Registration No. 33-40603
811-6310
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _____
Post-Effective Amendment No. 8
X
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
Amendment No. 11
X
SMITH BARNEY SHEARSON SERIES FUND
(Exact name of Registrant as Specified in Charter)
Two World Trade Center, New York, New York 10048
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code:
(212) 720-9218
Francis J. McNamara, III, Esq.
Secretary
Smith Barney Shearson Series Fund
Exchange Place
Boston, Massachusetts 02109
(Name and Address of Agent of Service)
Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment
becomes effective.
It is proposed that this filing will become effective:
____ immediately upon filing pursuant to Rule 485(b)
X on May 1, 1994 pursuant to Rule 485(b)
60 days after filing pursuant to Rule 485(a)
X on May 1, 1994 pursuant to Rule 485(a)
______________________________________________________________________________
______
The Registrant has previously filed a declaration of indefinite registration
of its shares pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended. Registrant's Rule 24f-2 Notice for the fiscal year ended
December 31, 1993 was filed on February 25, 1994.
SMITH BARNEY SHEARSON SERIES FUND
FORM N-IA
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a)
Part A.
Item No.
Prospectus Caption
1. Cover Page
Cover Page
2. Synopsis
Synopsis
3. Condensed Financial
Information
Financial Highlights;
The Portfolios' Performance
4. General Description of
Registrant
Cover Page; Investment Goals and
Policies of the Portfolios;
Additional Investments; Certain
Investments and Guidelines;
Special Considerations and Risk
Factors; Additional Information;
Appendix
5. Management of the Fund
Management of the Fund;
Portfolio Management;
Custodian and Transfer Agent;
Distributor
6. Capital Stock and Other
Securities
Additional Information; Dividends
and Taxes
7. Purchase of Securities Being
Offered
Net Asset Value; Cover Page; How
to Use the Fund; Distributor
8. Redemption or Repurchase
How to Use the Fund
9. Pending Legal Proceedings
Not Applicable
Part B
Item No.
Statement of
Additional Information Caption
10. Cover Page
Cover Page
11. Table of Contents
Contents
12. General Information and
History
Additional Information;
Distributor
13. Investment Objectives and
Policies
Investment Goals and Policies of
the Portfolios
14. Management of the Fund
Management of the Fund
15. Control Persons and Principal
Holders of Securities
Management of the Fund
16. Investment Advisory and Other
Services
Management of the Fund;
Distributor
17. Brokerage Allocation and
Other Practices
Investment Goals and Policies --
Portfolio Transactions
18. Capital Stock and Other
Securities
Net Asset Value; Performance Data
19. Purchase, Redemption and
Pricing of
Securities Being Offered
Purchase of Shares; Redemption
of Shares
20. Tax Status
Taxes
21. Underwriters
Management of the Fund
22. Calculations of Performance
Data
Performance Data
23. Financial Statements
Financial Statements
Smith Barney Shearson Series Fund
Prospectus dated April 29, 1994
Smith Barney Shearson Series Fund (the "Fund") is a diversified,
open-end management investment company -- a mutual fund -- with ten
portfolios (the "Portfolios"), each with separate goals and
investment policies:
The Money Market Portfolio's goal is maximum current income to the
extent consistent with the preservation of capital and the
maintenance of liquidity. This Portfolio will invest in high
quality short-term money market instruments.
The Intermediate High Grade Portfolio's goal is to provide as high
a level of current income as is consistent with the protection of
capital. This Portfolio will invest in high quality
intermediate-term U.S. government securities and corporate bonds of
U.S. issuers.
The Diversified Strategic Income Portfolio's goal is high current
income. This Portfolio will invest primarily in three types of
fixed income securities -- U.S. government and mortgage securities,
foreign government bonds and corporate bonds rated below investment
grade.
The Equity Income Portfolio's primary goal is current income, with
a secondary goal of long-term capital appreciation. This Portfolio
will invest primarily in dividend-paying common stocks,
concentrating in securities of companies in the utility industry.
The Equity Index Portfolio's goal is to provide investment results
that, before deduction of operating expenses, match the price and
yield performance of U.S. publicly traded common stocks, as
measured by the Standard & Poor's Daily Price Index of 500 Common
Stocks (the "S&P 500"). This Portfolio will invest in the common
stocks of companies represented in the S&P 500.
The Growth & Income Portfolio's goal is income and long-term
capital growth. This Portfolio will invest in dividend-paying
equity securities meeting certain specified investment criteria.
The Appreciation Portfolio's goal is long-term appreciation of
capital. This Portfolio will invest primarily in equity
securities.
The Total Return Portfolio's goal is to provide shareholders with
total return, consisting of long-term capital appreciation and
income. This Portfolio will invest primarily in a diversified
portfolio of dividend-paying common stocks.
The International Equity Portfolio's goal is to provide total
return on its assets from growth of capital and income. This
Portfolio will invest in equity securities of established
non-United States issuers.
The Emerging Growth Portfolio's goal is capital appreciation. This
Portfolio will invest primarily in common stocks of small and
medium sized companies considered to be emerging growth companies
by its investment adviser.
There can be no guarantee that the Portfolios' goals will be
achieved since any investment involves risks. An investment in the
Money Market Portfolio is neither insured nor guaranteed by the
United States government. Although the Money Market Portfolio will
seek to maintain a stable net asset value of $1.00 per share, there
can be no assurance that the Portfolio will be able to do so.
Discussions of the investments each Portfolio will make, and their
related risks, are found in the sections of this Prospectus
entitled "Investment Goals and Policies of the Portfolios,"
"Additional Investments" and "Special Considerations" and in the
Appendix to this Prospectus.
This Prospectus sets forth briefly certain information about the
Fund and each of the Portfolios that you should know before
investing. Additional information about the Fund and the
Portfolios has been filed with the Securities and Exchange
Commission (the "SEC") in a document entitled "Statement of
Additional Information," dated April 29, 1994 , as amended or
supplemented from time to time, which is available upon request and
without charge by calling or writing the Fund at the telephone
number or address set forth below or by contacting your Smith
Barney Shearson Financial Consultant.
The Fund is responsible only for statements that are included in
this Prospectus, the Statement of Additional Information or in
authorized sales material. The Statement of Additional Information
is incorporated by reference into this Prospectus in its entirety.
You cannot buy shares of the Fund directly. You can invest in the
Fund by buying a Symphony Annuity (the "Annuity"), either as an
individual flexible premium deferred annuity contract from IDS Life
Insurance Company ("IDS Life") or a certificate evidencing your
interest in a master group flexible premium deferred annuity from
IDS Life Insurance Company of New York ("IDS Life of New York").
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS OF THE
ANNUITY, ISSUED BY IDS LIFE OR IDS LIFE OF NEW YORK. BOTH
PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE
REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Smith Barney Shearson Series Fund
Two World Trade Center
New York, New York 10048
Annuity Owner Inquiries: (800) 422-3542 or (800) 724-0705 in New
York
Contents
Synopsis.......... 3
Expenses of the Portfolios.......... 5
Investment Goals and Policies of the Portfolios.......... 9
Additional Investments.......... 15
Certain Investment Guidelines.......... 16
Special Considerations and Risk Factors.......... 17
Portfolio Transactions.......... 21
Net Asset Value.......... 21
How to Use the Fund.......... 22
Dividends and Taxes.......... 23
Management of the Fund.......... 24
Portfolio Management.......... 25
Custodian and Transfer Agent.......... 26
Distributor.......... 26
Additional Information.......... 26
The Portfolios' Performance.......... 27
Appendix.......... 28
Synopsis
The Fund
The Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended
(the "1940 Act"), which currently offers a selection of ten
Portfolios. See "Investment Goals and Policies of the Portfolios"
and "Additional Information."
Management
The organizations that perform services for the Fund are listed
below and are described more fully under "Management of the Fund."
Name Service
PanAgora Asset Management, Inc........... Investment Adviser to
the Equity Index Portfolio (""PanAgora Management")
Smith, Barney Advisers, Inc........... Investment Adviser
to the International Equity Portfolio
(""Smith, Barney Advisers")
Smith Barney Shearson Asset Management Division of Smith,
Barney Advisers, Inc........... Investment Adviser to the
Appreciation Portfolio and the Total Return Portfolio
(""Asset Management")
Greenwich Street Advisors.......... Investment Adviser to
the Money Market Portfolio, the Intermediate High Grade Portfolio,
the Diversified Strategic Income Portfolio, the Equity Income
Portfolio and the Growth & Income Portfolio
American Capital Asset Management, Inc........... (""American
Capital") Investment Adviser to the Emerging Growth Portfolio
Smith Barney Global Capital Management, Inc...........
(""Global Capital Management") Sub-Investment Adviser to the
Diversified Strategic Income Portfolio
The Boston Company Advisors, Inc........... (""Boston Advisors")
Administrator to each Portfolio
Name Service
Smith Barney Shearson Inc. .......... Distributor
(""Smith Barney Shearson") Boston Safe Deposit and Trust
Company.......... ("Boston Safe") Custodian
The Shareholder Services Group, Inc. ("TSSG"),..........Transfer
and Dividend Paying Agent
a subsidiary of First Data Corporation
The Portfolios pay their respective investment advisers an
aggregate fee at annual rates of the value of the relevant
Portfolio's average net assets as follows: Money Market Portfolio
- --0.30%; Intermediate High Grade Portfolio --0.40%; Diversified
Strategic Income Portfolio 10.45%; Equity Income Portfolio --0.45%;
Equity Index Portfolio --0.40%; Growth & Income Portfolio --0.45%;
Appreciation Portfolio --0.55%; Total Return Portfolio --0.55%;
International Equity Portfolio --0.85%; and Emerging Growth
Portfolio --0.75%. Global Capital Management, as sub-investment
adviser to the Diversified Strategic Income Portfolio, is paid a
fee by Greenwich Street Advisors, the Portfolio's investment
adviser, at the annual rate of --0.15% of the value of the
Portfolio's average net assets. Boston Advisors, as administrator
of the Portfolios, is paid a fee at the annual rate of --0.20% of the
value of each Portfolio's average net assets. The aggregate
management fees paid by the Appreciation, Total Return,
International Equity and Emerging Growth Portfolios are higher than
those fees paid by most other investment companies, but not
necessarily higher than those paid by funds with similiar
investment objectives and policies. See ""Management of the Fund."
Buying Shares
You cannot buy shares of the Fund directly. You can invest by
buying an Annuity, from IDS Life or IDS Life of New York. You can
direct the allocation of part or all of your net purchase payment
to one or more of the ten subaccounts (the "Subaccounts") of the
IDS Life Account SBS or IDS Life of New York Account SBS (the
"Variable Account"). Each Subaccount invests only in a single
Portfolio of the Fund. In the future, the Fund may establish
additional portfolios or offer its shares to the holders of other
separate accounts established by IDS Life or IDS Life of New York,
or other insurance companies. See "How to Use the Fund."
Redeeming Shares
Shares may be redeemed as described in the Annuity prospectus. See
"How to Use the Fund."
