageous to do so.
a. Swaps
Swaps are commonly used for hedging purposes. Hedging involving mortgage and
interest rate swaps may enhance total return. Interest rate swaps involve the
Portfolio's exchange 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, both represent
commitments to pay and receive funds. Currency swaps involve the exchange of
their respective rights to make or receive payments in specified currencies.
b. Caps, Floors and Collars 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. An interest
rate collar incorporates a cap and a floor in one transaction as described
above.
c. Forward Foreign Exchange Contracts A forward foreign exchange contract is the
purchase or sale of a foreign currency, on a specified date, at an exchange rate
established before the currency's payment and delivery to hedge the currency
exchange risk associated with its assets or obligations denominated in foreign
currencies. Synthetic hedging is a technique utilizing forward foreign exchange
contracts that is frequently employed by many of the Portfolio. It entails
entering into a forward contract to sell a currency the changes in value of
which 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 buying U.S. dollars. There is a risk that the perceived linkage between
various currencies may not be present during the particular time that the
Portfolio is engaging in synthetic hedging. The 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 expects to have exposure.
d. Futures Contracts A futures contract is an agreement to buy or sell a
specific amount of a financial instrument at a particular price on a specified
date. The futures contract obligates the buyer to purchase the underlying
commodity and the seller to sell it. Losses from investing in futures
transactions that are unhedged or uncovered are potentially unlimited.
Substantially all futures contracts are closed out before settlement date or
called for cash settlement. A futures contract is closed out by buying or
selling an identical offsetting futures contract that cancels the original
contract to make or take delivery. At times, the ordinary spreads between values
in the cash and futures markets, due to differences in the character of these
markets, are subject to distortions. The possibility of such distortions means
that a correct forecast of general market, foreign exchange rate or interest
rate trends may not produce the Portfolio's intended results. Investors should
note that the Enhanced Equity Market Portfolio may, unlike the other Fund
Portfolio, invest more than 5% of its total net assets in futures contracts and
will utilize futures contracts for purposes other than bona fide hedging
e. Options Contracts
An option is a contractual right, but not an obligation, to buy (call) or sell
(put) property that is guaranteed in exchange for an agreed upon sum. If the
right is not exercised within a specified period of time, the option expires and
the option buyer forfeits the amount paid. An option may be a contract that
bases its value on the performance of an underlying bond. When the Portfolio
writes a call option, it gives up 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. A put option gives the purchaser, in return for
a premium, the right, for a specified period or 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 the put option, in return for the premium, has the
obligation, upon exercise of the option, to acquire the securities or currency
underlying the option at the exercise price. The Portfolio might, therefore, be
obligated to purchase the underlying securities or currency for more than their
current market price.
Risks: Hedging involves risks of imperfect correlation in price
movements of the hedge and movements in the price of the hedged
security. If interest or currency exchange rates do not move in the
direction of the hedge, the Portfolio will be in a worse position than
if hedging had not been employed. As a result, it will lose all or part
of the benefit of the favorable rate movement due to the cost of the
hedge or offsetting positions. Hedging transactions not entered into on
a U.S. or foreign exchange may subject the Portfolio to exposure to the
credit risk of its counterparty. Futures and Options transactions
entail special risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the
related Portfolio position could create the possibility that losses
will be greater than gains in the value of the Portfolio's position.
Other risks include the risk that the Portfolio could not close out a
futures or options position when it would be most advantageous to do
so.
TBA (To Be Announced) Transactions In a TBA transaction, the type of
mortgage-backed securities to be delivered is specified at the time of trade,
but the actual pool numbers of the securities to 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 to be delivered at settlement will be
announced shortly before settlement takes place. Agency pass-through
mortgage-backed securities are usually issued on a TBA basis. For the Portfolio
, the Fund will maintain a segregated custodial account containing cash, U.S.
Government securities or other liquid and unencumbered securities having a value
at least equal to the aggregate amount of the Portfolio's TBA transactions.
Risks: The value of the security
on the date of delivery may be
less than its purchase price,
presenting a possible loss of
asset value.
