FFTW FUNDS, INC.
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PROSPECTUS
WORLDWIDE-HEDGED PORTFOLIO
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Dated April 30, 1999,
as supplemented February 7, 2000
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE 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
Investment Objective 3
Potential Year 2000 Risk 4
Risk Return Bar Chart and Table 4
Average Annual Total Returns 4
Fee Table 5
Expense Table Example 5
Fund Management 6
Board of Directors 6
Investment Adviser 6
Investment Sub-Adviser 6
Portfolio Managers 6
Shareholder Information 7
Purchases 7
Purchasing Shares Table 8
Redemptions 8
Redeeming Shares Table 9
Pricing of Portfolio Shares 9
Voting Rights 9
Distribution of Fund Shares 11
Allowable Investment Strategies and Associated Risks 11
Supplemental Investment Policies 20
Shareholder Inquiries 21
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2
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RISK/RETURN SUMMARY
The following is a summary of certain key information about the Portfolio,
including its investment objective, 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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WORLDWIDE-HEDGED PORTFOLIO
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INVESTMENT To attain a high level of total return as may be consistent
OBJECTIVE: with the preservation of capital.
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PRINCIPAL The Portfolio invests primarily in high quality (rating of AA
INVESTMENT by S&P, Aa by Moody's or a comparable rating, or higher from a
STRATEGIES: nationally recognized statistical rating organization) debt
securities from worldwide bond markets, denominated in both
U.S. dollars and foreign currencies and actively utilizes
currency hedging techniques. The performance objective of the
Portfolio is to outperform the JP Morgan Global Government
Bond Index (Hedged).
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MINIMUM S&P Moody's AVERAGE
QUALITY (Short (Short PORTFOLIO
RATING: S&P: Moody's: Term): Term): Thompson: QUALITY:
---- -------- ------ ------- --------- ---------
BBB- Baa3 A-2 P-2 B AA (Aa)
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DURATION: The Portfolio's average U.S. dollar-weighted duration generally
will not exceed one year, plus or minus the average duration of
the JP Morgan Global Government Bond Index (Hedged).
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INVESTMENT At least 65% of the Portfolio's total assets must be invested
POLICIES: in high quality debt securities from worldwide bond markets,
denominated in both U.S. dollars and foreign currencies. The
Portfolio will maintain investments in debt securities of
issuers from at least three different countries including the
U.S. At least 35% of the Portfolio's total assets must be
invested in debt securities from jurisdictions outside the U.S.
As a fundamental policy, to the extent feasible, the Portfolio
will actively utilize currency-hedging techniques to hedge at
least 65% of its total assets. 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 o Asset-Backed Securities
INVESTMENTS: o Foreign Instruments
(See pages o U.S. Government and Agency Securities
14-20 of
this
Prospectus
for a more
detailed
description
of
allowable
investments.)
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PRINCIPAL RISKS: A loss of money could occur due to certain risks. These
(See page 11 of include:
this Prospectus o Correlation risk o Hedging risk o Market risk
for a more o Credit risk o Interest rate risk o Non-diversification
detailed o Currency risk o Leverage risk risk
description of o Futures risk o Liquidity risk o Prepayment risk
each risk.)
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3
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POTENTIAL YEAR 2000 RISK
Like other mutual funds, financial and business organizations and individuals
around the world, the Portfolio 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 Portfolio'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 Portfolio 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 Portfolio or on global markets or
economies, generally.
RISK/RETURN BAR CHART AND TABLE
The chart and table provided below give some indication of past performance of
the Portfolio. The chart and table illustrate 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. Please be aware past performance is not
necessarily an indication of how the Portfolio will perform in the future.
WORLDWIDE-HEDGED PORTFOLIO
BAR GRAPH
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Year 1993 1994 1995 1996 1997 1998
12.89% 7.84% 11.00% 10.03% 12.60% 11.53%
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During the 6-year period shown, the highest quarterly return was 10.461%
(quarter ending 9/30/94) and the lowest quarterly return was -3.982% (quarter
ending 3/31/94).
