FFTW FUNDS, INC.
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------------------------------
PROSPECTUS
U.S. PORTFOLIOS
------------------------------
DATED APRIL 30, 1999,
AS SUPPLEMENTED FEBRUARY 15, 2000
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o Money Market o Mortgage-Backed o U.S. Treasury
o Mortgage LIBOR o Asset-Backed o U.S. Corporate
o U.S. Short-Term o High Yield o Broad Market
o Limited Duration o Enhanced Equity Market
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PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING COMMISSION (THE
"COMMISSION") IN CONNECTION WITH THE ENHANCED EQUITY MARKET PORTFOLIO WHOSE
PARTICIPANTS ARE LIMITED TO QUALIFIED ELIGIBLE PARTICIPANTS, THIS PROSPECTUS IS
NOT REQUIRED TO BE, AND HAS NOT BEEN FILED WITH THE COMMISSION. THE COMMISSION
DOES NOT PASS UPON THE MERITS OF PARTICIPATION IN A FUND OR PORTFOLIO OR UPON
THE ADEQUACY OR ACCURACY OF A PROSPECTUS. CONSEQUENTLY, THE COMMISSION HAS NOT
REVIEWED OR APPROVED THIS PROSPECTUS FOR THE ENHANCED EQUITY MARKET PORTFOLIO.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED ANY FUND'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
Money Market Portfolio 3
Mortgage LIBOR Portfolio 4
U.S. Short Term Portfolio 5
Limited Duration Portfolio 6
Mortgage-Backed Portfolio 7
Asset-Backed Portfolio 8
High Yield Portfolio 9
Enhanced Equity Portfolio 10
U.S. Treasury Portfolio 11
U.S. Corporate Portfolio 12
Broad Market Portfolio 13
Principal Investment Risks 14
Potential Year 2000 Risk 15
Risk Return Bar Charts and Tables 15
Money Market Portfolio 15
U.S. Short Term Portfolio 16
Limited Duration Portfolio 17
Mortgage-Backed Portfolio 18
Average Annual Total Returns 18
Fee Table 19
Fee Table (Continued) 20
Expenses Table Example 21
Fund Management 22
Board of Directors 22
Investment Adviser 22
Portfolio Managers 22
Shareholder Information 22
Purchases 22
Purchasing Shares Table 24
Redemptions 25
Redeeming Shares Table 26
Pricing of Portfolio Shares 26
Dividends 27
Voting Rights 27
Tax Considerations 27
Distribution of Fund Shares 28
Investment Information 29
Allowable Investment Strategies and Associated Risks 29
Allowable Investments and Associated Risks 33
Supplemental Investment Policies 38
Portfolio Turnover 39
Financial Highlights Tables 39
Money Market Portfolio 39
U.S. Short Term Portfolio 39
Limited Duration Portfolio 40
Mortgage-Backed Portfolio 40
Shareholder Inquiries 41
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2
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RISK/RETURN SUMMARY
The following is a summary of certain key information about the Portfolios,
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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MONEY MARKET PORTFOLIO
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INVESTMENT OBJECTIVE: To provide the maximum current income that is
consistent with the preservation of capital.
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PRINCIPAL INVESTMENT The Portfolio invests primarily in high quality (rating
STRATEGIES: of AA by S&P, Aa by Moody's or a comparable rating, or
higher from a nationally recognized statistical rating
organization) money market securities that meet the
requirements of Rule 2a-7 of the 1940 Act. The
performance objective of the Portfolio is to outperform
IBC's Money Fund Report Averages TM - All Taxable.
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MINIMUM CREDIT FIRST TIER SECURITIES: any SECOND TIER SECURITIES:
QUALITY: instruments receiving the any instruments rated by
highest short-term rating two nationally
by at least two nationally recognized statistical
recognized statistical rating organizations in
organizations. the highest category and
by another in the second
highest category.
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INVESTMENT The Portfolio invests only in U.S. dollar-denominated
POLICIES: money market securities, eligible under Rule 2a-7 of
the 1940 Act.
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PRINCIPAL o Asset-Backed Securities
INVESTMENTS: o Bank Obligations
(See pages 33-38 o Corporate Debt Instruments
of this o Mortgage-Backed Securities
Prospectus for o U.S. Government and Agency Securities
a more detailed
description of
allowable
investments.)
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AVERAGE WEIGHTED o Portfolio will have an average weighted maturity of
MATURITY: not longer than 90 days.
o Individual securities may not have effective
maturities longer than 397 days.
o Obligations subject to repurchase agreements and
certain variable and floating rate obligations may
bear longer final maturities.
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VALUATION: Money Market Portfolio investments are valued based on
the amortized cost valuation technique described under
Rule 2a-7 of the 1940 Act.
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PRINCIPAL RISKS: o Banking industry risk
(See page 14 of this o Liquidity risk
Prospectus for a more o Market risk
detailed description o Interest rate risk
of each risk.) o Prepayment risk
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Note: An investment in the Money Market Portfolio is not
insured or guaranteed by the Federal Deposit Insurance
Corporation, or any other government agency. Although
the Money Market Portfolio seeks to preserve the value
of your investment at 1.00 per share, it is possible to
lose money by investing in the Money Market Portfolio.
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3
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MORTGAGE LIBOR PORTFOLIO
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INVESTMENT OBJECTIVE: To obtain a high level of total return as may be
consistent with the preservation of capital.
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PRINCIPAL INVESTMENT Once it commences investment activity, the Portfolio
STRATEGIES: will invest primarily in high quality [rating of AA by
Standard & Poor's Corp. ("S&P"), Aa by Moody's
Investors Services, Inc. ("Moody's") or a comparable
rating, or higher from a nationally recognized
statistical rating organization] mortgage-backed and
mortgage related securities. The Portfolio actively
utilizes hedging techniques to seek to outperform a
cash portfolio. At least 65% of the Portfolio's total
assets must be invested in mortgage-backed securities
of U.S. and foreign issuers with the goal to outperform
LIBOR (see note below). The performance objective of
the Portfolio is to outperform the JP Morgan 3-Month
Eurodeposit Index.
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MINIMUM QUALITY Thompson AVERAGE
RATING: S&P Moody's Bankwatch, PORTFOLIO
S&P: Moody's: (Short (Short Inc. ---------
---- -------- Term): Term): ("Thompson") QUALITY:
------ ------- ------------ --------
BBB- Baa3 A-2 P-2 B AA (Aa)
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DURATION: The Mortgage LIBOR Portfolio's average U.S. dollar-
weighted duration will not exceed plus or minus one
year around the average duration of the JP Morgan
3-Month Eurodeposit Index.
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INVESTMENT For temporary defensive purposes, 100% of the
POLICIES: 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 Mortgage-Backed Securities
(See pages o Stripped Instruments
33-38 of this o U.S. Government and Agency Securities
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 14 of include:
this Prospectus o Correlation risk o Hedging risk o Liquidity risk
for a more o Credit risk o Interest rate risk o Market risk
detailed o Futures risk o Leverage risk o Prepayment risk
description of
each risk.)
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THIS PORTFOLIO HAS NOT YET COMMENCED INVESTMENT ACTIVITY.
4
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U.S. SHORT-TERM PORTFOLIO
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INVESTMENT OBJECTIVE: To attain a high level of total return as may be
consistent with the preservation of capital and to
maintain liquidity.
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PRINCIPAL INVESTMENT The Portfolio invests primarily in high quality (rating
STRATEGIES: of AA by S&P, Aa by Moody's or a comparable rating, or
higher from a nationally recognized statistical rating
organization) short-term debt securities. The
performance objective of the Portfolio is to outperform
IBC's Money Fund Report Averages TM - All Taxable.
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MINIMUM QUALITY Thompson AVERAGE
RATING: S&P Moody's Bankwatch, PORTFOLIO
S&P: Moody's: (Short (Short Inc. ---------
---- -------- Term): Term): ("Thompson") 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 one year. Except for temporary defensive
purposes the Portfolio will not have an U.S. dollar-
weighted average duration exceeding three years.
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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 "diversified"under the 1940 Act.
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PRINCIPAL o Asset-Backed Securities o Mortgage-Backed Securities
INVESTMENTS: o Bank Obligations o U.S. Government and Agency
(See pages o Corporate Debt Securities
33-38 of this Instruments
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 14 of include:
this Prospectus o Correlation risk o Hedging risk o Liquidity risk
for a more o Credit risk o Interest rate risk o Market risk
detailed o Futures risk o Leverage risk o Prepayment risk
description of
each risk.)
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5
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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
STRATEGIES: securities (rating of AA by S&P, Aa by 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 Thompson AVERAGE
RATING: S&P Moody's Bankwatch, PORTFOLIO
S&P: Moody's: (Short (Short Inc. ---------
---- -------- Term): Term): ("Thompson") 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 Year Treasury Index.
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INVESTMENT At least 65% of the Portfolio's total assets must be
POLICIES: 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 o Asset-Backed Securities
INVESTMENTS: o Bank Obligations
(See pages o Corporate Debt Instruments
33-38 of this o Mortgage-Backed Securities
Prospectus for o Repurchase and Reverse Repurchase Agreements
a more detailed o Total Return Swaps
description of o U.S. Government and Agency Securities
allowable
investments.)
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PRINCIPAL RISKS: A loss of money could occur due to certain risks. These
(See page 14 of include:
this Prospectus o Banking industry risk o Futures risk o Liquidity risk
for a more o Correlation risk o Hedging risk o Market risk
detailed o Credit risk o Interest rate o Prepayment risk
description of risk
each risk.) o Leverage risk
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6
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MORTGAGE-BACKED PORTFOLIO
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INVESTMENT OBJECTIVE: To attain a high 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 (rating
STRATEGIES: of AA by S&P, Aa by Moody's or a comparable rating, or
higher from a nationally recognized statistical rating
organization) mortgage-backed securities, using hedging
techniques to manage interest rate and prepayment risk.
The performance objective of the Portfolio is to
outperform the Lehman Brothers Mortgage-Backed
Securities Index.
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MINIMUM QUALITY Thompson AVERAGE
RATING: S&P Moody's Bankwatch, PORTFOLIO
S&P: Moody's: (Short (Short Inc. ---------
---- -------- Term): Term): ("Thompson") QUALITY:
------ ------- ------------ --------
BBB- Baa3 A-2 P-2 B AA (Aa)
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DURATION: The average U.S. dollar-weighted duration will not
exceed plus or minus one year around the average
duration of the Lehman Brothers Mortgage-Backed
Securities Index.
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INVESTMENT At least 65% of the Portfolio's total assets must be
POLICIES: invested in mortgage-backed securities of U.S. and
foreign issuers. For the purposes of this Portfolio,
home equity loans are considered mortgage-backed
securities. For temporary defensive purposes, the
Portfolio may invest up to 100% of its total assets 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 Mortgage-Backed Securities
(See pages o Corporate Debt Instruments
33-38 of this o Repurchase and Reverse Repurchase Agreements
Prospectus for o Stripped Instruments
a more detailed o Total Return Swaps
description of o U.S. Government and Agency Securities
allowable
investments.)
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PRINCIPAL RISKS: A loss of money could occur due to certain risks. These
(See page 14 of include:
this Prospectus o Banking industry risk o Hedging risk o Market risk
for a more o Correlation risk o Interest rate o Non-diversification
detailed o Credit risk risk risk
description of o Futures risk o Leverage risk o Prepayment risk
each risk.) o Liquidity risk
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7
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ASSET-BACKED PORTFOLIO
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INVESTMENT OBJECTIVE: To attain a high level of total return as may be
consistent with the preservation of capital.
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PRINCIPAL INVESTMENT Once it commences investment activity, the Portfolio
STRATEGIES: will invest in high quality (rating of AA by S&P, Aa by
Moody's or a comparable rating, or higher from a
nationally recognized statistical rating organization)
asset-backed securities, allowing exposures to other
sectors of the debt market opportunity. The
performance objective of the Portfolio is to outperform
the Lehman Brothers Asset-Backed Securities Index.
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MINIMUM QUALITY AVERAGE
RATING: S&P Moody's PORTFOLIO
S&P: Moody's: (Short (Short ---------
---- -------- Term): Term): Thompson QUALITY:
------ ------- -------- --------
BBB- Baa3 A-2 P-2 B AA (Aa)
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DURATION: The average U.S. dollar-weighted duration generally
will not exceed plus or minus one year around the
average duration of the Lehman Brothers Asset-Backed
Securities Index.
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INVESTMENT At least 65% of the Portfolio's total assets must be
POLICIES: invested in asset-backed securities of the U.S. and
foreign issuers. For temporary defensive purposes, the
Portfolio may invest up to 100% of its total assets 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 Mortgage-Backed Securities
(See pages o Repurchase and Reverse Repurchase Agreements
33-38 of this o Stripped Instruments
Prospectus for o Total Return Swaps
a more detailed o U.S. Government and Agency Securities
description of
allowable
investments.)
- -------------------------------------------------------------------------------
PRINCIPAL RISKS: A loss of money could occur due to certain risks. These
(See page 14 of include:
this Prospectus o Banking industry risk o Hedging risk o Liquidity risk
for a more o Correlation risk o Interest rate o Market risk
detailed o Credit risk risk o Non-diversification
description of o Futures risk o Leverage risk risk
each risk.) o Prepayment risk
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THIS PORTFOLIO HAS NOT YET COMMENCED INVESTMENT ACTIVITY.
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8
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HIGH YIELD PORTFOLIO
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INVESTMENT OBJECTIVE: To attain a high level of total return as may be
consistent with the preservation of capital.
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PRINCIPAL INVESTMENT Once it commences investment activity, the Portfolio
STRATEGIES: will invest primarily in high yield debt securities.
The performance objective of the Portfolio is to
outperform the Salomon Smith Barney All BB and B Rated
Issues Index.
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MINIMUM QUALITY AVERAGE AVERAGE
RATING: S&P Moody's PORTFOLIO
S&P: Moody's: (Short (Short Thompson: ---------
---- -------- Term): Term): --------- QUALITY:
------- ------- --------
CCC- Caa3 C P-3 LC-3 B
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DURATION: The average U.S. dollar-weighted duration generally
will not exceed one year around the average duration of
the Smith Barney All BB and B Rated Issues Index.
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INVESTMENT At least 65% of High Yield Portfolio's total assets
POLICIES: must be invested in high yield securities of U.S. and
foreign issuers. For temporary defensive purposes, the
Portfolio may invest up to 100% of its total assets in
U.S. Government securities, cash or cash equivalent
securities. The Portfolio is non-diversified.
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PRINCIPAL o Brady Bonds
INVESTMENTS: o Convertible Securities
(See pages o Corporate Debt Instruments
33-38 of this o Foreign Instruments
Prospectus for o Stripped Instruments
a more detailed o Zero Coupon Securities
description of
allowable
investments.)
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PRINCIPAL RISKS: A loss of money could occur due to certain risks. These
(See page 14 of include:
this Prospectus o Correlation risk o Futures risk o Market risk
for a more o Credit risk o Hedging risk o Non-diversification
detailed o Currency risk o Interest rate risk risk
escription of o Liquidity risk o Prepayment risk
each risk.)
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NOTE: SPECIAL Also known as junk bonds, high yield bonds are issued
RISKS by corporations who either do not have long track
records of sales and earnings, or by those who possess
questionable credit strength. As a result, the risk of
default is higher on these instruments than it would b
on an investment grade bond. High yield bonds have
ratings of BB or lower and pay higher yields to
compensate for their greater risk.
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THIS PORTFOLIO HAS NOT YET COMMENCED INVESTMENT ACTIVITY.
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9
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ENHANCED EQUITY MARKET PORTFOLIO
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INVESTMENT OBJECTIVE: To attain a high level of total return that exceeds the
S&P Index TM.
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PRINCIPAL INVESTMENT Once it commences investment activity, the Portfolio
STRATEGIES: will invest primarily in high quality (rating of AA by
S&P, Aa by Moody's or a comparable rating, or higher
from a nationally recognized statistical rating
organization) short duration fixed income securities
and S&P 500 Index TM futures contracts. Where
possible, these securities will provide equity-like
returns. The performance objective of the Portfolio is
to outperform the S&P 500 Index TM.
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MINIMUM QUALITY AVERAGE
RATING: S&P Moody's PORTFOLIO
S&P: Moody's: (Short (Short ---------
---- -------- 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 three years.
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INVESTMENT The Portfolio may invest up to 100% of its total assets
POLICIES: in U.S. Government securities, cash or cash
equivalents, and will maintain 100% exposure to the S&P
500 Index TM. Up to 5% of the Portfolio's total assets
may be invested in margin at any given time; the
remaining 95% of the Portfolio's assets will be
invested in short term instruments. 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 Bank Obligations
(See pages o Corporate Debt Instruments
33-38 of this o Mortgage-Backed Securities
Prospectus for o U.S. Government and Agency Securities
a more detailed
description of
allowable
investments.)
- -------------------------------------------------------------------------------
PRINCIPAL RISKS: A loss of money could occur due to certain risks. These
(See page 14 of include:
this Prospectus o Banking industry risk o Futures risk o Leverage risk
for a more o Correlation risk o Hedging risk o Market risk
detailed o Credit risk o Interest rate o Non-diversification
description of risk risk
each risk.) o Liquidity risk o Prepayment risk
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THIS PORTFOLIO HAS NOT YET COMMENCED INVESTMENT ACTIVITY.
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10
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U.S. TREASURY PORTFOLIO
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INVESTMENT OBJECTIVE: To attain a high level of total return as may be
consistent with the preservation of capital and to
avoid credit quality risk.
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PRINCIPAL INVESTMENT Once it commences investment activity, the Portfolio
STRATEGIES: will invest primarily in U.S. Treasuries. The
performance objective of the Portfolio is to outperform
the Lehman Brothers Government Securities Index.
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MINIMUM QUALITY AVERAGE
RATING: S&P Moody's PORTFOLIO
S&P: Moody's: (Short (Short ---------
---- -------- Term): Term): Thompson QUALITY:
------ ------- -------- --------
BBB- Baa3 A-2 P-2 B AA (Aa)
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DURATION: The average U.S. dollar-weighted duration generally
will not exceed plus or minus one year around the
average duration of the Lehman Brothers Government
Securities Index.
- -------------------------------------------------------------------------------
INVESTMENT At least 95% of the Portfolio's total assets must be
POLICIES: invested in U.S. dollar-denominated obligations issued
by the U.S. Treasury and repurchase agreements
collateralized by such obligations. The Portfolio is
non-diversified.
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PRINCIPAL o U.S. Government and Agency Securities
INVESTMENTS:
(See pages
33-38 of this
Prospectus for
a more detailed
description of
allowable
investments.)
- -------------------------------------------------------------------------------
PRINCIPAL RISKS: A loss of money could occur due to certain risks. These
(See page 14 of include:
this Prospectus o Correlation risk o Interest rate risk
for a more o Futures risk o Leverage risk
detailed o Hedging risk o Market risk
description of
each risk.)
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THIS PORTFOLIO HAS NOT YET COMMENCED INVESTMENT ACTIVITY.
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11
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U.S. CORPORATE PORTFOLIO
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INVESTMENT OBJECTIVE: To attain a high level of total return as may be
consistent with the preservation of capital.
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PORTFOLIO DESCRIPTION: Once it commences investment activity, the Portfolio
will invest primarily in high quality (rating of AA by
S&P, Aa by Moody's or a comparable rating, or higher
from a nationally recognized statistical rating
organization) U.S. corporate obligations, with limited
exposure to other debt securities. The performance
objective of the Portfolio is to outperform the Salomon
Smith Barney Corporate Bond Index.
- -------------------------------------------------------------------------------
MINIMUM QUALITY AVERAGE
RATING: S&P Moody's PORTFOLIO
S&P: Moody's: (Short (Short ---------
---- -------- Term): Term): Thompson QUALITY:
------ ------- -------- --------
BBB- Baa3 A-2 P-2 B AA (Aa)
- -------------------------------------------------------------------------------
DURATION: The average U.S. dollar-weighted duration generally
will not exceed plus or minus one year around the
average duration of the Salomon Smith Barney Corporate
Bond Index.
- -------------------------------------------------------------------------------
INVESTMENT The Portfolio must invest at least 65% of its total
POLICIES: assets in U.S. dollar-denominated corporate debt
obligations of U.S. issuers. For temporary defensive
purposes, the Portfolio may invest up to 100% of its
total assets in U.S. Government securities, cash or
cash equivalent securities. The Portfolio is
non-diversified.
- -------------------------------------------------------------------------------
PRINCIPAL o Asset-Backed Securities
INVESTMENTS: o Bank Obligations
(See pages o Corporate Debt Instruments
33-38 of this o Foreign Instruments
Prospectus for o Mortgage-Backed Securities
a more detailed o U.S. Government and Agency Securities
description of
allowable
investments.)
- -------------------------------------------------------------------------------
PRINCIPAL RISKS: A loss of money could occur due to certain risks. These
(See page 14 of include:
this Prospectus o Correlation risk o Futures risk o Liquidity risk
for a more o Credit risk o Hedging risk o Market risk
detailed o Currency risk o Interest rate o Non-diversification
description of risk risk
each risk.) o Leverage risk o Prepayment risk
- -------------------------------------------------------------------------------
THIS PORTFOLIO HAS NOT YET COMMENCED INVESTMENT ACTIVITY.
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12
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BROAD-MARKET PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE: To attain a high level of total return as may be
consistent with the preservation of capital.
- -------------------------------------------------------------------------------
PRINCIPAL INVESTMENT Once it commences investment activity, the Portfolio
STRATEGIES: will invest primarily in high quality (rating of AA by
S&P, Aa by Moody's or a comparable rating, or higher
from a nationally recognized statistical rating
organization) fixed income securities reflective of the
broad spectrum of the U.S. bond market. The
performance objective of the Portfolio is to outperform
the Lehman Brothers Aggregate Bond Index.
- -------------------------------------------------------------------------------
MINIMUM QUALITY AVERAGE
RATING: S&P Moody's PORTFOLIO
S&P: Moody's: (Short (Short ---------
---- -------- Term): Term): Thompson QUALITY:
------ ------- -------- --------
BBB- Baa3 A-2 P-2 B AA (Aa)
- -------------------------------------------------------------------------------
DURATION: The average U.S. dollar-weighted duration generally
will not exceed plus or minus one year around the
average duration of the Lehman Brothers Aggregate Bond
Index.
- -------------------------------------------------------------------------------
INVESTMENT The Portfolio will invest at least 65% of its total
POLICIES: assets in fixed income securities. The allocation
among markets will vary based upon the issuance of new
securities and the retirement of outstanding securities
and instruments. For temporary defensive purposes, the
Portfolio may invest up to 100% of its total assets in
short-term U.S. Government securities, cash or cash
equivalent securities. The Investment Adviser will
manage the Broad Market Portfolio to approximate broad
market allocations by purchasing and selling
representative securities in each market, but the
Portfolio cannot guarantee that it will match such
broad market allocations. The current market
allocation is comprised of approximately 20% in
corporate securities, 50% in U.S. Government securities
and 30% in mortgage-backed and asset-backed securities.
The Portfolio is non-diversified.
- -------------------------------------------------------------------------------
PRINCIPAL o Asset-Backed Securities
INVESTMENTS: o Bank Obligations
(See pages o Corporate Debt Instruments
33-38 of this o Foreign Instruments
Prospectus for o Mortgage-Backed Securities
a more detailed o U.S. Government and Agency Securities
description of
allowable
investments.)
- -------------------------------------------------------------------------------
PRINCIPAL RISKS: A loss of money could occur due to certain risks. These
(See page 14 of include:
this Prospectus o Banking industry o Futures risk o Liquidity risk
for a more risk
detailed o Correlation risk o Hedging risk o Market risk
description of o Credit risk o Interest rate o Non-diversification
each risk.) o Currency risk risk risk
o Leverage risk o Prepayment risk
- -------------------------------------------------------------------------------
THIS PORTFOLIO HAS NOT YET COMMENCED INVESTMENT ACTIVITY.
</TABLE>
13
<PAGE>
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.
All of the U.S. Portfolios described in this Prospectus are 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 a Portfolio's investment objective will be achieved.
Investments in the Money Market, U.S. Short-Term, U.S. Treasury, and U.S.
Corporate Portfolios are neither guaranteed nor insured by the United States
Government. There is also no assurance that the Money Market Portfolio will
maintain a stable net asset value of $1.00 per share. It is possible to lose
money by investing in the Money Market Portfolio.
Investments in the U.S. Portfolios are subject to certain of the following
risks. The risks associated with each Portfolio depend on its investment
strategy and the types of securities it holds. The specific risks affecting
each Portfolio will be indicated in the individual portfolio descriptions in
this prospectus.
<TABLE>
<CAPTION>
<S> <C>
BANKING Investing in bank obligations will expose an investor to risks
INDUSTRY RISK: associated with the banking industry such as interest rate and
credit risks.
CORRELATION A Portfolio may experience changes in value as between the
RISK: 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.
CURRENCY RISK: Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. When
synthetic and cross-hedges are used, the net exposure of a
Portfolio to any one currency may be different from that of
its total assets denominated in such currency.
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 A Portfolio may be influenced by interest rate changes that
RISK: 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 a 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.
NON- A Portfolio is diversified when it spreads investment risk by
DIVERSIFICATION placing assets in several investment categories. A non-
RISK: diversified Portfolio concentrates its assets in a less
diverse spectrum of securities. Non-diversification can
intensify risk should a particular investment category suffer
from adverse market conditions.
PREPAYMENT A Portfolio may invest in mortgage-backed and other
RISK: 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.
</TABLE>
14
<PAGE>
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 CHARTS AND TABLES
The charts and tables provided below give some indication of the risks of
investing in the funds by illustrating the changes in each Portfolio's yearly
performance and show how each Portfolio's average returns for 1, 5 and 10 years
compare with a selected index.
MONEY MARKET PORTFOLIO
BAR GRAPH
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year 1994 1995 1996 1997 1998
4.13% 5.74% 5.18% 5.46% 5.51%
</TABLE>
During the 5-year period shown in the Money Market Portfolio's bar chart, the
highest quarterly return was 1.438% (quarter ending 6/30/95) and the lowest
quarterly return was 0.713% (quarter ending 3/31/94).
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
15
<PAGE>
U.S. SHORT-TERM PORTFOLIO
BAR GRAPH
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998
8.51% 6.40% 3.45% 2.89% 3.71% 5.71% 5.45% 5.09% 5.59%
</TABLE>
During the 9-year period shown in the U.S. Short Term Portfolio's bar chart,
the highest quarterly return was 2.215% (quarter ending 12/31/90) and the
lowest quarterly return was 0.553% (quarter ending 12/31/93).
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
16
<PAGE>
LIMITED DURATION PORTFOLIO
BAR GRAPH
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year 1994 1995 1996 1997 1998
0.29% 11.26% 5.29% 7.21% 6.79%
</TABLE>
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.
17
<PAGE>
MORTGAGE-BACKED PORTFOLIO
BAR GRAPH
<TABLE>
<CAPTION>
<S> <C> <C>
Year 1997 1998
10.19% 7.42%
</TABLE>
During the 2-year period shown in the Mortgage-Backed Portfolio's bar chart,
the highest quarterly return was 3.970% (quarter ending 6/30/97) and the lowest
quarterly return was 0.262% (quarter ending 12/31/98).
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PAST 1 YEAR PAST 5 YEARS SINCE INCEPTION*
(FOR THE PERIODS ENDING
DECEMBER 31, 1998)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Money Market Portfolio 5.51% 5.20% 5.12%
- -------------------------------------------------------------------------------
IBC Money Fund Report Averages
TM-All Taxable 5.03% 4.86% 4.89%
- -------------------------------------------------------------------------------
U.S. Short-Term Portfolio 5.59% 5.13% 5.21%
- -------------------------------------------------------------------------------
IBC Money Fund Report Averages
TM-All Taxable 5.03% 4.86% 4.89%
- -------------------------------------------------------------------------------
Limited Duration Portfolio 6.79% 5.76% 5.94%
- -------------------------------------------------------------------------------
Merrill Lynch 1-2.99 Year
Treasury Index 7.00% 5.59% 5.85%
- -------------------------------------------------------------------------------
Mortgage-Backed Portfolio 7.42% N/A 8.98%
- -------------------------------------------------------------------------------
Lehman Brothers Mortgage-Backed
Securities Index 6.97% N/A 8.33%
- -------------------------------------------------------------------------------
</TABLE>
*Portfolio Inception Dates:
1. Money Market Portfolio: 11/1/93
2. U.S. Short Term Portfolio: 12/6/89
3. Limited Duration Portfolio: 7/26/93
4. Mortgage Backed Portfolio: 4/29/96
18
<PAGE>
FEE TABLE
This Table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolio.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
Shareholder Transaction Money Mortgage U.S. Short Limited Mortgage-
Expenses (Fees Paid Market LIBOR (2) Term (3) Duration Backed
Directly By You) (1) (4) (5)
- -------------------------------------------------------------------------------
Redemption Fees None None None None None
- -------------------------------------------------------------------------------
Exchange Fees None None None None None
- --------------------------------------------------------------------------------
Contingent Deferred None None None None None
Sales Load
- -------------------------------------------------------------------------------
Sales Load on None None None None None
Reinvestment Dividends
- -------------------------------------------------------------------------------
Sales Load on Purchases None None None None None
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ANNUAL FUND OPERATING
EXPENSES (FEES PAID FROM
FUND ASSETS)
- -------------------------------------------------------------------------------
Management Fees 0.10% 0.30% 0.30% 0.30% 0.30%
- -------------------------------------------------------------------------------
Distribution Fees None None None None None
(12b-1)
- -------------------------------------------------------------------------------
Shareholder Services None None None None None
Fees
- -------------------------------------------------------------------------------
Other Expenses 0.26% 0.15% 0.12% 0.22% 0.13%
- -------------------------------------------------------------------------------
Total Annual Fund 0.36% 0.45% 0.42% 0.52% 0.43%
Operating Expenses
- -------------------------------------------------------------------------------
</TABLE>
(1) The Investment Adviser and Investors Capital have voluntarily agreed to cap
the Net Operating Expenses at 0.25% (on an annualized basis) of the Portfolio's
average daily net assets. The Investment Adviser and the Administrator will not
attempt to recover prior period waivers should expenses fall below the cap. All
operating expenses exceeding the voluntary waiver of fees will be paid by the
Investment Adviser. For the fiscal year ended 12/31/98, the Investment Adviser
and Administrator waived fees in the amount of 0.11%. 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.
(2) The Investment Adviser has voluntarily agreed to cap the Net Operating
Expenses at 0.45% (on an annualized basis) of the Portfolio's average daily net
assets. All operating expenses exceeding the voluntary waiver of fees will be
paid by the Investment Adviser. The Investment Adviser will not attempt to
recover prior period waivers should expenses fall below the cap. 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.