When Issued and Forward Commitment Securities The purchase of a when issued or
forward commitment security will be recorded on the date the Portfolio enters
into the commitment. The value of the security will be reflected in the
calculation of the Portfolio's net asset value. The value of the security on
delivery date may be more or less than its purchase price. Generally, no
interest accrues to the Portfolio until settlement. For the Portfolio , the Fund
will maintain a segregated custodial account containing cash, U.S. Government
securities or other liquid and unencumbered securities having a value at least
equal to the aggregate amount of the Portfolio's when issued and forward
commitments transactions.
Risks: The value of the security
on the date of delivery may be
less than its purchase price,
presenting a possible loss of
asset value.
ALLOWABLE INVESTMENTS AND ASSOCIATED RISKS
The following is a list of allowable investments for the Portfolio:
Asset-Backed Securities, Bank Obligations, Brady Bonds, Convertibles Securities,
Corporate Debt Instruments, Foreign Instruments, Illiquid Securities, Indexed
Notes, Currency Exchange-Related Securities and Similar Securities,
Inflation-Indexed Securities, Investment Companies, Mortgage-Backed Securities,
Multi-National Currency Unit Securities or More Than One Currency Denomination,
Municipal Instruments, Repurchase and Reverse Repurchase Agreements, Stripped
Instruments, Total Return Swaps, U.S. Government and Agency Securities,
Warrants, and Zero Coupon Securities.
Asset-Backed Securities
Asset-backed securities are secured by or
backed by assets other than
mortgage-related assets, such as
automobile and credit card receivables.
These securities 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, but include
assets such as:
a. motor vehicle installment sale contracts,
b. other installment sale contracts,
c. leases of various types of real and personal property, and
d. receivables from revolving credit (credit card) agreements.
Risks: Since the principal amount of asset-backed securities is
generally subject to partial or total prepayment risk. If an
asset-backed security is purchased at a premium or discount to par, a
prepayment rate that is faster than expected will reduce or increase
yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect on yield to maturity. These securities
may not have any security interest in the underlying assets, and
recoveries on the repossessed collateral may not, in some cases, be
available to support payments on these securities.
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Bank Obligations
Bank obligations are bank issued securities. These instruments include:
a. Time Deposits, e. Deposit Notes, h. Variable Rate Notes,
b. Certificates of Deposit, f. Eurodollar Time deposits, i. Loan Participations,
c. Bankers' Acceptances, g. Eurodollar Certificates of j. Variable Amount Master Demand Notes,
d. Bank Notes, Deposit, k. Yankee CDs, and
l. Custodial Receipts
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Risks: Investing in bank
obligations exposes the Portfolio
to risks associated with the
banking industry such as interest
rate and credit risks.
Brady Bonds
Brady Bonds are debt securities, issued or guaranteed by foreign governments in
exchange for existing external commercial bank indebtedness. To date, over $154
billion (face amount) of Brady Bonds have been issued by the governments of
thirteen countries, the largest proportion having been issued by Argentina,
Brazil, Mexico and Venezuela. Brady Bonds are either collateralized or
uncollateralized, 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.
Risks: Brady Bonds are generally
issued to countries with
developing capital markets or
unstable governments and as such,
are considered to be among the
more risky international
investments.
Convertible Securities
Convertible bonds or shares of convertible preferred stock are securities that
may be converted into, or exchanged for, underlying shares of common stock,
either at a stated price or stated rate. Convertible securities have general
characteristics similar to both fixed income and equity securities.
Risks: Typically, convertible securities are callable by the company,
which may, in effect, force conversion before the holder would
otherwise choose. If the issuer chooses to convert the security, this
action could have an adverse effect on the Portfolio's ability to
achieve its objectives.
Corporate Debt Instruments Corporate bonds are debt instruments issued by
private corporations. As creditors, bondholders have a prior legal claim over
common and preferred stockholders of the corporation as to both income and
assets for the principal and interest due to the bondholder. The Portfolio
purchases corporate bonds subject to quality restraints. Commercial paper, notes
and other obligations of U.S. and foreign corporate issuers must meet the
Portfolio's credit quality standards (including medium-term and variable rate
notes). The Portfolio may retain a downgraded corporate debt security if the
Investment Adviser determines retention of such security to be in the
Portfolio's best interests.
Risks: Investing in corporate
debt securities subjects the
Portfolio to interest rate changes
and credit risks.