Special Considerations
Investors in the Fund should be aware of the following general
observations: The market value of fixed-income securities, which
constitute a major part of the investments of several Portfolios,
may vary inversely in response to changes in prevailing interest
rates. The non-publicly traded and illiquid securities, and the
floating and variable rate demand notes, which certain Portfolios
may hold, may have to be sold at lower prices, or may remain
unsold, when the Portfolios desire to dispose of them. The
mortgage-related securities, including government stripped
mortgage-backed securities, in which certain Portfolios may invest
are sensitive to changes in interest rates and to prepayment of the
mortgages. The foreign securities, including securities of
developing countries, in which several Portfolios may invest, may
be subject to certain risks in addition to those inherent in U.S.
investments. The medium-, lower- and unrated securities and the
securities of unseasoned issuers that certain Portfolios may hold,
some of which have speculative characteristics, may be subject to
greater market fluctuation and risk of loss of income or principal
than higher-rated securities. Emerging growth companies, such as
those in which the Emerging Growth Portfolio may invest, may
involve certain special risks. Emerging growth companies often
have limited product lines, markets, or financial resources, and
may be dependent upon one or a few key people for management.
The securities of such companies may be subject to more abrupt or
erratic market movements than securities of larger, more
established companies or the market averages in general. The
Equity Income Portfolio's concentration policy may involve greater
risk and market fluctuation than if it invested in a broader range
of securities. One or more Portfolios may make certain investments
and employ certain investment techniques that involve other risks,
including entering into repurchase agreements, lending portfolio
securities and entering into futures contracts and related options
as hedges. These risks and those associated with when-issued and
delayed delivery transactions, put and call options, covered option
writing, short sales against the box, forward roll transactions,
currency exchange transactions, options on foreign currencies,
interest rate and other hedging transactions and reverse repurchase
agreements, are described under "Investment Goals and Policies of
the Portfolios," "Special Considerations" and in the Appendix to
this Prospectus.
Expenses of the Portfolios
Each Portfolio will bear its own expenses. Operating expenses for
each Portfolio generally will consist of all costs not specifically
borne by its investment adviser, sub-investment adviser and/or
administrator or the Fund's distributor, including organizational
costs, investment advisory and administration fees, fees for
necessary professional and brokerage services, fees for any pricing
service, the costs of regulatory compliance and costs associated
with maintaining legal existence and shareholder relations. From
time to time the investment adviser, the sub-investment adviser
and/or the administrator of a Portfolio may waive all or a portion
of the fees payable to it by the Portfolio, thereby reducing the
expenses of the Portfolio. A detailed description of the expenses
involved in investing in the Annuity and the Portfolios is included
in the Annuity prospectus.
Financial Highlights
The following information with respect to the years ended December
31, 1993, 1992 and 1991, respectively, have been audited by Coopers
& Lybrand, independent accountants, whose report thereon appears in
the Fund's Annual Report dated December 31, 1993, which if not
included with this prospectus, may be obtained without charge .
This information should be read in conjunction with the financial
statements and related notes that also appear in the Fund's Annual
Report which is incorporated by reference into the Statement of
Additional Information.
Smith Barney Shearson Series Fund
Financial HighlightsFor the Year ended December 31, 1993#
PortfolioIntermediateDiversified PortfolioPortfolio&
IncomeAppreciationPortfolio*Portfolio*International***Diversified
Money Intermediate Strategic Equity Equity
Growth Emerging Total International
Market High Grade Income Income Index & Income
Appreciation Growth Return Equity
Portfolio Portfolio Portfolio Portfolio
Portfolio Portfolio Portfolio Portfolio* Portfolio*
Portfolio*
Net asset value, beginning of period.......... $1.000
$10.29 $9.61 $10.90 $11.27 $10.68
$11.13 $10.00 $10.00 $10.00
Income from investment operations: Net investment income**
0.023 0.55 0.70 0.53 0.20 0.30 0.15
0.01 0.01 0.00 ***
Net realized and unrealized gain loss on investments..........
-- 0.26 0.47 0.60 0.71 0.67 0.63
0.40 0.29 0.05
Total from investment operations 0.023 0.81 1.17
1.13 0.91 0.97 0.78 0.41 0.30 0.05
Less distributions: Dividends from net investment income
(0.023) (0.36) (0.61) (0.47) (0.16) (0.26)
(0.11) -- -- --
Distributions from capital gains -- (.05) (.04)
(.01) (0.12) -- -- -- -- --
Distributions in excess of realized gains -- --
(.05) -- -- (.02) -- -- -- --
Distributions from capital -- -- (.01) --
- -- -- -- -- -- --
Total distributions (0.023) (0.41) (0.71)
(0.48) (0.28) (0.28) (0.11) 0.00 0.00 0.00
Net asset value, end of period.......... $1.000
$10.69 $10.07 $11.55 $11.90 $11.37 $11.80
$10.41 $10.30 $10.05
Total return 6 2.37% 8.00% 12.56% 10.41%
8.66% 9.09% 7.03% 4.10% 3.00% .50%
Ratios to average net assets/ supplemental data: Net assets,
end of period (000's).......... $3,703 $9,859 $43,244
$60,160 $8,842 $25,549 $77,843 $2,257
$2,777 $5,867
Ratio of operating expenses to average net assets 66 0.75%
0.85% 1.00% 0.87% 1.00% 1.00% 1.01%
1.05% 0.85% 1.08%
Ratio of net investment income to average net assets 2.34%
5.25% 7.14% 4.54% 1.77% 2.68% 1.35%
1.37% 1.93% (0.51)
Portfolio turnover rate.......... --% 139% 94%
4% 1% 78% 33% 0% 0% 0%
# The per share amounts have been calculated using the
monthly average shares method, which more appropriately presents
per share data for this year since use of the undistributed method
did not accord the results of operations.
* The Portfolios commenced operations on December 3, 1993.
** Net investment income before waiver of fees and
reimbursement of expenses by investment adviser and/or custodian
and/or transfer agents and IDS were: $0.009, $0.50, $0.70, N/A,
$0.10, $0.29, N/A, $(0.05), $(0.01), and $(0.02), respectively, for
the Money Market Portfolio, Intermediate High Grade Portfolio,
Diversified Strategic Income Portfolio, Equity Income Portfolio,
Equity Index Portfolio, Growth & Income Portfolio, Appreciation
Portfolio, Emerging Growth Portfolio, Total Return Portfolio and
International Equity Portfolio.
*** Amount represents less than $0.01.
6 Total return represents aggregate total return for the
period indicated and does not reflect any applicable sales charge.
66 Operating expense ratios before fees waived and expenses
reimbursed by the affiliated agents were: 2.15%, 1.36%, 1.02%, N/A,
1.88%; 1.01%; N/A; 9.99%; 4.14%; and 2.96%, respectively, for the
Money Market Portfolio, Intermediate High Grade Portfolio,
Diversified Strategic Income Portfolio, Equity Index Portfolio,
Growth & Income Portfolio, Appreciation Portfolio, Emerging Growth
Portfolio, Total Return Portfolio and International Equity
Portfolio. Financial Highlights continue on the next page.
IntermediateDiversifiedPortfolioPortfolio Appreciation
Financial Highlights (continued)For the Year Ended December 31,
1992
Diversified
Money Intermediate Strategic Equity Equity
Growth
Market High Grade Income Income Index & Income
Appreciation
Portfolio Portfolio Portfolio Portfolio
Portfolio Portfolio Portfolio
Net asset value, beginning of year.......... $1.000 $
10.24 $ 10.14 $ 10.20 $10.62 $ 10.15 $ 10.49
Income from investment operations: Net investment
income**.......... 0.027 0.45 0.67 0.45 0.17
0.27 0.11
Net realized and unrealized gain/(loss) on
investments.......... -- 0.08 (0.53) 0.72 0.55
0.55 0.53
Total from investment operations.......... 0.027 0.53
0.14 1.17 0.72 0.82 0.64
Less distributions: Dividends from net investment
income.......... (0.027) (0.48) (0.67) (0.47)
(0.02) (0.29) (0.00) ***
Distributions from net realized capital gains.......... --
-- -- -- (0.05) -- --
Distributions from capital.......... -- -- --
- -- -- (0.00) ***--
Total distributions.......... (0.027) (0.48)
(0.67) (0.47) (0.07) (0.29) 0.00
Net asset value, end of year.......... $1.000 $10.29
$9.61 $10.90 $11.27 $10.68 $11.13
Total return6.......... $2.75% 5.28% 1.42%
11.74% 6.74% 8.44% 6.13%
Ratios to average net assets/ supplemental data: Net assets,
end of year (000's).......... $2,108 $3,621 $19,991
$25,985 $4,178 $10,951 $53,450
Ratio of operating expenses to average net assets66..........
0.75% 0.85% 1.00% 1.00% 1.00% 1.00%
1.00%
Ratio of net investment income to average net assets..........
2.79% 4.75% 7.70% 4.93% 2.10% 3.06%
1.61%
Portfolio turnover rate.......... -- 124% 65%
4% 8% 78% 14%
** Net investment income before waiver of fees and
reimbursement of expenses by investment adviser and/or custodian
and/or transfer agents were: $0.013, $0.32, $0.64, $0.43, $0.02,
$0.21 and $0.10, respectively.
*** Amount represents less than $0.01.
66 Operating expense ratios before fees waived and expenses
reimbursed by the affiliated agents were: 2.18%; 2.28%; 1.41%;
1.27%; 2.89%; 1.65%; and 1.16%, respectively.
6 Total return represents aggregate total return for the
period indicated. Financial Highlights continue on the next
page.
Financial Highlights (continued)For the Period Ended December 31,
1991
Diversified
Money Intermediate Strategic Equity Equity
Growth
Market High Grade Income Income Index & Income
Appreciation
Portfolio* Portfolio* Portfolio* Portfolio*
Portfolio* Portfolio* Portfolio*
Net asset value, beginning of period.......... $1.000
$ 10.00 $ 10.00 $ 10.00 $10.00 $ 10.00 $ 10.00
Income from investment operations: Net investment
income**.......... 0.005 0.03 0.02 0.02 0.04
0.02 0.01
Net realized and unrealized gain on investments?? --
0.21 0.12 0.18 0.58 0.13 0.48
Total from investment operations 0.005 0.24 0.14
0.20 0.62 0.15 0.49
Less distributions: Dividends from net investment
income.......... (0.005) -- -- -- -- --
--
Total distributions.......... (0.005) -- --
- -- -- -- --
Net asset value, end of period.......... $1.000
$10.24 $10.14 $10.20 $10.62 $10.15 $10.49
Total return6.......... 0.53% 2.40% 1.40%
2.00% 6.20% 1.40% 4.90%
Ratios to average net assets/ supplemental data: Net assets,
end of period (000's).......... $830 $697 $3,914
$3,900 $1,733 $1,904 $11,436
Ratio of operating expenses to average net assets66..........
0.65% 0.80% 0.94% 0.93% 0.98% 0.90%
0.94%
Ratio of net investment income to average net assets..........
3.35% 4.49% 4.57% 4.14% 2.91% 4.14%
3.00%
Portfolio turnover rate.......... --% --% --%
- --% --% 3% --%
* The Portfolios shown commenced operations on October
16, 1991.