(3) Pursuant to an Investment Advisory Agreement, total operating expenses are
capped at 0.40% (on an annualized basis) of the Portfolio's average daily net
assets. The Investment Adviser and Investors Capital have voluntarily agreed to
cap the Net Operating Expenses at 0.25% (on an annualized basis) of the
Portfolio's average daily net assets. All operating expenses exceeding the caps
and voluntary waiver of fees will be paid by the Investment Adviser. The
Investment Adviser and the Administrator 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 and Administrator waived fees in the amount of
0.17%. 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. Under an agreement between the Investment Adviser and Investors
Capital, Investors Capital is currently voluntarily waiving up to 0.02% on the
first $350 million.
(4) 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.
(5) The Investment Adviser has voluntarily agreed to cap the Net Operating
Expenses at 0.25% (on an annualized basis) of the Portfolio's average daily net
assets. All operating expenses exceeding the voluntary waiver of fees will be
paid by the Investment Adviser. All operating expenses exceeding the voluntary
waiver of fees 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 0.20%. 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.
19
<PAGE>
FEE TABLE CONTINUED
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
Shareholder Asset High Enhanced U.S. U.S. Broad
Transaction Expenses Backed Yield Equity Treasury Corporate Market
(Fees Paid Directly (6) (7) Market (8) (9) (10) (11)
By You)
- -------------------------------------------------------------------------------
Redemption Fees None None None None None None
- -------------------------------------------------------------------------------
Exchange Fees None None None None None None
- -------------------------------------------------------------------------------
Contingent Deferred None None None None None None
Sales Load
- -------------------------------------------------------------------------------
Sales Load on None None None None None None
Reinvestment Dividends
- -------------------------------------------------------------------------------
Sales Load on Purchases None None None None None None
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ANNUAL FUND OPERATING
EXPENSES (FEES PAID FROM
FUND ASSETS)
- -------------------------------------------------------------------------------
Management Fees 0.10% 0.40% 0.35% 0.30% 0.10% 0.30%
- -------------------------------------------------------------------------------
Distribution Fees None None None None None None
(12b-1)
- -------------------------------------------------------------------------------
Shareholder Services None None None None None None
Fees
- -------------------------------------------------------------------------------
Other Expenses 0.15% 0.20% 0.15% 0.15% 0.15% 0.15%
- -------------------------------------------------------------------------------
Total Annual Fund 0.25% 0.60% 0.50% 0.45% 0.25% 0.45%
Operating Expenses
- -------------------------------------------------------------------------------
</TABLE>
(6) The Investment Adviser has voluntarily agreed to cap the Net Operating
Expenses at 0.25% (on an annualized basis) of the Portfolio's average daily net
assets. All operating expenses exceeding the voluntary waiver of fees will be
paid by the Investment Adviser. The Investment Adviser and the Administrator
will not attempt to recover prior period waivers should expenses fall below the
cap. 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.
(7) The Investment Adviser has voluntarily agreed to cap the Net Operating
Expenses at 0.60% (on an annualized basis) of the Portfolio's average daily net
assets. All operating expenses exceeding the voluntary waiver of fees will be
paid by the Investment Adviser. The Investment Adviser and the Administrator
will not attempt to recover prior period waivers should expenses fall below the
cap. 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.
(8) The Investment Adviser has voluntarily agreed to cap the Net Operating
Expenses at 0.50% (on an annualized basis) of the Portfolio's average daily net
assets. All operating expenses exceeding the voluntary waiver of fees will be
paid by the Investment Adviser. The Investment Adviser and the Administrator
will not attempt to recover prior period waivers should expenses fall below the
cap. 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.
(9) The Investment Adviser has voluntarily agreed to cap the Net Operating
Expenses at 0.45% (on an annualized basis) of the Portfolio's average daily net
assets. All operating expenses exceeding the voluntary waiver of fees will be
paid by the Investment Adviser. The Investment Adviser and the Administrator
will not attempt to recover prior period waivers should expenses fall below the
cap. 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.
(10) The Investment Adviser has voluntarily agreed to cap the Net Operating
Expenses at 0.25% (on an annualized basis) of the Portfolio's average daily net
assets. All operating expenses exceeding the voluntary waiver of fees will be
paid by the Investment Adviser. The Investment Adviser and the Administrator
will not attempt to recover prior period waivers should expenses fall below the
cap. 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.
(11) The Investment Adviser has voluntarily agreed to cap the Net Operating
Expenses at 0.45% (on an annualized basis) of the Portfolio's average daily net
assets. All operating expenses exceeding the voluntary waiver of fees will be
paid by the Investment Adviser. The Investment Adviser and the Administrator
will not attempt to recover prior period waivers should expenses fall below the
cap. 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.
20
<PAGE>
EXPENSES TABLE EXAMPLE
As an investor, you pay certain fees and expenses in connection with the
Portfolios, as described in the tables 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
PORTFOLIO NAME 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Money Market $37 $116 $202 $456
- -------------------------------------------------------------------------------
Mortgage LIBOR* $46 $144
- -------------------------------------------------------------------------------
U.S. Short Term $43 $135 $235 $530
- -------------------------------------------------------------------------------
Limited Duration $53 $167 $291 $653
- -------------------------------------------------------------------------------
Mortgage-Backed $44 $138 $241 $542
- -------------------------------------------------------------------------------
Asset-Backed* $26 $80
- -------------------------------------------------------------------------------
High Yield* $61 $192
- -------------------------------------------------------------------------------
Enhanced Equity $51 $160
Market*
- -------------------------------------------------------------------------------
U.S. Treasury* $46 $144
- -------------------------------------------------------------------------------
U.S. Corporate* $26 $80
- -------------------------------------------------------------------------------
Broad Market* $46 $144
- -------------------------------------------------------------------------------
</TABLE>
*Portfolio has not commenced investment operations, therefore only fees for one
and three years are represented.
21
<PAGE>
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 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
DAVID J. MARMON, MANAGING DIRECTOR. Mr. Marmon is responsible for management of
the Asset-Backed, High-Yield, U.S. Corporate and Broad Market Portfolios. He
joined FFTW in 1990 from Yamaichi International (America) where he headed
futures and options research. Mr. Marmon was previously a financial analyst and
strategist at the First Boston Corporation, where he developed hedging programs
for financial institutions and industrial firms. Mr. Marmon has a B.A. SUMMA
CUM LAUDE in economics from Alma College and an M.A. in economics from Duke
University.
STEWART M. RUSSELL, MANAGING DIRECTOR. Mr. Russell is responsible for
management of the Money Market, U.S. Short-Term, Limited Duration, Enhanced
Equity Market and U.S. Treasury Portfolios. 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 a M.B.A. in finance from New
York University.
PATRICIA L. COOK, MANAGING DIRECTOR. Ms. Cook is responsible for management of
the Mortgage LIBOR and Mortgage-Backed Portfolios. She joined FFTW in 1991
after twelve years with Salomon Brothers, where she most recently established
and headed the bond strategy team that analyzes relative values among
mortgages, treasuries, and other sectors of the fixed-income markets and
developed portfolio strategies for Salomon Brothers' global institutional
clients. Ms. Cook worked initially as an analyst in the firm's proprietary
trading unit before joining the firm's financing desk. Ms. Cook has a B.A. from
St. Mary's College and a M.B.A. 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 any 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 in all Portfolios except Mortgage LIBOR,
Mortgage-Backed, and Asset-Backed on the day Federal funds are received.
22
<PAGE>
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)
23
<PAGE>
TO PURCHASE SHARES
-------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
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 OF
DETERMINED FUNDS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
MONEY All Business o Any Business o Purchasers must Trade not effective
MARKET Days 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 12:00 pm EST and
completed if within the the wire is
account City of New received after 12:00
application York], or IBT at pm EST.
o Federal funds (617) 330-6000
must be wired prior to 12:00 pm When notice is given
to AMT EST to inform the before 12:00 EST and
Capital's Fund of the the wire is received
"Fund incoming wire after 12:00 EST, the
Purchase transfer. trade will be
Account"at o Purchasers must effective on the day
IBT indicate which the wire is received
Portfolio is to
be purchased. Trade effective on
o If Federal funds next business day:
are received by o If wire is
the Fund that received after
day, the order 1200 pm EST
will be and no notice is
effective that given.
day.
- -------------------------------------------------------------------------------
o U.S. All Business o Any Business o Purchasers must Trade not effective
SHORT- Days Day call Investors o If the Fund is
TERM o Submitted Capitalat (800) notified after
o LIMITED orders 762-4848 [or 4:00 pm EST and the
DURATION should (212) 332-5211 wire is received
o ENHANCED include a if within the after 4:00 pm EST.
EQUITY completed City of New York]
MARKET account or IBT at (617) When notice is given
o U.S Purchase 330-6000 prior before 4:00 EST and
TREASURY application to 4:00 pm the wire is received
o U.S. o Federal Eastern time to after 4:00 pm EST,
CORPORATE funds must inform the Fund the trade will be
o BROAD be wired of the incoming effective on the day
MARKET to AMT wire transfer. the wire is received
Capital's o Purchasers must
"Fund indicate which Trade effective on
Purchase Portfolio is to next business day:
Account" be purchased. o If wire is received
at IBT. o If Federal after 4:00 pm EST
funds are and no notice is
received by the given.
Fund that day,
the order will
be effective
that day.
- -------------------------------------------------------------------------------
MORTGAGE Last Business o Last o Purchasers must Trade not effective
LIBOR Day of each Business call Investors on a given day:
week or on Day of each Capital at (800) o If the Fund is
any other week or on 762-4848 [or (212) notified after
Business Days any other 332-5211 if within 4:00 pm EST and the
approved by Business the City of New the wire is
the Investment Days York] or IBT at received after 4:00
Adviser. approved by (617) 330-6000 pm EST.
the Invest- prior to 4:00 pm
ment EST to inform the When notice is given
Adviser. Fund of the in- before 4:00 EST and
o Federal funds form the Fund of the wire is received
must be wired the incoming after 4:00 EST, the
to AMT wire transfer. trade will be
Capital's o Purchasers must effective on the day
"Fund indicate which the wire is received
Purchase Portfolio is to
Account"at be purchased. Trade effective on
IBT. o If Federal funds next business day:
are received by o If wire is
the Fund that received after 4:00
day, the order pm EST and no
will be notice is given.
effective that
day.
- -------------------------------------------------------------------------------
o Last Business o Last o Purchasers must Trade not effective
MORTGAGE- Day of each Business call Investors on a given day:
BACKED month or on Day of each Capital at (800) o If the Fund is
o ASSET- any other month or any 762-4848 [or (212) notified after 4:00
BACKED Business other 332-5211 if within pm EST and the wire
o HIGH Days approved Business Days the City of New is received after
YIELD by the approved by York] or IBT at 4:00 pm EST.
Investment the Invest- (617) 330-6000
Adviser. ment Adviser. prior to 4:00 pm When notice is given
o Federal funds to inform the before 4:00 EST and
must be wired incoming wire the wire is received
to AMT transfer. after 4:00 EST, the
Capital's o Purchasers must trade will be
"Fund indicate which effective on the day
Purchase Portfolio is to the wire is received
Account" at be purchased.
IBT o If Federal funds Trade effective on
are received by next business day:
the Fund that o If wire is received
day, the order after 4:00 pm EST
will be effective and no notice is
that day. given.
- -------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
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 applicable 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.
25
<PAGE>
TO REDEEM SHARES
----------------
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
PORTFOLIO NAME WHEN REDEMPTION EFFECTIVE RESULT OF LATE
NOTIFICATION OF REDEMPTION
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
o Money Market If notice is received by the If notice is received by
Transfer Agent by 12:00 pm the Transfer Agent on a
EST on any Business Day, the non-business day or after
redemption will be effective 12:00 pm EST, the
and payment will be made on redemption notice will be
such Business day. Price of deemed received as of the
shares is based on the next next Business Day.
calculation of the NAV after
the order is placed.
- -------------------------------------------------------------------------------
o U.S. Short If notice is received by the If notice is received by
Term Transfer Agent by 4:00 pm the Transfer Agent on a
EST on any Business Day, the non-business day or after
redemption will be effective 4:00 pm EST the
and payment will be made on redemption notice will be
such Business day. Price of deem received as of the
shares is based on the next next Business Day.
calculation of the NAV after
the order is placed.
- -------------------------------------------------------------------------------
o U.S. Short If notice is received by the If notice is received on
Term Transfer Agent by 4:00 pm EST a non-business day or after
o Limited on any Business Day, the 4:00 pm EST, the
Duration redemption will be effective redemption notice will be
o Enhanced and payment will be made will be received as of the
Equity Market within seven calendar days, next Business Day.
o U.S. Treasury but generally on the day
o U.S. following receipt of such
Corporate notice. Price of shares is
o Broad Market based on the next calculation
o Mortgage LIBOR of the NAV after the order is
o Mortgage- placed.
Backed
o Asset-Backed
o High Yield
- -------------------------------------------------------------------------------
</TABLE>
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.
1. For all Portfolios other than Mortgage LIBOR, Mortgage-Backed, Asset-Backed,
High Yield and Money Market, net asset value is calculated by the Fund's
Accounting Agent as of 4:00 pm EST on each Business Day.
2. Mortgage LIBOR Portfolio's net asset value is calculated by the Fund's
Accounting Agent as of 4:00 pm EST on the last Business day of each week, on
any other Business Days in which the Investment Adviser approves a purchase,
and on each Business Day for which a redemption order has been placed.
3. Mortgage-Backed, Asset-Backed and High Yield Portfolios' net asset values
are calculated by the Fund's Accounting Agent as of 4:00 pm EST on the last
Business Day of each week and each month, on any other Business Days in
which the Investment Adviser approves a purchase, and on each Business Day
for which a redemption order has been placed.
4. Money Market Portfolio's net asset value is calculated as of 12:00 pm EST on
Business Days. The Money Market Portfolio seeks to maintain a stable net
asset value per share of $1.00. For purposes of calculating the Money
Market Portfolio's net asset value, securities are valued using the
"amortized cost" method of valuation, which does not take into consideration
unrealized gains or losses. The amortized cost method involves valuing an
instrument at its cost, and assumes a constant amortization to maturity of
any discount or premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods
26
<PAGE>
during which value based on amortized cost is higher or lower than the price
a Portfolio would receive if it sold the instrument.
The use of amortized cost and the maintenance of the Portfolio's per share net
asset value at $1.00 is based on its election to operate under the provisions
of Rule 2a-7 (the "Rule") under the 1940 Act. As conditions of
operating under the Rule, the Money Market Portfolio must:
1. maintain a dollar-weighted average Portfolio maturity of 90 days or shorter;
2. generally purchase only instruments having remaining maturities of 397 days
or shorter;
3. invest only in U.S. dollar-denominated securities which have been determined
by the Board of Directors to present minimal credit risks and which are of
eligible quality as determined under the Rule; and
4. diversify its holdings.
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 a 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 each Portfolio, other than
Mortgage-Backed, Mortgage LIBOR, Asset-Backed and High Yield will be declared
as dividends payable daily to the respective shareholders of record as of the
close of each Business Day. The net investment income of Mortgage LIBOR,
Mortgage-Backed, Asset-Backed and High Yield Portfolios will be declared as
dividends payable to the respective shareholders of record as of the last
Business Day of each month.
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 a
particular 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 a
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 a Portfolio, including the status of distributions from each
Portfolio under applicable state or local law.
FEDERAL INCOME TAXES
- --------------------
Each 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 a 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 a
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.
27
<PAGE>
A distribution will be treated as paid on December 31 of the current calendar
year if it is declared by a Portfolio in October, November or December with a
record date in any such month and paid by the Portfolio during January of the
following calendar year. Such distributions will be taxable to shareholders in
the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received. Each Portfolio will
inform shareholders of the amount and tax status of all amounts treated as
distributed to them not later than 60 days after the close of each calendar
year.
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
- ---------------------
A Portfolio may be subject to state, local or foreign taxation in any
jurisdiction in which the Portfolio may be deemed to be doing business.
Portfolio distributions may be subject to state and local taxes. 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 a 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 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.
28
<PAGE>
INVESTMENT INFORMATION
ALLOWABLE INVESTMENT STRATEGIES AND ASSOCIATED RISKS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
Money Mortgage U.S. Limited Mortgage- Asset- High
Market LIBOR Short- Duration Backed Backed Yield
Term
- -------------------------------------------------------------------------------
Dollar Roll o o o o o o
Transactions
- -------------------------------------------------------------------------------
Duration Management o o o o o o o
- -------------------------------------------------------------------------------
Hedging o o o o o o
- -------------------------------------------------------------------------------
Short Sales o o o o o o
Transactions
- -------------------------------------------------------------------------------
TBA Transactions o o o o o o
- -------------------------------------------------------------------------------
When Issued & o o o o o o
Forward Commitment
Securities
- -------------------------------------------------------------------------------
<C> <C> <C> <C>
---------------------------------------
Enhanced U.S. U.S. Broad
Equity Treasury Corporate Market
Market
- ------------------------------------------------------------
Dollar Roll o o o
Transactions
- ------------------------------------------------------------
Duration Management o o o o
- ------------------------------------------------------------
Hedging o o o o
- ------------------------------------------------------------
Short Sales o o o o
Transactions
- ------------------------------------------------------------
TBA Transactions o o o
- ------------------------------------------------------------
When Issued & o o o o
Forward Commitment
Securities
- ------------------------------------------------------------
</TABLE>
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. Portfolios 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 a 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 a Portfolio's duration by approximately the same amount
that holding an equivalent amount of the underlying securities would. Short
futures or put option positions have durations roughly equal to the negative
duration of the securities that underlie those positions and have the effect of
reducing 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%.
29
<PAGE>
RISKS: Changes in weighted average duration of a 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 a
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
b. purchasing and selling caps, contracts; and
floors and collars; e. purchasing and selling options.
c. purchasing or selling
forward exchange contracts;
All hedging instruments described below constitute commitments by a 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 a 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 a 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.
A 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 an U.S. or
foreign exchange may subject a 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 a
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 a
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.
30
<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 many of the Portfolios. 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 a Portfolio is engaging in
synthetic hedging. A 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 Portfolios, 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 a 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. A 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 a 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 a
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 a Portfolio sells a security it does not
own in anticipation of a decline in the market value of that security. Short
selling provides the Investment Adviser with flexibility to 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
31
<PAGE>
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.
RISKS: A short sale is generally used to take advantage of an anticipated
decline in price or to protect a profit. A 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
each 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 a
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 a Portfolio until settlement. For each
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 a 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.
32
<PAGE>
ALLOWABLE INVESTMENTS AND ASSOCIATED RISKS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
Money Mortgage U.S. Limited Mortgage- Asset- High
Market LIBOR Short- Duration Backed Backed Yield
Term
- -------------------------------------------------------------------------------
Asset-Backed o o o o o o o
Securities
- -------------------------------------------------------------------------------
Bank Obligations o o o o o o o
- -------------------------------------------------------------------------------
Brady Bonds o o o
- -------------------------------------------------------------------------------
Convertibles o o o
Securities
- -------------------------------------------------------------------------------
Corporate Debt o o o o o o o
Instruments
- -------------------------------------------------------------------------------
Foreign Instruments o o o
- -------------------------------------------------------------------------------
Illiquid Securities o o o o o o o
- -------------------------------------------------------------------------------
Indexed Notes, o o o o o
Currency Exchange-
Related Securites
and Similar Securities
- -------------------------------------------------------------------------------
Inflation-Indexed o o o o o o
Securities
- -------------------------------------------------------------------------------
Investment Companies o o o o o o
- -------------------------------------------------------------------------------
Mortgage-Backed o o o o o o o
Securities
- -------------------------------------------------------------------------------
Multi-National Currency o o o
Unit Securities or More
Than One Currency
Denomination
- -------------------------------------------------------------------------------
Municipal o o o o
Instruments
- -------------------------------------------------------------------------------
Repurchase and o o o o o o o
Reverse Repurchse
Agreements
- -------------------------------------------------------------------------------
Stripped Instruments o o o o o o o
- -------------------------------------------------------------------------------
Total Return Swaps o o o o o o
- -------------------------------------------------------------------------------
U.S. Government and o o o o o o o
Agency Securities
- -------------------------------------------------------------------------------
Warrants o o o
- -------------------------------------------------------------------------------
Zero Coupon Securites o o o o o o
- -------------------------------------------------------------------------------
<C> <C> <C> <C>
---------------------------------------------------
Enhanced U.S. U.S. Broad
Equity Treasury Corporate Market
- ------------------------------------------------------------------------
Asset-Backed o o o o
Securities
- ------------------------------------------------------------------------
Bank Obligations o o o o
- ------------------------------------------------------------------------
Brady Bonds o o o
- ------------------------------------------------------------------------
Convertibles o o o
Securities
- ------------------------------------------------------------------------
Corporate Debt o o o o
Instruments
- ------------------------------------------------------------------------
Foreign Instruments o o o
- ------------------------------------------------------------------------
Illiquid Securities o o o
- ------------------------------------------------------------------------
Indexed Notes, o o o
Currency Exchange-
Related Securites
and Similar Securities
- ------------------------------------------------------------------------
Inflation-Indexed o o o o
Securities
- ------------------------------------------------------------------------
Investment Companies o o o o
- ------------------------------------------------------------------------
Mortgage-Backed o o o o
Securities
- ------------------------------------------------------------------------
Multi-National Currency o o o
Unit Securities or More
Than One Currency
Denomination
- ------------------------------------------------------------------------
Municipal Instruments o o o
- ------------------------------------------------------------------------
Repurchase and Reverse o o o o
Repurchse Agreements
- ------------------------------------------------------------------------
Stripped Instruments o o o o
- ------------------------------------------------------------------------
Total Return Swaps o o o
- ------------------------------------------------------------------------
U.S. Government and o o o o
Agency Securities
- -----------------------------------------------------------------------
Warrants o o o
- -----------------------------------------------------------------------
Zero Coupon Securites o o o o
- -----------------------------------------------------------------------
</TABLE>
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.
33
<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C> <C>
a. Time Deposits, e. Deposit Notes, h. Variable Rate Notes,
b. Certificates of Deposit, f. Eurodollar Time i. Loan Participations,
c. Bankers' Acceptances, deposits, j. Variable Amount
d. Bank Notes, g. Eurodollar Certificates Master Demand Notes,
of Deposit, k. Yankee CDs, and
l. Custodial Receipts
</TABLE>
RISKS: Investing in bank obligations exposes a 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.
A 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 a 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. A 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). A 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 a 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 a Portfolios to different
currencies based on its perception of the most favorable markets and issuers.
It is further anticipated that such securities
34
<PAGE>
will be issued primarily by governmental and private entities located in such
countries and by supranational entities. A 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 Portfolios 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 a 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 Portfolios are allowed to invest up to 15% (10% in the case of the
Money Market Portfolio) of the value of their net assets in illiquid assets, it
is not expected that any Portfolio will invest a significant portion of its
assets in illiquid securities. The Investment Adviser monitors the liquidity of
such restricted securities under the supervision of the Board of Directors. A
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. A 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 a 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 a 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
35
<PAGE>
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 Portfolios 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 a 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 Portfolios 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.
A 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.
36
<PAGE>
RISKS: A 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 a 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 a
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 a 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 each 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 a portfolio obtaining an
instrument, which for some reason, does not perform as well as the
original swap instrument.
37
<PAGE>
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. A 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
ALL PORTFOLIOS OTHER THAN MONEY MARKET 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.
U.S. SHORT-TERM PORTFOLIO
Up to 35% of the Portfolio's total assets may be invested in non-U.S. dollar
denominated debt securities. No more than 5% of the Portfolio's total assets
may be invested in the securities of any one issuer (other than the U.S.
Government and its agencies). The Portfolio may not enter into repurchase
agreements or reverse repurchase agreements if it would result in more than 25%
of the Portfolio's assets being subject to repurchase agreements and/or reverse
repurchase agreements.
LIMITED DURATION PORTFOLIO
Up to 35% of the Portfolio's total assets may be invested in non-U.S. dollar
denominated securities.
U.S. TREASURY PORTFOLIO
The Portfolio may invest up to 5% of its total assets in high quality (rating
of AA by S&P, Aa by Moody's or a comparable rating, or higher from a nationally
recognized statistical rating organization) fixed income securities.
U.S. CORPORATE PORTFOLIO
The Portfolio may invest up to 35% of its total assets in
non-dollar-denominated corporate debt obligations of foreign issuers, or other
U.S. dollar-denominated non-corporate debt obligations.
38
<PAGE>
BROAD MARKET PORTFOLIO
The Portfolio has limited exposure to 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.
FINANCIAL HIGHLIGHTS TABLES
The Financial Highlights Tables are intended to help you understand the
Portfolios' 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO FINANCIAL HIGHLIGHTS
-------------------------------------------
(IN WHOLE DOLLARS EXCEPT WHERE OTHERWISE INDICATED)
- -------------------------------------------------------------------------------
FOR A SHARE Year Ended Year Ended Year Ended Year Ended Year Ended
OUTSTANDING 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
THROUGHOUT THE
PERIOD
- -------------------------------------------------------------------------------
Net asset value 1.00 1.00 1.00 1.00 1.00
at beginning of
period
- -------------------------------------------------------------------------------
Net investment 0.05 0.05 0.05 0.06 0.04
income
Net realized --- --- 0.00** 0.00** 0.00**
gains or (losses)
on investments
- -------------------------------------------------------------------------------
Total from 0.05 0.05 0.05 0.06 0.04
investment
operations
- -------------------------------------------------------------------------------
Distributions 0.05 0.05 0.05 0.06 0.04
from net
investment
income
Distributions --- --- 0.00** --- ---
from net
realized gain
on investments
Distributions in --- --- --- --- 0.00**
excess of net
realized gain
on investments
- -------------------------------------------------------------------------------
Total 0.05 0.05 0.05 0.06 0.04
Distributions
- -------------------------------------------------------------------------------
Net asset value 1.00 1.00 1.00 1.00 1.00
at end of period
- -------------------------------------------------------------------------------
Total return on 5.51% 5.46% 5.18% 5.74% 4.13%
investment
Net assets at 29,451 26,152 25,047 25,870 22,006
end of period
in 000's
Ratio of 0.25% 0.30% 0.40% 0.40% 0.40%
operating
expenses to
average net
assets (a)
Ratio of net 5.29% 5.33% 5.05% 5.58% 4.16%
investment
income to
average net
assets
Decrease in
above expense
ratios due to
waiver of
investment
advisory and
administration
fees and
reimbursement
of other
expenses
0.11% 0.16% 0.30% 0.37% 0.64%
- -------------------------------------------------------------------------------
</TABLE>
(a) Net of waivers and reimbursements **Rounds to less than $0.01
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
U.S. SHORT-TERM PORTFOLIO FINANCIAL HIGHLIGHTS
----------------------------------------------
(IN WHOLE DOLLARS EXCEPT WHERE OTHERWISE INDICATED)
- -------------------------------------------------------------------------------
FOR A SHARE Year Ended Year Ended Year Ended Year Ended Year Ended
OUTSTANDING 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
THROUGHOUT THE
PERIOD
- -------------------------------------------------------------------------------
Net asset value 9.77 9.85 9.88 9.89 9.98
at beginning of
period
Net investment 0.54 0.57 0.55 0.56 0.44
Income
Net realized (0.01) (0.08) (0.03) (0.01) (0.08)
and unrealized
gains or
(losses) on
investments,
financial futures
and option
contracts and
foreign currency-
related
transactions
- -------------------------------------------------------------------------------
Total from 0.53 0.49 0.52 0.55 0.36
investment
operations
- -------------------------------------------------------------------------------
Distributions 0.54 0.57 0.55 0.56 0.45
from net
investment income
Distributions in --- --- --- 0.00** 0.00**
excess of net
investment
income
- -------------------------------------------------------------------------------
Total 0.54 0.57 0.55 0.56 0.45
distributions
- -------------------------------------------------------------------------------
Net asset value 9.76 9.77 9.85 9.88 9.89
at end of period
- -------------------------------------------------------------------------------
Total return on 5.59% 5.09% 5.45% 5.71% 3.71%
investment
Net assets at 840,366 486,906 355,257 457,425 290,695
end of period
in 000's
Ratio of 0.25% 0.25% 0.27% 0.40% 0.40%
operating
expenses to
average net
assets,
exclusive of
interest expense
(a)
Ratio of 0.25% 0.26% 0.40% 0.51% 0.43%
operating
expenses to
average net
assets,
inclusive of
interest expense
(a)
Ratio of net 5.48% 5.78% 5.62% 5.64% 4.14%
investment
income to
average net
assets (a)
Decrease in 0.17% 0.18% 0.05% 0.07% 0.08%
above expense
ratios due to
waiver of
investment
advisory fees
and
administration
fees
- -------------------------------------------------------------------------------
</TABLE>
(a) Net of waivers and reimbursements ** Rounds to less than $0.01
39
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
LIMITED DURATION PORTFOLIO FINANCIAL HIGHLIGHTS
-----------------------------------------------
(IN WHOLE DOLLARS UNLESS OTHERWISE INDICATED)
- -------------------------------------------------------------------------------
FOR A SHARE Year Ended Year Ended Year Ended Year Ended Year Ended
OUTSTANDING 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
THROUGHOUT THE
PERIOD
- -------------------------------------------------------------------------------
Net asset value 9.93 9.93 10.00 9.55 9.95
at beginning of
period
- -------------------------------------------------------------------------------
Net investment 0.55 0.62 0.55 0.60 0.43
income
Net realized 0.11 0.08 (0.04) 0.45 (0.40)
gains or (losses)
on investments,
financial futures
and options
contacts, and
foreign currency-
related
transactions
- -------------------------------------------------------------------------------
Total investment 0.66 0.70 0.51 1.05 0.03
income
- -------------------------------------------------------------------------------
Distributions 0.55 0.62 0.55 0.60 0.43
from net
investment income
Distributions in 0.00** --- 0.00** --- ---
excess of net
investment income
Net realized 0.11 0.08 0.03 --- ---
gains or (losses)
on investments,
financial futures
and option
contracts and
foreign currency-
related
transactions
- -------------------------------------------------------------------------------
Total 0.66 0.70 0.58 0.60 0.43
distributions
- -------------------------------------------------------------------------------
Net asset value 9.93 9.93 9.93 10.00 9.55
at end of period
- -------------------------------------------------------------------------------
Total return on 6.79% 7.21% 5.29% 11.26% 0.29%
investment
Net assets at end 89,521 40,029 42,100 5,080 4,338
of period in 000's
Ratio of 0.30% 0.30% 0.31% 0.50% 0.50%
operating
expenses to
average net
assets,
exclusive of
interest
expense (a)
Ratio of 0.30% 0.60% 0.49% 1.41% 1.74%
operating
expenses to
average net
assets,
inclusive of
interest
expense (a)
Ratio of net 5.48% 6.10% 5.79% 6.09% 4.43%
investment
income to
average net
assets (a)
Decrease in 0.22% 0.31% 0.15% 0.53% 0.57%
above expense
ratios due to
waiver of
investment
advisory fees
and
reimbursements
of other
expenses
Portfolio 1,059% 1,292% 1,387% 1,075% 343%
turnover rate
- -------------------------------------------------------------------------------
</TABLE>
(a) Net of waivers and reimbursements **Rounds to less than $0.01
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
MORTGAGE-BACKED PORTFOLIO FINANCIAL HIGHLIGHTS
----------------------------------------------
(IN WHOLE DOLLARS UNLESS OTHERWISE INDICATED)
- -------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING Year Ended Year Ended From 4/29/96* to
THROUGHOUT THE PERIOD 12/31/98 12/31/97 12/31/96
- -------------------------------------------------------------------------------
Net asset value at beginning of 10.30 10.16 10.00
Period
- -------------------------------------------------------------------------------
Net investment income 0.68 0.68 0.41
Net realized gains or (losses) on 0.07 0.32 0.23
investments, financial futures and
options contacts, and foreign
currency-related transactions
- -------------------------------------------------------------------------------
Total investment income 0.75 1.00 0.64
- -------------------------------------------------------------------------------
Distributions from net investment 0.65 0.63 0.41
income
Distributions in excess of net --- 0.05 0.06
investment income
Distributions from net realized gain 0.22 0.18 0.01
on investments, short sales, and
financial futures, swaps and options
contracts
- -------------------------------------------------------------------------------
Total distributions 0.87 0.86 0.48
- -------------------------------------------------------------------------------
Net asset value at end of period 10.18 10.30 10.16
- ----------------------------------------------------------------------------------
Total return on investment 7.42% 10.19% 6.54% (c)
Net assets at end of period in 000's 813,367 655,271 220,990
Ratio of operating expenses to 0.23% 0.38% 0.45% (b)
average net assets, exclusive of
interest expense (a)
Ratio of operating expenses to 0.37% 0.47% 0.88% (b)
average net assets, inclusive of
interest expense (a)
Ratio of net investment income to 6.33% 6.07% 7.61% (b)
average net assets (a)
Decrease in above expense ratios 0.20% 0.07% 0.10% (b)
due to waiver of investment advisory
fees and reimbursement of other
expenses
Portfolio turnover rate 843% 3,396% 590%
- -------------------------------------------------------------------------------
(a) Net of waivers and reimbursements (b) Annualized (c) Not annualized
* Commencement of operations
</TABLE>
40
<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 15, 2000. The SAI provides more detailed information about the
Portfolios, 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 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
41
<PAGE>
FFTW FUNDS, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PROSPECTUS
GLOBAL AND INTERNATIONAL PORTFOLIOS
- -------------------------------------------------------------------------------
DATED APRIL 30, 1999,
AS SUPPLEMENTED FEBRUARY 15, 2000
<TABLE>
<CAPTION>
<S> <C> <C>
o Global Tactical Exposure o International o Global High Yield
o Worldwide o International Opportunities o Inflation-Indexed
o Worldwide-Hedged o International Corporate o Inflation-Indexed
o Emerging Markets Hedged
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED ANY FUND'S SHARES AS AN
INVESTMENT OR DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE.
ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A CRIME.
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PAGE
Risk/Return Summary 3
Global Tactical Exposure 3
Worldwide Portfolio 4
Worldwide-Hedged Portfolio 5
International Portfolio 6
International Opportunities Portfolio 7
International Corporate Portfolio 8
Emerging Markets Portfolio 9
Global High Yield Portfolio 10
Inflation Indexed Portfolio 11
Inflation Indexed-Hedged Portfolio 12
Principal Investment Risks 13
Potential Year 2000 Risk 14
Risk Return Bar Charts and Tables 14
Global Tactical Exposure Portfolio 14
Worldwide Portfolio 15
Worldwide-Hedged Portfolio 16
International Portfolio 17
Emerging Markets Portfolio 18
Average Annual Total Returns 19
Fee Table 19
Fee Table (Continued) 20
Expenses Table Example 21
Fund Management 22
Board of Directors 22
Investment Adviser 22
Investment Sub-Adviser 22
Portfolio Managers 22
Shareholder Information 23
Purchases 23
Purchasing Shares Table 24
Redemptions 24
Redeeming Shares Table 25
Pricing of Portfolio Shares 26
Dividends 26
Voting Rights 26
Tax Considerations 26
Distribution of Fund Shares 27
Investment Information 28
Allowable Investment Strategies and Associated Risks 28
Allowable Investments and Associated Risks 32
Supplemental Investment Policies 38
Portfolio Turnover 38
Financial Highlights Tables 38
Global Tactical Exposure Portfolio 39
Worldwide Portfolio 39
Worldwide-Hedged Portfolio 40
International Portfolio 40
International Opportunities Portfolio 41
Emerging Markets Portfolio 41
Shareholder Inquiries 42
</TABLE>
2
<PAGE>
RISK/RETURN SUMMARY
The following is a summary of certain key information about the Portfolios,
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.
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GLOBAL TACTICAL EXPOSURE PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT To attain a high level of total return as may be
OBJECTIVE: consistent with the preservation of capital.
- -------------------------------------------------------------------------------
PRINCIPAL The Portfolio primarily invests in high quality (rating
INVESTMENT of AA by Standard & Poor's Corp. ("S&P"), Aa by Moody's
STRATEGIES: Investor's Services, Inc. ("Moody's") or a comparable
rating or higher from a nationally recognized
statistical rating organization) debt securities from
worldwide bond markets. The systemic risk of non-U.S.
market currencies is hedged via an index swap. The
performance objective of the Portfolio is to outperform
the JP Morgan 3 Month Eurodeposit Index.
- -------------------------------------------------------------------------------
MINIMUM S&P Moody's Thompson Bank AVERAGE
QUALITY (Short (Short Watch, Inc. PORTFOLIO
RATING: S&P: Moody's: Term): Term): ("Thompson"): ---------
---- -------- ------ ------- ------------- QUALITY:
--------
BBB- BAA3 A-2 P-2 B AA (Aa)
- -------------------------------------------------------------------------------
DURATION: The Portfolio's average U.S. dollar-weighted duration
generally will not exceed three months, plus or minus the
average duration of the JP Morgan 3-Month Eurodeposit
Index.
- -------------------------------------------------------------------------------
INVESTMENT At least 65% of the Portfolio's total assets must be
POLICIES: invested in 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 will be invested in debt
securities from jurisdictions outside the U.S. 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 will actively hedge risk through the use of an
index swap. The Portfolio is non-diversified.
- -------------------------------------------------------------------------------
PRINCIPAL o Asset-Backed Securities
INVESTMENTS: o Foreign Instruments
See pages o Total Return swaps
32-38 of o USs. Government and Agency Securities
this
Prospectus
for a more
detailed
description
of allowable
investments.)
- -------------------------------------------------------------------------------
PRINCIPAL RISKS: A loss of money could occur due to certain risks. These
(See page 13 oF include:
this Prospectus o Correlation risk o Hedging risk o Market risk
for a more o Credit risk o Interest rate o Non-diversification
detailed o Currency risk risk risk
description of o Futures risk o Leverage risk o Prepayment risk
each risk.) o Liquidity risk
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
WORLDWIDE PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT To attain a high level of total return as may be
OBJECTIVE: consistent with the preservation of capital.
- -------------------------------------------------------------------------------
PRINCIPAL The Portfolio invests primarily in high quality (rating
INVESTMENT of AA by S&P, Aa by Moody's or a comparable rating, or
STRATEGIES: higher from a nationally recognized statistical rating
organization) debt securities from worldwide bond
markets, denominated in both U.S. dollars and foreign
currencies. The performance objective of the Portfolio
is to outperform the JP Morgan Global Government Bond
Index (Unhedged).
- -------------------------------------------------------------------------------
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)
- -------------------------------------------------------------------------------
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 (Unhedged).
- -------------------------------------------------------------------------------
INVESTMENT At least 65% of the Portfolio's total assets must be
POLICIES: invested 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 will be invested in
debt securities from jurisdictions outside the U.S. 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.
- -------------------------------------------------------------------------------
PRINCIPAL o Asset-Backed Securities
INVESTMENTS: o U.S. Government and Agency Securities
See pages 32- o Foreign Instruments
38 of this
Prospectus for
a more
detailed
description
of allowable
investments.)
- -------------------------------------------------------------------------------
PRINCIPAL RISKS: A loss of money could occur due to certain risks.
(See page 13 of These include:
this Prospectus o Correlation risk o Hedging risk o Market risk
for a more o Credit risk o Interest rate o Non-diversification
detailed o Currency risk risk risk
description of o Futures risk o Leverage risk o Prepayment risk
each risk.) o Liquidity risk
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
WORLDWIDE-HEDGED PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT To attain a high level of total return as may be
OBJECTIVE: consistent with the preservation of capital.
- -------------------------------------------------------------------------------
PRINCIPAL The Portfolio invests primarily in high quality (rating
INVESTMENT of AA by S&P, Aa by Moody's or a comparable rating, or
STRATEGIES: higher from a 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).
- -------------------------------------------------------------------------------
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)
- -------------------------------------------------------------------------------
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).
- -------------------------------------------------------------------------------
INVESTMENT At least 65% of the Portfolio's total assets must be
POLICIES: invested 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.
- -------------------------------------------------------------------------------
PRINCIPAL o Asset-Backed Securities
INVESTMENTS: o Foreign Instruments
(See pages o U.S. Government and Agency Securities
32-38 of this
Prospectus for
a more detailed
description of
allowable
investments.)
- -------------------------------------------------------------------------------
PRINCIPAL RISKS: A loss of money could occur due to certain risks.
(See page 13 of These include:
this Prospectus o Correlation o Hedging risk o Market risk
for a more risk
detailed o Credit risk o Interest rate o Non-diversification
description of o Currency risk risk risk
each risk.) o Futures risk o Leverage risk o Prepayment risk
o Liquidity risk
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT To attain a high level of return of total return as may
OBJECTIVE: be consistent with the preservation of capital.
- -------------------------------------------------------------------------------
PRINCIPAL The Portfolio primarily invests in high quality (rating
INVESTMENT of AA by S&P, Aa by Moody's or a comparable rating or
STRATEGIES: higher from a nationally recognized statistical rating
organization) debt securities from worldwide bond
markets, excluding the U.S. denominated in foreign
currencies. The performance objective of the Portfolio
is to outperform the JP Morgan Global Government Bond
Index (Non-U.S. Unhedged).
- -------------------------------------------------------------------------------
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)
- -------------------------------------------------------------------------------
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 (Non-U.S. Unhedged).
- -------------------------------------------------------------------------------
INVESTMENT At least 65% of the Portfolio's total assets must be
POLICIES: invested in high quality fixed income securities from
worldwide bond markets, denominated in foreign
currencies. The Portfolio will maintain investments in
debt securities of issuers from at least three different
countries. At least 65% of the Portfolio's total assets
will be invested in debt securities from jurisdictions
outside the U.S. 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.
- -------------------------------------------------------------------------------
PRINCIPAL o Foreign Instruments
INVESTMENTS:
See pages 32
-38 of this
Prospectus
for a more
detailed
description
of allowable
investments.)
- -------------------------------------------------------------------------------
PRINCIPAL RISKS: A loss of money could occur due to certain risks. These
(See page 13 of include:
this Prospectus o Correlation o Hedging risk o Market risk
for a more risk
detailed o Credit risk o Interest rate o Non-diversification
description risk risk
of each risk.) o Currency risk o Leverage risk o Prepayment risk
o Futures risk o Liquidity risk
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INTERNATIONAL OPPORTUNITIES PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT To attain a high level of total return as may be
OBJECTIVE: consistent with the preservation of capital.
- -------------------------------------------------------------------------------
PRINCIPAL The Portfolio primarily invests in high quality (rating
INVESTMENT of AA by S&P, Aa by Moody's or a comparable rating or
STRATEGIES: higher from a nationally recognized statistical rating
organization) debt securities from worldwide bond
markets, excluding the U.S., denominated in foreign
currencies. The currency hedge ratio is actively
managed. The performance objective of the Portfolio is
to outperform the lower of the JP Morgan Global
Government Bond Indices (Non-U.S. Hedged or Non-U.S.
Unhedged).
- -------------------------------------------------------------------------------
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)
- -------------------------------------------------------------------------------
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
Indices (either the Non-U.S. Hedged or Non-U.S.
Unhedged, whichever is lower).
- -------------------------------------------------------------------------------
INVESTMENT At least 65% of the Portfolio's total assets must be
POLICIES: invested in high quality debt securities from worldwide
bond markets denominated in foreign currencies. The
Portfolio will maintain investments in debt securities
of issuers from at least three different countries. At
least 65% of the Portfolio's total assets will be
invested in debt securities from jurisdictions outside
the U.S. The Portfolio may engage in currency hedging
techniques. 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.
- -------------------------------------------------------------------------------
PRINCIPAL o Foreign Instruments
INVESTMENTS:
See pages
32-38 of
this
Prospectus
for a more
detailed
description
of allowable
investments.)
- -------------------------------------------------------------------------------
PRINCIPAL RISKS: A loss of money could occur due to certain risks.
(See page 13 of These include:
this Prospectus o Correlation o Hedging risk o Market risk
for a more risk
detailed o Credit risk o Interest rat o Non-diversification
description risk risk
of each risk.) o Currency o Leverage risk
risk
o Futures risk o Liquidity risk
- -------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INTERNATIONAL CORPORATE PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT To attain a high level of total return as may be
OBJECTIVE: consistent with the preservation of capital.
- -------------------------------------------------------------------------------
PRINCIPAL Once it commences investment activity, the Portfolio
INVESTMENT will primarily invest in investment grade corporate debt
STRATEGIES: from worldwide bond markets. The performance objective
of the Portfolio is to outperform the Lehman Brothers
Euro Corporate Bond Index.
- -------------------------------------------------------------------------------
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)
- -------------------------------------------------------------------------------
DURATION: The Portfolio's average U.S. dollar-weighted duration
generally will not exceed one year plus or minus the
average duration of the Lehman Brothers Euro Corporate
Bond Index.
- -------------------------------------------------------------------------------
INVESTMENT At least 65% of the Portfolio's total assets must be
POLICIES: invested in investment grade corporate debt securities
from worldwide bond markets denominated in foreign
currencies. The Portfolio will maintain investments in
corporate debt securities of issuers from at least three
different countries. At least 65% of the Portfolio's
total assets will be invested in corporate debt
securities from jurisdictions outside the U.S. 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.
- -------------------------------------------------------------------------------
PRINCIPAL o Corporate Debt Instruments
INVESTMENTS: o Foreign Instruments
(See pages
32-38 of
this
Prospectus
for a more
detailed
description
of allowable
investments.)
- -------------------------------------------------------------------------------
PRINCIPAL RISKS: A loss of money could occur due to certain risks. These
(See page 13 of include:
this Prospectus o Correlation o Hedging risk o Market risk
for a more risk
detailed o Credit risk o Interest rate o Non-diversification
description risk risk
of each risk.) o Currency risk o Leverage risk
o Futures risk o Liquidity risk
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
THIS PORTFOLIO HAS NOT YET COMMENCED INVESTMENT ACTIVITY.
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT To attain a high level of total return as may be
OBJECTIVE: consistent with the preservation of capital.
- -------------------------------------------------------------------------------
PRINCIPAL The Portfolio primarily invests in debt securities from
INVESTMENT bond markets in emerging markets countries, denominated
STRATEGIES: in local currencies or currencies of OECD countries.
The performance objective of the Portfolio is to
outperform a composite index, consisting of 60% JP
Morgan Emerging Local Markets Index Plus and 40% JP
Morgan Emerging Markets Bond Index Plus. The Adviser/
Sub-Adviser intends to actively manage the Portfolio and
will allocate the Portfolio's investment assets among
various emerging markets countries (and currencies).
Such allocations are not expected to be comparable to,
nor as diverse as the allocations accorded to such
markets (and currencies) by the major bond market
indices. Portfolio managers will screen out credit or
default risks and highlight potentially risky emerging
market currencies by employing a fundamental economic
analysis and internally developed models.
- -------------------------------------------------------------------------------
MINIMUM S&P Moody's AVERAGE
QUALITY (Short (Short PORTFOLIO
RATING: S&P: Moody's: Term): Term): Thompson: ---------
---- -------- ------ ------- --------- QUALITY:
--------
CCC- Caa3 C P-3 LC-3 B
- -------------------------------------------------------------------------------
DURATION: The Portfolio's average U.S. dollar-weighted duration
generally will not exceed one year, plus or minus the
average duration of the composite index of 60% JP Morgan
Emerging Local Markets Index Plus and 40% JP Morgan
Emerging Markets Bond Index Plus.
- -------------------------------------------------------------------------------
INVESTMENT At least 65% of the Portfolio's total assets must be
POLICIES: invested in debt securities from bond markets in
emerging countries denominated in local currencies or
currencies of OECD countries. The Portfolio will
maintain investments in debt securities of issuers from
at least three different countries including the U.S.
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.
- -------------------------------------------------------------------------------
PRINCIPAL o Brady Bonds
INVESTMENTS: o Indexed Notes, Currency Exchange-Related Securities
(See pages 32 and Similar Securities
-38 of this o Foreign Instruments
Prospectus o Illiquid Securities
for a more
detailed
description
of allowable
investments.)
- -------------------------------------------------------------------------------
PRINCIPAL RISKS: A loss of money could occur due to certain risks. These
(See page 13 of include:
this Prospectus o Correlation o Hedging risk o Market risk
for a more risk
detailed o Credit risk o Interest rate o Non-diversification
description risk risk
of each risk.) o Currency risk o Leverage risk o Prepayment risk
o Futures risk o Liquidity risk
- -------------------------------------------------------------------------------
NOTE: Emerging markets bonds are issued by countries which may
SPECIAL have relatively unstable governments, may be highly
RISKS vulnerable to changes in local or global trade
conditions, and/or may suffer from volatile debt burdens
or inflation rates. As a result, the risk of default is
higher on these instruments than it would be on an
investment grade bond. Such bonds pay higher yields to
compensate for their greater risk.
- -------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GLOBAL HIGH YIELD PORTFOLIO
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INVESTMENT To attain a high level of total return as may be
OBJECTIVE: consistent with the preservation of capital.
- -------------------------------------------------------------------------------
PRINCIPAL Once it commences investment activity, the Portfolio
INVESTMENT will primarily invest in high yield debt securities.
STRATEGIES: High yield bonds (also referred to as "junk bonds")
have a rating of BB or lower and pay a higher yield to
compensate for its greater risk. The performance
objective of the Portfolio is to outperform the Salomon
Smith Barney All BB and B Rated Issues Index.
- -------------------------------------------------------------------------------
MINIMUM S&P Moody's AVERAGE
QUALITY (Short (Short PORTFOLIO
RATING: S&P: Moody's: Term): Term): Thompson: ---------
---- -------- ------ ------- --------- QUALITY:
--------
CCC- Caa3 C P-3 LC-3 B
- -------------------------------------------------------------------------------
DURATION: The Portfolio's average U.S. dollar-weighted duration
generally will not exceed one year, plus or minus the
average duration of the Salomon Smith Barney All BB & B
Rated Issues Index.
- -------------------------------------------------------------------------------
INVESTMENT At least 65% of the Portfolio's total assets must be
POLICIES: invested in high yield debt securities from worldwide
bond markets denominated in both U.S. dollars and
foreign currencies. 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 will be invested in debt
securities from jurisdictions outside the U.S. 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.
- -------------------------------------------------------------------------------
PRINCIPAL o Corporate Debt Instruments
INVESTMENTS: o Brady Bonds
(See pages 32 o Foreign Instruments
-38 of this o Indexed Notes, Currency Exchange-Related Securities
Prospectus and Similar Securities
for a more o Illiquid Securities
detailed
description of
allowable
investments.)
- -------------------------------------------------------------------------------
PRINCIPAL RISKS: A loss of money could occur due to certain risks.
(See page 13 of These include:
this Prospectus o Correlation o Hedging risk o Market risk
for a more detailed risk
description of each o Credit risk o Interest rate o Non-diversification
of each risk.) risk risk
o Currency risk o Leverage risk o Prepayment risk
o Futures risk o Liquidity risk
- -------------------------------------------------------------------------------
NOTE: SPECIAL Also known as junk bonds, high yield bonds are issued
RISKS by corporations who either do not have long track
records of sales and earnings, or by those who possess
questionable credit strength. As a result, the risk of
default is higher on these instruments than it would be
on an investment grade bond. High yield bonds have
ratings of BB or lower and pay s to compensate for
their greater risk.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
THIS PORTFOLIO HAS NOT YET COMMENCED INVESTMENT ACTIVITY.
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INFLATION-INDEXED PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT To attain a high level of return in excess of inflation
OBJECTIVE: as may be consistent with the preservation of capital.
- -------------------------------------------------------------------------------
PRINCIPAL The Portfolio primarily invests in securities with a
INVESTMENT coupon rate and/or principal amount, linked to the
STRATEGIES: inflation rate from worldwide bond markets, denominated
in both U.S. dollars and foreign currencies. The
performance objective of the Portfolio is to outperform
the Lehman Brothers Global Real Index.
- -------------------------------------------------------------------------------
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)
- -------------------------------------------------------------------------------
DURATION: The Portfolio's average U.S. dollar-weighted duration
generally will not exceed one year, plus or minus the
average duration of the Lehman Brothers Global Real
Index.
- -------------------------------------------------------------------------------
INVESTMENT At least 65% of the Portfolio's total assets must be
POLICIES: invested in inflation indexed securities. The Portfolio
is not required to invest any minimum percentage of its
assets in debt securities of issuers located outside the
U.S. nor in any minimum number of countries or
currencies. 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.
- -------------------------------------------------------------------------------
PRINCIPAL o Foreign Instruments
INVESTMENTS: o Inflation-Indexed Securities
(See pages 32 o U.S. Government and Agency Securities
-38 of this
Prospectus
for a more
detailed
description
of allowable
investments.)
- -------------------------------------------------------------------------------
PRINCIPAL RISKS: A loss of money could occur due to certain risks. These
(See page 13 of include:
this Prospectus o Correlation o Hedging risk o Market risk
for a more risk o Interest rate o Non-diversification
detailed o Credit risk risk risk
description o Currency risk o Leverage risk
of each risk.) o Futures risk o Liquidity risk
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
PORTFOLIO HAS NOT YET COMMENCED INVESTMENT ACTIVITY.
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INFLATION-INDEXED HEDGED PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT To attain a high level of return in excess of inflation
OBJECTIVE: as may be consistent with the preservation of capital.
- -------------------------------------------------------------------------------
PRINCIPAL Once it commences investment activity, the Portfolio
INVESTMENT will primarily invest in securities with a coupon rate
STRATEGIES: and/or principal amount, linked to the inflation rate
from worldwide bond markets, denominated in both U.S.
dollars and foreign currencies. The Portfolio will also
actively utilize currency-hedging techniques. The
performance objective of the Portfolio is to outperform
the Lehman Brothers Global Real Index.
- -------------------------------------------------------------------------------
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)
- -------------------------------------------------------------------------------
DURATION: The Portfolio's average U.S. dollar-weighted duration
generally will not exceed one year, plus or minus the
average duration of the Lehman Brothers Global Real
Index.
- -------------------------------------------------------------------------------
INVESTMENT At least 65% of the Portfolio's total assets must be
POLICIES: invested in inflation indexed securities. As a
fundamental policy, the Portfolio will attempt to hedge
at least 65% of its total assets. The Portfolio is not
required to invest any minimum percentage of its assets
in debt securities of issuers located outside the U.S.
nor in any minimum number of countries or currencies.
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.
- -------------------------------------------------------------------------------
PRINCIPAL o Foreign Instruments
INVESTMENTS: o Inflation-Indexed Securities
(See pages o Illiquid Securities
32-38 of o Indexed Notes, Currency Exchange-Related Securities
this and Similar Securities
Prospectus o U.S. Government and Agency Securities
for a more
detailed
description
of allowable
investments.)
- -------------------------------------------------------------------------------
PRINCIPAL RISKS: A loss of money could occur due to certain risks. These
(See page 13 of include:
this Prospectus o Correlation o Hedging risk o Market risk
for a more risk o Interest rate o Non-diversification
detailed o Credit risk risk risk
description o Currency o Leverage risk
of each risk.) risk o Liquidity risk
o Futures risk
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
THIS PORTFOLIO HAS NOT YET COMMENCED INVESTMENT ACTIVITY.
12
<PAGE>
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.
All of the Global and International Portfolios are 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 a Portfolio's investment objective will be achieved.
Investments in the Global and International Portfolios are subject to certain
of the following risks. The risks associated with each Portfolio depend on its
investment strategy and the types of securities it holds. The specific risks
affecting each Portfolio will be indicated in the individual portfolio
descriptions in this prospectus.
<TABLE>
<CAPTION>
<S> <C>
CORRELATION A Portfolio may experience changes in value as between the
RISK: securities held and the value of a particular derivative
instrument.
CREDIT The risk that a security's issuer or a counterparty to a contract
RISK: will default or not be able to honor a financial obligation.
CURRENCY Fluctuations in exchange rates between the U.S. dollar and foreign
RISK: currencies may negatively affect an investment. When synthetic
and cross-hedges are used, the net exposure of a Portfolio to any
one currency may be different from that of its total assets
denominated in such currency.
FUTURES The primary risks inherent in the use of futures depend on the
RISK: 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 Hedging is commonly used as a buffer against a perceived
RISK: investment risk. While it can reduce or eliminate losses, it can
also reduce or eliminate gains if the hedged investment increases
in value.
INTEREST A Portfolio may be influenced by interest rate changes that
RATE RISK: generally have an inverse relationship to corresponding market
values. Thus, as interest rates increase, the value of bonds
already issued, decrease.
LEVERAGE Derivatives may include elements of leverage, which can cause
RISK: greater fluctuations in a Portfolio's net asset value.
LIQUIDITY Certain securities may be difficult or impossible to sell at
RISK: favorable prices.
MARKET The market value of a security may increase or decrease over time.
RISK: 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.
NON- A Portfolio is diversified when it spreads investment risk by
DIVERSIFI- placing assets in several investment categories. A non-
CATION diversified Portfolio concentrates its assets in a less diverse
RISK: spectrum of securities. Non-diversification can intensify risk
should a particular investment category suffer from adverse market
conditions.
PREPAYMENT A Portfolio may invest in mortgage-backed and other asset-backed
RISK: securities. Such securities carry risks of faster or slower than
expected prepayment of principal, which affect the duration and
return of the security.
</TABLE>
3
<PAGE>
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 CHARTS AND TABLES
The charts and tables provided below give some indication of past performance
of those Portfolios that have commenced investment activity. These charts and
tables illustrate the changes in each Portfolio's yearly performance and show
how each 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 Fund will perform in the future.
GLOBAL TACTICAL EXPOSURE PORTFOLIO
BAR GRAPH
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Year 1995 1996 1997 1998
3.80% 3.18% 8.77% 8.20%
</TABLE>
During the 4-year period shown in the Global Tactical Exposure Portfolio's bar
chart, the highest quarterly return was 4.260% (quarter ending 12/31/95) and
the lowest quarterly return was -0.408% (quarter ending 3/31/96).
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
14
<PAGE>
WORLDWIDE PORTFOLIO
BAR GRAPH
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Year 1993 1994 1995 1996 1997 1998
15.86% -2.25% 12.60% 5.77% 2.93% 15.58%
</TABLE>
During the 6-year period shown in the Worldwide Portfolio's bar chart, the
highest quarterly return was 8.854% (quarter ending 9/30/98) and the lowest
quarterly return was -3.749% (quarter ending 3/31/94).
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
15
<PAGE>
WORLDWIDE HEDGED PORTFOLIO
BAR GRAPH
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Year 1993 1994 1995 1996 1997 1998
12.89% 7.84% 11.00% 10.03% 12.60% 11.53%
</TABLE>
During the 6-year period shown in the Worldwide Hedged Portfolio's bar chart,
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.
16
<PAGE>
INTERNATIONAL PORTFOLIO
BAR GRAPH
<TABLE>
<CAPTION>
<S> <C> <C>
Year -0.43% 18.35%
</TABLE>
During the 2-year period shown in the International Portfolio's bar chart, the
highest quarterly return was 10.424% (quarter ending 9/30/98) and the lowest
quarterly return was -5.281% (quarter ending 3/31/97).
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
17
<PAGE>
EMERGING MARKETS PORTFOLIO
BAR GRAPH
<TABLE>
<CAPTION>
<S> <C>
One Year 12/31/98
-10.50%
</TABLE>
During the 1-year period shown in the Emerging Markets Portfolio's bar chart,
the highest quarterly return was 18.471% (quarter ending 12/31/98) and the
lowest quarterly return was -23.471% (quarter ending 9/30/98).
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PAST 1 YEAR PAST 5 YEARS SINCE INCEPTION*
(FOR THE PERIODS ENDING
DECEMBER 31, 1998)
- -------------------------------------------------------------------------------
Global Tactical Exposure
Portfolio 8.20% N/A 7.27%
- -------------------------------------------------------------------------------
JP Morgan 3 Month Eurodeposit Index 5.82% N/A 5.90%
- -------------------------------------------------------------------------------
Worldwide Portfolio 15.58% 6.72% 8.77%
- -------------------------------------------------------------------------------
JP Morgan Global Government Bond
Index (Unhedged) 15.30% 8.07% 8.87%
- -------------------------------------------------------------------------------
Worldwide Hedged Portfolio 11.53% 10.58% 10.83%
- -------------------------------------------------------------------------------
JP Morgan Global Government
Bond Index (Hedged) 11.42% 7.65% 8.40%
- -------------------------------------------------------------------------------
International Portfolio 18.35% N/A 9.03%
- -------------------------------------------------------------------------------
JP Morgan Global Government
Bond Index (Non-US Unhedged) 18.30% N/A 7.75%
- -------------------------------------------------------------------------------
Emerging Markets Portfolio -10.50% N/A -8.49%
- -------------------------------------------------------------------------------
Constructed Benchmark
(Consisting of 60% JP Morgan
Emerging Local Markets Index
Plus and 40% JP Morgan Emerging
Markets Bond Index Plus) 8.97% N/A 2.20%
- -------------------------------------------------------------------------------
</TABLE>
*Portfolio Inception Dates:
1. Global Tactical Exposure Portfolio: 3/25/93. The Portfolio was fully
liquidated on 12/30/94, and recommenced operations on September 14, 1995.
2. Worldwide Portfolio: 4/15/92
3. Worldwide Hedged Portfolio: 5/19/92
4. International Portfolio: 5/9/96
5. Emerging Markets Portfolio: 8/12/97
** Information for the Portfolios that have not commenced investment activity
is not available.
FEE TABLE
Fees and Expenses of the Portfolios. This Table describes the fees and expenses
that you may pay if you buy and hold shares of the Portfolio.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
Shareholder Global Worldwide Worldwide- International International
Transaction Tactical (2) Hedged (3) (4) Opportunities
Expenses Exposure (5)
(Fees Paid (1)
Directly
By You)
- -------------------------------------------------------------------------------
Redemption None None None None None
Fees
- -------------------------------------------------------------------------------
Exchange Fees None None None None None
- -------------------------------------------------------------------------------
Contingent
Deferred
Sales Load None None None None None
- -------------------------------------------------------------------------------
Sales Load on
Reinvestment
Dividends None None None None None
- -------------------------------------------------------------------------------
Sales Load
on Purchases None None None None None
- -------------------------------------------------------------------------------
ANNUAL FUND OPERATING
EXPENSES (FEES PAID
FROM FUND ASSETS)
- -------------------------------------------------------------------------------
Management
Fees 0.40% 0.40% 0.40% 0.40% 0.40%
- -------------------------------------------------------------------------------
Distribution
Fees (12b-1) None None None None None
- -------------------------------------------------------------------------------
Shareholder
Services Fees None None None None None
- -------------------------------------------------------------------------------
Other
Expenses 0.17% 0.21% 0.18% 0.23% 0.49%
- -------------------------------------------------------------------------------
Total Annual
Fund
Operating
Expenses 0.57% 0.61% 0.58% 0.63% 0.89%
- -------------------------------------------------------------------------------
</TABLE>
(1) 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. All operating expenses exceeding the voluntary waiver of fees 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 0.27%.