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
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AVERAGE ANNUAL TOTAL RETURNS PAST 1 YEAR PAST 5 YEARS SINCE INCEPTION*
(FOR THE PERIODS ENDING
DECEMBER 31, 1998)
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Worldwide-Hedged Portfolio 11.53% 10.58% 10.83%
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JP Morgan Global Government
Bond Index (Hedged) 11.42% 7.65% 8.40%
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*Portfolio inception was May 19, 1992.
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4
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FEE TABLE
Fees and Expenses of the Portfolio. 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 (FEES PAID Worldwide-Hedged Portfolio
DIRECTLY BY YOU)
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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 0.40%
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Distribution Fees (12b-1) None
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Shareholder Services Fees None
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Other Expenses 0.18%
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Total Annual Fund Operating Expenses 0.58%
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1. Before January 21, 2000, the Investment Adviser had voluntarily agreed to
cap the Net Operating Expenses at 0.45% (on an annualized basis) of the
Portfolio's average daily net assets. On January 21, 2000, shareholders
approved amendments to the Advisory Agreement eliminating the 0.60%
contractual expense cap. Beginning January 21, 2000, the Investment Adviser
voluntarily agreed to cap the Portfolio's total operating expenses at 0.60%
(on an annualized basis) of the Portfolio's average daily net assets. This
voluntary expense cap may be terminated or changed at any time by the
Investment Adviser, although the Investment Adviser has no current intention
of doing so. All operating expenses exceeding the voluntary expense cap will
be paid by the Investment Adviser. 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 0.13%. 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.
EXPENSE TABLE EXAMPLE
As an investor, you pay certain fees and expenses in connection with the
Portfolio, as described in the tables above. This table is intended to help you
compare the cost of investing in the Portfolio 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 Portfolio. 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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Worldwide-Hedged $59 $186 $324 $726
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5
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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 portfolios. 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 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. The
Investment Adviser is directly wholly owned by Charter Atlantic Corporation, a
New York corporation.
INVESTMENT 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 Portfolio. Organized in 1989, the Sub-Adviser is an
U.S.-registered investment adviser and currently manages approximately $7.5
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 the Portfolio. The
Sub-Adviser's offices are located at 3 Royal Court, The Royal Exchange, London,
EC 3V 3RA. The Investment Sub-Adviser is directly or indirectly wholly owned by
Charter Atlantic Corporation, a New York corporation.
PORTFOLIO MANAGERS
LIAQUAT AHAMED, MANAGING DIRECTOR OF THE GLOBAL AND INTERNATIONAL PORTFOLIOS.
Mr. Ahamed 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.
DAVID N. FISHER, PORTFOLIO MANAGER. Mr. Fisher joined FFTW in August 1993 after
spending two years teaching in the People's Republic of China. At FFTW he is
responsible for the overall management of the Emerging Market Fund,
concentrating particularly on the external sovereign debt market. He is also in
charge of local currency investments in the various markets of Latin America.
Previously, he was responsible for dollar bloc investments as a part of the
global group. He has developed many of the proprietary risk management and
performance attribution systems currently in use at the firm, as well as
several technically oriented trading systems. Mr. Fisher has a B.A. in History
from Princeton University.
ADNAN AKANT, MANAGING DIRECTOR. Mr. Akant joined FFTW in 1984, after six years
with the World Bank, where he served as a project financial analyst in Europe
and the Middle East, and joined the treasurer's staff as an investment officer.