** Net investment income before waiver of fees and
reimbursement of expenses by investment adviser and/or custodian
and/or transfer agents were: $(0.029), $(0.14), $(0.01), $(0.01),
$(0.05), $(0.05) and $0.00, respectively.
6 Total return represents aggregate total return for the
period indicated.
66 Annualized operating expense ratios before fees waived
and expenses reimbursed by the affiliated agents were: 21.47%;
26.28%; 7.76%; 8.34%; 7.60%; 20.02%; and 3.64%, respectively.
Investment Goals and Policies of the Portfolios
Set forth below is a description of the investment goals and
policies of the ten Portfolios currently offered by the Fund, which
consist of one money market Portfolio, two fixed-income Portfolios
and seven equity Portfolios. The investment goals of a Portfolio
may not be changed without the approval of the holders of a
majority of the outstanding shares of that Portfolio. There can,
of course, be no guarantee that the Portfolios will achieve their
investment goals. Additional information about investment
strategies that one or more of the Portfolios may employ and
investment policies mentioned below appears in the Appendix to this
Prospectus and in the Statement of Additional Information. A
description of the corporate bond and commercial paper rating
systems of Standard & Poor's Corporation ("S&P"), Moody's Investors
Service, Inc. ("Moody's") and other nationally recognized
statistical rating organizations ("NRSROs") is also contained in
the Statement of Additional Information.
Money Market Portfolio
Goal - The Money Market Portfolio's goal is maximum current income
to the extent consistent with the preservation of capital and the
maintenance of liquidity.
Investment Policies - In seeking to achieve its goal, the Money
Market Portfolio will invest in short-term money market
instruments, including: securities issued or guaranteed by the U.S.
government, its agencies and instrumentalities ("U.S. government
securities"); repurchase agreements, U.S. and foreign bank time
deposits, certificates of deposit and bankers' acceptances;
high-grade commercial paper of U.S. and foreign issuers and other
short-term corporate debt obligations of such issuers that are
comparable in priority and security to such instruments, including
variable rate and floating rate instruments. Except when
maintaining a temporary defensive position, the Portfolio intends
to invest more than 25% of its assets in short-term bank
instruments. The Portfolio will invest in money market instruments
that are determined by Greenwich Street Advisors to present minimal
credit risks and which at the time of purchase are considered to be
"Eligible Securities," as defined by the SEC.
The Portfolio will invest only in securities that are purchased
with and payable in U.S. dollars and that have (or, pursuant to
regulations adopted by the SEC are deemed to have) remaining
maturities of 13 months or less at the date of purchase by the
Portfolio. The Portfolio will maintain a dollar-weighted average
portfolio maturity of 90 days or less. The Portfolio will follow
these policies to maintain a constant net asset value of $1.00 per
share, although there is no assurance that it can do so on a
continuing basis.
The Bond Portfolios
Intermediate High Grade Portfolio
Goal - The Intermediate High Grade Portfolio's goal is to provide
as high a level of current income as is consistent with the
protection of capital.
Investment Policies - The Intermediate High Grade Portfolio will
seek to achieve its goal by investing, under normal circumstances,
substantially all -- but not less than 65% -- of its assets in U.S.
government securities and high grade corporate bonds of U.S.
issuers (i.e., bonds rated within the two highest rating categories
by Moody's or S&P or, if not rated, believed by Greenwich Street
Advisors to be of comparable quality).
Under normal market conditions, the average weighted maturity of
the Portfolio's assets will be between three and ten years. The
portion of the Portfolio's assets not invested in intermediate-term
U.S. government securities and U.S. corporate bonds may be invested
in short-term U.S. government and corporate obligations,
convertible securities and preferred stock that is not convertible
into common stock. The Portfolio may not hold securities rated
lower than Baa by Moody's or BBB by S&P or unrated securities
deemed to be comparable to securities rated below investment grade.
The Portfolio may invest up to 10% of its total assets in
government stripped mortgage-backed securities and may invest in
floating or variable rate demand notes.
Diversified Strategic Income Portfolio
Goal - The Diversified Strategic Income Portfolio's goal is high
current income.
Investment Policies - The Diversified Strategic Income Portfolio
will seek to achieve its goal through allocating and reallocating
its assets primarily among three types of fixed-income securities
- -- U.S. government and mortgage related securities, foreign
government securities and corporate securities rated below
investment grade. Under current market conditions, Greenwich
Street Advisors expects to maintain 50% of its assets in
government/mortgage securities, 25% in foreign government
securities and 25% of its assets in high-yield corporate
securities. The portions of the Portfolio's assets invested in
each type of security will vary from time to time and, at any given
time, the Portfolio may be entirely invested in a single type of
fixed-income security. Under normal circumstances, substantially
all -- but not less than 65% -- of the Portfolio's assets will be
invested in fixed-income securities, including non-convertible
preferred stocks.
Greenwich Street Advisors and Global Capital Management will select
investments on the basis of an analysis of economic and market
conditions and relative risks and opportunities of those types of
fixed-income securities. In general, the particular type or types
of fixed-income securities selected for investment by the Portfolio
at any given time will be those that, in the view of its investment
advisers, offer the highest income available at the time, unless
the investment adviser believes that such income potential is not
sufficient to justify the higher risks associated with these
securities. The Portfolio generally will invest in intermediate-
and long-term fixed-income securities with the result that, under
normal market conditions, the weighted average maturity of the
Portfolio's securities is expected to be between five and twelve
years.
Mortgage-related securities in which the Portfolio may invest,
which include mortgage obligations collateralized by mortgage loans
or mortgage pass-through certificates, will be rated no lower than
Aa by Moody's or AA by S&P or, if unrated, will be deemed by
Greenwich Street Advisors to be of comparable quality. Under
current market conditions, the Portfolio's mortgage-related
holdings can be expected to consist primarily of securities issued
or guaranteed by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and
the Federal Home Loan Mortgage Corporation ("FHLMC"). The
Portfolio may invest up to 35% of its assets in corporate
fixed-income securities of U.S. issuers rated Ba or lower by
Moody's or BB or lower by S&P, but not lower than Caa or CCC,
respectively, or in unrated securities deemed by Greenwich Street
Advisors to be of comparable quality. Special considerations
arising from investment in lower-rated and unrated securities are
described in ""Special Considerations and Risk Factors -- Medium-,
Lower- and Unrated Securities." The Portfolio may also invest in
fixed-income securities issued by supranational organizations and
may engage in transactions in options, interest rate futures
contracts, options on interest rate futures contracts, forward
currency contracts, options on foreign currencies and foreign
currency futures contracts. Up to 5% of the Portfolio's assets may
be invested in developing countries.
The Equity Portfolios
Equity Income Portfolio
Goal - The Equity Income Portfolio's primary goal is current
income. Long-term capital appreciation is a secondary goal.
Investment Policies - The Equity Income Portfolio will seek to
achieve its goals principally through investment in dividend-paying
common stocks of companies whose prospects for dividend growth and
capital appreciation are considered favorable by Greenwich Street
Advisors. The Portfolio will normally invest at least 65% of its
assets in equity securities. Under normal circumstances, the
Portfolio will concentrate at least 25% of its assets in equity and
debt securities of companies in the utility industry. A company
will be considered to be in the utility industry if it is
principally engaged (i.e., at least 50% of a company's assets
consist of, or gross income or net profits result from, utility
operations or the company is regulated as a utility by a government
agency or authority) in the manufacture, production, generation,
transmission and sale of electric and gas energy and companies
principally engaged in the communications field, including entities
such as telephone, telegraph, satellite, microwave and other
companies regulated by governmental agencies as utilities that
provide communication facilities for the public benefit.
Other types of securities that may be held by the Portfolio when
deemed advisable by Greenwich Street Advisors include investment
grade debt securities such as bonds, debentures and commercial
paper, U.S. government securities and money market instruments,
provided that up to 10% of the Portfolio's assets may be invested
in debt securities rated as low as B by Moody's or S&P or deemed to
be of equivalent quality. When the outlook for common stocks is
not considered promising in the judgment of Greenwich Street
Advisors, a substantial portion of the assets of the Portfolio may
be held in these other types of securities for temporary defensive
purposes.
The Portfolio's investments in common stocks will generally be made
in companies that share some of the following characteristics:
established operating histories; above-average current dividend
yields relative to the S&P 500; low price/earnings ratios relative
to the S&P 500; and strong balance sheets and other financial
characteristics. The Portfolio may also invest in securities
convertible into or ultimately exchangeable for common stock (i.e.,
convertible bonds or convertible preferred stock) and may purchase
common stocks that do not provide current income but which offer
opportunities for capital appreciation and future income. The
Portfolio may also enter into repurchase agreements and reverse
repurchase agreements, borrow money, lend its portfolio securities,
write covered options on securities, purchase options on
securities, sell securities short against the box, purchase and
sell securities on a when-issued or delayed delivery basis, enter
into interest rate futures contracts and related options.
Equity Index Portfolio
Goal - The Equity Index Portfolio's goal is to provide investment
results that, before deduction of operating expenses, match the
price and yield performance of U.S. publicly traded common stocks,
as measured by the S&P 500.
Investment Policies - Once the Equity Index Portfolio reaches a
sufficient asset size, it will seek to achieve its goal by owning
all 500 stocks in the S&P 500 in proportion to their actual market
capitalization weightings. The Portfolio will be reviewed daily
and will be adjusted, when necessary, to maintain security
weightings as close to those of the S&P 500 as possible, given the
amount of assets in the Portfolio at that time. The Portfolio may
invest up to 5% of its assets in equity securities that are not
included in the S&P 500 if PanAgora Management believes such
investments will assist the Portfolio in approximating the return
of the S&P 500. The Portfolio may use up to an additional 5% of
its assets to enter into stock index futures and related options to
increase efficiency, may lend portfolio securities and write
covered options to help offset operating expenses, and may acquire
money market instruments. Portfolio turnover is expected to be
lower than for most other investment companies.
No attempt will be made to manage the Portfolio in the traditional
sense using economic, financial and market analysis, nor will the
adverse financial situation of an issuer necessarily result in the
elimination of its securities from the Portfolio, unless the
securities are removed from the S&P 500. From time to time,
administrative adjustments may be made in the Portfolio because of
changes in the composition of the S&P 500. The Portfolio reserves
the right to remove an investment from the Portfolio if, in the
opinion of PanAgora Management, the merit of the investment has
been substantially impaired by extraordinary events or financial
conditions.
The Portfolio will use the S&P 500 as its standard for performance
comparison because the S&P 500 represents approximately 70% of the
total market value of all U.S. common stocks, is well known to
investors and is representative of the performance of publicly
traded U.S. common stocks.
Growth & Income Portfolio
Goal - The Growth & Income Portfolio's goal is income and long-term
capital growth.
Investment Policies - The Growth & Income Portfolio will seek to
achieve its goal by investing in income-producing equity
securities, including dividend-paying common stocks, securities
that are convertible into common stocks and warrants. Greenwich
Street Advisors has developed quantitative investment criteria
against which prospective investments will be evaluated and will
make buy and sell decisions based on those criteria. Those
criteria establish parameters for suitable investments and deal
with such matters as market capitalization, credit quality,
dividend growth, historic earnings, current yield and industry
diversification. The criteria, which may be changed by Greenwich
Street Advisors in light of its experience in managing the
Portfolio or in response to changing market or economic conditions,
are designed to identify companies with consistent dividend-paying
histories, relatively high levels of dividends, the capacity to
raise dividends in the future and the potential for capital
appreciation.