Foreign Instruments
a. Foreign Securities Foreign securities are securities denominated in
currencies other than the U.S. dollar and may be denominated in any single
currency or multi-currency units. The Investment Adviser will adjust exposure of
the Portfolio to different currencies based on its perception of the most
favorable markets and issuers. It is further anticipated that such securities
will be issued primarily by governmental and private entities located in such
countries and by supranational entities. The Portfolio will only invest in
countries considered to have stable governments, based on the Investment
Adviser's analysis of social, political, and economic factors.
b. Foreign Government, International and Supranational Agency Securities These
securities include debt obligations issued or guaranteed by a foreign government
or its subdivisions, agencies and instrumentalities, international agencies and
supranational entities.
Risks: Generally, foreign
financial markets have
substantially less volume than the
U.S. market. Securities of many
foreign companies are less liquid,
and their prices are more volatile
than securities of comparable
domestic companies. Certain
Portfolio may invest portions of
their assets in securities
denominated in foreign
currencies. These investments
carry risks of fluctuations of
exchange rates relative to the
U.S. dollar. Securities issued by
foreign entities (governments,
corporations etc.) may involve
risks not associated with U.S.
investments, including
expropriation of assets, taxation,
political or social instability
and low financial reporting
standards--all of which may cause
declines in investment returns.
Illiquid Securities
Illiquid securities cannot be sold or disposed of in the ordinary course of
business within seven days for approximately the value at which the Portfolio
has valued the securities.
These include:
1. securities with legal or contractual restrictions on resale,
2. time deposits, repurchase agreements and dollar roll transactions having
maturities longer than seven days, and
3. securities not having readily available market quotations. Although the
Portfolio 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. The Investment Adviser monitors the liquidity of such
restricted securities under the supervision of the Board of Directors.
The Portfolio may purchase securities 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. The Portfolio
may also invest in commercial paper 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.
Any resale by the purchaser must be in an exempt transaction. Section 4(2) paper
is normally resold to other institutional investors 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 Investment Adviser will
monitor the liquidity of such restricted securities under the supervision of the
Board of Directors.
Risks: Investing in illiquid securities presents the potential risks of
tying up the Portfolio's assets at a time when liquidating assets may
be necessary to meet debts and obligations.
Indexed Notes, Currency Exchange-Related Securities and Similar Securities These
securities are notes, the principal amount of which and/or the rate of interest
payable is determined by reference to an index. This index may be determined by
the rate of exchange between the specified currency for the note and one or more
other currencies or composite currencies.
Risks: Foreign currency markets
can be highly volatile and are
subject to sharp price
fluctuations. A high degree of
leverage is typical for foreign
currency instruments in which the
Portfolio may invest.
Inflation-Indexed Securities Inflation-indexed securities are linked to the
inflation rate from worldwide bond markets such as the U.S. Treasury
Department's "inflation-protection" issues. The initial issues are ten year
notes which are issued quarterly. Other maturities will be sold 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. These securities may be eligible for coupon stripping
under the U.S. Treasury program. In addition to the U.S. Treasury's issues,
inflation-indexed securities include inflation-indexed securities from other
countries such as Australia, Canada, New Zealand, Sweden and the United Kingdom.
Risks: If the periodic adjustment rate measuring inflation falls, the
principal value of inflation-indexed bonds will be adjusted downward,
and consequently the interest payable on these securities (calculated
with respect to a smaller principal amount) will be reduced. Repayment
of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation-indexed
bonds, even during a period of deflation. However, the current market
value of the bonds is not guaranteed, and will fluctuate. The Portfolio
many also invest in other inflation related bonds that may or may not
provide a similar guarantee. If a guarantee of principal is not
provided, the adjusted principal value of the bond repaid at maturity
may be less than the original principal.
The U.S. Treasury has only recently begun issuing inflation-indexed
bonds. As such, there is no trading history of these securities, and
there can be no assurance that a liquid market in these instruments
will develop, although one is expected to continue to evolve. Lack of a
liquid market may impose the risk of higher transaction costs and the
possibility that the Portfolio may be forced to liquidate positions
when it would not be advantageous to do so. Finally, there can be no
assurance that the Consumer Price Index for Urban Consumers will
accurately measure the real rate of inflation in the price of goods and
services.