At World Bank, Mr. Akant served as a member of the investment department where
he was responsible for investment and trading of each of the major sectors of
the bank's actively managed liquidity portfolio. He was also a member of the
investment strategy committee and shared responsibility for formulating and
implementing the bank's trading and investment strategy. Mr. Akant was later
promoted to senior investment officer, and was the division's deputy in charge
of the U.S. dollar portfolio. Mr. Akant holds a Ph.D. in systems science, an MS
in finance and international management, an Engineer's
6
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degree, an MS in electrical engineering and a BS in electrical engineering, all
from the Massachusetts Institute of Technology. Mr. Akant also taught graduate
and undergraduate level courses as a teaching assistant. Mr. Akant is a member
of the New York Academy of Sciences, IEEE, and of the Sigma XI, Tau Beta Pi,
and Eta Kappa Nu honor societies.
SIMON G. HARD, GENERAL MANAGER OF THE SUB-ADVISER OF THE GLOBAL AND
INTERNATIONAL PORTFOLIOS. Mr. Hard 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 a Mphil in the history and philosophy of science from Wolfson
College, Cambridge 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 on the day Federal funds are received.
Purchases of shares 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: Worldwide-Hedged Portfolio
7
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TO PURCHASE SHARES
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PORTFOLIO WHEN NET WHEN & HOW PROCEDURE FOR SAME RESULT OF LATE
NAME ASSET VALUE SHARES MAY BE DAY PURCHASES NOTIFICATION OR
IS PURCHASED DELAY IN RECEIPT
DETERMINED OF FUNDS
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WORLDWIDE- All Business o Any Business o Purchasers must Trade not effective
HEDGED Days Business Day call Investors on a given day:
o Submitted Capital at (800) o If the Fund is
orders must 762-4848 [or notified after
include a (212)332-5211 if 4:00 pm EST and
completed within the City the wire is
account of New York] or received after
application. IBT at (617) 4:00 pm EST.
o Federal funds 330-6000 prior to
must be wired 4:00 pm EST to Trade effective on
to AMT inform the Fund when wire is
Capital's of the day received:
"Fund incoming wire o If notice is
Purchase transfer. given before
Account" at 4:00 pm EST and
IBT. the wire is
received after
4:00 pm EST.
Trade effective on
next business day:
o If wire is
received after
4:00 pm EST and
and no notice is
given.
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REDEMPTIONS
All Portfolio 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 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 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 should the 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.
8
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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.
3. IN THE CASE OF FOREIGN EXCHANGES, THE PORTFOLIO'S NAV MAY CHANGE WHEN
SHAREHOLDERS CANNOT BUY OR SELL SHARES.
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PORTFOLIO NAME WHEN REDEMPTION EFFECTIVE RESULT OF LATE NOTIFICATION
OF REDEMPTION
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Worldwide-Hedged If notice is received by the If notice is received by the
Transfer Agent by 4:00 pm EST Transfer Agent on a non-
on any Business Day, the business day or after 4:00
redemption will be effective pm. EST time, the
and payment will be made redemption notice will be
within seven calendar days, deemed received as of the
but generally two business next Business Day.
days following receipt of
such 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. The net asset value of the Portfolio 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-term
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 a dividend payable daily to 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. Matters to be acted upon affecting the
Portfolio (such as approval of the investment advisory agreement with the
Investment Adviser or the submission of changes of fundamental Portfolio
investment policy) require the affirmative vote of the Portfolio shareholders.
The election of the Fund's Board of Directors and the approval of the Fund's
independent auditors are voted upon by shareholders on a Fund-wide basis. 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.
9
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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 Portfolio 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.
10
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DISTRIBUTION OF FUND SHARES
Shares of the Fund are distributed by 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
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Worldwide-Hedged
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Dollar Roll Transactions o
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Duration Management o
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Hedging o
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Short Sales Transactions o
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TBA Transactions o
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When Issued and Forward Commitment Securities o
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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 that 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%.
11
<PAGE>
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:
a. engaging in swaps; d. purchasing and selling futures contracts; and
b. purchasing and selling e. purchasing and selling options.
caps, floors and collars;
c. purchasing or selling
forward exchange contracts;
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 counter party 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 an 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.