Under normal market conditions, the Portfolio will invest
substantially all -- but not less than 65% -- of its assets in
equity securities. The Portfolio may invest the remainder of its
assets in money market instruments, as well as in corporate bonds,
convertible securities and mortgage-related securities that are
rated investment grade or are deemed to be of comparable quality.
The Portfolio may enter into repurchase agreements, lend portfolio
securities, enter into interest rate and stock index futures and
related options, purchase or sell securities on a when-issued or
delayed delivery basis and write covered options.
Appreciation Portfolio
Goal - The Appreciation Portfolio's goal is long-term appreciation
of capital.
Investment Policies - The Appreciation Portfolio will attempt to
achieve its goal by investing primarily in equity and
equity-related securities that are believed to afford attractive
opportunities for appreciation. For example, the Portfolio may
invest in the securities of companies whose earnings are expected
to increase, companies whose securities prices are lower than are
believed justified in relation to their underlying assets or
earning power or companies in which changes are anticipated that
would result in improved operations or profitability. The
Portfolio's investments will be broadly diversified among different
industries. In analyzing securities for investment, Asset
Management will consider many different factors, including past
growth records, management capability, future earnings prospects
and technological innovation, as well as general market and
economic factors that can influence the price of securities.
Under normal market conditions, substantially all -- but not less
than 65% -- of the Portfolio's assets will consist of common
stocks, but the Portfolio also may hold securities convertible into
common stocks and warrants. When Asset Management believes that a
conservative or defensive investment posture is warranted or when
opportunities for capital appreciation do not appear attractive,
the Portfolio may invest temporarily in debt obligations, preferred
securities or short-term money market instruments. The Portfolio
may from time to time lend its portfolio securities and invest in
securities of non-U.S. issuers in the form of depositary receipts
representing interests in the common stocks of foreign issuers.
Total Return Portfolio
Goal - The Total Return Portfolio's goal is to provide shareholders
with total return, consisting of long-term capital appreciation and
income.
Investment Policies - The Total Return Portfolio will seek to
achieve its goal by investing primarily in a diversified portfolio
of dividend-paying common stocks. The Portfolio may engage in
various portfolio strategies involving options to seek to increase
its return and to hedge its portfolio against movements in the
equity markets and interest rates. Because the Portfolio seeks
total return by emphasizing investments in dividend-paying common
stocks, it will not have as much investment flexibility as total
return funds which may pursue their objective by investing in both
income and equity stocks without such an emphasis. The Portfolio
also may invest up to 10% of its assets in medium- or low-rated
securities (securities rated less than investment grade by Moody's
or S&P) or unrated securities of comparable quality,
interest-paying debt securities, such as U.S. government
securities, and other securities, including convertible bonds,
convertible preferred stock and warrants. In addition, the
Portfolio will limit its investments in warrants to 5% of its net
assets. The Portfolio also may lend its portfolio securities and
enter into "short sales against the box."
International Equity Portfolio
Goal - The International Equity Portfolio's goal is to provide a
total return on its assets from growth of capital and income.
Investment Policies - Under normal market conditions, the Portfolio
will invest at least 65% of its assets in a diversified portfolio
of equity securities consisting of dividend and non-dividend paying
common stock, preferred stock, convertible debt and rights and
warrants to such securities and up to 35% of the Portfolio's assets
in bonds, notes and debt securities (consisting of securities
issued in the Euro-currency markets or obligations of the United
States or foreign governments and their political subdivisions) of
established non-United States issuers. Investments may be made for
capital appreciation or for income or any combination of both for
the purpose of achieving a higher overall return than might
otherwise be obtained solely from investing for growth of capital
or for income. There is no limitation on the percent or amount of
the Portfolio's assets which may be invested for growth or income
and, therefore, from time to time the investment emphasis may be
placed solely or primarily on growth of capital or solely or
primarily on income. In seeking to achieve its objective, the
Portfolio presently expects to invest its assets primarily in
common stocks of established non-United States companies which in
the opinion of its investment adviser have potential for growth of
capital. In determining whether the Portfolio will be invested for
capital appreciation or for income or any combination of both, its
investment adviser regularly analyzes a broad range of
international equity and fixed income markets in order to assess
the degree of risk and level of return that can be expected from
each market.
The Portfolio will generally invest its assets broadly among
countries and will have represented in the portfolio business
activities in not less than three different countries. Except as
stated below, the Portfolio will invest at least 65% of its assets
in companies organized or governments located in any area of the
world other than the United States, such as the Far East (e.g.,
Japan, Hong Kong, Singapore, Malaysia), Western Europe (e.g., the
United Kingdom, Germany, the Netherlands, France, Italy,
Switzerland), Central and South America (e.g., Mexico, Chile and
Venezuela), Australia, Canada and such other areas and countries as
its investment adviser may determine from time to time. The
Portfolio may invest in securities issued by companies formerly
party to the Warsaw Pact. However, under unusual economic or
market conditions as determined by its investment adviser, for
defensive purposes the Portfolio may temporarily invest all or a
major portion of its assets in U.S. government securities or in
debt or equity securities of companies incorporated in and having
their principal business activities in the United States. To the
extent the Portfolio's assets are invested for temporary defensive
purposes, such assets will not be invested in a manner designed to
achieve the Portfolio's investment objective.In determining the
appropriate distribution of investments among various countries and
geographic regions, the investment adviser will ordinarily consider
the following factors: prospects for relative economic growth
between countries; expected levels of inflation; government
policies influencing business conditions; the outlook for currency
relationship; and the range of individual investment opportunities
available to international investors. In the future, if any other
relevant factors arise they will also be considered. In analyzing
companies for investment, the investment adviser ordinarily looks
for one or more of the following characteristics: an above-average
earnings growth per share; high return on invested capital; healthy
balance sheet; sound financial and accounting policies and overall
financial strength; strong competitive advantages; effective
research and product development and marketing; efficient service;
pricing flexibility; strength of management; and general operating
characteristics which will enable the company to compete
successfully in its market place. Ordinarily, the Portfolio's
investment adviser will not view a company as being sufficiently
well established to be considered for inclusion in the Portfolio
unless the company, together with any predecessors, has been
operating for at least three fiscal years. It is expected that
portfolio securities will ordinarily be traded on a stock exchange
or other market in the country in which the issuer is principally
based, but may also be traded on markets in other countries
including, in many cases, the United States securities exchanges
and over-the-counter markets.
To the extent that the Portfolio's assets are not otherwise
invested as described above, the assets may be held in cash, in any
currency, or invested in U.S. as well as foreign high quality money
market instruments and equivalents.
Emerging Growth Portfolio
Goal - The Emerging Growth Portfolio's goal is to provide capital
appreciation.
Investment Policies - The Emerging Growth Portfolio will seek to
invest at least 65% of its total assets in common stocks of small
and medium sized companies, both domestic and foreign, in the early
stages of their life cycle, that its investment adviser believes
have the potential to become major enterprises. Investments in
such companies may offer greater opportunities for growth of
capital than larger, more established companies, but also may
involve certain special risks. Emerging growth companies often
have limited product lines, markets or financial resources, and
they may be dependent upon one or a few key people for management.
The securities of such companies may be subject to more abrupt or
erratic market movements than securities of larger, more
established companies or the market averages in general. While the
Portfolio will invest primarily in common stocks, to a limited
extent, it may invest in other securities such as preferred stocks,
convertible securities and warrants.
The Portfolio will not limit its investments to any single group or
type of security. The Portfolio may also invest in special
situations involving new management, special products and
techniques, unusual developments, mergers or liquidations.
Investments in unseasoned companies and special situations often
involve much greater risks than are inherent in ordinary
investments, because securities of such companies may be more
likely to experience unexpected fluctuations in price.
The Portfolio's primary approach is to seek what its investment
adviser believes to be unusually attractive growth investments on
an individual company basis. The Portfolio may invest in
securities that have above average volatility of price movement.
Because prices of common stocks and other securities fluctuate, the
value of an investment in the Portfolio will vary based upon its
investment performance. The Portfolio attempts to reduce overall
exposure to risk from declines in securities prices by spreading
its investments over many different companies in a variety of
industries. There is, however, no assurance that the Portfolio
will be successful in achieving its objective.The Portfolio may
invest up to 20% of its total assets in securities of foreign
issuers. Additionally, the Portfolio may invest up to 15% of the
value of its assets in restricted securities (i.e., securities
which may not be sold without registration under the Securities Act
of 1933) and in other securities not having readily available
market quotations. The Portfolio may enter into repurchase
agreements with domestic banks and broker-dealers, which involves
certain risks.
Additional Investments
Money Market Instruments
The Money Market Portfolio will invest exclusively in money market
instruments. Each of the remaining Portfolio's may, as a cash
management tool, hold up to 20%, except that each of the Total
Return, Emerging Growth and International Equity Portfolios may
invest up to 35%, of the value of its assets in cash and invest in
short-term instruments and, for temporary defensive purposes, may
hold cash and invest in short-term instruments without limitation.
Short-term instruments in which the Portfolios may invest include:
U.S. government securities; obligations of banks having at least $1
billion in assets (including certificates of deposit, time deposits
and bankers' acceptances of U.S. or foreign banks, U.S. savings and
loan associations and similar institutions); commercial paper rated
no lower than A-2 by S&P or Prime-2 by Moody's or the equivalent
from another NRSRO or, if unrated, of an issuer having an
outstanding, unsecured debt issue then rated within the two highest
rating categories; and repurchase agreements with respect to any of
the foregoing entered into with banks and non-bank dealers approved
by the Fund's Board of Trustees.
The Money Market Portfolio will limit its portfolio investments to
securities that the Fund's Board of Trustees determines present
minimal credit risks and which are "Eligible Securities" at the
time of acquisition by the Portfolio. The term Eligible Securities
includes securities rated by the "Requisite NRSROs" in one of the
two highest short-term rating categories, securities of issuers
that have received such ratings with respect to other short-term
debt securities and comparable unrated securities. "Requisite
NRSROs" means (a) any two NRSROs that have issued a rating with
respect to a security or class of debt obligations of an issuer, or
(b) one NRSRO, if only one NRSRO has issued such a rating at the
time that the Portfolio acquires the security. Currently, there
are six NRSROs: S&P, Moody's, Fitch Investors Services, Inc., Duff
and Phelps, Inc., IBCA Limited and its affiliate, IBCA, Inc. and
Thomson Bankwatch. A discussion of the ratings categories of the
NRSROs is contained in the Appendix to the Statement of Additional
Information.
The Money Market Portfolio generally may not invest more than 5% of
its total assets in the securities of any one issuer, except for
U.S. government securities. In addition, the Portfolio may not
invest more than 5% of its total assets in Eligible Securities that
have not received the highest rating from the Requisite NRSROs and
comparable unrated securities ("Second Tier Securities") and may
not invest more than 1% of its total assets in the Second Tier
Securities of any one issuer. The Portfolio may invest more than
5% (but no more than 25%) of the then-current value of the
Portfolio's total assets in the securities of a single issuer for
a period of up to three business days, provided that (a) the
securities either are rated by the Requisite NRSROs in the highest
short-term rating category or are securities of issuers that have
received such rating with respect to other short-term debt
securities or are comparable unrated securities, and (b) the
Portfolio does not make more than one such investment at any one
time.