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.
19
<PAGE>
(2) The Investment Adviser has voluntarily agreed to cap the Net Operating
Expenses at 0.60% (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 0.01%. All operating expenses
exceeding caps and 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.
(3) 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.
(4) The Investment Adviser has voluntarily agreed to cap the Net Operating
Expenses at 0.60% (on an annualized basis) of the Portfolio's average daily net
assets. All operating expenses exceeding the voluntary waiver of fees 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 0.03%.
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.
(5) The Investment Adviser has voluntarily agreed to cap the Net Operating
Expenses at 0.60% (on an annualized basis) of the Portfolio's average daily net
assets. All operating expenses exceeding the voluntary waiver of fees will be
paid by the Investment Adviser. The Investment Adviser will not attempt to
recover prior period waivers or reimbursements should expenses fall below the
cap. 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.
(FEE TABLE CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
Shareholder International Emerging Global High Inflation- Inflation-
Transaction Corporate (6) Markets Yield (8) Indexed Indexed
Expenses (Fees (7) (9) Hedged (10)
Paid Directly
By You)
- -------------------------------------------------------------------------------
Redemption Fees None None None None None
- -------------------------------------------------------------------------------
Exchange Fees None None None None None
- -------------------------------------------------------------------------------
Contingent None None None None None
Deferred
Sales Load
- -------------------------------------------------------------------------------
Sales Load on None None None None None
Reinvestment
Dividends
- -------------------------------------------------------------------------------
Sales Load on None None None None None
Purchases
- -------------------------------------------------------------------------------
ANNUAL FUND OPERATING
EXPENSES (FEES PAID
FROM FUND ASSETS)
- -------------------------------------------------------------------------------
Management Fees 0.10% 0.75% 0.50% 0.40% 0.40%
- -------------------------------------------------------------------------------
Distribution None None None None None
Fees (12b-1)
- -------------------------------------------------------------------------------
Shareholder None None None None None
Services Fees
- -------------------------------------------------------------------------------
Other Expenses 0.20% 0.25% 0.20% 0.15% 0.20%
- -------------------------------------------------------------------------------
Total Annual
Fund Operating
Expenses 0.30% 1.00% 0.70% 0.55% 0.60%
- -------------------------------------------------------------------------------
</TABLE>
(6) 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. All operating expenses exceeding the voluntary waiver of fees will be
paid by the Investment Adviser. The Investment Adviser will not attempt to
recover prior period waivers should expenses fall below the cap. 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.
(7) The Investment Adviser has voluntarily agreed to cap the Net Operating
Expenses at 1.00% (on an annualized basis) of the Portfolio's average daily net
assets. All operating expenses exceeding the voluntary waiver of fees will be
paid by the Investment Adviser. The Investment Adviser will not attempt to
recover prior period waivers should expenses fall below the cap. 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.
20
<PAGE>
(8) The Investment Adviser has voluntarily agreed to cap the Net Operating
Expenses at 0.70% (on an annualized basis) of the Portfolio's average daily net
assets. All operating expenses exceeding the voluntary waiver of fees will be
paid by the Investment Adviser. The Investment Adviser will not attempt to
recover prior period waivers should expenses fall below the cap. 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.
(9) The Investment Adviser has voluntarily agreed to cap the Total Annual Fund
Operating Expenses at 0.35% (on an annualized basis) of the Portfolio's average
daily net assets. The Investment Adviser will pay all operating expenses that
exceed the voluntary waiver of fees. Effective December 29, 1999, and until
further notice, the Investment Adviser has voluntarily agreed to lower its
Management Fee to 0.20% from 0.40% (on an annualized basis) and cap Other
Expenses at 0.15% (on an annualized basis). The Investment Adviser will not
attempt to recover prior period waivers should expenses fall below the cap.
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.
(10) The Investment Adviser has voluntarily agreed to cap the Net Operating
Expenses at 0.60% (on an annualized basis) of the Portfolio's average daily net
assets. All operating expenses exceeding the voluntary waiver of fees will be
paid by the Investment Adviser. The Investment Adviser will not attempt to
recover prior period waivers should expenses fall below the cap. 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 FEE TABLE
As an investor, you pay certain fees and expenses in connection with the
Portfolios, as described in the tables 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
PORTFOLIO NAME 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Global Tactical $58 $183
Exposure*
- -------------------------------------------------------------------------------
Worldwide $62 $195 $340 $762
- -------------------------------------------------------------------------------
Worldwide Hedged $59 $186 $324 $726
- -------------------------------------------------------------------------------
International $64 $202 $351 $786
- -------------------------------------------------------------------------------
International $91 $284 $493 $1,096
Opportunities
- -------------------------------------------------------------------------------
International Corporate* $31 $97
- -------------------------------------------------------------------------------
Emerging Markets $102 $318 $552 $1,225
- -------------------------------------------------------------------------------
Global High Yield* $72 $224
- -------------------------------------------------------------------------------
Inflation Indexed* $56 $176
- -------------------------------------------------------------------------------
Inflation Indexed $61 $192
Hedged*
- -------------------------------------------------------------------------------
</TABLE>
* Portfolio has not commenced investment operations, therefore only fees
for one and three years are represented.
21
<PAGE>
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 Global and International Portfolios. 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 each of the Global and International Portfolios. 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.
SIMON LUE-FONG, PORTFOLIO MANAGER, joined FFTW in 1994. After focusing on
European interest rates for fourt years, Simon is now the portfolio manager of
FFTW's Emerging Markets Portfolio and is one of three portfolio managers
responsible for foreign exchange positions in major economies. Mr. Lue-Fong has
a B.A. in Finance from Bournemouth University where he specialized in portfolio
management.
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.
22
<PAGE>
dollar portfolio. Mr. Akant holds a Ph.D. in systems science, an MS in finance
and international management, an Engineer's 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 any 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: (Indicate Portfolio name)
23
<PAGE>
TO PURCHASE SHARES
------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
PORTFOLIO WHEN NET WHEN & HOW PROCEDURE FOR RESULT OF LATE
NAME ASSET SHARES MAY SAME DAY NOTIFICATION OR DELAY
VALUE IS BE PURCHASES IN RECEIPT OF FUNDS
DETERMINED PURCHASED
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
o EMERGING Last o Last o Purchasers Trade not effective
MARKETS Business Business must call on a given day:
o GLOBAL Day of each Day of each Investors o If the Fund is
HIGH month or on month or any Capital at notified after 4:00
YIELD any other other (800) 762- pm EST and the wire
o GLOBAL Business Business Days 4848 [or is received after
TACTICAL Days approved by (212) 332- 4:00 pm EST.
EXPOSURE approved by the Invest- 5211 if
the ment within the When notice is given
Investment Adviser. City of before 4:00 EST and
Adviser. o Submitted New York] the wire is received
orders must or IBT at after 4:00 EST, the
include a (617) 330- trade will be effec-
completed 6000 prior tive on the day the
account to 4:00 pm wire is received
application EST to in-
o Federal funds form the Trade effective on
must be wired Fund of the next business day:
to AMT incoming o If wire is received
Capital's wire trans- after 4:00 pm EST
"Fund fer. and no notice is
Purchase o Purchasers given.
Account" at must indi-
IBT cate which
Portfolio is
to be pur-
chased.
o If Federal
funds are
received by
the Fund
that day,
the order
will be
effective
that day.
- -------------------------------------------------------------------------------
o WORLDWIDE- All o Any Business o Purchasers Trade not effective
HEDGED Business Day must call on a given day:
o INTER- Days o Submitted Investors o If the Fund is
NATIONAL orders must Capital at notified after 4:00
o INTER- include a (800) 762- pm EST and the wire
NATIONAL completed 4848 [or is received after
OPPORTUN- account (212) 332- 4:00 pm EST.
ITIES application 5211 if within
o INTER- o Federal funds the City of Trade effective on
NATIONAL must be wired New York] day when wire is
CORPORATE to AMT or IBT at received:
o INFLATION- Capital's (617) 330- o If notice is given
INDEXED "Fund 6000 prior before 4:00 pm EST
o INFLATION- Purchase to 4:00 pm and the wire is
INDEXED Account at EST to in- received after 4:00
HEDGED IBT form the pm EST.
Fund of the
incoming Trade effective on
wire trans- next business day:
fer. o If wire is received
o Purchasers after 4:00 pm EST
must indi- and no notice is
cate which given.
Portfolio
is to be
purchased.
o If Federal
funds are
received by
the Fund
that day,
the order
will be
effective
that day.
- -------------------------------------------------------------------------------
</TABLE>
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.
24
<PAGE>
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 applicable 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.
TO REDEEM SHARES
----------------
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------
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, A PORTFOLIO'S NAV MAY CHANGE WHEN
SHAREHOLDERS CANNOT BUY OR SELL SHARES.
- -------------------------------------------------------------------------------
PORTFOLIO NAME WHEN REDEMPTION EFFECTIVE RESULT OF LATE NOTIFICATION
OF REDEMPTION
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
o Global Tactical If notice is received by If notice is received by the
Exposure the Transfer Agent by Transfer Agent on a non-
o Worldwide 4:00 pm EST on any business day or after 4:00
o Worldwide- Business Day, the pm. EST time, the redemption
Hedged redemption will be notice will be deemed
o International effective and payment received as of the next
o International will be made within Business Day.
Opportunities seven calendar days, but
o International generally two business
Corporate days following receipt of
o Emerging such notice. Price of
Markets shares is based on the
o Global High next calculation of the
Yield NAV after the order is
o Inflation- placed.
Indexed
o Inflation-
Indexed
Hedged
- -------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
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 is calculated by the Fund's Accounting Agent
as of 4:00 pm EST on each Business Day for each Portfolio.
1. For all Portfolios other than Emerging Markets, Global High Yield and
Global Tactical Exposure, net asset value is calculated by the Fund's
Accounting Agent as of 4:00 pm. EST on each Business Day.
2. Emerging Markets, Global High Yield and Global Tactical Exposure
Portfolios' net asset values are calculated by the Fund's Accounting Agent
as of 4:00 pm EST on the last Business Day of each month, on any other
Business Days in which the Investment Adviser approves a purchase, and on
each Business Day for which a redemption order has been placed.
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 a 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 each Portfolio, other than
Emerging Markets, Global High Yield and Global Tactical Exposure Portfolios
will be declared as a dividend payable daily to the respective shareholders of
record as of the close of each Business Day. The net investment income of
Emerging Markets, Global High Yield and Global Tactical Exposure Portfolios
will be declared payable to the respective shareholders of record as of the
last Business Day of each month.
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 a
particular 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 a
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 a Portfolio, including the status of distributions from each
Portfolio under applicable state or local law.
FEDERAL INCOME TAXES Each 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 a 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
26
<PAGE>
shares. If a portion of a 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 a Portfolio in October, November or December with a
record date in any such month and paid by the Portfolio during January of the
following calendar year. Such distributions will be taxable to shareholders in
the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received. Each Portfolio will
inform shareholders of the amount and tax status of all amounts treated as
distributed to them not later than 60 days after the close of each calendar
year.
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
- ---------------------
A Portfolio may be subject to state, local or foreign taxation in any
jurisdiction in which the Portfolio may be deemed to be doing business.
Portfolio distributions may be subject to state and local taxes. 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 a 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 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.
27
<PAGE>
INVESTMENT INFORMATION
ALLOWABLE INVESTMENT STRATEGIES AND ASSOCIATED RISKS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
Global World- World- Inter- Inter- Inter- Emerging
Tactical wide wide national national national Markets
Exposure Hedged Oppor- Corp-
tunities orate
- -------------------------------------------------------------------------------
Dollar Roll o o o o o o o
Transactions
- -------------------------------------------------------------------------------
Duration o o o o o o o
Management
- -------------------------------------------------------------------------------
Hedging o o o o o o o
- -------------------------------------------------------------------------------
Short Sales o o o o o o o
Transactions
- -------------------------------------------------------------------------------
TBA Transactions o o o o o o o
- -------------------------------------------------------------------------------
When Issued & o o o o o o o
Forward
Commitment
Securities
- -------------------------------------------------------------------------------
<C> <C> <C>
- ---------------------------------------------------
Global Inflation Inflation
High Indexed Indexed
Yield Hedged
- ---------------------------------------------------
Dollar Roll o o o
Transactions
- ---------------------------------------------------
Duration o o o
Management
- ---------------------------------------------------
Hedging o o o
- ---------------------------------------------------
Short Sales o o o
Transactions
- ---------------------------------------------------
TBA Transactions o o o
- ---------------------------------------------------
When Issued & o o o
Forward
Commitment
Securities
- ---------------------------------------------------
</TABLE>
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. Portfolios 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 a 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 a Portfolio's duration by approximately the same amount
that holding an equivalent amount of the underlying securities would. Short
futures or put option positions have durations roughly equal to the negative
duration of the securities that underlie those positions and have the effect of
reducing 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%.
28
<PAGE>
RISKS: Changes in weighted average duration of a 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 a
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;
b. purchasing and selling caps, and
floors and collars; e. purchasing and selling options.
c. purchasing or selling
forward exchange contracts;
All hedging instruments described below constitute commitments by a 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 a 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 a 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.
A 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 a 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 a
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 a
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.
29
<PAGE>
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 Portfolios. 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 a Portfolio is engaging in
synthetic hedging. A 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.
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 a 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. A 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 a 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 a
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 a Portfolio sells a security it does not
own in anticipation of a decline in the market value of that security. Short
selling provides the Investment Adviser with flexibility to 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.
RISKS: A short sale is generally used to take advantage of an anticipated
decline in price or to protect a profit. A Portfolio will incur loss as a
result of a short sale if the price of the security increases between the
date of the
30
<PAGE>
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
each 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 a
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 a Portfolio until settlement. For each
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 a 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.
31
<PAGE>
<TABLE>
<CAPTION>
ALLOWABLE INVESTMENTS AND ASSOCIATED RISKS
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
Global World- World- Inter- Inter- Inter- Emerging
Tactical wide wide national national national Markets
Exposure Hedged Oppor- Corp-
tunities orate
- -------------------------------------------------------------------------------
Asset-Backed o o o o o o o
Securities
- -------------------------------------------------------------------------------
Bank o o o o o o o
Obligations
- -------------------------------------------------------------------------------
Brady Bonds o o o o o o o
- -------------------------------------------------------------------------------
Convertibles o o
Securities
- -------------------------------------------------------------------------------
Corporate Debt o o o o o o o
Instruments
- -------------------------------------------------------------------------------
Foreign o o o o o o o
Instruments
- -------------------------------------------------------------------------------
Illiquid o o o o o o o
Securities
- -------------------------------------------------------------------------------
Indexed Notes, o o o o o o o
Currency
Exchange-Related
Securities and
Similar
Securities
- -------------------------------------------------------------------------------
Inflation- o o o o o o o
Indexed
Securities
- -------------------------------------------------------------------------------
Investment o o o o o o o
Companies
- -------------------------------------------------------------------------------
Mortgage-Backed o o o o o o o
Securities
- -------------------------------------------------------------------------------
Multi-National o o o o o o o
Currency Unit
Securities or
More Than One
Currency
Denomination
- -------------------------------------------------------------------------------
Repurchase and o o o o o o o
Reverse
Repurchase
Agreements
- -------------------------------------------------------------------------------
Stripped o o o o o o o
Instruments
- -------------------------------------------------------------------------------
Total Return o o o o o o o
Swaps
- -------------------------------------------------------------------------------
U.S. o o o o o o o
Government and
Agency
Securities
- -------------------------------------------------------------------------------
Warrants o
- -------------------------------------------------------------------------------
Zero Coupon o o o o o o o
Securities
- -------------------------------------------------------------------------------
<C> <C> <C>
- ---------------------------------------------------
Global Inflation Inflation
High Indexed Indexed
Yield Hedged
- ---------------------------------------------------
Asset-Backed o o o
Securities
- ---------------------------------------------------
Bank o o o
Obligations
- ---------------------------------------------------
Brady Bonds o o o
- ---------------------------------------------------
Convertibles o
Securities
- ---------------------------------------------------
Corporate Debt o o o
Instruments
- ---------------------------------------------------
Foreign o o o
Instruments
- ---------------------------------------------------
Illiquid o o o
Securities
- ---------------------------------------------------
Indexed Notes, o o o
Currency
Exchange-Related
Securities and
Similar
Securities
- ---------------------------------------------------
Inflation- o o o
Indexed
Securities
- ---------------------------------------------------
Investment o o o
Companies
- ---------------------------------------------------
Mortgage- o o o
Backed
Securities
- ---------------------------------------------------
Multi-National o o o
Currency Unit
Securities or
More Than One
Currency
Denomination
- ---------------------------------------------------
Repurchase and o o o
Reverse
Repurchase
Agreements
- ---------------------------------------------------
Stripped o o o
Instruments
- ---------------------------------------------------
Total Return o o o
Swaps
- ---------------------------------------------------
U.S. o o o
Government
and Agency
Securities
- ---------------------------------------------------
Warrants o
- ---------------------------------------------------
Zero Coupon o o o
Securities
- ---------------------------------------------------
</TABLE>
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
32
<PAGE>
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:
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' g. Eurodollar Certificates Demand Notes,
Acceptances, of Deposit, k. Yankee CDs, and
d. Bank Notes, l. Custodial Receipts
RISKS: Investing in bank obligations exposes a 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.
A 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 a 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. A 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). A 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 a Portfolio to
interest rate changes and credit risks.
33
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 a 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 Global and International Portfolios, other than Emerging Markets, 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.
Portfolios 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. Certain Portfolios 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.
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
b. present the risk of sudden ownership;
adverse government action; e. prohibitions of repatriation of
c. nationalization of businesses; assets; or
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 a 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.
34
<PAGE>
Although the Portfolios are allowed to invest up to 15% of the value of their
net assets in illiquid assets (10% in the case of Money Market Portfolios), 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.
A 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. A 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 a 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 a 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 Portfolios 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 a 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 Portfolios will not invest in any Funds classified as "Load Funds."
35
<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.
A 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: A 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 a 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.
36
<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 a
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
a Portfolio and the Portfolio agrees to repurchase the securities for an agreed
price at a later date.
Each 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 a 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. A 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.
37
<PAGE>
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
ALL OF THE GLOBAL AND INTERNATIONAL PORTFOLIOS
These Portfolios 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.
WORLDWIDE AND WORLDWIDE-HEDGED PORTFOLIOS
These Portfolios 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
Portfolios' 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.
38
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
GLOBAL TACTICAL EXPOSURE 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 10.05 9.80 10.19 10.00*** 10.39
- -------------------------------------------------------------------------------
Net investment income 0.52**** 0.41 0.47 0.19 0.20
Net realized and
unrealized gains or
(losses) on investments,
swaps, financial futures,
and options contracts,
and foreign currency-
related transactions 0.28 0.43 (0.15) 0.19 (0.46)
- -------------------------------------------------------------------------------
Total investment income 0.80 0.84 0.32 0.38 (0.26)
- -------------------------------------------------------------------------------
Distributions from net
investment income 0.53 0.36 0.47 0.19 0.20
Distributions in excess
of net investment 0.00 (c) 0.17 --- 0.00 (c) ---
income
Distributions from net
realized gain on
investments, financial
futures contracts and
foreign currency
related transactions --- 0.06 0.05 --- 0.50
Distributions in excess
of net realized gain on
investments, financial
futures contracts, and
foreign currency
related transactions 0.07 --- 0.09 --- ---
Distributions from
capital stock in excess
of par value --- --- 0.10 --- ---
- -------------------------------------------------------------------------------
Total distributions 0.60 0.59 0.71 0.19 0.70
- -------------------------------------------------------------------------------
Net asset value at end
of period 10.25 10.05 9.80 10.19 9.43**
- -------------------------------------------------------------------------------
Total return on
investment 8.20% 8.77% 3.18% 3.80% (b) (2.53%)
Net assets at end of
period in 000's 423,966 283,005 126,645 34,005 ---
Ratio of operating
expenses to average
net assets, exclusive
of interest expense 0.27% 0.42% 0.60% 0.60% (b) 0.57%
(a)
Ratio of operating
expenses to average
net assets, inclusive
of interest expense 5.54% 0.42% 0.60% 0.60% (b) 0.57%
(a)
Ratio of net income to
average net assets 5.14% 3.67% 4.65% 6.12% (b) 2.87%
Decrease in above
expense ratios due to
waiver of investment
advisory fees and
reimbursement of other
expenses 0.30% 0.16% 0.06% 0.17% (b) 0.49%
Portfolio turnover rate 766% 712% 784% 764% 1,282%
- -------------------------------------------------------------------------------
(a) Net of waivers and reimbursements (b) Annualized (c) Rounds to less than
$0.01 ** Represents net asset value per share at 12/30/94. The Portfolio was
fully liquidated on 12/30/94 based on this net asset value. *** The Portfolio
recommenced operations on 9/14/95. **** Calculation based on average shares
outstanding.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
WORLDWIDE 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 9.42 9.64 9.83 9.27 10.02
- -------------------------------------------------------------------------------
Net investment income 0.46 0.49 0.53 0.58 0.50
Net realized and
unrealized gains or
(losses) on
investments,
financial futures
and options
contracts and
foreign currency-
related transactions 0.96 (0.22) 0.01 0.56 (0.74)
- -------------------------------------------------------------------------------
Total investment
income 1.42 0.27 0.54 1.14 (0.24)
- -------------------------------------------------------------------------------
Distributions from
net investment income 0.46 0.19 0.53 0.30 0.20
Distributions in
excess of net
investment income --- 0.11 --- --- 0.01
Distributions from
net realized gain on
investments,
financial futures,
and options
contracts and
foreign currency-
related transactions 0.10 --- 0.09 --- ---
Distributions in
excess of net
realized gain on
investments,
financial futures
and options
contracts, and
foreign currency
related transactions --- --- --- --- ---
Distributions from
capital stock in
excess of par value --- 0.19 0.11 0.28 0.30
- -------------------------------------------------------------------------------
Total distributions 0.56 0.49 0.73 0.58 0.51
- -------------------------------------------------------------------------------
Net asset value at
end of period 10.28 9.42 9.64 9.83 9.27
- -------------------------------------------------------------------------------
Total return on
investment 15.58% 2.93% 5.77% 12.60% (2.25%)
Net assets at end
of period in 000's 69,653 82,236 74,939 86,186 53,721
Ratio of operating
expenses to average
net assets -
exclusive of interest
expense (a) 0.60% 0.60% 0.60% 0.60% 0.60%
Ratio of operating
expenses to average
net assets -
inclusive of interest
expense (a) 0.60% 0.60% 0.60% 0.60% 0.63%
Ratio of net
investment income to
average net assets
(a) 4.76% 5.21% 5.52% 6.13% 5.11%
Decrease in above
expense ratios due
to waiver of
investment advisory
fees and
reimbursement of
other expenses 0.01% 0.02% 0.05% 0.30% 0.02%
Portfolio turnover
rate 668% 713% 1,126% 1,401% 1,479%
- -------------------------------------------------------------------------------
(a) Net of waivers and reimbursements
</TABLE>
39
<PAGE>
<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
net investment income 0.70 0.59 0.62 0.67 0.44
Distributions in
excess of net
investment income --- --- 0.37 --- 0.00**
Distributions from
net realized gain on
investments,
financial futures
and options
contracts and on
foreign currency-
related transactions 0.61 0.42 --- --- ---
- -------------------------------------------------------------------------------
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
investment 11.53% 12.60% 10.03% 11.00% 7.84%
Net assets at end of
period in 000's 174,805 80,390 30,024 28,255 273
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 ** Rounds to less than $0.01
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO FINANCIAL HIGHLIGHTS
--------------------------------------------
(IN WHOLE DOLLARS UNLESS OTHERWISE INDICATED)
- -------------------------------------------------------------------------------
FOR A SHARE EXCEPT WHERE OTHERWISE INDICATED YEAR ENDED YEAR ENDED
12/31/98 12/31/97
- -------------------------------------------------------------------------------
Net asset value at beginning of period 9.50 10.20
- -------------------------------------------------------------------------------
Net investment income 0.48 0.50
Net realized and unrealized gains or (losses) on
investments, financial futures contracts, and
foreign currency-related transactions 1.21 (0.56)
- -------------------------------------------------------------------------------
Total investment income 1.69 (0.06)
- -------------------------------------------------------------------------------
Distributions from net investment income 0.45 0.14
Distributions in excess of net investment income 0.40 ---
Distributions from net realized gain on
investments, financial futures contracts, and
foreign currency related transactions 0.66 0.14
Distributions from capital stock in excess of
par value --- 0.36
- -------------------------------------------------------------------------------
Total distributions 1.51 0.64
- -------------------------------------------------------------------------------
Net asset value at end of period 9.68 9.50
- -------------------------------------------------------------------------------
Total return on investment 18.35% (0.43%)
Net assets at end of period in 000's 81,705 67,653
Ratio of operating expenses to average net assets
(a) 0.60% 0.60%
Ratio of net investment income to average net
assets (a) 4.56% 5.19%
Decrease in above expense ratios due to waiver of
investment advisory fees 0.03% 0.10%
Portfolio turnover rate 1,049% 809%
- -------------------------------------------------------------------------------
(a) Net of waivers and reimbursements (b) Annualized (c) Not annualized
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- -------------------------------------------------------------------------------
INTERNATIONAL OPPORTUNITIES PORTFOLIO FINANCIAL HIGHLIGHTS
----------------------------------------------------------
(IN WHOLE DOLLARS UNLESS OTHERWISE INDICATED)
- -------------------------------------------------------------------------------
FOR A SHARE EXCEPT WHERE OTHERWISE INDICATED Period from 10/8/98*
to 12/31/98
- -------------------------------------------------------------------------------
Net asset value at beginning of period 10.00
- -------------------------------------------------------------------------------
Net investment income 0.09
Net realized and unrealized gains or (losses) on
investments, financial futures contracts, and foreign
currency-related transactions --
- -------------------------------------------------------------------------------
Total investment income 0.09
- -------------------------------------------------------------------------------
Distributions from net investment income 0.09
Distributions in excess of net realized gain on
investments, financial futures contracts, and foreign
currency related transactions 0.06
- -------------------------------------------------------------------------------
Total distributions 0.15
- -------------------------------------------------------------------------------
Net asset value at end of period 9.94
- -------------------------------------------------------------------------------
Total return on investment 0.89% (c)
Net assets at end of period in 000's $25,576
Ratio of operating expenses to average net assets (a) 0.60% (b)
Ratio of net investment income to average net assets
(a) 3.78% (b)
Decrease in above expense ratios due to waiver of
investment advisory fees 0.29% (b)
Portfolio turnover rate 238%
- -------------------------------------------------------------------------------
(a) Net of waivers and reimbursements (b) Annualized (c) Not annualized
*Commencement of operations
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
- -------------------------------------------------------------------------------
EMERGING MARKETS PORTFOLIO FINANCIAL HIGHLIGHTS
-----------------------------------------------
(IN WHOLE DOLLARS UNLESS OTHERWISE INDICATED)
- -------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD Year Ended 12/31/98
- -------------------------------------------------------------------------------
Net asset value at beginning of period 9.59
- -------------------------------------------------------------------------------
Net investment income 0.88
Net realized and unrealized gains or (losses) on
investments, financial futures contacts and foreign
currency-related transactions (1.86)
- -------------------------------------------------------------------------------
Total investment income (0.98)
- -------------------------------------------------------------------------------
Distributions from net investment income 0.76
- -------------------------------------------------------------------------------
Distributions from net realized and unrealized (losses)
on investments, financial futures contracts and
foreign currency-related transactions ---
- -------------------------------------------------------------------------------
Distributions from capital stock in excess of par
value 0.13
- -------------------------------------------------------------------------------
Total distributions 0.89
- -------------------------------------------------------------------------------
Net asset value at end of period 7.72
- -------------------------------------------------------------------------------
Total return on investment (10.50%)
Net assets at end of period in 000's 164,709
Ratio of operating expenses to average net assets,
exclusive of interest expense 1.00%
Ratio of operating expenses to average net assets,
inclusive of interest expense 1.15%
Ratio of net income to average net assets 10.52
Portfolio turnover rate 157%
- -------------------------------------------------------------------------------
(a) Annualized (b) Not Annualized
</TABLE>
41
<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 15, 2000. The SAI provides more detailed information about the
Portfolios, 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 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 Investm ent Company Act filing number: 33-27896/811-5796
42
<PAGE>
FFTW FUNDS, INC.
- -------------------------------------------------------------------------------
200 PARK AVENUE, 46TH FLOOR, NEW YORK, NEW YORK 10166 (212) 681-3000
Distributed by:
AMT Capital Securities, L.L.C. ("AMT Capital")
600 Fifth Avenue
New York, NY 10020
(212) 332-5211
- -------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
dated April 30, 1999
as supplemented February 15, 2000
FFTW Funds, Inc. (the "Fund") is a no-load, open-end management investment
----
company managed by Fischer Francis Trees & Watts, Inc. (the "Investment
----------
Adviser"). The Fund currently consists of twenty-one portfolios (each a
- -------
"Portfolio") grouped in two Prospectuses as described below:
---------
<TABLE>
<CAPTION>
<S> <C>
U.S. PORTFOLIOS PROSPECTUS GLOBAL AND INTERNATIONAL PORTFOLIOS PROSPECTUS
- ------------------------------ ------------------------------------------------
Money Market Global Tactical Exposure
Mortgage LIBOR Worldwide
U.S. Short-Term Worldwide-Hedged
Limited Duration International
Mortgage-Backed International Opportunities
Asset-Backed International Corporate
High Yield Emerging Markets
Enhanced Equity Market Global High Yield
U.S. Treasury Inflation-Indexed
U.S. Corporate Inflation-Indexed Hedged
Broad Market
</TABLE>
This Statement of Additional Information is not a prospectus and should be read
in conjunction with each Portfolio's Prospectus dated April 30, 1999, as
supplemented February 15, 2000. The two Prospectuses have been filed with the
Securities and Exchange Commission and can be obtained, without charge, by
calling or writing Investor's Capital. This Statement of Additional Information
incorporates by reference the Prospectus.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
CONTENTS
PAGE
Overview of the Fund 3
History of the Fund 3
Organization of the Fund 3
Management of the Fund 3
Principal Securities Holders 9
Distribution of Fund Shares 12
Supplemental Portfolio Information 13
Supplemental Investment Information 14
Supplemental Description of Investments 14
Supplemental Description of Investment Techniques 18
Supplemental Discussion of Risks 18
Supplemental Hedging Techniques 21
Investment Restrictions 28
Portfolio Transactions 30
Supplemental Tax Considerations 31
Shareholder Information 35
Calculation of Performance Data 36
Control Person 37
Custodian and Accounting Agent 37
Transfer and Disbursing Agent 38
Legal Counsel 38
Auditors 38
Financial Statements 38
Quality Rating Descriptions 39
</TABLE>
2
<PAGE>
OVERVIEW OF THE FUND
HISTORY OF THE FUND
From its inception on February 23, 1989 to September 27, 1989, Fund's name was
"FFTW Institutional Reserves Fund, Inc." The Fund commenced operations on
December 6, 1989. From September 27, 1989 to July 22, 1991 the Fund's name was
"FFTW Reserves, Inc." On July 22, 1991 the Fund's name was changed to its
present name, "FFTW Funds, Inc." The U.S. Short-Term Portfolio commenced
operations on December 6, 1989, Worldwide Portfolio commenced operations on
April 15, 1992 and Worldwide-Hedged Portfolio commenced operations on May 19,
1992. These Portfolios were called the Short-Term Series (and prior to
September 18, 1991 as FFTW Institutional Reserves Fund), Worldwide Series and
Worldwide Hedged Series, respectively. The Board of Directors recently approved
a name change for several Portfolios, eliminating "Fixed Income" from their
name. Effective September 11,1998, the name of the International-Hedged
Portfolio was changed to the Global Tactical Exposure Portfolio, the name of
the Stable Return Portfolio was changed to Limited Duration Portfolio and the
name of the Mortgage Total Return Portfolio was changed to Mortgage-Backed
Portfolio.