12
<PAGE>
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 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 distortion means that a correct forecast
of general market, foreign exchange rate or interest rate trends may not
produce the Portfolio's intended results.
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 an 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.
SHORT SALES
- -----------
Short sales are transactions in which the 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 reduce
certain risks of the Portfolio's holdings and increase the Portfolio's total
return. To the extent that the Portfolio has sold securities short, it will
maintain a daily segregated account, containing cash, U.S. Government
securities or other liquid and unencumbered securities, at such a level that
(a) the amount deposited in the account plus the amount deposited with the
broker as collateral will equal the current value of the security sold short
and (b) the amount deposited in the segregated account plus the amount
deposited with the broker as collateral will not be less than the market value
of the security at the time it was sold short.
13
<PAGE>
RISKS: A short sale is generally used to take advantage of an anticipated
decline in price or to protect a profit. The Portfolio will incur 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 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. Without the purchase of
an option, the potential loss from a short sale is unlimited.
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. The
Fund will maintain a segregated custodial account for the Portfolio 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
<TABLE>
<CAPTION>
<S> <C>
- ----------------------------------------------------------------
Worldwide-Hedged
- ----------------------------------------------------------------
Asset-Backed Securities o
- ----------------------------------------------------------------
Bank Obligations o
- ----------------------------------------------------------------
Brady Bonds o
- ----------------------------------------------------------------
Corporate Debt Instruments o
- ----------------------------------------------------------------
Foreign Instruments o
- ----------------------------------------------------------------
Illiquid Securities o
- ----------------------------------------------------------------
Indexed Notes, Currency o
Exchange-Related Securities
and Similar Securities
- ----------------------------------------------------------------
Inflation-Indexed Securities o
- ----------------------------------------------------------------
Investment Companies o
- ----------------------------------------------------------------
Mortgage-Backed Securities o
- ----------------------------------------------------------------
Multi-National Currency Unit o
Securities or More Than One
Currency Denomination
- ----------------------------------------------------------------
Repurchase and Reverse o
Repurchase Agreements
- ----------------------------------------------------------------
Stripped Instruments o
- ----------------------------------------------------------------
Total Return Swaps o
- ----------------------------------------------------------------
U.S. Government and Agency o
Securities
- ----------------------------------------------------------------
Zero Coupon Securities o
- ----------------------------------------------------------------
</TABLE>
14
<PAGE>
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.
BANK OBLIGATIONS
- ----------------
Bank obligations are bank-issued securities. These instruments include, but are
not limited to:
<TABLE>
<CAPTION>
<S> <C> <C>
a. Time Deposits, e. Deposit Notes, h. Variable Rate Notes,
b. Certificates of f. Eurodollar Time i. Loan Participations,
Deposit, deposits, j. Variable Amount Master
c. Bankers' Acceptances, g. Eurodollar Demand Notes,
d. Bank Notes, Certificates of k. Yankee CDs, and
Deposit, l. Custodial Receipts
</TABLE>
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.
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.
15
<PAGE>
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 and the Sub-Adviser will adjust exposure of the
Portfolio 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 Worldwide-Hedged Portfolio will invest primarily in securities denominated
in the currencies of the United States, 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. 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 it's 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. The Portfolio may invest portions of its 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.
c. EMERGING MARKETS SECURITIES
Emerging markets securities are foreign securities issued from countries which
are considered to be "emerging" or "developing" by the Morgan Stanley Composite
Index (MSCI) or by the World Bank. Such emerging markets include all markets
other than Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Ireland, Italy, Hong Kong, Ireland, Italy, Japan, the Netherlands, New
Zealand, Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom and
the United States.
RISKS: The risks of investing in foreign securities may be intensified
when the issuers are domiciled or doing substantial business in emerging
market countries or countries with developing capital markets. Security
prices in emerging markets can be significantly more volatile than those
in more developed nations of the world, reflecting the greater
uncertainties of investing in less established markets and economies.