U.S. Government Securities
The U.S. government securities in which the Portfolios may invest
include: direct obligations of the United States Treasury (such as
Treasury Bills, Treasury Notes and Treasury Bonds), and obligations
issued by U.S. government agencies and instrumentalities, including
securities that are supported by the full faith and credit of the
United States (such as certificates issued by GNMA); securities
that are supported by the right of the issuer to borrow from the
U.S. Treasury (such as securities of Federal Home Loan Banks); and
securities that are supported only by the credit of the
instrumentality (such as bonds issued by FNMA and FHLMC). Treasury
Bills have maturities of less than one year, Treasury Notes have
maturities of one to ten years and Treasury Bonds generally have
maturities of greater than ten years at the date of issuance.
The Portfolios may invest up to 5% of their net assets in U.S.
government securities for which the principal repayment at
maturity, while paid in U.S. dollars, is determined by reference to
the exchange rate between the U.S. dollar and the currency of one
or more foreign countries ("Exchange Rate-Related Securities").
Exchange Rate-Related Securities are issued in a variety of forms,
depending on the structure of the principal repayment formula. The
principal repayment formula may be structured so that the
securityholder will benefit if a particular foreign currency to
which the security is linked is stable or appreciates against the
U.S. dollar. In the alternative, the principal repayment formula
may be structured so that the securityholder benefits if the U.S.
dollar is stable or appreciates against the linked foreign
currency. Finally, the principal repayment formula can be a
function of more than one currency and, therefore, be designed in
either of the aforementioned forms or a combination of those forms.
Investments in Exchange Rate-Related Securities entail special
risks. There is the possibility of significant changes in rates of
exchange between the U.S. dollar and any foreign currency to which
an Exchange Rate-Related Security is linked. If currency exchange
rates do not move in the direction or to the extent anticipated at
the time of purchase of the security, the amount of principal
repaid at maturity might be significantly below the par value of
the security, which might not be offset by the interest earned by
the Portfolios over the term of the security. The rate of exchange
between the U.S. dollar and other currencies is determined by the
forces of supply and demand in the foreign exchange markets. These
forces are affected by the international balance of payments and
other economic and financial conditions, government intervention,
speculation and other factors. The imposition or modification of
foreign exchange controls by the United States or foreign
governments or intervention by central banks also could affect
exchange rates. Finally, there is no assurance that sufficient
trading interest to create a liquid secondary market will exist for
particular Exchange Rate-Related Securities due to conditions in
the debt and foreign currency markets. Illiquidity in the forward
foreign exchange market and the high volatility of the foreign
exchange market may from time to time combine to make it difficult
to sell an Exchange Rate-Related Security prior to maturity without
incurring a significant price loss.
Certain Investment Guidelines
Up to 10% (15% in the case of the International Equity, Emerging
Growth and Total Return Portfolios) of the assets of any Portfolio
may be invested in securities with contractual or other
restrictions on resale and other instruments that are not readily
marketable, including (a) repurchase agreements with maturities
greater than seven days, (b) futures contracts and related options
for which a liquid secondary market does not exist and (c) time
deposits maturing in more than seven calendar days. Each Portfolio
may borrow from banks for temporary or emergency purposes, but not
for leverage, in an amount up to 30% of its assets, and may pledge
its assets to the same extent in connection with such borrowings.
Whenever borrowings from banks exceed 5% of the value of the assets
of a Portfolio, the Portfolio will not make any additional
investments. The International Equity Portfolio may borrow for
investment purposes, provided that any transactions constituting
borrowing by the Portfolio may not exceed one-third of its assets.
Except for the limitations on borrowing, the investment guidelines
set forth in this paragraph may be changed at any time without
shareholder consent by vote of the Board of Trustees of the Fund.
A complete list of investment restrictions that identifies
additional restrictions that cannot be changed without the approval
of the majority of an affected Portfolio's outstanding shares is
contained in the Statement of Additional Information.
Special Considerations and Risk Factors
This section describes certain investments of one or more
Portfolios and related risks. Further information concerning
investments of the Portfolios and related risks may be found in the
Appendix to this Prospectus and in the Statement of Additional
Information.
Fixed-Income Securities
The market value of fixed-income obligations of the Portfolios will
be affected by general changes in interest rates, which will result
in increases or decreases in the value of fixed-income obligations
held by the Portfolios. The market value of the Portfolios'
fixed-income obligations can be expected to vary inversely in
relation to changes in prevailing interest rates. Investors also
should recognize that in periods of declining interest rates the
yield of income-oriented Portfolios will tend to be somewhat higher
than prevailing market rates, and in periods of rising interest
rates these Portfolios' yield will tend to be somewhat lower.
Also, when interest rates are falling, the inflow of net new money
to these Portfolios from the continuous sale of their shares
probably will be invested in instruments producing lower yields
than the balance of their holdings, thereby reducing the
Portfolios' current yield. In periods of rising interest rates the
opposite can be expected to occur. In addition, fixed-income
securities in which certain Portfolios may invest may not yield as
high a level of current income as might be achieved by investing in
securities with less liquidity and safety and longer maturities.
Non-Publicly Traded and Illiquid Securities
Each Portfolio may purchase securities that are not publicly
traded. The sale of securities that are not publicly traded is
typically restricted under federal securities laws. As a result,
a Portfolio may be forced to sell those securities at less than
fair market value or may not be able to sell them when its
investment adviser believes it desirable to do so. The Portfolios'
investments in illiquid securities are subject to the risk that
should a Portfolio desire to sell any of these securities when a
ready buyer is not available at a price that the Portfolio deems
representative of their value, the value of the Portfolio's net
assets could be adversely affected.
Mortgage-Related Securities
To the extent that a Portfolio purchases mortgage-related
securities at a premium, mortgage foreclosures and prepayments of
principal by mortgagors (which may be made at any time without
penalty) may result in some loss of the Portfolio's principal
investment to the extent of the premium paid. The yield of a
Portfolio that invests in mortgage-related securities may be
affected by reinvestment of prepayments at higher or lower rates
than the original investment. In addition, like other debt
securities, the values of mortgage-related securities, including
government and government-related mortgage pools, generally will
fluctuate in relation to interest rates.
Government Stripped Mortgage-Backed Securities
The Intermediate High Grade Portfolio may invest up to 10% of its
total assets in government stripped mortgage-backed securities
issued and guaranteed by GNMA, FNMA or FHLMC. These securities
represent beneficial ownership interests in either periodic
principal distribution ("principal-only") or interest distributions
("interest-only") on mortgage-backed certificates issued by GNMA,
FNMA or FHLMC, as the case may be. The certificates underlying
government stripped mortgage-backed securities represent all or
part of the beneficial interest in pools of mortgage loans.
Investing in government stripped mortgage-backed securities
involves the risks normally associated with investing in
mortgage-backed securities issued by government or
government-related entities. See "Mortgage-Related Securities"
above. In addition, the yields on government stripped
mortgage-backed securities are extremely sensitive to the
prepayment experience on the mortgage loans underlying the
certificates collateralizing the securities. If a decline in the
level of prevailing interest rates results in a rate of principal
prepayments higher than anticipated, distributions of principal
will be accelerated, thereby reducing the yield to maturity on
interest-only government stripped mortgage-backed securities and
increasing the yield to maturity on principal-only government
stripped mortgage-backed securities. Sufficiently high prepayment
rates could result in the Portfolio not fully recovering its
initial investment in an interest-only government stripped
mortgage-backed security. Government stripped mortgage-backed
securities are currently traded in an over-the-counter market
maintained by several large investment banking firms. There can be
no assurance that the Portfolio will be able to effect a trade of
a government stripped mortgage-backed security at a time when it
wishes to do so, although the Portfolio will acquire government
stripped mortgage-backed securities only if a secondary market for
the securities exists at the time of acquisition.
Foreign Securities
Each Portfolio may invest in obligations of companies and
governments of foreign nations, which involve certain risks in
addition to the usual risks inherent in U.S. investments. These
risks include those resulting from revaluation of currencies,
future adverse political and economic developments and the possible
imposition of currency exchange blockages or other foreign
governmental laws or restrictions, reduced availability of public
information concerning issuers and the lack of uniform accounting,
auditing and financial reporting standards or of other regulatory
practices and requirements comparable to those applicable to U.S.
companies. The performance of a Portfolio investing in foreign
securities may be adversely affected by fluctuations in value of
one or more foreign currencies relative to the U.S. dollar.
Moreover, securities of many foreign companies may be less liquid
and their prices more volatile than those of securities of
comparable U.S. companies. In addition, with respect to certain
foreign countries, there is the possibility of expropriation,
nationalization, confiscatory taxation and limitations on the use
or removal of funds or other assets of a Portfolio, including the
withholding of dividends. Foreign securities may be subject to
foreign government taxes that could reduce the return on such
securities. Changes in foreign currency exchange rates that may
affect the value of portfolio securities and the appreciation or
depreciation of investments. Investment in foreign securities may
also result in higher expenses due to the cost of converting
foreign currency exchange rates may affect the value of portfolio
securities and the appreciation or depreciation of investments.
Investment in foreign securities may also result in higher expenses
due to the cost of converting foreign currency to U.S. dollars, the
payment of fixed brokerage commissions on foreign exchanges, which
generally are higher than commissions on U.S. exchanges, and the
expense of maintaining securities with foreign custodians.
In addition, the Diversified Strategic Income Portfolio may invest
up to 5% of its assets in securities traded in markets of
developing countries. A developing country generally is considered
to be a country that is in the initial stages of its
industrialization cycle. Investing in the equity and fixed-income
markets of developing countries involves exposure to economic
structures that are generally less diverse and mature, and to
political systems that can be expected to have less stability, than
those of developed countries. Historical experience indicates that
the markets of developing countries have been more volatile than
the markets of the more mature economies of developed countries;
however, such markets often have provided higher rates of return to
investors.
Medium-, Lower- and Unrated Securities
The Intermediate High Grade, Diversified Strategic Income, Equity
Income, Growth & Income and Total Return Portfolios may invest in
medium- or lower-rated securities and unrated securities of
comparable quality. Generally, these securities offer a higher
current yield than is offered by higher-rated securities, but also
will likely have some quality and protective characteristics that,
in the judgment of the rating organizations, are outweighed by
large uncertainties or major risk exposures to adverse conditions
and are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the
terms of the obligation. The market values of certain of these
securities also tend to be more sensitive to individual corporate
developments and changes in economic conditions than higher-quality
bonds. In addition, medium- and lower-rated securities and
comparable unrated securities generally present a higher degree of
credit risk. Issuers of medium-, lower-rated and comparable
unrated securities are often highly leveraged and may not have more
traditional methods of financing available to them so that their
ability to service their debt obligations during a major economic
downturn or during sustained periods of rising interest rates may
be impaired. The risk of loss due to default by such issuers is
significantly greater because medium- and lower-rated securities
and unrated securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. In light
of these risks, each Portfolio's investment adviser, in evaluating
the creditworthiness of an issue, whether rated or unrated, will
take various factors established by the Fund's Board of Trustees
into consideration, which may include, as applicable, the issuer's
financial resources, its sensitivity to economic conditions and
trends, the operating history of and the community support for the
facility financed by the issue, the ability of the issuer's
management and regulatory matters.