Investment Companies
An investment company is an investment
vehicle, which, for a management fee,
invests the pooled funds of investors in
securities appropriate for its investment
objectives. Two basic types of
investment companies exist:
1. Open end funds: these funds have a
floating number of outstanding shares
and will sell or redeem shares at
their current net asset value,
2. Closed end funds: these funds have a fixed number of outstanding shares
that are traded on an exchange.
The Portfolio will not invest in any
Funds classified as "Load Funds."
The acquiring company may not purchase or otherwise acquire securities in the
acquired company (if no-load) if, immediately after the acquisition the
acquiring company and any company controlled by it would own in the aggregate
more than 3% of the total outstanding voting stock of the acquired company.
The Portfolio may invest in another Portfolio within the FFTW Funds, Inc.
family. This is commonly referred to as cross-portfolio investing. Should such
cross-portfolio investing occur, investors will not be double-charged advisory
fees. The Portfolio in which it is directly invested will only charge investors
an advisory fee.
Risks: Generally, risks posed by a
particular fund will mirror those
posed by the underlying
securities. A money market fund
has the highest safety of
principal, whereas bond funds are
vulnerable to interest rate
movements.
Mortgage-Backed Securities
Mortgage-backed securities are securities
representing ownership interests in, or debt
obligations secured entirely or primarily
by, "pools" of residential or commercial
mortgage loans or other mortgage-backed
securities. Mortgage-backed securities may
take a variety of forms, the most common
being:
o Mortgage-pass through securities issued by
a. the Government National Mortgage Association (Ginnie Mae),
b. the Federal National Mortgage Association (Fannie Mae),
c. the Federal Home Loan Mortgage Corporation (Freddie Mac),
d. commercial banks, savings and loan associations, mortgage banks or by
issuers that are affiliates of or sponsored by such entities,
o Collateralized mortgage obligations (CMOs) which are debt obligations
collateralized by such assets, and o Commercial mortgage-backed securities.
The Investment Adviser expects that new types of mortgage-backed securities may
be created offering asset pass-through and asset-collateralized investments in
addition to those described above by governmental, government-related and
private entities. As new types of mortgage-related securities are developed and
offered to investors, the Investment Adviser will consider whether it would be
appropriate for such Portfolio to make investments in them.
CMOs are derivatives collateralized by mortgage pass-through securities. Cash
flows from mortgage pass-through securities are allocated to various tranches in
a predetermined, specified order. Each tranche has a stated maturity - the
latest date by which the tranche can be completely repaid, assuming no
prepayments - and has an average life - the average of the time to receipt of a
principal payment weighted by the size of the principal payment. The average
life is typically used as a proxy for maturity because the debt is amortized,
rather than being paid off entirely at maturity.
Risks: The Portfolio may invest in mortgage-backed and other
asset-backed securities carrying the risk of a faster or slower than
expected prepayment of principal which may affect the duration and
return of the security. Portfolio returns will be influenced by changes
in interest rates. Changes in market yields affect the Portfolio's
asset value since Portfolio debt will generally increase when interest
rates fall and decrease when interest rates rise. Thus, interest rates
have an inverse relationship with corresponding market values. Prices
of shorter-term securities generally fluctuate less in response to
interest rate changes than do longer-term securities.
Multi-National Currency Unit Securities or More Than One Currency Denomination
Multi-national currency unit securities are tied to currencies of more than one
nation. This includes the European Currency Unit--a "basket" consisting of
specified currencies of the member states of the European Community (a Western
European economic cooperative organization). These securities include securities
denominated in the currency of one nation, although it is issued by a
governmental entity, corporation or financial institution of another nation.
Risks: Investments involving
multi-national currency units are
subject to changes in currency
exchange rates which may cause the
value of such invested securities
to decrease relative to the U.S.
dollar.
Municipal Instruments
Municipal instruments are debt obligations issued by a state or local government
entity. The instruments may support general governmental needs or special
governmental projects. It is not anticipated that such instruments will ever
represent a significant portion of any Portfolio's assets.
Risks: Investments in municipal
instruments are subject to the
municipality's ability to make
timely payment. Municipal
instruments may also be subject to
bankruptcy protection should the
municipality file for such
protection.