ORGANIZATION OF THE FUND
STOCK ISSUANCE
- --------------
The Fund's authorized capital stock consists of 5,000,000,000 shares, each with
$.001 par value. Each Portfolio has been allocated 200,000,000 shares, with
800,000,000 shares unallocated.
SHAREHOLDER VOTING
- ------------------
Each Portfolio's shares have equal voting rights--all shareholders have one
vote for each share held. All issued and outstanding shares are fully paid and
non-assessable, transferable, and redeemable at net asset value at the
shareholder's option. Shares have no preemptive or conversion rights.
The Fund's shares have non-cumulative voting rights. Thus, in a Board of
Directors election, shareholders holding more than 50% of the voting shares can
elect 100% of the Directors if they choose to do so. In such event, the holders
of the remaining voting shares (less than 50%) will be unable to elect any
person or persons to the Board of Directors.
CROSS PORTFOLIO LIABILITY
- -------------------------
No Portfolio of the Fund shall be liable for the obligations of any other
Portfolio.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS AND OFFICERS
- -------------------------------
The Fund is managed by its Board of Directors. The individuals listed below are
the officers and directors of the Fund. An asterisk (*) placed next to the name
of each director means the director is an "interested person" of the Fund. Such
term is defined in the Investment Company Act of 1940, as amended (the "1940
----
Act"), by virtue of his affiliation with the Fund or the Investment Adviser.
- ---
JOHN C HEAD III, 51, FUND DIRECTOR
1330 Avenue of the Americas, New York, New York. Mr. Head has been a Managing
Member of Head & Company L.L.C. since 1987. He is Chairman of the Board of ESG
Re Limited and a Director of PartnerRe Ltd. and other private companies.
LAWRENCE B. KRAUSE, 70, FUND DIRECTOR
University of California - San Diego ("UCSD"), La Jolla, CA. Mr. Krause is a
----
member of the Editorial Advisory Board of the Political Science Quarterly, a
member of the Council on Foreign Relations, and Vice-Chairman of the U.S.
National Committee for Pacific Economic Cooperation. In December, 1990, he was
selected as the first holder of the Pacific Economic Cooperation Chair at UCSD.
In 1989, Mr. Krause became the Director, Korea-Pacific Program at UCSD. In
1988, he was named Coordinator of the Pacific Economic Outlook Project for the
Pacific Economic Cooperation Conference.
3
<PAGE>
Mr. Krause was the first appointment to the new Graduate School of
International Relations and Pacific Studies at UCSD and joined the faculty as a
professor on January 1, 1987. From 1969 - 1986 Mr. Krause was a senior fellow
of the Brookings Institution. Mr. Krause is also an author of numerous
publications.
*ONDER JOHN OLCAY, 63, FUND CHAIRMAN OF THE BOARD AND PRESIDENT AND CEO OF THE
FUND
200 Park Avenue, New York, NY. Mr. Olcay has been a shareholder and Managing
Director and Vice Chairman of the Investment Adviser for the last six years.
*STEPHEN P. CASPER, 49, FUND DIRECTOR AND FUND TREASURER
------------------
200 Park Avenue, New York, NY. Mr. Casper has been a shareholder and Managing
Director of the Investment Adviser since December 1991. In addition, Mr. Casper
has been the Chief Financial Officer of the Investment Adviser since February
1990. From March 1984 through January 1990, Mr. Casper was Treasurer of
Rockefeller & Company, a registered investment adviser.
SAUL H. HYMANS, 61, FUND DIRECTOR
200 Park Avenue, New York, NY. Mr. Hymans has been a Professor of Economics at
the University of Michigan since 1964.
ANDREA REDMOND, 43, FUND DIRECTOR
200 Park Avenue, New York, NY. Ms. Redmond has been Managing Director of
Russell Reynolds Associates, Inc. since 1989.
CARLA E. DEARING, 37, FUND ASSISTANT TREASURER
600 Fifth Avenue, New York, NY. Ms. Dearing serves as President and Director of
Investors Capital. Ms. Dearing was a Vice President of Morgan Stanley & Co.,
where she worked from June 1984 to August 1986 and from November 1988 to
January 1992.
WILLIAM E. VASTARDIS, 43, FUND SECRETARY AND TREASURER
600 Fifth Avenue, New York, NY. Mr. Vastardis serves as Managing Director and
Head of Fund Administration for Investors Capital. Prior to his employment at
Investors Capital, Mr. Vastardis served as Vice President and head of the
Vanguard Group Inc.'s private label administration unit for seven years, after
working six years in Vanguard's fund accounting operations.
No employee of either the Investment Adviser or Investors Capital receives
compensation from the Fund for acting as an officer or director of the Fund.
The Fund pays each director who is not a director, officer or employee of the
Investment Adviser or Investors Capital or any of their affiliates, an annual
retainer of $35,000 which is paid in quarterly installments. On February 19,
1999, the payment to directors was increased from $5,000 quarterly and $1,000
per each meeting attended by a director to $8,750 quarterly with no per meeting
attendance fee.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Director's Compensation Table
Fiscal Year Ended December 31, 1998*
- -------------------------------------------------------------------------------
Director Aggregate Compensation Pension or Estimated
From Registrant Retirement Benefits Annual
Accrued As Part of benefits Upon
Fund Expenses Retirement
- -------------------------------------------------------------------------------
Stephen P. Casper $0 $0 $0
- -------------------------------------------------------------------------------
John C Head III $27,000 $0 $0
- -------------------------------------------------------------------------------
Lawrence B. Krause $27,000 $0 $0
- -------------------------------------------------------------------------------
Onder John Olcay $0 $0 $0
- -------------------------------------------------------------------------------
<C>
- -----------------------
Total Compensation
From Registrant and
Fund Complex Paid to
Directors
- -----------------------
$0
- -----------------------
$27,000
- -----------------------
$27,000
- -----------------------
$0
- -----------------------
</TABLE>
* Ms. Redmond and Mr. Hyman were elected Directors on January 21, 2000.
4
<PAGE>
By virtue of the responsibilities assumed by the Investment Adviser and
Investors Capital and their affiliates under their respective agreements with
the Fund, the Fund itself requires no employees in addition to its officers.
Directors and officers of the Fund collectively owned less than 1% of the
Fund's outstanding shares as of December 31, 1998.
INVESTMENT ADVISER AND SUB-ADVISER AGREEMENTS
- ---------------------------------------------
The Fund has a separate advisory agreement with respect to each Portfolio. The
Fund also has a separate sub-advisory agreement with respect to each of the
Global and International Portfolios.
Pursuant to their terms, the advisory agreements between the Fund and the
Investment Adviser (the "Advisory Agreements") and the sub-advisory agreements
-------------------
(the "Sub-Advisory Agreements") between the Investment Adviser and its
-----------------------
affiliate, Fischer Francis Trees & Watts (the "Sub-Adviser"), remain in effect
-----------
for two years following their date of execution. Thereafter, such agreements
will automatically continue for successive annual periods. Continuance
thereafter is specifically approved at least annually. Continuance is voted on
by the Board of Directors or the vote of a Portfolio's "majority" (as defined
in the 1940 Act) of outstanding voting shares as a single class, provided, that
in either event, the continuance is also approved by:
a. at least a majority of the Board of Directors who are not "interested
persons" (as defined in the 1940 Act) of the Fund,
b. the Investment Adviser, or
c. the Sub-Adviser by vote cast in person at a meeting called for the purpose
of voting on such approval.
The following table highlights the dates in which the Advisory Agreements were
last approved by the Board of Directors and by the Portfolio's public
shareholders:
<TABLE>
<CAPTION>
<S> <C> <C>
LAST ADVISORY AGREEMENT APPROVAL DATES
U.S. PORTFOLIOS LAST BOARD APPROVAL LAST SHAREHOLDER APPROVAL
--------------- ------------------- -------------------------
Money Market 2/19/99 1/21/97
Mortgage LIBOR 7/7/98 9/8/98
U.S. Short -Term 2/19/99 11/19/99
Limited Duration 2/19/99 2/18/93
Mortgage-Backed 2/19/99 1/2/96
Asset-Backed 7/7/98 9/8/98
High Yield 7/7/98 9/8/98
Enhanced Equity Market 7/7/98 9/8/98
U.S. Treasury 2/19/99 1/21/97
U.S. Corporate 7/7/98 9/8/98
Broad Market 2/19/99 1/21/97
GLOBAL AND INTERNATIONAL
------------------------
PORTFOLIOS LAST BOARD APPROVAL LAST SHAREHOLDER APPROVAL
------------------------ ------------------- -------------------------
Global Tactical Exposure 2/19/99 2/18/93
Worldwide 2/19/99 12/31/92
Worldwide-Hedged 2/19/99 11/19/99
International 2/19/98 2/18/93
International Opportunities 7/7/98 9/8/98
International Corporate 7/7/98 9/8/98
Emerging Markets 2/19/99 1/21/97
Global High Yield 7/7/98 9/8/98
Inflation-Indexed 2/19/99 1/21/97
Inflation-Indexed Hedged 2/19/99 1/21/97
</TABLE>
The following table highlights the dates in which the Sub-Advisory Agreements
were last approved by the Board of Directors and by a majority of shareholders.
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
LAST SUB-ADVISORY AGREEMENT APPROVAL DATES
GLOBAL AND INTERNATIONAL
PORTFOLIOS LAST BOARD APPROVAL LAST SHAREHOLDER APPROVAL
------------------------ ------------------- -------------------------
Global Tactical Exposure 2/19/99 2/18/93
Worldwide 2/19/99 12/31/92
Worldwide-Hedged 2/19/99 11/19/99
International 2/19/99 2/18/93
International Opportunities 7/7/98 9/8/98
International Corporate 7/7/98 9/8/98
Emerging Markets 2/19/99 1/21/97
Global High Yield 7/7/98 9/8/98
Inflation-Indexed 2/19/99 1/21/97
Inflation-Indexed Hedged 2/19/99 1/21/97
</TABLE>
Each Advisory and Sub-Advisory Agreement is terminable without penalty:
a. on not less than 60 days' notice by the Board of Directors;
b. by a vote of the holders of a majority of the relevant Portfolio's
outstanding shares voting as a single class; or
c. upon not less than 60 days' notice by the Investment Adviser or the
Sub-Adviser.
Each Advisory and Sub-Advisory Agreement will terminate automatically in the
event of its "assignment" (as defined in the 1940 Act).
ADVISER'S/SUB-ADVISER'S PAYMENT OF FUND EXPENSES
- ------------------------------------------------
The Investment Adviser pays all of its expenses arising from its performance
obligations pursuant to the Advisory Agreements, including:
a. all executive salaries and expenses of the Fund's directors,
b. officers employed by the Investment Adviser, or
c. its affiliates and office rent of the Fund.
The Investment Adviser will pay all of the fees payable to its affiliate as
Sub-Adviser. The Sub-Adviser pays all of its expenses arising from the
performance of its obligations under the Sub-Advisory Agreements.
FUND'S PAYMENT OF FUND EXPENSES
- -------------------------------
Subject to the expense reimbursement provisions described in the Prospectus
under "Fund Expenses," other expenses incurred in the operation of the Fund are
borne by the Fund, including, without limitation:
a. brokerage commissions, h. expenses of printing and distributing
b. insurance premiums and reports to shareholders,
extraordinary expenses such as i. expenses of printing and filing
litigation expenses, reports and other documents filed with
c. fees and expenses of independent governmental agencies,
attorneys, j. notices and proxy materials to
d. auditors, existing shareholders,
e. custodians, k. interest,
f. administrators, l. expenses of annual and special
g. expenses of registering and shareholders' meetings,
qualifying shares of the Fund m. membership dues in the Investment
under federal and state laws Company Institute,
and regulations, n. fees and expenses of directors of the
Fund who are not employees of the
Investment Adviser or its affiliates.
PORTFOLIO'S PAYMENT OF FUND EXPENSES
- ------------------------------------
Fund expenses directly attributable to a Portfolio are charged to that
Portfolio; other expenses are allocated proportionately among all the
Portfolios in relation to their net assets. As compensation (subject to expense
caps as described under "Portfolio Operating Expenses" in the Prospectus) for
the services rendered by the Investment Adviser under the Advisory Agreements,
each Portfolio pays the Investment Adviser a monthly advisory fee (U.S.
Short-Term, Worldwide and Worldwide-Hedged Portfolios pay their fees quarterly)
which is calculated by applying the following annual percentage rates to such
Portfolio's average daily net assets for the month (quarter):
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
U.S. Portfolios Rates Global and International Portfolios Rates
- --------------- ----- ----------------------------------- -----
- -------------------------------------------------------------------------------
Money Market 0.10% Global Tactical Exposure**** 0.10%
Mortgage LIBOR 0.30% Worldwide 0.40%
U.S. Short Term* 0.15% Worldwide-Hedged ***** 0.26%
Limited Duration** 0.15% International 0.40%
Mortgage-Backed*** 0.10% International Opportunities 0.40%
Asset-Backed 0.10% International Corporate 0.10%
High Yield 0.40% Emerging Markets 0.75%
Enhanced Equity Market 0.35% Global High Yield 0.50%
U.S. Treasury 0.30% Inflation-Indexed* 0.20%
U.S. Corporate 0.10% Inflation-Indexed Hedged 0.40%
Broad Market 0.30%
- -------------------------------------------------------------------------------
</TABLE>
* Effective December 29, 1999, the Investment Adviser has voluntarily
lowered the advisory fee from 0.40%.
** Effective January 21, 2000, the Investment Adviser contractually
lowered the advisory fee to 0.15%.
*** Effective October 1, 1997, the Investment Adviser has voluntarily
lowered the advisory fee from 0.35%.
**** Effective September 1, 1997, the Investment Adviser has voluntarily
lowered the advisory fee from 0.40%.
***** Effective July 1, 1995, the Investment Adviser has voluntarily lowered
the advisory fee from 0.40%.
For the years ended December 31, 1998, December 31, 1997 and December 31, 1996,
the amount of advisory fees (net of waivers and reimbursements) paid by each
Portfolio were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
Portfolio Year Ended Dec. 31, Year Ended Dec. 31, Year Ended Dec. 31,
Name 1998 1997 1996
- -------------------------------------------------------------------------------
U.S. PORTFOLIOS
---------------
- -------------------------------------------------------------------------------
Money Market $7,832 $7,718 $0
U.S. Short-Term 856,044 598,652 607,871
Limited Duration 109,507 10,639 1,711
Mortgage-Backed
(1) 843,247 1,286,506 126,822
- -------------------------------------------------------------------------------
GLOBAL AND INTERNATIONAL PORTFOLIOS
-----------------------------------
- -------------------------------------------------------------------------------
Global Tactical
Exposure (2) $334,646 $500,355 $180,065
Worldwide 323,633 308,466 334,929
Worldwide-Hedged 415,539 112,750 1,647
International (3) 269,258 136,714 12,322
International
Opportunities (4) 6,257 N/A N/A
Emerging
Markets (3) 1,191,914 191,177 N/A
</TABLE>
(1) Commencement of operations was May 29, 1996.
(2) The Portfolio was fully liquidated on December 30, 1994, and recommenced
operations on September 14, 1995.
(3) Commencement of operations was on October 8, 1998.
(4) Commencement of operations was May 9, 1996.
(5) Commencement of operations was August 12, 1997.
7
<PAGE>
ADMINISTRATION AGREEMENT
- ------------------------
Pursuant to an Administration Agreement dated May 29, 1998, Investors Capital
serves as the Fund's Administrator. Investors Capital assists in managing and
supervising all aspects of the general day-to-day business activities and
operations of the Fund other than investment advisory activities, including:
custodial, transfer agent, dividend disbursing, accounting, auditing,
compliance and related services. Pursuant to its terms, the Administration
Agreement between the Fund and Investors Capital, a Delaware corporation, will
automatically continue for successive annual periods subject to the approval of
the Fund's Board of Directors.
The Fund pays Investors Capital a monthly fee at an annual rate of 0.07% of the
Fund's average daily net assets on the first $350 million, 0.05% thereafter up
to $2 billion, 0.04% thereafter up to $5 billion, and 0.03% on assets over $5
billion. The Fund also reimburses Investors Capital for certain costs. In
addition, the Fund has agreed to pay Investors Capital an incentive fee for
reducing a Portfolio expense ratio of one or more of the Fund's Portfolios
below a specified expense ratio. The maximum incentive fee is 0.02% of the
average daily net assets of a Portfolio.
For the years ended December 31, 1998, December 31, 1997 and December 31, 1996,
the amount of administration fees paid by each Portfolio were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
Portfolio Year Ended Dec. 31, Year Ended Dec. 31, Year Ended Dec. 31,
Name 1998 1997 1996
- -------------------------------------------------------------------------------
U.S. PORTFOLIOS
---------------
- -------------------------------------------------------------------------------
Money Market $14,727 $13,160 N/A*
U.S. Short-Term 323,059 267,418 $288,865
Limited Duration 41,257 16,528 13,271
Mortgage-Backed
(1) 556,090 327,923 36,852
- -------------------------------------------------------------------------------
GLOBAL AND INTERNATIONAL PORTFOLIOS
-----------------------------------
- -------------------------------------------------------------------------------
Global Tactical
Exposure (2) $237,408 $152,302 $31,337
Worldwide 42,545 40,802 56,202
Worldwide-
Hedged 107,615 31,338 16,069
International
(3) 269,258 136,714 12,322
International
Opportunities (4) 2,666 N/A N/A
Emerging
Markets (3) 112,704 18,709 N/A
</TABLE>
* The Money Market Portfolio began operations as a Portfolio of FFTW Funds,
Inc. (the "FFTW Portfolio") on April 29, 1997. Previously, the Portfolio
operated as the Money Market Portfolio of AMT Capital Fund, Inc. (the "AMT
Capital Portfolio") which was sub-advised by Fischer Francis Trees & Watts,
Inc. Shareholders of the AMT Capital Portfolio approved a tax-free
reorganization into the FFTW Portfolio on April 28, 1997.
8
<PAGE>
PRINCIPAL SECURITIES HOLDERS
MONEY MARKET PORTFOLIO
------------------
As of March 31, 1999, the following person held 5% or more of the outstanding
shares of Common Stock, par of $.001 per share, as beneficial owners:
<TABLE>
<CAPTION>
<S> <C>
Name and Address of Beneficial Owner: Percent of Portfolio:
- ------------------------------------- ---------------------
COOPER INDUSTRIES INC., 1001 FANNIN
STREET, FIRST CITY TOWER, SUITE 3900,
P. O. BOX 4446, HOUSTON, TX 77210 99.33%
U.S. SHORT-TERM PORTFOLIO
-------------------------
As of March 31, 1999, the following persons held 5% or more of the outstanding
shares of Common Stock, par of $.001 per share, as beneficial owners:
Name and Address of Beneficial Owner: Percent of Portfolio:
- ------------------------------------- ---------------------
GENERAL MOTORS EMPLOYEES GLOBAL GROUP
PENSION TRUST, C/O FISCHER FRANCIS TREES
& WATTS, INC., 200 PARK AVENUE, 46TH
FLOOR, NEW YORK, NY 10166 40.93%
BANK OF AMERICA FUND, C/O FISCHER FRANCIS
TREES & WATTS, INC., 200 PARK AVENUE,
46TH FLOOR, NEW YORK, NY 10166 10.78%
PACIFIC GAS AND ELECTRIC COMPANY SHORT
TERM LIQUIDITY PORTFOLIO, C/O STATE
STREET BANK AND TRUST COMPANY, ONE
ENTERPRISE DRIVE, NORTH QUINCY, MA 02171 7.69%
SOLUTIA INC. DEFINED BENEFIT PLAN, C/O
FISCHER FRANCIS TREES & WATTS, INC.,
200 PARK AVENUE, 46TH FLOOR, NEW YORK,
NY 10166 6.36%
LIMITED DURATION PORTFOLIO
--------------------------
As of March 31, 1999, the following persons held 5% or more of the outstanding
shares of Common Stock, par of $.001 per share, as beneficial owners:
Name and Address of Beneficial Owner: Percent of Portfolio:
- ------------------------------------- ---------------------
ROCKDALE HEALTH SYSTEMS, C/O FISCHER
FRANCIS TREES & WATTS, INC., 200 PARK
AVENUE, 46TH FLOOR, NEW YORK, NY 10166 36.83%
BARCLAYS GLOBAL INVESTORS TRUST, FBO
MARS DEFERRED COMPENSATION PLAN
STABLE VALUE MASTER FUND, 800
SCUDDERS MILL ROAD, PLAINSBORO, NJ
08536 25.27%
CORP. FOR SUPPORTIVE HOUSING, 342
MADISON AVENUE, SUITE 505, NEW YORK,
NY 10173 14.40%
THE DOW CHEMICAL COMPANY FOUNDATION,
DORINCO 100, MIDLAND, MI 48674 12.27%
SPRINT SHORT INTERMEDIATE, 2330
SHAWNEE MISSION PARKWAY, WAESTWOOD,
KS 66205-2005 7.28%
9
<PAGE>
MORTGAGE-BACKED PORTFOLIO
-------------------------
As of March 31, 1999, the following persons held 5% or more of the outstanding
shares of Common Stock, par of $.001 per share, as beneficial owners:
Name and Address of Beneficial Owner: Percent of Portfolio:
- ------------------------------------- ---------------------
FORD MOTOR COMPANY, DINGLE & COMPANY,
FBO FORD MOTOR COMPANY, C/O COMERCIA
BANK, P. O. BOX 75000, DETROIT, MI
48275 30.66%
INTERNATIONAL BANK FOR
RECONSTRUCTION AND DEVELOPMENT
RETIREMENT STAFF BENEFITS PLAN, C/O
FISCHER FRANCIS TREES & WATTS, INC.,
200 PARK AVENUE, 46TH FLOOR, NEW
YORK, NY 10166 10.89%
HARBOR CAPITAL GROUP TRUST FOR
DEFINED BENEFIT PLANS, C/O FISCHER
FRANCIS TREES & WATTS, INC., 200
PARK AVENUE, 46TH FLOOR, NEW YORK,
NY 10166 9.42%
THE NORTHERN TRUST COMPANY, FBO
MONSANTO DEFINED CONTRIBUTION AND
EMPLOYEE STOCK OWNERSHIP TRUST,
P. O. BOX 92956, CHICAGO, IL 60675 9.33%
INTERNATIONAL BANK FOR
RECONSTRUCTION AND DEVELOPMENT
STAFF RETIREMENT PLAN, C/O FISCHER
FRANCIS TREES & WATTS, INC. 200
PARK AVENUE, 46TH FLOOR, NEW YORK,
NY 10166 8.60%
STATE STREET BANK & TRUST COMPANY,
FBO BULL HN INFORMATION SYSTEMS INC.
RETIREMENT/AGGREGATE, 1 ENTERPRISE
DRIVE SW 5C, NORTH QUINCY, MA
02171 7.74%
GLOBAL TACTICAL EXPOSURE PORTFOLIO
----------------------------------
As of March 31, 1999, the following persons held 5% or more of the outstanding
shares of Common Stock, par of $.001 per share, as beneficial owners:
Name and Address of Beneficial Owner: Percent of Portfolio:
- ------------------------------------- ---------------------
COMERICA BANK TRUST U/A DTD 5/1/86,
FORD MOTOR COMPANY MASTER TRUST
MUTUAL FUNDS, P. O. BOX 75000,
DETROIT, MI 48275 64.63%
HARBOR CAPITAL GROUP TRUST FOR
DEFINED BENEFIT PLANS, C/O FISCHER
FRANCIS TREES & WATTS, INC. 200 PARK
AVENUE, 46TH FLOOR, NEW YORK, NY 10166 8.04%
NORTHROP CORPORATION, EMPLOYEE
BENEFIT PLAN, 1840 CENTURY PARK W.,
LOS ANGELES, CA 90006 5.84%
WORLDWIDE PORTFOLIO
-------------------
As of March 31, 1999, the following persons held 5% or more of the outstanding
shares of Common Stock, par of $.001 per share, as beneficial owners:
Name and Address of Beneficial Owner: Percent of Portfolio:
- ------------------------------------- ---------------------
BOB & COMPANY, C/O BANK OF BOSTON,
P. O. BOX 1809, BOSTON, MA 02105 25.83%
10
<PAGE>
COMMUNITY FOUNDATION FOR SOUTHEASTERN
MICHIGAN, 333 W. FORT STREET, SUITE
2010, DETROIT, MI 48226 18.96%
LIVA & COMPANY, P. O. BOX 1412,
ROCHESTER, NY 14603 14.67%
GENEVA REGIONAL HEALTH SYSTEM, INC.,
196 NORTH STREET, GENEVA, NY 14456 9.87%
MASSACHUSETTS EYE & EAR INFIRMARY -
PENSION, 243 CHARLES STREET, BOSTON,
MA 02114 7.43%
ROCHESTER GENERAL HOSPITAL, 1425
PORTLAND AVENUE, ROCHESTER, NY
14621 5.47%
FOUNDATION OF THE MASSACHUSETTS EYE
AND EAR INFIRMARY - UNRESTRICTED,
243 CHARLES STREET, BOSTON, MA
02114 5.40%
WORLDWIDE-HEDGED PORTFOLIO
--------------------------
As of March 31, 1999, the following persons held 5% or more of the outstanding
shares of Common Stock, par of $.001 per share, as beneficial owners:
Name and Address of Beneficial Owner: Percent of Portfolio:
- ------------------------------------- ---------------------
MAC & COMPANY, MUTUAL FUNDS
OPERATIONS, P. O. BOX 3198,
PITTSBURGH, PA 15230 39.82%
THE NORTHERN TRUST COMPANY, MARS
BENEFIT TRUST, P. O. BOX 92956,
CHICAGO, IL 60675 10.27%
MITRA & COMPANY, 1000 N. WATER
STREET, 14TH FLOOR, MILWAUKEE, WI
53202 10.05%
LAW SCHOOL ADMISSION COUNCIL, INC.,
BOX 40, NEWTOWN, PA 18940 9.48%
WENDEL & COMPANY, THE BANK OF NEW
YORK, P. O. BOX 1066, WALL STREET
STATION, NEW YORK, NY 10268 9.21%
STATE STREET BANK & TRUST COMPANY
AS TRUSTEE FOR THE GOLDMAN SACHS
PENSION PLAN, 200 NEWPORT AVENUE,
NORTH QUINCY, MA 02171 6.68%
THE MCCALLIE SCHOOL, 500 DODDS
AVENUE, CHATTANOOGA, TN 37404 5.01%
INTERNATIONAL PORTFOLIO
-----------------------
As of March 31, 1999, the following persons held 5% or more of the outstanding
shares of Common Stock, par of $.001 per share, as beneficial owners:
Name and Address of Beneficial Owner: Percent of Portfolio:
- ------------------------------------- ---------------------
EVELYN AND WALTER HAAS, JR. FUND, ONE
LOMBARD STREET, SUITE 305, SAN
FRANCISCO, CA 94111 30.08%
COLONIAL WILLIAMSBURG FOUNDATION,
P. O. BOX 1776, WILLIAMSBURG, VA
23187-1776 18.76%
NORTHERN TRUST COMPANY, P. O. BOX
92956, 801 S. CANAL STREET C1S,
CHICAGO, IL 60675 18.14%
MAC & COMPANY, P. O. BOX 3198,
PITTSBURGH, PA 15230-3198 8.92%
11
<PAGE>
THE DOW CHEMICAL COMPANY SALARIED
SAVINGS PLAN, C/O BANKERS TRUST
COMPANY, 100 PLAZA ONE, MAIL STOP # 3048,
JERSEY CITY, NJ 07311 7.06%
HF INVESTMENT LP, 1700 OLD DEERFIELD
ROAD, HIGHLAND PARK, IL 60035 6.90%
RETIREMENT INCOME PLAN FOR EMPLOYEES
OF COLONIAL WILLIAMSBURG, P. O. BOX
1776, WILLIAMSBURG, VA 23187-1776 6.07%
INTERNATIONAL OPPORTUNITIES PORTFOLIO
-------------------------------------
As of March 31, 1999, the following persons held 5% or more of the outstanding
shares of Common Stock, par of $.001 per share, as beneficial owners:
Name and Address of Beneficial Owner: Percent of Portfolio:
- ------------------------------------- ---------------------
HEB INVESTMENT PLANS, C/O FISCHER
FRANCIS TREES & WATTS, INC., 200
PARK AVENUE, 46TH FLOOR, NEW YORK,
NY 10166 100.00%
EMERGING MARKETS PORTFOLIO
--------------------------
As of March 31, 1999, the following persons held 5% or more of the outstanding
shares of Common Stock, par of $.001 per share, as beneficial owners:
Name and Address of Beneficial Owner: Percent of Portfolio:
- ------------------------------------- ---------------------
FORD MOTOR COMPANY MASTER TRUST,
P. O. BOX 75000, DETROIT, MI 48275 35.17%
UTAH RETIREMENT SYSTEMS, C/O FISHER
FRANCIS TREES & WATTS, INC., 200 PARK
AVENUE, 46TH FLOOR, NEW YORK, NY
10166 24.81%
AMERITECH PENSION TRUST, C/O FISCHER
FRANCIS TREES & WATTS, INC., 200
PARK AVENUE 46TH FLOOR, NEW YORK,
NY 10166 9.88%
THE 1199 HEALTH CARE EMPLOYEES
PENSION PLAN, C/O FISCHER FRANCIS
TREES & WATTS, INC., 200 PARK AVENUE,
46TH FLOOR, NEW YORK, NY 10166 7.20%
HARBOR CAPITAL GROUP TRUST FOR
DEFINED BENEFIT PLANS, C/O FISCHER
FRANCIS TREES & WATTS, INC., 200 PARK
AVENUE, 46TH FLOOR, NEW YORK, NY
10166 7.05%
</TABLE>
DISTRIBUTION OF FUND SHARES
Shares of the Fund are distributed by Investors Capital pursuant to a
Distribution Agreement dated as of May 29, 1998 between the Fund and Investors
Capital. No fees are payable by the Fund pursuant to the Distribution
Agreement, and Investors Capital bears the expense of its distribution
activities. The Fund and Investors Capital have agreed to indemnify one another
against certain liabilities.