The markets in which medium- and low-rated or comparable unrated
securities are traded generally are more limited than those in
which higher-rated securities are traded. The existence of limited
markets for these securities may restrict the availability of
securities for the Fund to purchase and also may have the effect of
limiting the ability of the Fund to (a) obtain accurate market
quotations for purposes of valuing securities and calculating net
asset value and (b) sell securities at their fair value either to
meet redemption requests or to respond to changes in the economy or
the financial markets. The market for medium-, lower rated and
comparable unrated securities is relatively new and has not fully
weathered a major economic recession. Any such recession, however,
would disrupt severely the market for such securities and adversely
affect the value of such securities, and could adversely affect the
ability of the issuers of such securities to repay principal and
pay interest thereon.
Fixed-income securities, including medium-, lower-rated and
comparable unrated securities, frequently have call or buy-back
features that permit their issuers to call or repurchase the
securities from their holders, such as a Portfolio. If an issuer
exercises these rights during periods of declining interest rates,
the Portfolio may have to replace the security with a lower
yielding security resulting in a decreased return to the Portfolio.
The market value of securities in lower rating categories is more
volatile than that of higher quality securities, and the markets in
which medium- and lower-rated or unrated securities are traded are
more limited than those in which higher-rated securities are
traded. Adverse publicity and investor perceptions may also have
a negative impact on the value and liquidity of lower-rated, high
yield securities, especially in a limited trading market. The
existence of limited markets may make it more difficult for a
Portfolio to obtain accurate market quotations for purposes of
valuing the Portfolio and calculating its net asset value.
Moreover, the lack of a liquid trading market may restrict the
availability of securities for a Portfolio to purchase and may also
have the effect of limiting the ability of a Portfolio to sell
securities at their fair value either to meet redemption requests
or to respond to changes in the economy or the financial markets.
Subsequent to its purchase by a Portfolio, an issue of securities
may cease to be rated or its rating may be reduced below the
minimum required for purchase by the Portfolio. Neither event will
require sale of such securities by the Portfolio involved, but the
Portfolio's investment adviser will consider such event in its
determination of whether the Portfolio should continue to hold the
securities.
Securities that are rated Ba by Moody's or BB by S&P have
speculative characteristics with respect to capacity to pay
interest and repay principal. Securities that are rated B
generally lack characteristics of the desirable investment and
assurance of interest and principal payments over any long period
of time may be small. Securities that are rated Caa or CCC are of
poor standing. These issues may be in default or present elements
of danger may exist with respect to principal or interest.
The Diversified Strategic Income Portfolio's holdings (as rated by
S&P) for the fiscal year ended December 31, 1993 were composed as
follows: 0.76% rated BBB; 5.93% rated BB; 14.14% rated B; 1.82%
rated CCC; and 0.60% rated D . The percentages were calculated on
a dollar weighted average basis by determining monthly the
percentage of the Fund's net assets invested in each rating
category and do not necessarily indicate what the composition of
the Portfolio's holdings will be in subsequent years.
Concentration
The Money Market Portfolio will concentrate at least 25% of its
assets in the banking industry and the Equity Income Portfolio will
concentrate at least 25% of its assets in the utility industry,
provided that, if, at some future date, adverse economic conditions
prevail in either of those industries, the relevant Portfolio may
temporarily, for defensive purposes, invest less than 25% of its
assets in the affected industry. Because of its concentration
policy, a Portfolio may be subject to greater risk and market
fluctuation than a fund that had securities representing a broader
range of investment alternatives. The Money Market and Equity
Income Portfolios' concentration policies are fundamental policies
that cannot be changed without the approval of a majority of the
relevant Portfolio's outstanding voting securities.
Securities of Unseasoned Issuers
The Diversified Strategic Income, Total Return, International
Equity and Emerging Growth Portfolios may invest in securities of
unseasoned issuers, which may have limited marketability and,
therefore, may be subject to wide fluctuations in market value. In
addition, certain securities may lack a significant operating
history and may be dependent on products or services without an
established market share.
Floating and Variable Rate Demand Notes
The Money Market Portfolio may acquire floating and variable rate
demand notes of corporate issuers. Although floating and variable
rate demand notes are frequently not rated by credit rating
agencies, unrated notes purchased by the Portfolio will be
determined by the Portfolio's investment adviser to be of
comparable quality at the time of purchase to instruments rated
"high quality" (i.e., within the two highest ratings) by any NRSRO.
Moreover, while there may be no active secondary market with
respect to a particular floating or variable rate demand
notepurchased by the Portfolio, the Portfolio may, upon the notice
specified in the note, demand payment of the principal of and
accrued interest on the note at any time and may resell the note at
any time to a third party. The absence of such an active secondary
market, however, could make it difficult for the Portfolio to
dispose of a particular floating or variable rate demand note in
the event the issuer of the note defaulted on its payment
obligations, and the Portfolio could, for this or other reasons,
suffer a loss to the extent of the default.
Leverage
The International Equity Portfolio may borrow from banks, on a
secured or unsecured basis, up to one-third of the value of its
assets. If the Portfolio borrows and uses the proceeds to make
additional investments, income and appreciation from such
investments will improve its performance if they exceed the
associated borrowing costs but impair its performance if they are
less than such borrowing costs. This speculative factor is known
as "leverage."
Leverage creates an opportunity for increased returns to
shareholders of the Portfolio but, at the same time, creates
special risk considerations. For example, leverage may exaggerate
changes in the net asset value of the Portfolio's shares and in the
Portfolio's yield. Although the principal or stated value of such
borrowings will be fixed, the Portfolio assets may change in value
during the time the borrowing is outstanding. Leverage will create
interest or dividend expenses for the Portfolio which can exceed
the income from the assets retained. To the extent the income or
other gain derived from securities purchased with borrowed funds
exceed the interest or dividends the Portfolio will have to pay in
respect thereof, the Portfolio's net income or other gain will be
greater than if leverage had not been used. Conversely, if the
income or other gain from the incremental assets is not sufficient
to cover the cost of leverage, the net income or other gain of the
Portfolio will be less than if leverage had not been used. If the
amount of income from the incremental securities is insufficient to
cover the cost of borrowing, securities might have to be liquidated
to obtain required funds. Depending on market or other conditions,
such liquidiations could be disadvantageous to the Portfolio.
Portfolio Transactions
All orders for transactions in securities, options, futures
contracts and options on future contracts on behalf of the
Portfolios will be placed by their respective investment advisers
with broker-dealers that those advisers select, including Smith
Barney Shearson and other affiliated brokers. A Portfolio may
utilize Smith Barney Shearson or a Smith Barney Shearson-affiliated
broker in connection with a purchase or sale of securities when the
Portfolio's investment adviser believes that the broker's charge
for the transaction does not exceed usual and customary levels.
The same standard applies to the use of Smith Barney Shearson or a
Smith Barney Shearson-affiliated broker as a commodities broker in
connection with entering into futures contracts and options on
futures contracts.
Net Asset Value
The value of an individual share of a Portfolio is the net asset
value of that share. The net asset value per share of each
Portfolio will be calculated separately on each day, Monday through
Friday, except on days when the New York Stock Exchange, Inc. (the
"NYSE") is closed. The NYSE is currently scheduled to be closed on
New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas, and on the
preceding Friday or subsequent Monday when one of these holidays
falls on a Saturday or Sunday, respectively. Net asset value per
share of each Portfolio is determined as of the close of regular
trading on the NYSE (currently 4:00 p.m., New York time). The
Money Market Portfolio seeks to maintain its net asset value at
$1.00 per share.
Net asset value per share is computed by dividing the value of a
Portfolio's net assets by the total number of its shares
outstanding. Generally, a Portfolio's investments are valued at
market value or, in the absence of a market value with respect to
any portfolio securities, at fair value as determined by or under
the direction of the Fund's Board of Trustees. A security that is
primarily traded on a U.S. or foreign exchange (including
securities traded through the National Market System) is valued at
the last sale price on that exchange or, if there were no
salesduring the day, at the current quoted bid price. Portfolio
securities that are primarily traded on foreign exchanges are
generally valued at the preceding closing values of such securities
on their respective exchanges, except that when an occurrence
subsequent to the time a value was so established is likely to have
changed the value, then the fair value of those securities will be
determined by consideration of other factors by or under the
direction of the Fund's Board of Trustees or its delegates.
Over-the-counter securities that are not traded through the
National Market System and securities listed or traded on certain
foreign exchanges whose operations are similar to the U.S.
over-the-counter market are valued on the basis of the bid price at
the close of business on each day. An option is generally valued
at the last sale price or, in the absence of a last sale price, the
last offer price. Investments in U.S. government securities (other
than short-term securities) are valued at the average of the quoted
bid and asked prices in the over-the-counter market. Short-term
investments that mature in 60 days or less are valued at amortized
cost when the Fund's Board of Trustees determines that this
constitutes fair value; assets of the Money Market Portfolio are
also valued at amortized cost. The value of a futures contract
equals the unrealized gain or loss on the contract, which is
determined by marking the contract to the current settlement price
for a like contract acquired on the day on which the futures
contract is being valued. A settlement price may not be used if
the market makes a limit move with respect to the security, index
or currency underlying the futures contract. In such event, the
futures contract will be valued at a fair market price to be
determined by or under the direction of the Fund's Board of
Trustees. Further information regarding the Fund's valuation
policies is contained in the Statement of Additional Information.
How to Use the Fund
Investing in the Fund
Shares of the Fund are currently offered to the Variable Account to
fund the Annuity issued by IDS Life or IDS Life of New York. Net
purchase payments for the Annuity are allocated to the Subaccounts,
which are subaccounts of the Variable Account. Each Subaccount
purchases shares of a specified Portfolio of the Fund without a
sales charge at the net asset value per share determined at the
close of business on the day of receipt of the purchase order at
the office of TSSG, the Fund's transfer agent. For further
information, see the description provided in the Annuity
prospectus.
Sales Charges and Surrender Charges
The Fund does not assess any sales charge, either when it sells or
when it redeems shares of a Portfolio. However, surrender charges
that may be assessed under the Annuity are described in the
prospectus for the Annuity. Mortality and expense risk fees and
other charges are also described in the Annuity prospectus.
Redeeming and Exchanging Shares
The Fund will redeem any shares presented by the ten Subaccounts,
its sole shareholders, in response to full or partial surrenders of
the Annuity or transfer of money from one Subaccount to another, or
from a Subaccount to a fixed account offered by IDS Life or IDS
Life of New York to Annuity owners (the "Fixed Account"), by owners
of Annuities. Information on how to transfer funds is described in
the Annuity prospectus. Generally, payment upon redemption will be
made within seven days after receiving a valid redemption request
(unless redemption is suspended or payment is delayed as permitted
in accordance with SEC regulations). The Fund will use the net
asset value at the close of trading on the NYSE on the day the
notice of surrender or transfer is received by IDS Life or IDS Life
of New York. If the request arrives at IDS Life or IDS Life of New
York after the close of trading on the NYSE, the shares will be
redeemed at the net asset value at the close of the next business
day. The value of any redeemed shares may be more or less than
their original purchase price.