Repurchase and Reverse Repurchase Agreements Under a repurchase agreement, a
bank or securities firm (a dealer in U.S. Government Securities reporting to the
Federal Reserve Bank of New York) or Investors Bank & Trust Co. agrees to sell
U.S. Government Securities to the Portfolio and repurchase such securities from
the Portfolio at a later date for an agreed upon price. Under a reverse
repurchase agreement, a primary or reporting dealer in U.S. Government
Securities purchases U.S. Government Securities from the Portfolio and the
Portfolio agrees to repurchase the securities for an agreed price at a later
date.
The Fund will maintain a segregated custodial account for the Portfolio's
reverse repurchase agreements. Until repayment is made, the segregated accounts
may contain 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). Repurchase and reverse
repurchase agreements will generally be restricted to those maturing within
seven days.
Risks: If the other party to a
repurchase and/or reverse
repurchase agreement becomes
subject to a bankruptcy or other
insolvency proceeding, or fails to
satisfy its obligations
thereunder, delays may result in
recovering cash or the securities
sold, or losses may occur as to
all or part of the income,
proceeds or rights in the security.
Stripped Instruments
Stripped instruments are bonds, reduced to
its two components: its rights to receive
periodic interest payments (IOs) and
rights to receive principal repayments
(POs). Each component is then sold
separately. Such instruments include:
a. Municipal Bond Strips
b. Treasury Strips
c. Stripped Mortgage-Backed Securities
Risks: POs do not pay interest, its return is solely based on payment
of principal at maturity. Both POs and IOs tend to be subject to
greater interim market value fluctuations in response to changes in
interest rates. Stripped Mortgage-Backed Securities IOs run the risk of
unanticipated prepayment which will decrease the instrument's overall
return.
Total Return Swaps
A total return swap is an exchange of one security for another. Unlike a hedge
swap, a total return swap is solely entered into as a derivative investment to
enhance total return.
Risks: A total return swap may result in the Portfolio obtaining an instrument,
which for some reason, does not perform as well as the original swap instrument.
U.S. Government and Agency Securities and
Government-Sponsored Enterprises/Federal
Agencies
U.S. Government and agency securities are
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. The Portfolio may
also invest in other securities which may
be issued by a U.S. Government-sponsored
enterprise or federal agency, and
supported either by its ability to borrow
from the U.S. Treasury or by its own
credit standing. Such securities do not
constitute direct obligations of the
United States but are issued, in general,
under the authority of an Act of
Congress. The universe of eligible
securities in these categories include
those sponsored by:
a. U.S. Treasury Department,
b. Farmer's Home Administration,
c. Federal Home Loan Mortgage Corporation,
d. Federal National Mortgage Association,
e. Student Loan Marketing Association, and
f. Government National Mortgage Association.
Risks: Investing in securities
backed by the full faith and
credit of the U.S. Government are
guaranteed only as to interest
rate and face value at maturity,
not its current market price.
Warrants
A warrant is a corporate-issued option that entitles the holder to buy a
proportionate amount of common stock at a specified price. Warrants are freely
transferable and can be traded on the major exchanges
Risks: Warrants retain their
value only so long as the stock
retains its value. Typically,
when the value of the stock
drops, the value of the warrant
drops.
Zero Coupon Securities Zero coupon securities are sold at a deep discount from
their face value. Such securities make no periodic interest payments, however,
the buyer receives a rate of return by the gradual appreciation of the security,
until it is redeemed at face value on a specified maturity date.
Risks: Zero coupon securities do not pay interest until maturity and tend to be
subject to greater interim market value fluctuations in response to interest
rate changes rather than interest paying securities of similar maturities.
Supplemental Investment Policies
The Portfolio may invest more than 5% of its net assets in futures margins
and/or premiums on options only if those net assets are being used for bona fide
hedging purposes. Up to 35% of the Portfolio's total assets may be invested in
non-U.S. dollar denominated securities.
Portfolio Turnover
Portfolio turnover rates are believed to be higher than the turnover experienced
by most fixed income funds, due to the Investment Adviser's active management of
duration. This could, in turn, lead to higher turnover costs. High Portfolio
turnover may involve greater brokerage commissions and transactions costs which
will be paid by the Portfolio. In addition, high turnover rates may result in
increased short-term capital gains.
<PAGE>
FINANCIAL HIGHLIGHTS TABLES
The Financial Highlights Tables are intended to help you understand the
Portfolio's financial performance for the past five years, or, if shorter, the
period of the Portfolio's operations. The "Total Return on Investment" indicates
how much an investment in each respective Portfolio would have earned, assuming
all dividends and distributions had been reinvested.