Investors should note that not every Portfolio of FFTW Funds, Inc., listed in
the Prospectus is registered in your state. If a Portfolio is not registered in
your state, you may not purchase shares of that Portfolio.
12
<PAGE>
SUPPLEMENTAL PORTFOLIO INFORMATION
EXPECTED PORTFOLIO TURNOVER
The following table represents each Portfolio's expected turnover ranges.
Actual turnover may be higher than what is set forth below, depending on market
conditions.
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------
Portfolio Name Expected Portfolio Turnover
- -------------------------------------------------------------------------------
Money Market Portfolio Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
Mortgage LIBOR Portfolio Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
U.S. Short-Term Portfolio Between 2,000% and 6,000% per year
- -------------------------------------------------------------------------------
Limited Duration Portfolio Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
Mortgage-Backed Portfolio Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
Asset-Backed Portfolio Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
High Yield Portfolio Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
Enhanced Equity Portfolio Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
U.S. Treasury Portfolio Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
U.S. Corporate Portfolio Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
Broad Market Portfolio Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
Global Tactical Exposure Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
Worldwide Portfolio Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
Worldwide-Hedged Portfolio Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
International Portfolio Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
International Opportunities
Portfolio Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
International Corporate Portfolio Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
Emerging Markets Portfolio Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
Global High-Yield Portfolio Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
Inflation-Indexed Portfolio Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
Inflation-Indexed Hedged
Portfolio Between 500% and 1,000% per year
- -------------------------------------------------------------------------------
</TABLE>
MONEY MARKET PORTFOLIO
The Money Market Portfolio began operations as a Portfolio of FFTW Funds, Inc.
(the "FFTW Portfolio"), on April 29, 1997. Previously, the Portfolio operated
as the Money Market Portfolio of AMT Capital Fund, Inc. (the "AMT Capital
Portfolio"), which was sub-advised by Fischer Francis Trees & Watts, Inc.
Shareholders of this AMT Capital Portfolio approved a tax-free reorganization
into the FFTW Portfolio on April 28, 1997.
MORTGAGE LIBOR PORTFOLIO
The term "LIBOR" is an acronym for London InterBank Offered Rate. LIBOR is the
rate that most creditworthy international banks dealing in Eurodollars charge
each other for large loans. LIBOR is used as the base for other large
Eurodollar loans to less creditworthy corporations and governments. For
purposes of this Portfolio, home equity loans are considered mortgage-backed
securities.
U.S. SHORT TERM PORTFOLIO
U.S. Short-Term's shares are not guaranteed by the U.S. Government. U.S.
Short-Term is not a "money market fund" and may engage in investments not
permitted by money market funds under applicable regulations.
13
<PAGE>
LIMITED DURATION PORTFOLIO
Limited Duration is a suitable investment option for defined contribution and
retirement plans. The Limited Duration Portfolio's name was formally changed
from Stable Return Portfolio on September 11, 1998.
MORTGAGE-BACKED PORTFOLIO
The Mortgage-Backed Portfolio's name was formally changed from Mortgage Total
Return Portfolio on September 11, 1998. For the purpose of this Portfolio, home
equity loans are considered mortgage-backed securities.
U.S. TREASURY PORTFOLIO
Investors in most jurisdictions will be provided with income exempt from state
and local tax. Consult with a tax adviser to determine if your state and local
tax laws exempt income derived from U.S. Treasury mutual fund portfolios.
GLOBAL TACTICAL EXPOSURE PORTFOLIO
The Global Tactical Exposure Portfolio's name was formally changed from
International Hedged Portfolio on September 11, 1998.
SUPPLEMENTAL INVESTMENT INFORMATION
SUPPLEMENTAL DESCRIPTIONS OF INVESTMENTS
The different types of securities in which the Portfolios may invest, subject
to their respective investment objectives, policies and restrictions, are
described in the Prospectus under "DESCRIPTIONS OF INVESTMENTS AND THE RISKS
INVOLVED." Additional information concerning the characteristics of certain of
the Portfolio's investments is set forth below.
U.S. TREASURY AND U.S. GOVERNMENT AGENCY SECURITIES
- ---------------------------------------------------
U.S. Treasury and U.S. Government Agency Securities differ primarily in their
interest rates, the lengths of their maturities and the dates of their
issuances. While these securities are issued under the authority of an Act of
Congress, the U.S. Government is not obligated to provide financial support to
the issuing instrumentalities.
FOREIGN GOVERNMENT AND INTERNATIONAL AND SUPRANATIONAL AGENCY SECURITIES
- ------------------------------------------------------------------------
Obligations issued by foreign governmental entities have various kinds of
government support and include obligations issued or guaranteed by foreign
governmental entities with taxing powers issued or guaranteed by international
or supranational entities. These obligations may or may not be supported by the
full faith and credit of a foreign government, or several foreign governments.
Examples of international and supranational entities include the following
entities:
a. International Bank for Reconstruction, and Development ("World Bank");
----------
b. European Steel and Coal Community;
c. Asian Development Bank, the European Bank for Reconstruction; and
d. Development and the Inter-American Development Bank.
The governmental members, or "shareholders", usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.
14
<PAGE>
BANK OBLIGATIONS
- ----------------
The Fund limits its U.S. bank obligation investments to U.S. banks meeting the
Investment Adviser's creditworthiness criteria. The Fund limits its investments
in foreign bank obligations to foreign banks (including U.S. branches of
foreign banks) meeting the Investment Adviser's or the Sub-Adviser's investment
quality standards. Generally, such foreign banks must be comparable to
obligations of U.S. banks in which each Portfolio may invest.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
- --------------------------------------------
When participating in repurchase agreements, a Portfolio buys securities from a
vendor (e.g., a bank or securities firm) with the agreement that the vendor
will repurchase the securities at the same price plus interest at a later date.
Repurchase agreements may be characterized as loans secured by the underlying
securities. Repurchase transactions allow the Portfolio to earn a return on
available cash at minimal market risk. The Portfolio may be subject to various
delays and risks of loss should the vendor become subject to a bankruptcy
proceeding or if it is otherwise unable to meet its obligation to repurchase.
The securities underlying a repurchase agreement will be marked to market every
business day so that the value of such securities is at least equal to the
value of the repurchase price thereof, including the accrued interest thereon.
Repurchase and reverse repurchase agreements may also involve foreign
government securities with which there is an active repurchase market. The
Investment Adviser expects that such repurchase and reverse repurchase
agreements will primarily involve government securities of countries belonging
to the Organization for Economic Cooperation and Development ("OECD").
----
Transactions in foreign repurchase and reverse repurchase agreements may
involve additional risks.
DOLLAR ROLL TRANSACTIONS
- ------------------------
"Dollar roll" transactions occur when a Portfolio sells GNMA certificates or
other mortgage-backed securities to a bank or broker-dealer (the
"counterparty") along with a commitment to purchase from the counterparty
------------
similar, but not identical, securities at a future date, at the same price. The
counterparty receives all principal and interest payments, including
prepayments, made on the security while it is the holder. The Portfolio
receives a fee from the counterparty as consideration for entering into the
commitment to purchase. Dollar rolls may be renewed over a period of several
months with a new purchase and repurchase price fixed and a cash settlement
made at each renewal without physical delivery of securities. The transaction
may be preceded by a firm commitment agreement, pursuant to which, the
Portfolio agrees to buy a security on a future date. Portfolios will not use
such transactions for leverage purposes and will segregate cash, U.S.
Government securities or other appropriate securities in an amount sufficient
to meet its purchase obligations under the transactions.
Dollar roll transactions are similar to reverse repurchase agreements in that
they involve the sale of a security coupled with an agreement to repurchase.
Like all borrowings, a dollar roll involves costs to a Portfolio. For example,
while a Portfolio receives a fee as consideration for agreeing to repurchase
the security, the Portfolio may forgo the right to receive all principal and
interest payments while the counterparty holds the security. These payments to
the counterparty may exceed the Portfolio fee received, thereby effectively
charging the Portfolio interest on its borrowing. Further, although the
Portfolio can estimate the amount of expected principal prepayment over the
term of the dollar roll, a variation in the actual amount of prepayment could
increase or decrease the cost of the Portfolio's borrowing.
MORTGAGE-BACKED SECURITIES
- --------------------------
Mortgage-backed securities can be issued in multiple classes. Such securities
are called multi-class mortgage-backed securities ("MBS") and the classes are
---
often referred to as "traunches." MBS securities are issued at a specific fixed
or floating coupon rate and have a stated maturity or final distribution date.
Principal prepayment on the Underlying Assets may cause the MBSs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all or most classes of the MBSs on a periodic
basis, typically monthly or quarterly. The principal and interest on the
Underlying Assets may be allocated among the several classes of a series of a
MBS in many different ways. In a relatively common structure, payments of
principal (including any principal prepayments) on the Underlying Assets are
applied to the classes of a series of a MBS in the order of their respective
stated maturities. No payment of principal will be made on any class of MBSs
until all other classes having an earlier stated maturity have been paid in
full.
OTHER ASSET-BACKED SECURITIES
- -----------------------------
The Investment Adviser expects that other asset-backed securities (unrelated to
mortgage loans) will be developed and offered to investors in the future.
Certain asset-backed securities have already been offered to investors
including securities
15
<PAGE>
backed by automobile loans and credit card receivables. Consistent with each
Portfolio's investment objectives and policies, a Portfolio may invest in other
types of asset-backed securities, as they become available.
ZERO COUPON SECURITIES AND CUSTODIAL RECEIPTS
- ---------------------------------------------
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest
coupons or receipts for their underlying principal (the "coupons") which have
-------
been separated by their holder. Holders are typically custodian banks or
investment brokerage firms. A holder will separate the interest coupons from
the underlying principal (the "corpus") of the U.S. Treasury security. A
------
number of securities firms and banks have stripped the interest coupons and
resold them in custodial receipt programs with a number of different names,
including "Treasury Income Growth Receipts" ("TIGRS") and "Certificate of
-----
Accrual on Treasuries" ("CATS"). The underlying U.S. Treasury bonds and notes
----
themselves are held in book-entry form at the Federal Reserve Bank or, in the
case of bearer securities (i.e., unregistered securities which are owned
ostensibly by the bearer or holder thereof), in trust on behalf of the owners
thereof. Counsel to the underwriters of these certificates or other evidences
of ownership of the U.S. Treasury securities have stated that for Federal tax
and securities law purposes, purchasers of such certificates, such as a
Portfolio, will most likely be deemed the beneficial holders of the underlying
U.S. Treasury securities.
Recently, the Treasury has facilitated transfer of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "Separate Trading of
Registered Interest and Principal of Securities" ("STRIPS"). Under the
------
STRIPS program, a Portfolio can have its beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu of
holding certificates or other evidences of ownership of the underlying U.S.
Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured interest
coupons by the holder, the principal or corpus is sold at a deep discount
because the buyer receives only the right to receive a future fixed payment on
the security and does not receive any rights to periodic interest (cash)
payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself.
LOAN PARTICIPATIONS
- -------------------
A loan participation is an interest in a loan to an U.S. corporation (the
"corporate borrower") which is administered and sold by an intermediary bank.
------------------
The borrower of the underlying loan will be deemed to be the issuer of the
participation interest except to the extent the Portfolio derives its rights
from the intermediary bank who sold the loan participation. Such loans must be
to issuers whose obligations a Portfolio may invest. Any participation
purchased by a Portfolio must be issued by a bank in the United States with
assets exceeding $1 billion. (See: "Supplemental Discussion of Risks Associated
With the Fund's Investment Policies and Investment Techniques")
VARIABLE AMOUNT MASTER DEMAND NOTES
- -----------------------------------
Variable amount master demand notes are investments of fluctuating amounts and
varying interest rates made pursuant to direct arrangements between a Portfolio
(as lender) and a borrower. These notes are direct lending arrangements between
lenders and borrowers, and are generally non-transferable, nor are they
ordinarily rated by either Moody's or Standard & Poors.
CURRENCY-INDEXED NOTES
- ----------------------
In selecting the two currencies with respect to which currency-indexed notes
are adjusted, the Investment Adviser and the Sub-Adviser will consider the
correlation and relative yields of various currencies. Each Portfolio may
purchase a currency-indexed obligation using the currency in which it is
denominated and, at maturity, will receive interest and principal payments
thereon in that currency. The amount of principal payable by the issuer at
maturity, however, will fluctuate in response to any changes in the exchange
rates between the two specified currencies during the period from the date the
instrument is issued to its maturity date. The potential for realizing gains as
a result of changes in foreign currency exchange rates may enable a Portfolio
to hedge the currency in which the obligation is denominated (or to effect
cross-hedges against other currencies) against a decline in the U.S. dollar
value of investments denominated in foreign currencies while providing an
16
<PAGE>
attractive market rate of return. Each Portfolio will purchase such indexed
obligations to generate current income or for hedging purposes and will not
speculate in such obligations.
PRINCIPAL EXCHANGE RATE LINKED SECURITIES
- -----------------------------------------
Principal exchange rate linked securities (or "PERLs") are debt obligations,
-----
the principal on which is payable at maturity in an amount that may vary based
on the exchange rate between the U.S. dollar and a particular foreign currency.
The return on "standard" principal exchange rate linked securities is enhanced
if the foreign currency to which the security is linked appreciates against the
U.S. dollar. PERLs are adversely affected by increases in the foreign exchange
value of the U.S. dollar. Reverse principal exchange rate linked securities
differ from "standard" PERL securities in that their return is enhanced by
increases in the value of the U.S. dollar and adversely impacted by increases
in the value of the foreign currency. Security interest payments are generally
made in U.S. dollars at rates reflecting the degree of foreign currency risk
assumed or given up by the note's purchaser.
PERFORMANCE INDEXED PAPER
- -------------------------
Performance indexed paper (or "PIPs") is U.S. dollar-denominated commercial
----
paper, whose yield is linked to certain foreign exchange rate movements. The
investor's yield on performance indexed paper is established at maturity as a
function of spot exchange rates between the U.S. dollar and a designated
currency. This yield is within a stipulated range of return at the time the
obligation was purchased, lying within a guaranteed minimum rate below and a
potential maximum rate of return above market yields on U.S. dollar-denominated
commercial paper. Both the minimum and maximum rates of investment return
correspond to the minimum and maximum values of the spot exchange rate two
business days prior to maturity.
OTHER FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES
- --------------------------------------------------
Securities may be denominated in the currency of one nation although issued by
a governmental entity, corporation or financial institution of another nation.
For example, a Portfolio may invest in a British pound sterling-denominated
obligation issued by a United States corporation. Such investments involve
credit risks associated with the issuer and currency risks associated with the
currency in which the obligation is denominated. The Portfolio's investment
Adviser or the Sub-Adviser bases its decision to invest in any future foreign
currency exchange-related securities on the same general criteria applicable to
the Investment Adviser's or Sub-Adviser's decision for such Portfolio to invest
in any debt security. This includes the Portfolio's minimum ratings and
investment quality criteria, with the additional element of foreign currency
exchange rate exposure added to the Investment Adviser's or Sub-Adviser's
analysis of interest rates, issuer risk and other factors.
SECURITIES DENOMINATED IN MULTI-NATIONAL CURRENCY UNITS OR MORE THAN ONE
- ------------------------------------------------------------------------
CURRENCY
- --------
An illustration of a multi-national currency unit is the European Currency Unit
(the "ECU"). The ECU is a "basket" consisting of specified currency amounts of
---
the member states of the European Community, a Western European economic
cooperative organization. The specific currency amounts comprising the ECU may
be adjusted by the Council of Ministers of the European Community to reflect
changes in relative values of the underlying currencies. The Investment Adviser
does not believe that such adjustments will adversely affect holders of
ECU-denominated obligations or the marketability of such securities. European
supranational entities commonly issue ECU-denominated obligations.
Foreign Currency Warrants
- -------------------------
Foreign currency warrants such as currency exchange warrants ("CEWs") are
----
warrants entitling the holder to receive a cash amount from their issuer
(generally, for warrants issued in the United States in U.S. Dollars). This
cash amount is calculated pursuant to a predetermined formula, based on the
exchange rate between a specified foreign currency and the U.S. Dollar as of
the exercise date of the warrant. Foreign currency warrants are generally
exercisable when issued and expire at a specified date and time. Foreign
currency warrants have been issued in connection with U.S. Dollar-denominated
debt offerings by major corporate issuers in an attempt to reduce the foreign
currency exchange risk, which from the point of view of prospective purchasers
of the securities, is inherent in the international fixed income marketplace.
The formula used to determine the amount payable upon exercise of a foreign
currency warrant may make the warrant worthless unless the applicable foreign
currency exchange rate moves in a particular direction (e.g., unless the U.S.
Dollar appreciates or depreciates against the particular foreign currency to
which the warrant is linked or indexed). Foreign currency warrants are subject
to other risks associated with foreign securities, including risks arising from
complex political or economic factors.
17
<PAGE>
MUNICIPAL INSTRUMENTS
- ---------------------
Municipal notes include such instruments as tax anticipation notes, revenue
anticipation notes, and bond anticipation notes. Municipal notes are issued by
state and local governments and public authorities as interim financing in
anticipation of tax collections, revenue receipts or bond sales. Municipal
bonds may be issued to raise money for various public purposes, and include
general obligation bonds and revenue bonds. General obligation bonds are backed
by the taxing power of the issuing municipality and considered the safest type
of bonds. Revenue bonds are backed by the revenues of a project or facility
such as the tolls from a toll bridge. Industrial development revenue bonds are
a specific type of revenue bond backed by the credit and security of a private
user. Revenue bonds are generally considered to have more potential risk than
general obligation bonds.
Municipal obligation rates can be floating, variable or fixed. The values of
floating and variable rate obligations are generally more stable than those of
fixed rate obligations in response to changes in interest rate levels. Variable
and floating rate obligations usually carry rights permitting a Portfolio to
sell them upon short notice at par value plus accrued interest. The issuers or
financial intermediaries providing rights to sell may support their ability to
purchase the obligations by obtaining credit with liquidity supports. These may
include lines of credit (conditional commitments to lend) or letters of credit,
(which are ordinarily irrevocable) issued by domestic banks or foreign banks
having a United States branch, agency or subsidiary. When considering whether
an obligation meets a Portfolio's quality standards, the Investment Adviser
will look at the creditworthiness of the party providing the right to sell as
well as to the quality of the obligation itself.
Municipal securities may be issued to finance private activities, the interest
from which is an item of tax preference for purposes of the federal alternative
minimum tax. Such "private activity" bonds might include industrial development
revenue bonds, and bonds issued to finance such projects as solid waste
disposal facilities, student loans or water and sewage projects.
SUPPLEMENTAL DESCRIPTION OF INVESTMENT TECHNIQUES
BORROWING
- ---------
Each Portfolio may borrow money temporarily from banks when:
a. it is advantageous to do so in order to meet redemption requests,
b. a Portfolio fails to receive transmitted funds from a shareholder on a
timely basis,
c. the custodian of the Fund fails to complete delivery of securities sold, or
d. a Portfolio needs cash to facilitate the settlement of trades made by the
Portfolio.
In addition, each Portfolio may, in effect, lend securities by engaging in
reverse repurchase agreements and/or dollar roll transactions and may, in
effect, borrow money by doing so. Securities may be borrowed by engaging in
repurchase agreements.
SECURITIES LENDING
- ------------------
With the exception of U.S. Short-Term, each Portfolio may lend out its
investment securities. The value of these securities may not exceed 33 1/3% of
the Portfolio's total assets. Such securities may be lent to banks, brokers and
other financial institutions if it receives in return, collateral in cash, U.S.
Government Securities or irrevocable bank stand-by letters of credit. Such
collateral will be maintained at all times in an amount equal to at least 100%
of the current market value of the loaned securities. The Fund may terminate
the loans at any time and the relevant Portfolio will then receive the loaned
securities within five days. During the loan period, the Portfolio receives the
income on the loaned securities and a loan fee thereby potentially increasing
its total return.
SUPPLEMENTAL DISCUSSION OF RISKS ASSOCIATED WITH THE FUND'S INVESTMENT POLICIES
AND INVESTMENT TECHNIQUES
The risks associated with the different types of securities in which the
Portfolios may invest are described in the Prospectus under "INVESTMENT
TECHNIQUES / STRATEGIES & ASSOCIATED RISKS." Additional information concerning
risks associated with certain of the Portfolio's investments is set forth
below.
18
<PAGE>
FOREIGN INVESTMENTS
- -------------------
Foreign financial markets, while growing in volume, have, for the most part,
substantially less volume than United States markets. Thus, many foreign
company securities are less liquid and their prices are more volatile than
securities of comparable domestic companies. Foreign markets also have
different clearance and settlement procedures, and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delivery of securities may not occur at the same time as payment in some
foreign markets. Delays in settlement could result in temporary periods when a
portion of portfolio assets remains uninvested, earning no return. The
inability of a Portfolio to make intended security purchases due to settlement
problems could cause the Portfolio to miss attractive investment opportunities.
Inability to dispose portfolio securities due to settlement problems could
result either in portfolio losses due to subsequent declines in portfolio
security value or, if the Portfolio has entered into a contract to sell the
security, could result in possible liability to the purchaser. Comparatively
speaking, there is less government supervision and regulation of exchanges,
financial institutions and issuers in foreign countries than there is in the
United States. In addition, a foreign government may impose exchange control
regulations, which may impact currency exchange rates.
FOREIGN BANK OBLIGATIONS
- ------------------------
Foreign bank obligations involve somewhat different investment risks than those
affecting obligations of United States banks. Included in these risks are
possibilities that:
a. investment liquidity may be impaired due to future political and economic
developments;
b. their obligations may be less marketable than comparable obligations of
United States banks;
c. a foreign jurisdiction might impose withholding taxes on interest income
payable on those obligations;
d. foreign deposits may be seized or nationalized;
e. foreign governmental restrictions such as exchange controls may be adopted
that might adversely affect the payment of principal and interest on those
obligations;
f. the selection of those obligations may be more difficult because there may
be less publicly available information concerning foreign banks; or
g. the accounting, auditing and financial reporting standards, practices and
requirements applicable to foreign banks may differ from those applicable
to United States banks.
Foreign banks are not generally subject to examination by any United States
government agency or instrumentality. Also, investments in commercial banks
located in some foreign countries are subject to additional risks because they
engage in commercial banking and diversified securities activities.
DOLLAR ROLL TRANSACTIONS
- ------------------------
Dollar roll transactions involve potential risks of loss, which differ from
those relating to the securities underlying the transactions. For example,
should the counterparty become insolvent, a Portfolio's right to purchase from
the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Portfolio is able to purchase them.
Similarly, a Portfolio may be required to purchase securities in connection
with a dollar roll at a higher price than may otherwise be available on the
open market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical, security to a Portfolio, the security which the
Portfolio is required to buy under the dollar roll may be worth less than an
identical security. There can be no assurance that a Portfolio's use of the
cash it receives from a dollar roll will provide a return exceeding borrowing
costs.
MORTGAGE AND ASSET-BACKED SECURITIES
- ------------------------------------
Prepayments on securitized assets such as mortgages, automobile loans and
credit card receivables ("Securitized Assets") generally increase with falling
------------------
interest rates and decrease with rising interest rates. Repayment rates are
often influenced by a variety of economic and social factors. In general, the
collateral supporting non-mortgage asset-backed securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. In addition to prepayment risk, borrowers on the underlying
Securitized Assets may default in their payments creating delays or loss of
principal.
Non-mortgage asset-backed securities involve certain risks not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of a security interest in assets underlying the related mortgage collateral.
Credit card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts owed on the credit
cards, thereby reducing
19
<PAGE>
the balance due. Most issuers of automobile receivables permit the servicer to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there
is a possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
New forms of asset-backed securities are continuously being created. While
Portfolios only invest in asset-backed securities the Investment Adviser
believes are liquid, market experience in some of these securities is limited
and liquidity may not have been tested in market cycles.
FORWARD COMMITMENTS
- -------------------
Portfolios may purchase securities on a when-issued or forward commitment
basis. These transactions present a risk of loss should the value of the
securities to be purchased increase prior to the settlement date and the
counterparty to the trade fail to execute the transaction. If this were to
occur, the Portfolio's net asset value, including a security's appreciation or
depreciation purchased on a forward basis, would decline by the amount of such
unrealized appreciation.
LOAN PARTICIPATIONS
- -------------------
Because the bank issuing a loan participation does not guarantee the
participation in any way, it is subject to the credit risks generally
associated with the underlying corporate borrower. It may be necessary under
the terms of the loan participation for a Portfolio to assert, through the
issuing bank, such rights as may exist against the underlying corporate
borrower should the underlying corporate borrower fail to pay principal and
interest when due. Thus, the Portfolio could be subject to delays, expenses and
risks which are greater than those which would have been involved if the
Portfolio had purchased a direct obligation (such as commercial paper) of the
borrower. Moreover, under the terms of the loan participation, the purchasing
Portfolio may be regarded as a creditor of the issuing bank (rather than of the
underlying corporate borrower), so that the Portfolio also may be subject to
the risk that the issuing bank may become insolvent. Further, in the event of
the bankruptcy or insolvency of the corporate borrower, the loan participation
might be subject to certain defenses that can be asserted by a borrower as a
result of improper conduct by the issuing bank. The secondary market, if any,
for these loan participation interests is limited, and any such participation
purchased by a Portfolio will be treated as illiquid, until the Board of
Directors determines that a liquid market exists for such participations. Loan
participations will be valued at their fair market value, as determined by
procedures approved by the Board of Directors.
HIGH YIELD/HIGH RISK DEBT SECURITIES
- ------------------------------------
High Yield, Emerging Markets and Global High Yield will invest its assets in
debt securities which are rated below investment-grade--that is, rated below
Baa by Moody's or BBB by Standard & Poors, and in unrated securities judged to
be of equivalent quality by the Investment Adviser or Sub-Adviser. Securities
below investment grade carry a high degree of risk (including the possibility
of default or bankruptcy of the issuers of such securities), and generally
involve greater price volatility and risk of principal and income. These
securities may be less liquid than securities in the higher rating categories
and are considered to be speculative. The lower the ratings of such debt
securities, the greater their risks render them like equity securities. See
"Quality Ratings Descriptions" in this Statement of Additional Information for
a more complete description of the ratings assigned by ratings organizations
and their respective characteristics.
Economic downturns have in the past, and could in the future, disrupt the high
yield market and impair the ability of issuers to repay principal and interest.
Also, an increase in interest rates would have a greater adverse impact on the
value of such obligations than on comparable higher quality debt securities.
During an economic downturn or period of rising interest rates, highly
leveraged issues may experience financial stresses, which could adversely affect
their ability to service their principal and interest payment obligations.
Prices and yields of high yield securities will fluctuate over time and, during
periods of economic uncertainty, volatility of high yield securities may
adversely affect the Portfolio's net asset value. In addition, investments in
high yield zero coupon or pay-in-kind bonds, rather than income-bearing high
yield securities, may be more speculative and may be subject to greater
fluctuations in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent that
there is no established retail secondary market or because of a decline in the
value of such securities. A thin trading market may limit the ability of the
Portfolio to accurately
20
<PAGE>
value high yield securities it holds and to dispose of those securities.
Adverse publicity and investor perceptions may decrease the values and
liquidity of high yield securities. These securities may also involve special
registration responsibilities, liabilities and costs.
Credit quality in the high yield securities market can change suddenly and
unexpectedly, and even recently issued credit ratings may not fully reflect the
actual risks posed by a particular high yield security. For these reasons, it
is the policy of the Investment Adviser and Sub-Adviser not to rely exclusively
on ratings issued by established credit rating agencies, but to supplement such
ratings with its own independent and on-going review of credit quality. The
achievement of the Portfolio's investment objective by investment in such
securities may be more dependent on the Investment Adviser's or Sub-Adviser's
credit analysis than is the case for higher quality bonds. Should the rating of
a portfolio security be downgraded, the Investment Adviser or Sub-Adviser will
determine whether it is in the best interest of the Portfolio to retain or
dispose of such security.
Prices for below investment-grade securities may be affected by legislative and
regulatory developments.
SUPPLEMENTAL HEDGING TECHNIQUES
Each of the Portfolios may enter into forward foreign currency contracts (a
"forward contract") and may purchase and write (on a covered basis) exchange-
----------------
traded or over-the-counter ("OTC") options on currencies, foreign currency
---
futures contracts and options on foreign currency futures contracts. These
contracts are primarily entered into to protect against a decrease in the U.S.
dollar equivalent value of its foreign currency portfolio securities or the
payments thereon that may result from an adverse change in foreign currency
exchange rates. Under normal circumstances, Worldwide-Hedged and
Inflation-Indexed Hedged intends to hedge its currency exchange risk to the
extent feasible, but there can be no assurance that all of the assets of each
Portfolio denominated in foreign currencies will be hedged at any time, or that
any such hedge will be effective. Each of the other Portfolios may at times, at
the discretion of the Investment Adviser and the Sub-Adviser, hedge all or some
portion of its currency exchange risk.
Conditions in the securities, futures, options and foreign currency markets
will determine whether and under what circumstances the Fund will employ any of
the techniques or strategies described below. The Fund's ability to pursue
these strategies may be limited by applicable regulations of the Commodity
Futures Trading Commission ("CFTC") and the federal tax requirements applicable
----
to regulated investment companies. (See: "Investment Techniques / Strategies &
Associated Risks" in the Prospectus and "Tax Considerations" below for more
information on hedging.)
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS & ASSOCIATED RISKS
- --------------------------------------------------------------
Each Portfolio may, and generally the Global and International Portfolios will,
purchase and sell forward contracts. A forward contract obligates one party to
purchase and the other party to sell a definite foreign currency amount at some
specified future date. Purchasing or selling forward contracts may help offset
declines in the U.S. dollar-equivalent value of a Portfolio's foreign currency
denominated assets and the income available for distribution to Portfolio
shareholders. These declines in the U.S. dollar-equivalent value may be the
result of adverse exchange rate changes between the U.S. dollar and the various
foreign currencies in which a Portfolio's assets or income may be denominated.
The U.S. dollar-equivalent value of the principal amount of and rate of return
on foreign currency denominated securities will decline should the U.S. dollar
exchange rate rise in relation to that currency. Such declines could be
partially or completely offset by an increase in the value of a forward
contract on that foreign currency.
In addition to entering into forward contracts with respect to assets that a
Portfolio holds (a "position hedge"), the Investment Adviser or the Sub-Adviser
--------------
may purchase or sell forward contracts or foreign currency options in a
particular currency with respect to specific anticipated transactions (a
"transaction hedge"). By purchasing forward contracts, the Investment Adviser
------------------
or Sub-Adviser can establish the exchange rate at which a Portfolio will be
entitled to exchange U.S. dollars for a foreign currency or a foreign currency
for U.S. dollars at some point in the future. Thus, such contracts may lock in
the U.S. dollar cost of purchasing foreign currency denominated securities, or
set the U.S. dollar value of the income from securities it owns or the proceeds
from securities it intends to sell.