A detailed description of how to surrender the Annuity and transfer
money among Subaccounts, or between a Subaccount and the Fixed
Account, is included in the Annuity prospectus.
Dividends and Taxes
Dividends
Net Investment Income. Dividends and distributions will be
automatically reinvested, without a sales charge, in the
shareholder's account at net asset value in additional shares of
the Portfolio that paid the dividend or distribution, unless the
shareholder instructs the Portfolio to pay all dividends and
distributions in cash. The Subaccounts do not intend to elect to
receive cash dividends or distributions. Net investment income,
including dividends on stocks and interest on bonds or other
securities the Fund holds, is distributed to the ten Subaccounts,
the sole shareholders of the Portfolios, as follows:
` monthly for the Money Market (declared daily), Intermediate
High Grade, Diversified Strategic Income, Total Return and Equity
Income Portfolios;
` quarterly for the Growth & Income Portfolio; and
` annually for the Appreciation, Emerging Growth, International
Equity and Equity Index Portfolios.
Capital Gains. Distributions of any net realized capital gains of
the Portfolios will be paid annually shortly after the close of the
fiscal year in which they are earned.
Taxes
In the opinion of counsel to the Fund, each Portfolio will be
treated as a separate taxpayer with the result that, for federal
income tax purposes, the amounts of investment income and capital
gains earned will be determined on a Portfolio-by-Portfolio (rather
than on a Fund-wide) basis.
The Fund intends that each Portfolio will separately meet the
requirements for qualification each year as a "regulated investment
company" within the meaning of the Internal Revenue Code of 1986,
as amended (the "Code"). In order to qualify as a regulated
investment company, each Portfolio must meet certain income and
diversification tests, including the requirement that it derive
less than 30% of its gross income in each taxable year from the
sale or other disposition of (a) stock or securities held for less
than three months, (b) options, futures or forward contracts (other
than options, futures or forward contracts on foreign currencies)
held for less than three months and (c) foreign currencies (or
options, futures or forward contracts on such foreign currencies)
held for less than three months but only if such currencies (or
options, futures or forward contracts) are not directly related to
the Portfolio's principal business of investing in stock or
securities (or options or futures with respect to stock or
securities). As a regulated investment company and provided
certain distribution requirements are met, a Portfolio will not be
subject to federal income tax on its net investment income and net
capital gains that it distributes to the Subaccounts, its
shareholders.
Dividends paid by a Portfolio from taxable investment income and
distributions of short-term capital gains will be treated as
ordinary income in the hands of the shareholders for federal income
tax purposes, whether received in cash or reinvested in additional
shares. Distributions of net long-term capital gains will be
treated as long-term capital gains in the hands of the
shareholders, if certain notice and designation requirements are
satisfied, whether paid in cash or reinvested in additional shares,
regardless of the length of time the investor has held shares of
the Portfolio. The Fund has been informed by the Variable Account
that it should, for federal income tax purposes, be considered the
shareholder of each of the Portfolios.
To comply with regulations under Section 817(h) of the Code, each
Portfolio will be required to diversify its investments so that on
the last day of each calendar quarter no more than 55% of the value
of their assets is represented by any one investment, no more than
70% is represented by any two investments, no more than 80% is
represented by any three investments and no more than 90% is
represented by any four investments. Generally, all securities of
the same issuer are treated as a single investment. For the
purposes of Section 817(h) of the Code, obligations of the United
States Treasury and each U.S. government instrumentality are
treated as securities of separate issuers. Compliance with these
diversification rules will limit the ability of the Money Market
and Intermediate High Grade Portfolios, in particular, to invest
more than 55% of their assets in direct obligations of the United
States Treasury or to invest primarily in securities issued by a
single agency or instrumentality of the United States government.
The Treasury Department has indicated that it may issue future
pronouncements addressing the circumstances in which a variable
contract owner's control of the investments of a separate account
may cause the variable contract owner, rather than the insurance
company, to be treated as the owner of the assets held by the
separate account. If the variable contract owner is considered the
owner of the securities underlying the separate account, income and
gains produced by those securities would be included currently in
the variable contract owner's gross income. It is not known what
standards will be set forth in such pronouncements or when, if at
all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there can be no
assurance that the Portfolios will be able to operate as currently
described in this Prospectus, or that the Fund will not have to
change the investment goal or investment policies of a Portfolio.
While a Portfolio's investment goal is fundamental and may be
changed only by a vote of a majority of the Portfolio's outstanding
shares, the Fund's Board of Trustees reserves the right to modify
the investment policies of a Portfolio as necessary to prevent any
such prospective rules and regulations from causing an Annuity
owner to be considered the owner of the shares of the Portfolio
underlying the Variable Account.
Reference is made to the prospectus for the Annuity for information
regarding the federal income tax treatment of distributions from
the Variable Account to Annuity owners.
Management of the Fund
Board of Trustees
Overall responsibility for management and supervision of the Fund
and the Portfolios rests with the Fund's Board of Trustees. The
Trustees approve all significant agreements between the Fund and
the persons or companies that furnish services to the Fund and its
Portfolios, including agreements with the investment advisers and
sub-investment advisers and/or administrator of the Portfolios and
with the Fund's custodian, transfer agent and distributor. The
dayion about them, are contained in the Statement of Additional
Information. By virtue of the responsibilities assumed by the
investment advisers, the sub-investment advisers and the
administrator of the Portfolios, the Fund requires no employees
other than its executive officers, none of whom devotes full time
to the affairs of the Fund.
Investment Advisers and Administrator
Each Portfolio's assets are managed separately. Subject to the
supervision and direction of the Fund's Board of Trustees, the
investment adviser of each Portfolio manages the Portfolio in
accordance with the Portfolio's goal or goals and stated investment
policies, makes investment decisions for the Portfolio, places
orders to purchase and sell securities on behalf of the Portfolio
and employs professional portfolio managers and securities analysts
who provide research services to the Portfolio.
PanAgora Management, located at 260 Franklin Street, 22nd Floor,
Boston, Massachusetts 02110, is 50% owned by Nippon Life Insurance
Company, and 50% owned by Lehman Brothers, Inc., which is a wholly
owned subsidiary of Lehman Brothers Holdings Inc. ("Lehman
Holdings"). American Express Company ("American Express") owns
100% of Lehman Holdings' issued and outstanding common stock, which
represents approximately 92% of Lehman Holdings' voting stock. The
remainder of Lehman Holdings' voting stock is owned by Nippon Life
Insurance Company. American Express is principally engaged in the
businesses of providing travel-related services, information
services, investment services, international banking services and
investors' diversified financial services. PanAgora Management
provides investment management and investment advisory services to
pension funds, endowment funds and investment companies with
aggregate assets under management, as of February 28 , 1994, in
excess of $15.4 billion.
Asset Management, located at Two World Trade Center, New York, New
York 10048, is a division of Smith, Barney Advisers, Inc. Asset
Management has been in the investment counseling business since
1940. Asset Management renders investment advice to investment
company clients, with aggregate assets under management, as of
February 28 , 1994, in excess of $10.1 billion.
Smith Barney Shearson Series FundSmith, Barney Advisers, Inc.,
located at 1345 Avenue of the Americas, New York, New York 10105,
is controlled by Smith Barney Shearson Holdings Inc. ("Holdings").
Holdings is a wholly owned subsidiary of The Travelers Inc. (which
was formerly known as Primerica Corporation) ("Travelers"), a
diversified financial services holding company principally engaged
in the business of providing investment, consumer finance and
insurance services. Smith, Barney Advisers, Inc. provides
investment advice to investment companies with aggregate assets
under management as of February 28, 1994 in excess of $9.1 billion.
Greenwich Street Advisors, located at Two World Trade Center, New
York, New York 10048, has been (through its predecessors) in the
investment counseling business since 1934 and is a division of
Mutual Management Corp. which was incorporated in 1978. Mutual
Management Corp. is an indirect wholly owned subsidiary of
Travelers. Greenwich Street Advisors renders investment advice to
investment company clients with aggregate assets under management,
as of February 28 , 1994, in excess of $43.7 billion.
Global Capital Management, located at 10 Piccadilly, London, W1V
9LA England, is a wholly owned subsidiary of Holdings. Global
Capital Management is responsible for and selects the Portfolio's
investments in foreign securities and selects brokers and dealers
that execute the Portfolio's investments in foreign securities.
Global Capital Management renders investment advice to
institutional clients and investment companies with aggregate
assets under management, as of February 28, 1994 , in excess of
$6.7
million.
Boston Advisors, located at One Boston Place, Boston, Massachusetts
02108, is an indirect wholly owned subsidiary of Mellon Bank
Corporation ("Mellon") and serves as administrator to each
Portfolio. As administrator, Boston Advisors calculates the net
asset values of all Portfolios and generally assists in all aspects
of the administration and operation of the Portfolios. Boston
Advisors provides investment management, investment advisory and/or
administrative services to investment companies with aggregate
assets under management, as of February 28, 1994 , in excess of
$92.5 billion.
American Capital, located at 2800 Post Oak Boulevard, Houston,
Texas 77056, is a wholly owned subsidiary of American Capital
Management & Research, Inc., an indirect wholly owned subsidiary of
Primerica Corporation. American Capital, together with its
predecessors, has been in the investment advisory business since
1926. As of February 28, 1994 , American Capital provides
investment advice to investment companies with total
net assets of
approximately $17.1 billion.
Portfolio Management
The Intermediate High Grade Portfolio -- John C. Bianchi is a Vice
President and Investment Officer of the Portfolio. Mr. Bianchi
has served as a Managing Director of Greenwich Street Advisors
(formerly Shearson Lehman Advisors) since October 1989. Prior to
that time, Mr. Bianchi served as Senior Vice President of
Bernstein-Macaulay. G. Ruppert Vernon, Jr. has served as a Vice
President of Greenwich Street Advisors since October 1989. Prior
to that time, Mr. Vernon served as an Assistant Vice President of
E.F. Hutton & Company Inc.
The Diversified Strategic Income Portfolio -- James C. Conroy is
a Vice President and Investment Officer of the Portfolio. Mr.
Conroy has served as a Managing Director of Greenwich Street
Advisors since October 1989. Prior to that time, Mr. Conroy
served as a Senior Vice President of Bernstein-Macaulay. John C.
Bianchi is a Vice President and Investment Officer of the
Portfolio.
The Equity Income Portfolio -- Jack S. Levande is a Vice President
and Investment Officer of the Fund, and a Managing Director of
Greenwich Street Advisors. Prior to October 1989, Mr. Levande was
a Senior Vice President of E.F. Hutton & Company Inc.
The Equity Index Portfolio -- William G. Zink is a Vice President
and Investment Officer of the Portfolio, and has served as Manager
- -- Equities of PanAgora Management since July 1992. Prior to that
date, Mr. Zink served as a General Manager of PanAgora Management.