Emerging market countries may have:
a. Relatively unstable governments; d. restrictions on foreign ownership;
b. present the risk of sudden e. prohibitions of repatriation of
adverse government action; assets; or
c. nationalization of businesses; f. 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.
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.
16
<PAGE>
Although the Portfolio is allowed to invest up to 15% of the value of its net
assets in illiquid assets, it is not expected that the 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 are 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 may 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."
17
<PAGE>
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:
1. 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,
2. Collateralized mortgage obligations (CMOs) which are debt obligations
collateralized by such assets, and
3. 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 the Portfolio's assets.
18
<PAGE>
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 (that is a dealer in
U.S. Government Securities reporting to the Federal Reserve Bank of New York)
or the Fund's Custodian agrees to sell U.S. Government Securities to the
Portfolio and repurchase such securities from the Portfolio for an agreed price
at a later date. 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 Portfolio will maintain a segregated custodial account for its 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. Additionally, potential risks of default also
exist on the part of the counterparty.
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.
19
<PAGE>
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 it is being used for bona fide hedging
purposes.
The Portfolio may not enter into a repurchase or reverse repurchase agreement
if, as a result thereof, more than 25% of the Portfolio's total assets would be
subject to the agreement.
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.
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 the 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
WORLDWIDE-HEDGED PORTFOLIO FINANCIAL HIGHLIGHTS
-----------------------------------------------
(IN WHOLE DOLLARS UNLESS OTHERWISE INDICATED)
- ------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING Year Year Year Year Year
THROUGHOUT THE PERIOD Ended Ended Ended Ended Ended
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
- -------------------------------------------------------------------------------
Net asset value at
beginning of period 11.23 10.91 10.85 10.41 10.08
- -------------------------------------------------------------------------------
Net investment income 0.59 0.53 0.62 0.45 0.34
Net realized and
unrealized gains or
(losses) on
investments,
financial futures
and options
contracts, and
foreign currency-
related transactions 0.68 0.80 0.43 0.66 0.43
- -------------------------------------------------------------------------------
Total investment
income 1.27 1.33 1.05 1.11 0.77
- -------------------------------------------------------------------------------
Distributions from 0.70 0.59 0.62 0.67 0.44
net investment income
Distributions in --- --- 0.37 --- 0.00**
excess of net
investment income
Distributions from 0.61 0.42 --- --- ---
net realized gain on
investments,
financial futures
and options
contracts and on
foreign currency-
related transactions
- -------------------------------------------------------------------------------
Total distributions 1.31 1.01 0.99 0.67 0.44
- -------------------------------------------------------------------------------
Net asset value at
end of period 11.19 11.23 10.91 10.85 10.41
- -------------------------------------------------------------------------------
Total return on 11.53% 12.60% 10.03% 11.00% 7.84%
investment
Net assets at end of 174,805 80,390 30,024 28,255 273
period in 000's
Ratio of operating
expenses to average
net assets -
exclusive of interest
expense (a) 0.45% 0.45% 0.45% 0.45% 0.60%
Ratio of operating
expenses to average
net assets -
inclusive of interest
expense (a) 0.45% 0.45% 0.45% 0.45% 0.65%
Ratio of net income
to average net
assets (a) 4.85% 5.29% 5.71% 5.84% 4.72%
Decrease in above
expense ratios due to
waiver of investment
advisory fees and
reimbursement of
other expenses 0.13% 0.20% 0.24% 0.54% 0.17%
Portfolio turnover
rate 745% 704% 1,087% 500% 1,622%
- -------------------------------------------------------------------------------
(a) Net of waivers and reimbursements
(b) Rounds to less than $0.01
</TABLE>
20
<PAGE>
SHAREHOLDER INQUIRIES
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, as supplemented
February 7, 2000. The SAI provides more detailed information about the
Portfolio, including its 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 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 1-202-942-8090. 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
electronic request at the following E-mail address: [email protected].
Fund's Investment Company Act filing number: 33-27896/811-5796
21