21
<PAGE>
While the use of foreign currency forward contracts may protect a Portfolio
against declines in the U.S. dollar-equivalent value of the Portfolio's assets,
such use will also reduce the possible gain from advantageous changes in the
value of the U.S. dollar against particular currencies in which their assets
are denominated. Moreover, the use of foreign currency forward contracts will
not eliminate fluctuations in the underlying U.S. dollar-equivalent value of
the prices of or rates of return on
the assets held in the Portfolio.
The use of such techniques will subject the Portfolio to certain risks:
a. the foreign exchange markets can be highly volatile and are subject to
sharp price fluctuations;
b. trading forward contracts can involve a degree of leverage, and relatively
small movements in the rates of exchange between the currencies underlying
a contract could result in immediate and substantial losses to the
investor;
c. trading losses that are not offset by corresponding gains in assets being
hedged could reduce the value of assets held by a Portfolio;
d. the precise matching of the forward contract amounts and the value of the
hedged portfolio securities involved will not generally be possible. The
future value of such foreign currency denominated portfolio securities will
change as a consequence of market movements in the value of those
securities. This change is unrelated to fluctuations in exchange rates and
the U.S. dollar-equivalent value of such assets between the date the
forward contract is entered into and the date that it is sold. Thus, it may
be necessary for a Portfolio to purchase additional foreign currency in the
cash market (and bear the expense of such purchase), if the market value of
the security is less than the amount of the foreign currency it may
deliver, pursuant to the forward contract.
The success of any currency hedging technique depends on the ability of the
Investment Adviser or Sub-Adviser to predict correctly, movements in foreign
currency exchange rates. If the Investment Adviser or Sub-Adviser incorrectly
predicts the direction of such movements, or if unanticipated changes in
foreign currency exchange rates occur, a Portfolio's performance may decline
because of the use of such contracts. The accurate projection of currency
market movements is extremely difficult, and the successful execution of a
hedging strategy is highly uncertain.
Portfolio costs of engaging in foreign currency forward contracts will vary
with factors such as:
a. the foreign currency involved;
b. the length of the contract period; and
c. the market conditions then prevailing, including general market
expectations as to the direction of the movement of various foreign
currencies against the U.S. dollar.
Furthermore, the Investment Adviser or Sub-Adviser may not be able to purchase
forward contracts with respect to all of the foreign currencies in which the
Portfolio's portfolio securities may be denominated. In those circumstances,
the correlation between movement in the exchange rates of the subject currency
and the currency in which the portfolio security is denominated may not be
precise. Moreover, if the forward contract is entered into in an
over-the-counter transaction, the Portfolio generally will be exposed to the
credit risk of its counterparty. Should a Portfolio enter into such contracts
on a foreign exchange, the contract will be subject to the rules of that
foreign exchange. Foreign exchanges may impose significant restrictions on the
purchase, sale or trading of such contracts, and may impose limits on price
moves. Such limits may affect significantly, the ability to trade the contract
or otherwise, to close out the position and could create potentially
significant discrepancies between the cash and market value of the position in
the forward contracts. Finally, the cost of purchasing forward contracts in a
particular currency will reflect, in part, the rate of return available on
instruments denominated in that currency. The cost of purchasing forward
contracts to hedge foreign currency portfolio securities may reduce that rate
of return toward the rate of return that would be earned on assets denominated
in U.S. dollars.
OTHER STRATEGIES OF THE GLOBAL AND INTERNATIONAL PORTFOLIOS
- -----------------------------------------------------------
The Global and International Portfolios may use forward contracts to hedge the
value of portfolio securities against changes in exchange rates. These
Portfolios may attempt to enhance its portfolio return by entering into forward
contracts and currency options, as discussed below, in a particular currency in
an amount in excess of the value of its assets denominated in that currency or
when it does not own assets denominated in that currency. If the Investment
Adviser or Sub-Adviser is not able to predict correctly the direction and
extent of movements in foreign currency exchange rates, entering into such
forward or option contracts may decrease rather than enhance the Portfolio's
return. In addition, if the Portfolio enters into forward contracts when it
does not own assets denominated in that currency, the Portfolio's volatility
may increase and losses on such contracts will not be offset by increases in
the value of portfolio assets.
22
<PAGE>
OPTIONS ON FOREIGN CURRENCIES
- -----------------------------
Each Portfolio may purchase and sell (or write) put and call options on foreign
currencies protecting against:
a. a decline in the U.S. dollar-equivalent value of its portfolio securities
or payments due thereon, or
b. a rise in the U.S. dollar-equivalent cost of securities that it intends to
purchase.
A foreign currency put option grants the holder the right, but not the
obligation to sell a specified amount of a foreign currency to its counterparty
at a predetermined price on a later date. Conversely, a foreign currency call
option grants the holder the right, but not the obligation, to purchase a
specified amount of a foreign currency at a predetermined price at a later
date.
As in the case of other types of options, a Portfolio's benefits from the
purchase of foreign currency options will be reduced by the amount of the
premium and related transaction costs. In addition, where currency exchange
rates do not move in the direction, or to the extent anticipated, the Portfolio
could sustain losses on transactions in foreign currency options, requiring
them to forego a portion or all of the benefits of advantageous changes in such
rates.
Each Portfolio may write options on foreign currencies for hedging purposes.
For example, where a Portfolio anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option most likely will
not be exercised, and the decrease in value of portfolio securities will be
offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar costs of securities to be acquired, a Portfolio could
write a put option on the relevant currency. If rates move in the manner
projected, the put option will expire unexercised, allowing the Portfolio to
hedge such increased costs up to the amount of the premium. As in the case of
other types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium. If movement in
the expected direction does not occur, the option may be exercised and the
Portfolio would be required to purchase or sell the underlying currency at a
loss which may not be fully offset by the amount of the premium. Through the
writing of options on foreign currencies, a Portfolio also may be required to
forego all or a portion of the benefits that might otherwise have been obtained
from favorable movements in exchange rates.
OPTIONS ON SECURITIES
- ---------------------
Each Portfolio may also enter into closing sale transactions with respect to
options it has purchased. A put option on a security grants the holder the
right, but not the obligation, to sell the security to its counterparty at a
predetermined price at a later date. Conversely, a call option on a security
grants the holder the right, but not the obligation, to purchase the security
underlying the option at a predetermined price at a later date.
Normally, a Portfolio would purchase put options in anticipation of a decline
in the market value of securities it holds or securities it intends to
purchase. If a Portfolios purchases a put option and the value of the security
decreases below the strike price of the option, the Portfolio has the right to
sell that security to its counterparty for the strike price (or realize the
value of the option by entering into a closing transaction). Thus, the
Portfolio would protect itself against any further decrease in the value of the
security during the term of the option.
Conversely, if the Investment Adviser or Sub-Adviser anticipates that a
security that it intends to acquire will increase in value, it might cause a
Portfolio to purchase a call option on that security or securities similar to
that security. If the value of the security does rise, the call option may
wholly or partially offset the increased price of the security. As in the case
of other types of options, however, the benefit to the Portfolio will be
reduced by the amount of the premium paid to purchase the option and any
related transaction costs. If, however, the value of the security falls instead
of rises, the Portfolio will have foregone a portion of the benefit of the
decreased price of the security in the amount of the option premium and the
related transaction costs.
A Portfolio would purchase put and call options on securities indices for the
same purposes, as it would purchase options on securities. Options on
securities indices are similar to options on securities except that the options
on securities reflect the change in price of a group of securities rather than
an individual security. The exercise of options on securities indices is
settled in cash rather than by delivery of the securities comprising the index
underlying the option.
23
<PAGE>
A Portfolio's transactions in options on securities and securities indices will
be governed by the rules and regulations of the respective exchanges, boards of
trade or other trading facilities on which the options are traded.
CONSIDERATIONS CONCERNING OPTIONS
- ---------------------------------
The writer of an option receives a premium, which it retains regardless of
whether the option is exercised. The purchaser of a call option has the right
to purchase the securities or currency subject to the option at a specified
price (the "exercise price") for a specified length of time. By writing a call
---------------
option, the writer becomes obligated during the term of the option, and upon
exercise of the option, to sell the underlying securities or currency to the
purchaser against receipt of the exercise price. The writer of a call option
also loses the potential for gain on the underlying securities or currency in
excess of the exercise price of the option during the period that the option is
open.
Conversely, the purchaser of a put option has the right to sell the securities
or currency subject to the option, to the writer of the put option at the
specified exercise price for a specified length of time. Upon exercising a put
option, the writer of the put option is obligated to purchase securities or
currency underlying the option at the exercise price during the term of the
option. A writer might, therefore, be obligated to purchase the underlying
securities or currency for more than their current market price or U.S. dollar
value, respectively.
Each Portfolio may purchase and sell both exchange-traded and OTC options.
Although many options on equity securities and options on currencies are
currently exchange-traded, options on debt securities are primarily traded in
the over-the-counter market. The writer of an exchange-traded option wishing to
terminate its obligation may effect a "closing purchase transaction." This is
accomplished by buying an option of the same series as the option previously
written. Options of the same series are options with respect to the same
underlying security or currency, having the same expiration date and the same
exercise price. Likewise, an investor who is the holder of an option may
liquidate a position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased. There is no guarantee that either a closing purchase or a closing
sale transaction can be effected.
An exchange-traded option position may be closed out only where a secondary
market exists for an option of the same series. For a number of reasons, a
secondary market may not exist for options held by a Portfolio, or trading in
such options might be limited or halted by the exchange on which the option is
trading. In such cases, it might not be possible to effect closing
transactions. (e.g., options the Portfolio has purchased with the result that
the Portfolio would have to exercise the options in order to realize any
profit). If the Portfolio is unable to effect a closing purchase transaction in
a secondary market in an option it has written, it will not be able to sell the
underlying security or currency until either: 1) the option expires, or 2) the
Portfolio delivers the underlying security or currency upon exercise or
otherwise cover its position.
EXCHANGE TRADED & OTC OPTIONS
- ------------------------------
U.S. exchange-traded options are issued by a clearing organization affiliated
with the exchange on which the option is listed. Thus, in effect, every
exchange-traded option transaction is guaranteed. In contrast, over the counter
("OTC") options are contracts between a Portfolio and its counterparty with no
clearing organization guarantee. Thus, when the Portfolio purchases OTC
options, it relies on the dealer from whom it purchased the option to make or
take delivery of the securities underlying the option. The dealer's failure to
do so would result in the loss of the premium paid by the Portfolio as well as
the loss of the expected benefit of the transaction. The Investment Adviser or
Sub-Adviser will purchase options only from dealers determined by the
Investment Adviser to be creditworthy.
Exchange-traded options generally have a continuous liquid market whereas OTC
options may not. Consequently, a Portfolio will generally be able to realize
the value of an OTC option it has purchased only by exercising it or reselling
it to the dealer who issued it. Similarly, when the Portfolio writes an OTC
option, it generally will be able only to close out the OTC option prior to its
expiration by entering into a closing purchase transaction with the original
issuing dealer of the OTC option. A Portfolio will only enter into OTC options
with dealers who agree to enter into them, and those who are capable of
entering into closing transactions with the Portfolio. There can be no
assurance that the Portfolio will be able to liquidate an OTC option at a
favorable price at any time prior to expiration. Until the Portfolio is able to
effect a closing purchase transaction in a covered OTC call option the
Portfolio has written, it will not be able to liquidate securities used as
cover until the option expires, it is exercised or different cover is
substituted. In the event of insolvency of the counterparty, the Portfolio may
be unable to liquidate an OTC option. In the case of options written by
24
<PAGE>
a Portfolio, the inability to enter into a closing purchase transaction may
result in material losses to the Portfolio. For example, since the Portfolio
must maintain a covered position with respect to any call option on a security
it writes, the Portfolio may be limited in its ability to sell the underlying
security while the option is outstanding. This may impair the Portfolio's
ability to sell a portfolio security at a time when such a sale might be
advantageous.
FOREIGN CURRENCIES
- ------------------
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the
extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may
take place in the underlying markets that cannot be reflected in the options
market until they reopen. Foreign currency transactions occurring in the
interbank market involve substantially larger amounts than those that may be
involved in the use of foreign currency options. Thus, investors may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
The use of options to hedge a Portfolio's foreign currency-denominated
portfolio or to enhance return raises additional considerations. As described
above, a Portfolio may, among other things, purchase call options on securities
it intends to acquire in order to hedge against anticipated market appreciation
in the price of the underlying security or currency. If the market price does
increase as anticipated, the Portfolio will benefit from that increase but only
to the extent that the increase exceeds the premium paid and related
transaction costs. If the anticipated rise does not occur, or if it does not
exceed the amount of the premium and related transaction costs, the Portfolio
will bear the expense of the options without gaining an offsetting benefit. If
the market price of the underlying currency or securities should fall instead
of rise, the benefit the Portfolio obtains from purchasing the currency or
securities at a lower price will be reduced by the amount of the premium paid
for the call options and by transaction costs.
A Portfolio also may purchase put options on currencies or portfolio securities
when it believes a defensive posture is warranted. Protection is provided
during the life of a put option because the put gives the Portfolio the right
to sell the underlying currency or security at the put exercise price,
regardless of a decline in the underlying currency's or security's market price
below the exercise price. This right limits the Portfolio's losses from the
currency's or security's possible decline in value below the exercise price of
the option to the premium paid for the option and related transaction costs. If
the market price of the currency or the Portfolio's securities should increase,
however, the profit that the Portfolio might otherwise have realized will be
reduced by the amount of the premium paid for the put option and by transaction
costs.
The value of an option position will reflect, among other things:
a. the current market price of the underlying currency or security;
b. the time remaining until expiration;
c. the relationship of the exercise price to the market price;
d. the historical price volatility of the underlying currency; and
e. security and general market conditions.
For this reason, the successful use of options as a hedging strategy depends
upon the ability of the Investment Adviser or the Sub-Adviser to forecast the
direction of price fluctuations in the underlying currency or securities
market.
Options normally have expiration dates of up to nine months. The exercise price
of the options may be below, equal to or above the current market values of the
underlying securities or currency at the time the options are written. Options
purchased by a Portfolio expiring unexercised have no value, and therefore a
loss will be realized in the amount of the premium paid (and related
transaction costs). If an option purchased by any Portfolio is in-the-money
prior to its expiration date, unless the Portfolio exercises the option or
enters into a closing transaction with respect to that position, the Portfolio
will not realize any gain on its option position.
A Portfolio's activities in the options market may result in a higher turnover
rates and additional brokerage costs. Nevertheless, the Portfolio may also save
on commissions and transaction costs by hedging through such activities,
25
<PAGE>
rather than buying or selling securities or foreign currencies in anticipation
of market moves, or foreign exchange rate fluctuations.
FUTURES CONTRACTS
- -----------------
Each Portfolio may enter into contracts for the purchase or sale for future
delivery (a "futures contract") of:
-----------------
a. fixed-income securities or foreign currencies;
b. contracts based on financial indices including any index of U.S.
Government Securities;
c. foreign government securities; or
d. corporate debt securities.
U.S. futures contracts have been designed by exchanges, which have been
designated as "contracts markets" by the CFTC, and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on a number of exchanges and,
through their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange. A Portfolio will
enter into futures contracts, based on debt securities that are backed by the
full faith and credit of the U.S. Government, such as long-term U.S. Treasury
Bonds, Treasury Notes, GNMA-modified pass-through mortgage-backed securities
and three-month U.S. Treasury Bills. Portfolios may also enter into futures
contracts based on securities that would be eligible investments for such
Portfolio and that are denominated in currencies other than the U.S. dollar.
This includes, without limitation, futures contracts based on government bonds
issued in the United Kingdom, Japan, the Federal Republic of Germany, France
and Australia and futures contracts based on three-month Euro-deposit contracts
in the major currencies.
A Portfolio would purchase or sell futures contracts to attempt to protect the
U.S. dollar-equivalent value of its securities from fluctuations in interest or
foreign exchange rates without actually buying or selling securities or foreign
currency. For example, if a Portfolio expected the value of a foreign currency
to increase against the U.S. dollar, the Portfolio might enter into futures
contracts for the sale of that currency. Such a sale would have much the same
effect as selling an equivalent value of foreign currency. If the currency did
increase, the value of the securities held by the Portfolio would decline, but
the value of the futures contracts would increase at approximately the same
rate. Thus, the Portfolio's net asset value would not decline as much as it
otherwise would have.
Although futures contracts, by their terms, call for the actual delivery or
acquisition of securities or currency, in most cases the contractual obligation
is fulfilled before the date of the contract without having to make or take
delivery of the securities or currency. The offsetting of a contractual
obligation is accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical futures contract calling for delivery in the
same month. Such a transaction, which is effected through a member of an
exchange, cancels the obligation to make or take delivery of the securities or
currency. Since all transactions in the futures market are performed through a
clearinghouse associated with the exchange on which the contracts are traded, a
Portfolio will incur brokerage fees when it purchases or sells futures
contracts.
At the time a futures contract is purchased or sold, the Portfolio must
allocate cash or securities as a deposit payment ("initial margin"). It is
---------------
expected that the initial margin on U.S. exchanges may range from approximately
3% to approximately 15% of the value of the securities or commodities
underlying the contract. Under certain circumstances, however, such as periods
of high volatility, an exchange may require the Portfolio to increase the level
of its initial margin payment. Additionally, initial margin requirements may be
increased generally in the future by regulatory action. An outstanding futures
contract is valued daily and the payment in cash of "variation margin" may be
required, a process known as "marking to the market." Each day, the Portfolio
will be required to provide (or will be entitled to receive) variation margin
in an amount equal to any decline (in the case of a long futures position) or
increase (in the case of a short futures position) in the contract's value
since the preceding day.
Futures contracts entail special risks. Among other things, the ordinary
spreads between values in the cash and futures markets, due to differences in
the character of these markets, are subject to distortions relating to:
a. investors' obligations to meet additional variation margin requirements;
b. decisions to make or take delivery, rather than entering into offsetting
transactions; and
c. the difference between margin requirements in the securities markets and
margin deposit requirements in the futures market.
The possibility of such distortion means that a correct forecast of general
market, foreign exchange rate or interest rate trends by the Investment Adviser
or Sub-Adviser may not result in a successful transaction.
26
<PAGE>
The Investment Adviser believes that use of such contracts and options thereon
will benefit the Portfolios. However, if the Investment Adviser's judgment
about the general direction of securities market movements, foreign exchange
rates or interest rates is incorrect, a Portfolio's overall performance would
be poorer than if it had not entered into any such contracts or purchased or
written options thereon. For example, if a Portfolio hedges against an interest
rate increase, (which would adversely affect the price of debt securities held)
and interest rates decrease, the Portfolio would lose part or all of the
benefit of the increased value of its assets, which it had hedged. This would
result in offsetting losses in its futures positions. In such situations, if
the Portfolio has insufficient cash, it may have to sell some of its assets to
meet daily variation margin requirements. Any such sale of assets may, but will
not necessarily, be at increased prices which reflect the rising market. Thus,
the Portfolio may have to sell assets at a time when it may be disadvantageous
to do so.
A Portfolio's ability to establish and close out positions in futures contracts
and options on futures contracts will be subject to the development and
maintenance of a liquid market. Although a Portfolio generally will purchase or
sell only those futures contracts and options thereon for which there appears
to be a liquid market, there is no assurance that a liquid market on an
exchange will exist for any particular futures contract or option thereon at
any particular time. Where it is not possible to effect a closing transaction
in a contract at a satisfactory price, the Portfolio would have to make or take
delivery under the futures contract or, in the case of a purchased option,
exercise the option or let it expire. In the case of a futures contract that a
Portfolio has sold and is unable to close out, the Portfolio would be required
to maintain margin deposits on the futures contract and to make variation
margin payments until the contract is closed.
Under certain circumstances, exchanges may establish daily limits of the amount
that the price of a futures contract or related option contract may vary either
up or down from the previous day's settlement price. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a
price beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because
the limit may prevent the liquidation of unfavorable positions. Futures or
options contract prices could move to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation
of positions and subjecting some traders to substantial losses.
Buyers and sellers of foreign currency futures contracts are generally subject
to the same risks that apply to the use of futures. In addition, there are
risks associated with foreign currency futures contracts and their use as
hedging devices similar to those associated with options on foreign currencies
described above. Further, settlement of a foreign currency futures contract
must occur within the country issuing the underlying currency. Thus, a
Portfolio must accept delivery of the underlying foreign currency in accordance
with any U.S. or foreign restrictions or regulations regarding the maintenance
of foreign banking arrangements by U.S. residents. It may also be required to
pay any fees, taxes or charges associated with such delivery that are assessed
in the country of the underlying currency.
OPTIONS ON FUTURES CONTRACTS
- ----------------------------
The purchase of a call option on a futures contract is similar in some respects
to the purchase of a call option on an individual security or currency.
Depending on the pricing of the option compared to either the price of the
futures contract upon which it is based, or the price of the underlying
securities or currency, it may or may not be less risky than ownership of the
futures contract or the underlying securities or currency. As with the purchase
of futures contracts, a Portfolio that is not fully invested may purchase a
call option on a futures contract to hedge against a market advance due to
declining interest rates or a change in foreign exchange rates.
Writing a call option on a futures contract constitutes a partial hedge against
decreasing prices of the security or foreign currency. The hedge is deliverable
upon exercise of the futures contract. If the futures price of the option at
expiration is below the exercise price, a Portfolio will retain the full amount
of the option premium, providing a partial hedge against any decline that may
have occurred in the Portfolio's holdings. Writing a put option on a futures
contract constitutes a partial hedge against increasing prices of the security
or foreign currency. The hedge is deliverable upon exercise of the futures
contract. If the futures price at expiration of the option is higher than the
exercise price, the Portfolio will retain the full amount of the option premium
providing a partial hedge against any increase in the price of securities,
which a Portfolio intends to purchase. If a Portfolio's put or call option is
exercised, it will incur a loss that will be reduced by the amount of the
premium it receives. Depending on the degree of correlation between changes in
the value of its securities and changes in
27
<PAGE>
the value of its futures positions, a Portfolio's losses from existing options
on futures may be reduced or increased by changes in the value of its
securities.
The purchase of a put option on a futures contract is similar in some respects
to the purchase of protective put options on Portfolio securities. Thus, a
Portfolio may purchase a put option on a futures contract to hedge against the
risk of rising interest rates.
The amount of risk a Portfolio assumes when it purchases an option on a futures
contract is:
RISK = THE PREMIUM PAID FOR THE OPTION + RELATED TRANSACTION COSTS
In addition to the correlation risks discussed above, purchasing an option also
entails the risk that changes in the value of the underlying futures contract
will not be fully reflected in the value of the option purchased.
Options on foreign currency futures contracts may involve certain additional
risks. Trading options on foreign currency futures contracts is relatively new.
The ability to establish and close out positions in such options is subject to
the maintenance of a liquid secondary market. To mitigate this problem, a
Portfolio will not purchase or write options on foreign currency futures
contracts, unless and until the market for such options has developed
sufficiently. This would make clearer the risks connected with such options,
and would allow the are not greater than the risks in connection with
transactions in the underlying foreign currency futures contracts. This is
subject to the investment Advisor's or Sub-Advisor's discretion. Compared to
the purchase or sale of foreign currency futures contracts, the purchase of
call or put options thereon involves less potential risk to the Portfolio
because the maximum amount at risk is the premium paid for the option (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a foreign currency futures contract would result in a
loss. This would occur when there is no movement in the price of the underlying
currency or futures contract, when use of the underlying futures contract would
not.
INVESTMENT RESTRICTIONS
The Fund has adopted the investment restrictions listed below relating to the
investment of each Portfolio's assets and its activities other than Emerging
Markets Portfolio, International Portfolio and Limited Duration Portfolio.
These are fundamental policies that may not be changed without the approval of
the holders of a majority of the outstanding voting securities of a Portfolio
(which for this purpose and under the 1940 Act means the lesser of (i) 67% of
the shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (ii) more than 50% of the outstanding shares).
Portfolios may not:
a. borrow money, except in conformity with the limits set forth in the 1940
Act; notwithstanding the foregoing, short-term credits necessary for settlement
of securities of transactions are not considered borrowings;
b. issue senior securities, except to the extent permitted under the 1940 Act;
c. underwrite securities of other issuers;
d. purchase or sell real estate (other than marketable securities representing
interests in, or backed by, real estate); or
e. purchase or sell physical commodities or related commodity contracts.
The Fund has also adopted the non-fundamental investment restrictions listed
below relating to the investment of each Portfolio's assets and its activities
other than Emerging Markets Portfolio, International Portfolio and Limited
Duration Portfolio. These non-fundamental policies may be changed by the Board
of Directors without the approval of shareholders. The Portfolios may not:
a. purchase securities on margin (although deposits referred to as "margin"
will be made in connection with investments in futures contracts, as explained
above, and a Portfolio may obtain such short-term credits as may be necessary
for the clearance of purchases and sales of securities);
b. invest in companies for the purpose of exercising control or management;
c. purchase or retain the securities of any issuer if the officers, directors
or trustees of the Fund, or its advisors, or managers own beneficially more
than one half of one percent of the securities of an issuer, or together own
beneficially more than five percent of the securities of that issuer;
28
<PAGE>
d. invest more than fifteen percent (15%) of the Fund's total assets in the
securities of issuers which together with any predecessors have a record of
less than three years continuous operation or securities of issuers which
are restricted as to disposition.
From time to time, a Portfolio's investment policy may restrict or limit the
maximum percentage of the Portfolio's assets that may be invested in any
security or other asset, or set forth a policy regarding quality standards. If
so, such standard or percentage limitation shall be determined immediately
after, and as a result of, the Portfolio's acquisition of such security or
other asset. Accordingly, any later increase or decrease in a percentage
resulting from a change in values, net assets or other circumstances will not
be considered when determining whether that investment complies with the
Portfolio's investment policies and restrictions.
Additional investment restrictions specific to a particular portfolio are as
follows:
MONEY MARKET PORTFOLIO
- ----------------------
Money Market may not (although not a fundamental policy):
a. invest more than 5% of its total assets in the securities of any one issuer
or in premiums related to puts from any one issuer, except U.S. Government
securities, provided that the Portfolio may invest more than 5% of its
total assets in first tier securities of any one issuer for a period of up
to three business days or, in unrated securities that have been determined
to be of comparable quality by the Investment Adviser; or
b. invest more than 5% of its total assets in second tier securities, or in
unrated securities determined by the Investment Adviser to be of comparable
quality.
c. Money Market Minimum Credit Ratings for Allowable Investments:
1. First Tier Securities: any instruments receiving the highest short-term
---------------------
rating by at least two nationally recognized statistical rating
organizations ("NRSROs") such as "A-1" by Standard & Poor's and "P-1" by
Moody's or are single rated and have received the highest short-term rating
by the NRSRO. This includes all instruments issued by the U.S. Government,
its agencies or instrumentalities and any single rated and unrated
instruments that are determined to be of comparable quality by the
Investment Adviser pursuant to guidelines approved by the Board of
Directors.
2. Second Tier Securities: any instrument rated by two NRSROs in the second
----------------------
highest category, or rated by one NRSRO in the highest category and by
another NRSRO in the second highest category or by one NRSRO in the second
highest category. Second Tier Securities are limited in total of 5% of the
Portfolio's total assets and on a per issuer basis, to no more than the
greater of 1% of the Portfolio's total assets or $1,000,000. This also
includes any single rated and unrated instruments that are determined to be
of comparable quality by the Investment Adviser pursuant to guidelines
approved by the Board of Directors.
U.S. SHORT-TERM PORTFOLIO
- -------------------------
U.S. Short-Term has adopted five additional fundamental policies that may not
be changed without the approval of the holders of a majority of the shares of
the Portfolio. The Portfolio may not:
a. invest more than 5% of its total assets in the securities of any issuer
(other than securities issued by the U.S. Government, its agencies and
instrumentalities, and repurchase agreements), or purchase more than 10% of
the voting securities of any one issuer, with respect to 75% of the
Portfolio's assets;
b. invest more than 25% of its total assets in the securities of issuers in
any industry (other than U.S. Government Securities, the banking industry
and the finance industry). For purposes of this test, finance will be
deemed to include all asset-backed securities.
c. make loans to other persons, except by:
i. the purchase of a portion of an issue of debt obligations in which a
Portfolio is authorized to invest in accordance with its investment
objectives, and
ii. engaging in repurchase agreements.
d. purchase or sell physical commodities or related commodity contracts.
U.S. Short-Term has also adopted the following non-fundamental policy that may
be changed by the Board of Directors without the approval of a majority of the
shares of the Portfolio. The Portfolio may not:
a. enter into repurchase agreements if, as a result thereof, more than 25% of
its total assets would be subject to repurchase agreements.
29
<PAGE>
WORLDWIDE AND WORLDWIDE-HEDGED PORTFOLIOS
- -----------------------------------------
Worldwide and Worldwide-Hedged each have adopted the following fundamental
policy that may not be changed without the approval of the holders of a
majority of the shares of either Portfolio. Each Portfolio may not:
a. purchase or sell physical commodities or related commodity contracts.
Worldwide and Worldwide-Hedged each has also adopted the following
non-fundamental policy that may be changed by the Board of Directors without
the approval of a majority of the shares of the Portfolio. The Portfolio may
not:
a. enter into repurchase agreements if, as a result thereof, more than 25% of
its total assets would be subject to repurchase agreements.
EMERGING MARKETS PORTFOLIO
- --------------------------
Emerging Markets Portfolio has adopted the following fundamental policies that
may not be changed without the approval of the holders of a majority of the
outstanding voting securities of the Portfolio. The Portfolio may not:
a. borrow money, except by engaging in reverse repurchase agreements (reverse
repurchase agreements and dollar roll transactions that are covered pursuant to
SEC regulations or staff positions, will not be considered borrowing) or dollar
roll transactions or from a bank as a temporary measure for the reasons
enumerated in "INVESTMENT RESTRICTIONS" provided that the Portfolio will not
borrow, more than an amount equal to one-third of the value of its assets, nor
will it borrow for leveraging purposes (i.e., the Portfolio will not purchase
securities while temporary bank borrowings in excess of 5% of its total assets
are outstanding);
b. issue senior securities (other than as specified in clause a);
c. underwrite securities of other issuers;
d. purchase securities on margin (although deposits referred to as "margin"
will be made in connection with investments in futures contracts, as explained
above, and the Portfolio may obtain such short-term credits as may be necessary
for the clearance of purchases and sales of securities);
e. make short sales of securities (does not include options, futures, options
on futures or forward currency contracts);
f. purchase or sell real estate (other than marketable securities representing
interests in, or backed by, real estate); or
g. purchase or sell physical commodities or related commodity contracts.