This information has been audited by Ernst & Young, LLP. You will find the
auditor's report and the FFTW Funds, Inc. financial statements in the annual
report, which is available upon request.
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LIMITED DURATION PORTFOLIO FINANCIAL HIGHLIGHTS
(IN WHOLE DOLLARS UNLESS OTHERWISE INDICATED)
==============================================================================================================================
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD Year Ended Year Ended Year Ended Year Ended Year Ended
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
----------------------------------------------- --------------- ---------------- -------------- -------------- ===============
Net asset value at beginning of period 9.93 9.93 10.00 9.55 9.95
----------------------------------------------- --------------- ---------------- -------------- -------------- ===============
Net investment income 0.55 0.62 0.55 0.60 0.43
Net realized gains or (losses) on 0.11 0.08 (0.04) 0.45 (0.40)
investments, financial futures and options
contacts, and foreign currency-related
transactions
----------------------------------------------- --------------- ---------------- -------------- -------------- ===============
Total investment income 0.66 0.70 0.51 1.05 0.03
----------------------------------------------- --------------- ---------------- -------------- -------------- ===============
Distributions from net investment income 0.55 0.62 0.55 0.60 0.43
Distributions in excess of net investment 0.00** --- 0.00** --- ---
income
Net realized gains or (losses) on
investments, financial futures and option
contracts and foreign currency-related 0.11 0.08 0.03 --- ---
transactions
----------------------------------------------- --------------- ---------------- -------------- -------------- ===============
Total distributions 0.66 0.70 0.58 0.60 0.43
----------------------------------------------- --------------- ---------------- -------------- -------------- ===============
Net asset value at end of period 9.93 9.93 9.93 10.00 9.55
=============================================== --------------- ---------------- -------------- -------------- ===============
Total return on investment 6.79% 7.21% 5.29% 11.26% 0.29%
Net assets at end of period in 000's 89,521 40,029 42,100 5,080 4,338
Ratio of operating expenses to average net
assets, exclusive of interest expense (a) 0.30% 0.30% 0.31% 0.50% 0.50%
Ratio of operating expenses to average net
assets, inclusive of interest expense (a) 0.30% 0.60% 0.49% 1.41% 1.74%
Ratio of net investment income to average net 5.48% 6.10% 5.79% 6.09% 4.43%
assets (a)
Decrease in above expense ratios due to
waiver of investment advisory fees and 0.22% 0.31% 0.15% 0.53% 0.57%
reimbursements of other expenses
Portfolio turnover rate 1,059% 1,292% 1,387% 1,075% 343%
=============================================== =============== ================ ============== ============== ===============
(a) Net of waivers and reimbursements **Rounds to less than $0.01
</TABLE>
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This Prospectus contains a concise statement of information investors should
know before they invest in the Fund. Please retain this Prospectus for future
reference. Additional information about the Fund's investments is available in
the Fund's annual and semi-annual reports to shareholders, as well as the
Statement of Additional Information (SAI) dated April 30, 1999. The SAI provides
more detailed information about the Portfolio, including their operations and
investment policies. A current SAI is on file with the Securities and Exchange
Commission and is incorporated by reference and is legally considered a part of
this Prospectus. In the Fund's annual report, you will find a discussion of the
market conditions and investment strategies that significantly affected the
Fund's performance during its last fiscal year.
The Fund's SAI, annual and semi-annual reports are available, without charge,
upon request by contacting Investors Capital Services, Inc., a branch office of
AMT Capital Securities, LLC, 600 Fifth Avenue, New York, NY 10020 at their toll
free telephone number (800) 762-4848 [or (212) 332-5211, if within New York
City].
Information about the Fund (including the SAI) can be reviewed and copied at the
Commission's Public Reference Room in Washington D.C. Information on the
operation of the public reference room may be obtained by calling the Commission
at 1-800-SEC-0330. Reports and other information about the Fund are available on
the Commission's Internet site at http://www.sec.gov. Copies of this information
may be obtained, upon payment of a duplicating fee, by writing the Public
Reference Section of the Commission, Washington D.C. 20549-6009.
Fund's Investment Company Act filing number: 33-27896/811-5796