In addition, Emerging Markets Portfolio may not:
a. invest in companies for the purpose of exercising control or management;
b. purchase or retain the securities of any issuer if the officers, directors
or trustees of the Fund, or its advisors, or managers own beneficially more
than one half of one percent of the securities of an issuer, or together own
beneficially more than five percent of the securities of that issuer;
c. invest more than fifteen percent (15%) of the Fund's total assets in the
securities of issuers which together with any predecessors have a record of
less than three years continuous operation or securities of issuers which are
restricted as to disposition.
INTERNATIONAL AND LIMITED DURATION PORTFOLIOS
- ---------------------------------------------
International and Limited Duration Portfolios each have adopted the following
fundamental policies that may not be changed without the approval of the
holders of a majority of the outstanding voting securities of either Portfolio.
Each Portfolio may not:
a. borrow money, except by engaging in reverse repurchase agreements (reverse
repurchase agreements and dollar roll transactions that are covered pursuant to
SEC regulations or staff positions, will not be considered borrowing) or dollar
roll transactions or from a bank as a temporary measure for the reasons
enumerated in "INVESTMENT RESTRICTIONS" provided that a Portfolio will not
borrow, more than an amount equal to one-third of the value of its assets, nor
will it borrow for leveraging purposes (i.e., a Portfolio will not purchase
securities while temporary bank borrowings in excess of 5% of its total assets
are outstanding);
b. issue senior securities (other than as specified in clause a);
c. purchase securities on margin (although deposits referred to as "margin"
will be made in connection with investments in futures contracts, as explained
above, and a Portfolio may obtain such short-term credits as may be necessary
for the clearance of purchases and sales of securities);
d. make short sales of securities (does not include options, futures, options
on futures or forward currency contracts);
e. underwrite securities of other issuers;
f. invest in companies for the purpose of exercising control or management;
g. purchase or sell real estate (other than marketable securities representing
interests in, or backed by, real estate); or
h. purchase or sell physical commodities or related commodity contracts.
In addition, each Portfolio may not:
a. purchase or retain securities of any issuer if the officers, directors or
trustees of the Fund, or its advisors, or managers own beneficially more than
one half of one percent of the securities of an issuer, or together own
beneficially more than five percent of the securities of that issuer; and
b. invest more than fifteen percent (15%) of the Fund's total assets in the
securities of issuers which together with any predecessors have a record of
less than three years continuous operation or securities of issuers which are
restricted as to disposition.
ILLIQUID SECURITIES
- -------------------
The Commission's staff has taken the position that purchased OTC options and
the assets used as cover for written OTC options are illiquid securities.
Therefore, each Portfolio has adopted an investment policy regarding the
purchase or sale of OTC options. The purchase or sale of an OTC option will be
restricted if:
a. the total market value of the Portfolio's outstanding OTC options exceed
15% (10% for Money Market) of the Portfolio's net assets, taken at market
value, together with all other assets of the Portfolio that are
illiquid or are not otherwise readily marketable;
b. the market value of the underlying securities covered by OTC call options
currently outstanding that were sold by such Portfolio exceed 15% (10% for
Money Market) of the net assets of such Portfolio, taken at market value,
together with all other assets of the Portfolio that are illiquid or are
not otherwise readily marketable; and
c. margin deposits on such Portfolio's existing OTC options on futures
contracts exceed 15% (10% for Money Market) of the net assets of such
Portfolio, taken at market value, together with all other assets of the
Portfolio that are illiquid or are not otherwise readily marketable.
This policy is not fundamental to Portfolio operations and the Fund's Directors
may amended it without the approval of the Fund's or a Portfolio's
shareholders. However, the Fund will not change or modify this policy prior to
a change or modification by the Commission staff of its position.
PORTFOLIO TRANSACTIONS
The Fund's debt securities are primarily traded in the over-the-counter market
by dealers who are usually acting as principal for their own account. On
occasion, securities may be purchased directly from the issuer. Such securities
are generally traded on a net basis and do not normally involve brokerage
commissions or transfer taxes. The Fund enters into financial futures and
options contracts normally involving brokerage commissions.
For the years ended December 31, 1998, December 31, 1997 and December 31, 1996,
the amount of brokerage commissions (associated with financial futures and
options contracts) paid by each Portfolio were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
Portfolio December 31, 1998 December 31, December 31,
1997 1996
- -------------------------------------------------------------------------------
U.S. PORTFOLIOS
---------------
- -------------------------------------------------------------------------------
U.S. Short-Term $139,225 $126,108 $110,133
Limited Duration 3,587 3,649 0
Mortgage-Backed(1) 221,300 463,651 30,152
30
<PAGE>
- -------------------------------------------------------------------------------
GLOBAL AND INTERNATIONAL PORTFOLIOS
-----------------------------------
- -------------------------------------------------------------------------------
Global Tactical
Exposure (2) $239,523 $127,213 $12,342
Worldwide 28,336 21,065 10,254
Worldwide-Hedged 54,965 11,724 2,719
International (3) 34,107 13,040 2,707
International
Opportunities (4) 305 N/A N/A
Emerging Markets (3) 39,923 7,697 N/A
- ----------------------------------------------------------------------------------
</TABLE>
(1) Commenced operations April 29, 1996.
(2) The Portfolio was fully liquidated on December 30, 1994, and recommenced
operations on September 14, 1995.
(3) Commenced operations May 9, 1996.
(4) Commenced operations on October 8, 1998
(5) Commenced operations on August 12, 1997.
The cost of executing transactions will consist primarily of dealer spreads.
These spreads are not included in Portfolio expenses and therefore, are not
subject to the expense cap. Nevertheless, incurring this spread, ignoring the
other intended positive effects of each such transaction, will decrease the
total return of the Portfolio. A Portfolio will buy one asset and sell another
only if the Investment Adviser and/or the Sub-Adviser believes it is
advantageous to do so after considering the effect of the additional custodial
charges and the spread on the Portfolio's total return.
All purchases and sales will be executed with major dealers and banks on a best
net price basis. No trades will be executed with the Investment Adviser, the
Sub-Adviser, their affiliates, officers or employees acting as principal or
agent for others, although such entities and persons may be trading
contemporaneously in the same or similar securities. The Investment Adviser
and/or Sub-Adviser may decide that a particular investment, which is
appropriate for one Portfolio, is considered for purchase for the account of
another Portfolio, client or fund. If this occurs, the investment opportunity,
as well as the expenses incurred in the transaction, will be allocated in a
manner deemed equitable by the Investment Adviser.
The Global and International Portfolios are expected to invest substantial
portions of their assets in foreign securities. Since costs associated with
transactions in foreign securities are generally higher than costs associated
with transactions in domestic securities, the operating expense ratios of these
Portfolios can be expected to be higher than that of an investment company
investing exclusively in domestic securities.
SUPPLEMENTAL TAX CONSIDERATIONS
The following summary of tax consequences does not purport to be complete. It
is based on U.S. federal tax laws and regulations in effect on the date of this
Statement of Additional Information, which are subject to change by legislative
or administrative action. Each investor is advised to consult their own tax
advisor for more complete information on specific tax consequences.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
- -----------------------------------------------
Each active Portfolio has qualified, and intends to continue to qualify, to be
treated as a regulated investment company ("RIC") under the Internal Revenue
---
Code of 1986, as amended (the "Code"). To qualify as a RIC, a Portfolio must,
----
among other things:
a. derive at least 90% of its gross income each taxable year, from
dividends, interest, payments (with respect to securities loans and gains
from the sale or other disposition of securities or foreign currencies)
or other income (including gains from options, futures or forward
contracts) derived from its business of investing in securities or foreign
currencies (the "Qualifying Income Requirement");
-----------------------------
31
<PAGE>
b. diversify its holdings so that, at the end of each quarter of the
Portfolio's taxable year:
a. at least 50% of the Portfolio's asset market value is represented by
cash and cash items (including receivables), U.S. Government
Securities, securities of other RICs and other securities, with such
other securities of any one issuer limited to an amount not greater
than 5% of the value of the Portfolio's total assets and not greater
than 10% of the outstanding voting securities of such issuer and
ii) not more than 25% of the value of the Portfolio's total assets is
invested in the securities of any one issuer (other than U.S.
Government Securities or the securities of other RICs); and
c. distribute at least 90% of its investment company taxable income (which
includes, among other items, interest and net short-term capital gains in
excess of net long-term capital losses).
The U.S. Treasury Department has the authority to promulgate regulations,
pursuant to which, gains from foreign currency (and options, futures and
forward contracts on foreign currency) not directly related to a RIC's
principal business of investing in stocks and securities would not be treated
as qualifying income. To date, such regulations have not been promulgated.
If a Portfolio does not qualify as a RIC for any taxable year, all of its
taxable income will be taxed to the Portfolio at corporate rates. For each
taxable year the Portfolio qualifies as a RIC, it will not be subject to
federal income tax on that part of its investment company taxable income and
net capital gains (the excess of net long-term capital gain over net short-term
capital loss) it distributes to its shareholders. In addition, to avoid a
nondeductible 4% federal excise tax, the Portfolio must distribute during each
calendar year an amount at least equal to the sum of: a. 98% of its ordinary
income (not taking into account any capital gains or losses), determined on a
calendar year basis; b. 98% of its capital gains in excess of capital losses,
determined in general on an October 31 year-end basis; and c. any undistributed
amounts from previous years.
Each Portfolio intends to distribute all of its net income and gains by
automatically reinvesting such income and gains in additional Portfolio shares.
Each Portfolio will monitor its compliance with all of the rules set forth in
the preceding paragraph.
DISTRIBUTIONS
- -------------
The following qualifies as taxable income to Portfolio shareholders:
a. Portfolio's automatic reinvestment of its ordinary income,
b. net short-term capital gains and net long-term capital gains in additional
Portfolio shares, and
c. distribution of such shares to shareholders.
Generally, shareholders will be treated as if the Portfolio had distributed
income and gains to them and then reinvested by them in Portfolio shares--even
though no cash distributions have been made to shareholders. The automatic
reinvestment of ordinary income and net realized short-term Portfolio capital
gains would be taxable to shareholders as ordinary income. Each Portfolio's
automatic reinvestment of any net long-term capital gains designated as capital
gain dividends by the Portfolio will be taxable to the shareholders as
long-term capital gain. This is the case regardless of how long they have held
their shares. None of the amounts treated as distributed to a Portfolio's
shareholders will be eligible for the corporate dividends received deduction. A
distribution will be treated as paid on December 31 of the current calendar
year, if the Portfolio: a. declares it during October, November or December,
and b. the distribution has a record date in such a month, and c. it is paid by
the Portfolio during January of the following calendar year. Such distributions
will be taxable to shareholders in the calendar year in which the distributions
are declared, rather than in the calendar year in which the distributions are
received. Each Portfolio will inform shareholders of the amount and tax status
of all amounts treated as distributed to them not later than 60 days after the
close of each calendar year.
SALE OF SHARES
- --------------
Upon the sale or other disposition of Portfolio shares, or upon receipt of a
distribution in complete Portfolio liquidation, a shareholder usually will
realize a capital gain or loss. This loss may be long-term or short-term,
generally depending upon the shareholder's holding period for the shares. For
tax purposes, a loss will be disallowed on the sale or exchange of shares if
the disposed of shares are replaced (including shares acquired pursuant to a
dividend reinvestment plan) within a period of 61 days. The 61-day time window
begins 30 days before and ends 30 days after the sale or exchange of such
shares. Should a disposition fall within this 61 day window, the basis of the
acquired shares will be adjusted to reflect the disallowed loss. A
32
<PAGE>
shareholder holding Portfolio shares for six months or longer will realize a
long-term capital loss on share disposition. Should such loss occur, to the
extent of any net capital gains distributions deemed received by the
shareholder.
ZERO COUPON SECURITIES
- ----------------------
A Portfolio's investment in zero coupon securities will result in Portfolio
income, equal to a portion of the excess of the amortized face value of the
securities over their issue price (the "original issue discount"), prior
-------------------------
amortized value or purchased cost for each year that the securities are held.
This is so, even though the Portfolio receives no cash interest payments during
the holding period. This income is included when determining the amount of
income the Portfolio must distribute to maintain its status as a RIC and to
avoid the payment of Federal income tax and the 4% excise tax.
HEDGING TRANSACTIONS
- --------------------
Certain options, futures and forward contracts in which a Portfolio may invest
are "section 1256 contracts." Gains and losses on section 1256 contracts are
generally treated as 60 percent long-term and 40 percent short-term capital
gains or losses ("60/40 treatment"). This is so, regardless of the length of
----------------
the Portfolio's actual holding period for the contract. Also, a Portfolio
holding a section 1256 contract at the end of each taxable year (and generally,
for the purposes of the 4% excise tax, on October 31 of each year) must be
treated as if the contract had been sold at its fair market value on that day
("mark to market treatment"). As such, any deemed gain or loss on the contract
------------------------
is subject to 60/40 treatment. Foreign currency gain or loss (discussed below)
arising from section 1256 contracts may, however, be treated as ordinary income
or loss.
STRADDLES
- ---------
The hedging transactions undertaken by a Portfolio may result in "straddles"
for federal income tax purposes, affecting the character of gains or losses
realized by the Portfolio. Losses realized by a Portfolio on positions that are
part of a straddle may be deferred under the straddle rules rather than being
taken into account in calculating the taxable income for the taxable year in
which such losses are realized. Further, a Portfolio may be required to
capitalize, instead of currently deducting any interest expense on indebtedness
incurred or continued to purchase or carry any positions that are part of a
straddle. To date, only a few regulations implementing the straddle rules have
been executed; thus, the Portfolio tax consequences of engaging in straddles
transactions are unclear. Hedging transactions may increase the amount of
short-term capital gain realized by the Portfolios. Such gain is taxed as
ordinary income when distributed to shareholders.
A Portfolio may make one or more of the elections available under the Code that
is applicable to straddles. If a Portfolio makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
may accelerate the recognition of gains or losses from the affected straddle
positions.
Straddle rules may affect the amount, character and timing of gains or losses
from the positions that are part of a straddle. The amount of Portfolio income
distributed and taxed as ordinary income or long-term capital gain to
shareholders may be increased or decreased compared to a fund not engaging in
such hedging transactions.
FOREIGN CURRENCY-RELATED TRANSACTIONS
- -------------------------------------
Gains or losses attributable to exchange rate fluctuations are generally
treated as ordinary income or ordinary loss when they occur between the time a
Portfolio accrues interest or other receivables, accrues expenses or other
liabilities, denominated in a foreign currency and the time the Portfolio
actually collects such receivables, or pays such liabilities. In addition,
gains or losses may be the result of:
a. certain option dispositions
b. futures and forward contracts
c. debt security dispositions denominated in a foreign currency
d. fluctuations in foreign currency value between the date of acquisition of
the security or contract and the date of disposition.
These gains or losses, referred to under the Code as "section 988" gains or
losses, may increase or decrease the amount of a Portfolio's investment company
taxable income to be distributed to shareholders as ordinary income.
33
<PAGE>
BACKUP WITHHOLDING
- ------------------
A Portfolio may be required to withhold U.S. federal income tax at the rate of
31% of all amounts deemed to be distributed as a result of the automatic
reinvestment by the Portfolio of its income and gains in additional shares of
the Portfolio. The 31% rate applies to shareholders receiving redemption
payments who:
a. fail to provide the Portfolio with their correct taxpayer
identification number;
b. fail to make required certifications,
c. have been notified by the Internal Revenue Service that they are subject to
backup withholding.
Backup withholding is not an additional tax. Any amounts withheld will be
credited against a shareholder's U.S. federal income tax liability. Corporate
shareholders and certain other shareholders are exempt from such backup
withholding.
FOREIGN SHAREHOLDERS
- --------------------
A foreign shareholder, qualifying as a non-resident alien, a foreign trust or
estate, foreign corporation, or foreign partnership ("foreign shareholder") may
-------------------
have to pay U.S. tax depending on whether the Portfolio income is "effectively
connected" with an U.S. trade or business.
If a foreign shareholder's Portfolio income is not "effectively connected" with
an U.S. trade or business, the distributions of investment company taxable
income will be subject to an U.S. tax of 30% (or lower treaty rate).
If a foreign shareholder's Portfolio income is effectively connected with an
U.S. trade or business, then:
a. distributions of investment company taxable income,
b. capital gain dividends, and
c. any gain realized upon the redemption, sale or exchange of shares of the
Portfolio will be subject to U.S. Federal income tax at the graduated rates
applicable to U.S. citizens or domestic corporations. Such shareholders
may also be subject to the branch profits tax at a 30% rate.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty may differ from those described herein. Foreign
shareholders are advised to consult their own tax advisers regarding investment
tax consequences in a Portfolio.
SHORT SALES
- -----------
Each of the following Portfolios: Mortgage LIBOR, Mortgage-Backed,
Asset-Backed, High Yield, Enhanced Equity Market, U.S. Corporate, International
Opportunities, International Corporate, Global High Yield, Inflation-Indexed
and Inflation-Indexed Hedged will not realize gain or loss on the short sale of
a security until it closes the transaction by delivering the borrowed security
to the lender. Pursuant to Code Section 1233, all or a portion of any gain
arising from a short sale may be treated as short-term capital gain, regardless
of the period of time the Portfolio held the security used to close the short
sale. The distribution requirements applicable to the Portfolio's assets may
limit the extent to which each Portfolio will be able to engage in short sales
and transactions in options, futures and forward contracts.
CONSTRUCTIVE SALES
- ------------------
Under normal circumstances, a Fund may recognize gain from a constructive sale
of an "appreciated financial position" it holds if it enters into a short sale,
forward contract or other transaction that substantially reduces the risk of
loss with respect to the appreciated position. In that event, the Fund would be
treated as if it had sold and immediately repurchased the property and would be
taxed on any gain (but not loss) from the constructive sale. The character of
gain from a constructive sale would depend upon the Fund's holding period in
the property. Loss from a constructive sale would be recognized when the
property was subsequently disposed of, and its character would depend on the
Fund's holding period and the application of various loss deferral provisions
of the Code. Constructive sale treatment does not apply to transactions closed
in the 90-day period ending with the 30th day after the close of the taxable
year, if certain conditions are met.
U.S. SHORT-TERM PORTFOLIO
- -------------------------
As a result of its expected high portfolio turnover rate, U.S. Short-Term
Portfolio may recognize higher short-term capital gains than mutual funds with
lower turnover rates. Such gains must be distributed to shareholders.
34
<PAGE>
GLOBAL AND INTERNATIONAL PORTFOLIOS
- -----------------------------------
Income received by a Portfolio from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. The amount of foreign tax cannot be predicted in advance
because the amount of a Portfolio's assets that may be invested in a particular
country is subject to change.
Global and International Portfolios may invest in shares of foreign
corporations that may be classified under the Code as passive foreign
investment companies ("PFICs"). In general, a foreign corporation is classified
as a PFIC if at least one-half of its assets constitute investment-type assets,
or 75% or more of its gross income is investment-type income. If a Fund
receives a so-called "excess distribution" with respect to PFIC stock, the Fund
itself may be subject to a tax on a portion of the excess distribution, whether
or not the corresponding income is distributed by the Fund to shareholders. In
general, under PFIC rules, an excess distribution is treated as having been
realized ratably over the period during which the Fund held the PFIC shares.
The Fund, itself will be subject to tax on the portion, if any, of an excess
distribution that is so allocated to prior Fund taxable years and an interest
factor will be added to the tax, as if the tax had been payable in such prior
taxable years. Certain distributions from a PFIC as well as gain from the sale
of PFIC shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital gain.
A Fund may be eligible to elect alternative tax treatment with respect to PFIC
shares. Under an election that currently is available in some circumstances, a
Fund would be required to include in its gross income its shares of the
earnings of a PFIC on a current basis, regardless of whether distributions were
received from the PFIC in a given year. If this election were made, the special
rules, discussed above, relating to the taxation of excess distributions would
not apply. In addition, another election would involve marking to market a
Fund's PFIC shares at the end of each taxable year, with the result that
unrealized gains would be treated as though they were realized and reported as
ordinary income. Any mark-to-market losses and any loss from an actual
disposition of PFIC shares would be deductible as ordinary losses to the extent
of any net mark-to-market gains included in income in prior years.
If more than 50% of a Portfolio's total asset value at the end of its taxable
year consists of securities of foreign corporations as will be expected with
respect to the International Portfolios, the Portfolio will be eligible, and
may elect to "pass through" to shareholders the Portfolio's foreign income and
similar taxes it has paid. Pursuant to this election, a shareholder will be
required to include in gross income (in addition to taxable dividends actually
received) a pro rata share of the foreign taxes paid by the Portfolio in gross
income. The Portfolio will be entitled either to deduct (as an itemized
deduction) that amount in computing taxable income or use that amount as a
foreign tax credit against U.S. federal income tax liability. The amount of
foreign taxes for which a shareholder can claim a credit in any year will be
subject to limitations set forth in the Code, including a separate limitation
for "passive income," which includes, among other items, dividends, interest
and certain foreign currency gains. Shareholders not subject to U.S. federal
income tax on portfolio income may not claim this deduction or credit.
International Portfolio shareholders will be notified within 60 days after the
close of the Portfolio's taxable year whether the foreign taxes paid by such
Portfolio will "pass through" for the year.
OTHER TAXES
- -----------
A Portfolio may be subject to state, local or foreign taxes in any jurisdiction
where the Portfolio is deemed to be doing business. In addition, Portfolio
shareholders may be subject to state, local or foreign taxes on Portfolio
distributions. In many states, Portfolio distributions derived from interest on
certain U.S. Government obligations may be exempt from taxation. Shareholders
should consult their own tax advisers concerning these matters.
SHAREHOLDER INFORMATION
Certificates representing a particular Portfolio's shares will not be issued to
shareholders. Investors Bank & Trust Company, the Fund's Transfer Agent,
maintains accounts for each shareholder. The registration and transfer of
shares as recorded in these accounts shall be reflected by bookkeeping entry,
without physical delivery. Detailed confirmations of purchase or redemption are
sent to each shareholder. Monthly account statements are sent detailing which
shares were purchased as a result of a reinvestment of Portfolio distributions.
35
<PAGE>
The Transfer Agent will require a shareholder to provide requests in writing,
accompanied by a valid signature guarantee form, when changing certain
information in an account (i.e., wiring instructions, telephone privileges,
etc.). None of the Fund, Investors Capital, AMT Capital and the Transfer Agent
will be responsible for the validity of written or telephonic requests.
Should conditions exist making cash payments undesirable, the Fund reserves the
right to honor any Portfolio redemption request by making whole or part payment
in readily marketable securities and valued as they are for purposes of
computing the Portfolio's net asset value (redemption-in-kind). If payment is
made in securities, a shareholder may incur transaction expenses in converting
these securities to cash. The Fund has elected to be governed by Rule 18f-1
under the Investment Company Act of 1940. Thus, the Fund is obligated to redeem
shares, with respect to any one shareholder during any 90-day period, solely in
cash up to the lesser of $250,000 or 1% of the net asset value of a Portfolio
at the beginning of the period.
CALCULATION OF PERFORMANCE DATA
From time to time, Portfolios may include their yield and total return in
reports to shareholders or prospective investors. Quotations of a Portfolio's
yield are based on all investment income per share during a particular 30-day
(or one month) period, (including dividends and interest); less expenses
accrued during the period ("net investment income"). Such quotations are
computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula, which
is prescribed by the Commission:
Yield = 2[ ( a - b + 1 ) 6 - 1]
-----
c d
Where:
a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of Shares of a Portfolio outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period.
The yield as defined above for each relevant Fund Portfolio for the 30-day
period ended December 31, 1998 is as follows:
U.S. Portfolios
---------------
U.S. Short-Term ...........................4.97%
Limited Duration ...........................5.50%
Mortgage Backed ...........................5.77%
Global and International Portfolios
-----------------------------------
Global Tactical Exposure ...................4.63%
Worldwide ..................................3.78%
Worldwide-Hedged ...........................4.10%
International ..............................4.06%
International Opportunities ................3.48%
Emerging Markets ..........................12.99%
The Money Market Portfolio may, from time to time, include the "yield" and
"effective yield" in advertisements or reports to shareholders or prospective
investors.
Yield is calculated by first determining the net change over a 7-calendar day
period, exclusive of capital changes, in the value of a hypothetical
preexisting account having a balance of one share at the beginning of the
period. This number is then divided by the value of the account at the
beginning of the base period, to obtain the base period return. The yield is
annualized by multiplying the base period return by 365/7. The yield is stated
to the nearest hundredth of one percent. The effective yield is calculated by
the same method as yield except that the base period return is compounded by
adding 1, raising the sum to a power equal to 365/7, and subtracting 1 from the
result, according to the following formula:
36
<PAGE>
Effective Yield = [(Base Period Return + 1)365/7] - 1
Money Market Portfolio's yield and effective yield for the seven-day period
ended December 31, 1998 are 4.99% and 5.12%, respectively.
Average annual total return quotes will be expressed as the average annual
compounded rate of return of a hypothetical investment in a Fund Portfolio over
1, 5 and 10 years (up to the life of the Portfolio). This will be calculated
pursuant to the following formula, prescribed by the Securities and Exchange
Commission:
P (1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period.
All total return figures assume that all dividends are reinvested when paid.
From the time of Fund commencement, the total return as defined above, for each
Portfolio (annualized) for the one and five year periods, and life of the
Portfolio, ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
ONE YEAR FIVE YEARS LIFE OF PORTFOLIO INCEPTION
U.S. PORTFOLIOS
- ---------------
Money Market 5.51% 5.20% 5.12% 11/1/93
U.S. Short-Term 5.59% 5.13% 5.21% 12/6/89
Limited Duration 6.79% 5.76% 5.94% 7/26/93
Mortgage-Backed 7.42% N/A 8.98% 4/29/96
GLOBAL AND INTERNATIONAL
- ------------------------
PORTFOLIOS
- ----------
Global Tactical
Exposure** 8.20% N/A 7.27% 9/14/95
Worldwide 15.58% 6.72% 8.77% 4/15/92
Worldwide-Hedged 11.53% 10.58% 10.83% 5/19/92
International 18.35% N/A 9.03% 5/9/96
International
Opportunities N/A N/A 0.89%* 10/8/98
Emerging Markets (10.50%) N/A (8.49%) 8/12/97
* Not Annualized
** The Portfolio redeemed all of its assets on December 30, 1994, and began
selling shares again on September 14, 1995. The total return (on an annualized
basis) from its original inception of March 25, 1993 through December 30, 1994,
was 5.39%.
</TABLE>
CONTROL PERSON
As of March 31, 1999, Fischer Francis Trees & Watts, Inc. had discretionary
investment advisory agreements with shareholders of the Fund, representing
78.4% of the Fund's total net assets and therefore, may be deemed a control
person.
CUSTODIAN AND ACCOUNTING AGENT
Investors Bank & Trust Company, P.O. Box 1537, Boston, Massachusetts
02205-1537, is Custodian and Accounting Agent for the Fund.
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TRANSFER AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, P.O. Box 1537, Boston, Massachusetts 02205-1537
is Transfer Agent for the shares of the Fund, and Dividend Disbursing Agent for
the Fund.
LEGAL COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, NW, Washington, D.C. 20006-2401, is
legal counsel for the Fund.
INDEPENDENT AUDITORS
KPMG LLP, 345 Park Avenue, New York, New York 10154, is the independent auditor
for the Fund.
FINANCIAL STATEMENTS
The audited financial statements for the year ended December 31, 1998 are
incorporated herein by reference to the Annual Report to shareholders covering
this period. A copy has been delivered with this Statement of Additional
Information.
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QUALITY RATING DESCRIPTIONS
STANDARD & POORS CORPORATION
AAA. Bonds rated AAA are the highest grade debt obligations. This rating
indicates an extremely strong capacity to pay principal and interest.
AA. Bonds rated AA also qualify as high-quality obligations. Capacity to pay
principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in a small degree.
A. Bonds rated A have a strong capacity to pay principal and interest, although
they are more susceptible to the adverse effects of changes in circumstances
and economic conditions.
BBB. Bonds rated BBB are regarded as having adequate capacity to pay interest
or principal. Although these bonds normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and principal.
BB. Bonds rated BB are less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions, which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B. Bonds rated B is more vulnerable to nonpayment than obligations rated BB,
but the obligor currently has the capacity to meet its financial commitment on
the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment
on the obligation.
CCC. Bonds rated CCC are currently vulnerable to nonpayment, and are dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. It the event of adverse
business, financial or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC. Bonds rated CC are currently highly vulnerable to nonpayment.
C. Bonds rated C may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this
obligation are being continued.
The ratings may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
Municipal notes issued since July 29, 1984 are designated "SP-1," "SP-2," and
"SP-3." The designation SP-1 indicates a very strong capacity to pay principal
and interest. A "+" is added to those issues determined to possess overwhelming
safety characteristics.
A-1. Standard & Poor's Commercial Paper ratings are current assessments of the
likelihood of timely payments of debts having original maturity of no more than
365 days. The A-1 designation indicates the degree of safety regarding timely
payment is very strong.
A-2. Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
A-3. Adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial commitment on
the obligation.
MOODY'S INVESTORS SERVICE, INC.
Aaa. Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa. These bonds are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities, fluctuations of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than the Aaa securities.
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<PAGE>
A. These bonds possess many favorable investment attributes and may be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa. These bonds are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present, but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba. These bonds possess speculative elements because their future cannot be
considered as well assured. Uncertainty of position characterizes bonds in this
class, because the protection of interest and principal payments may be very
moderate and not well safeguarded.
B. These bonds lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa. This rating represents bonds, which may be in default, or, there may be
present elements of danger with respect to principal or interest.
Ca. This rating represents highly speculative bonds. Such instruments are often
in default or have other marked shortcomings.
C. The lowest class of bonds, the prospects of attaining any real investment
standing are poor.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Moody's ratings for state and municipal and other short-term obligations will
be designated Moody's Investment Grade ("MIG"). This distinction is in
---
recognition of the differences between short-term credit risk and long-term
credit risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of high importance in
long-term borrowing risk are of lesser importance in the short run.
MIG-1. Notes bearing this rating are of the best quality enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2. Notes bearing this rating are of favorable quality, with all security
elements accounted for, but lacking the undeniable strength of the previous
grade. Market access for refinancing, in particular, is likely to be less well
established.
MIG-3. Notes bearing this rating are of favorable quality, although liquidity
and cash flow protection may be narrow, and market access for refinancing is
likely to be well established.
P-1. Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. The designation "Prime-1"or "P-1" indicates the highest
quality repayment capacity of the rated issue.
P-2. Issuers have a strong capacity for repayment of short-term promissory
obligations.
THOMSON BANKWATCH, INC.
A. Company possesses an exceptionally strong balance sheet and earnings record,
translating into an excellent reputation and unquestioned access to its natural
money markets. If weakness or vulnerability exists in any aspect of the
company's business, it is entirely mitigated by the strengths of the
organization.
A/B. Company is financially very solid with a favorable track record and no
readily apparent weakness. Its overall risk profile, while low, is not quite as
favorable as companies in the highest rating category.
IBCA LIMITED
A1. Short-term obligations rated A1 are supported by a very strong capacity for
timely repayment. A plus sign is added to those issues determined to possess
the highest capacity for timely payment.
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