David L. Beckedorff is a Vice President and Investment Officer of
the Portfolio, and has served as Senior Manager -- Equities of
PanAgora Management since 1990. Prior to that date, Mr. Beckedorff
served as President of DLB Computer Systems, a software development
company.
The Growth & Income Portfolio -- R. Jay Gerken has served as a
Managing Director of Greenwich Street Advisors since October 1989.
Prior to that time, Mr. Gerken served as a Senior Vice President
of E.F. Hutton & Company Inc. George V. Novello has served as a
Managing Director of Greenwich Street Advisors since September
1990. From January 1990 until September 1990, Mr. Novello served
as a Senior Vice President of Gruntal Financial Corp. Prior to
that time, he served as a Senior Vice President of McKinley Allsopp
& Co.
The Appreciation Portfolio -- Harry D. Cohen is currently
President of Asset Management; and an Executive Vice President of
Smith Barney Shearson Inc. ("Smith Barney Shearson"). Prior to
July 1993, Mr. Cohen served as Executive Vice President of
Shearson Lehman Brothers Inc. ("Shearson Lehman Brothers"). Harold
L. Williamson, Jr. is Vice Chairman of Asset Management and a
Managing Director of Smith Barney Shearson. Prior to July 1993,
Mr. Williamson was an Executive Vice President of Shearson Lehman
Brothers.
The Emerging Growth Portfolio -- Gary Lewis has served as a
Portfolio Manager at American Capital Management for over five
years, and as Portfolio Manager for the American Capital Emerging
Growth Fund since April 1989.
The Total Return Portfolio -- John G. Goode has been President and
Chief Executive Officer of what is now the Davis Skaggs Investment
Management Division of the Smith Barney Shearson Asset Management
Division of Smith Barney Advisers, Inc. since 1989. Since November
1990, Mr. Goode has also been the Portfolio Manager of the Smith
Barney Shearson Fundamental Value Fund Inc.
The International Equity Portfolio -- Jeffrey Russell has been a
Managing Director at Smith Barney Shearson since July 1993. From
1990 until July 1993 Mr. Russell was employed at Smith Barney,
Harris Upham & Co. Incorporated, where he served as Managing
Director from 1991 until July 1993. Prior to 1990, Mr. Russell
served as Corporate Vice President of Drexel Burnham Lambert Inc.
Portfolio Management
The Fund's management discussion and analysis, and additional
performance information regarding the Portfolios of the Fund during
the Fiscal year ended December 31,1993 is included in the Annual
Report dated December 31,1993. A copy of the Annual Report may be
obtained upon request without charge from your Smith Barney
Shearson Financial Consultant or by writing or calling the Fund at
the address or phone number listed on page one of this Prospectus.
Custodian and Transfer Agent
Boston Safe, located at One Boston Place, Boston, Massachusetts
02108, acts as custodian of the Fund's investments generally.
Boston Safe is a wholly owned subsidiary of The Boston Company,
Inc. ("TBC").
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and
acts as the Fund's transfer and dividend paying agent.
Distributor
Smith Barney Shearson , a subsidiary of Smith Barney Shearson
Holdings Inc. ("Holdings"), located at 388 Greenwich Street, New
York, New York 10013, serves as distributor of the Fund's shares,
for which it receives no separate fee from the Fund. IDS Life or
IDS Life of New York pays Smith Barney Shearson for the services it
provides and the expenses it bears in distributing the Annuity,
including payment of commissions for sales. IDS Life or IDS Life
of New York will bear certain additional costs in connection with
the offering of the Fund's shares, including the costs of printing
and distributing prospectuses, statements of additional information
and sales literature. Holdings is a wholly owned subsidiary of The
Travelers Inc.
Additional Information
Formation
The Fund was organized on May 13, 1991 under the laws of the
Commonwealth of Massachusetts and is a business entity commonly
known as a "Massachusetts business trust." The Fund is registered
with the SEC as a diversified, open-end management investment
company, as defined in the 1940 Act. The Fund commenced operations
on October 16, 1991, under the name Shearson Series Fund. On July
30, 1993 the Fund changed its name to its current name, Smith
Barney Shearson Series Fund.
Shares of Beneficial Interest
The Fund offers shares of beneficial interest of separate series
with a par value of $.001 per share. Shares of ten series have
been authorized, which represent the interests in the ten
Portfolios described in this Prospectus. When matters are
submitted for shareholder vote, shareholders of each Portfolio will
have one vote for each full share owned and proportionate,
fractional votes for fractional shares held.
For a discussion of the rights of Annuity owners concerning the
voting of shares held by the Subaccounts, please refer to the
Annuity prospectus. IDS Life or IDS Life of New York, on behalf of
the Variable Account, will vote the shares of the Fund held by each
of the Subaccounts in accordance with instructions received from
the owners of Annuities having a voting interest in the relevant
Subaccount. IDS Life or IDS Life of New York will vote the shares
of the Fund for which they have voting rights, and will vote the
shares of Annuity holders who have not given voting instructions,
in the same proportion as the votes for which they have received
instructions.
Generally, shares of the Fund vote by individual Portfolio on all
matters except (a) matters affecting only the interests of one or
more of the Portfolios, in which case only shares of the affected
Portfolio or Portfolios would be entitled to vote, or (b) when the
1940 Act requires that shares of the Portfolios be voted in the
aggregate. All shares of the Fund vote together as one series for
the election of Trustees. There will normally be no meetings of
shareholders for the purpose of electing Trustees unless less than
a majority of the Trustees holding office have been elected by
shareholders, at which time the Trustees then in office will call
a shareholders' meeting for the election of Trustees. Any Trustee
may be removed from office upon the vote of shareholders holding at
least two-thirds of the Fund's outstanding shares at a meeting
called for that purpose. The Trustees are required to call such a
meeting upon the written request of shareholders holding at least
10% of the Fund's outstanding shares. In addition, shareholders
who meet certain criteria will be assisted by the Fund in
communicating with other shareholders in seeking the holding of
such a meeting.
As of the date of this Prospectus, the Subaccounts owned all of the
remaining outstanding shares of each of the Portfolios, with the
exception of a nominal amount owned by an IDS affiliate.
The Fund sends to each owner of an Annuity a semiannual report and
an audited annual report, each of which includes a list of the
investment securities held by the Portfolios at the end of the
period covered. Annuity owners may make inquiries regarding the
Fund and its Portfolios, including the current performance of the
Portfolios, from their Smith Barney Shearson Financial Consultants.
Annuity owners can make inquiries regarding their Annuity by
calling (800) 422-3542 or (800) 724-0705 in New York.
The Portfolios' Performance
Yield
The Money Market Portfolio may, from time to time, include the
yield and effective yield in advertisements or reports to
shareholders or prospective investors. Current yield for the Money
Market Portfolio will be based on income received by a hypothetical
investment over a given seven-day period (less expenses accrued
during the period), and then "annualized" (i.e., assuming that the
seven-day yield would be received for fifty-two weeks, stated in
terms of an annual percentage return on the investment). "Effective
yield" for the Money Market Portfolio will be calculated in a
manner similar to that used to calculate yield, but will reflect
the compounding effect of earnings on reinvested dividends.
For the Diversified Strategic Income Portfolio and the Intermediate
High Grade Portfolio, from time to time, the Fund may advertise the
thirty-day yield. The yield of a Portfolio refers to the income
generated by an investment in such Portfolio over the thirty-day
period identified in the advertisement and is computed by dividing
the net investment income per share earned by the Portfolio during
the period by the net asset value per share on the last day of the
period. This income is "annualized" by assuming that the amount of
income is generated each month over a one-year period and is
compounded semiannually. The annualized income is then shown as a
percentage of the net asset value.
Total Return
From time to time, a Portfolio other than the Money Market
Portfolio may advertise its "average annual total return" over
various periods of time. Such total return figures show the
average percentage change in value of an investment in the
Portfolio from the beginning date of the measuring period to the
end of the measuring period. These figures reflect changes in the
price of the Portfolio's shares and assume that any income
dividends and/or capital gains distributions made by the Portfolio
during the period were reinvested in shares of the Portfolio.
Figures will be given for recent one-, five- and ten-year periods
(if applicable), and may be given for other periods as well (such
as from commencement of the Portfolio's operations, or on a
year-by-year basis). When considering average annual total return
figures for periods longer than one year, it is important to note
that the relevant Portfolio's annual total return for any one year
in the period might have been greater or less than the average for
the entire period. A Portfolio also may use "aggregate" total
return figures for various periods, representing the cumulative
change in value of an investment in the Portfolio for the specific
period (again reflecting changes in a Portfolio's share prices and
assuming reinvestment of dividends and distributions). Aggregate
total returns may be shown by means of schedules, charts or graphs
and may indicate subtotals of the various components of total
return (i.e., change in value of initial investment, income
dividends and capital gains distributions).
It is important to note that yield and total return figures are
based on historical earnings and are not intended to indicate
future performance. The Statement of Additional Information
describes the method used to determine the Portfolios' yield and
total return. Shareholders may make inquiries regarding a
Portfolio, including current yield quotations or total return
figures, to their Smith Barney Shearson Financial Consultant.
In reports or other communications to shareholders or in
advertising material, a Portfolio may compare its performance with
that of other mutual funds as listed in the rankings prepared by
Lipper Analytical Services, Inc. or similar independent services
that monitor the performance of mutual funds or with other
appropriate indexes of investment securities, such as the S&P 500,
Salomon Brothers World Government Bond Index, Lehman Brothers
Government Bond Index and Lehman Brothers Mortgage-Backed
Securities Index, with the Consumer Price Index, Dow Jones
Industrial Average or NASDAQ, or with investment or savings
vehicles. The performance information also may include evaluations
of the Portfolios published by nationally recognized ranking
services and by financial publications that are nationally
recognized, such as Barron's, Business Week, Forbes, Fortune,
Institutional Investor, Investor's Daily, Kiplinger's Personal
Finance Magazine, Money, Morningstar Mutual Fund Values, Mutual
Fund Forecaster, The New York Times, Stranger's Investment Advisor,
USA Today, U.S. News & World Report and The Wall Street Journal.
Such comparative performance information will be stated in the same
terms in which the comparative data or indices are stated. Any
such advertisement would also include the standard performance
information required by the Securities and Exchange Commission (the
"SEC") as described above. For these purposes, the performance of
the Portfolios, as well as the performance of other mutual funds or
indices, do not reflect sales charges, the inclusion of which would
reduce a Portfolio's performance.
A Portfolio may also utilize performance information in
hypothetical illustrations provided in narrative form. These
hypotheticals will be accompanied by the standard performance
information required by the SEC as described above.
Appendix
Certain Investment Strategies
In attempting to achieve its investment goal or goals, a Portfolio
may employ, among others, one or more of the strategies set forth
below. More detailed information concerning these strategies and
their related risks is contained in the Statement of Additional
Information.
In the future, the Fund may desire to employ additional investment
strategies, including, in the case of Portfolios not currently
authorized to engage in futures activity, such hedging strategies
as entering into futures contracts and related options. The Fund
will do so only upon 60 days' notice to shareholders of the
Portfolios involved and in conformity with its investment
restrictions.
Repurchase Agreements. The Money Market Portfolio will enter into
repurchase agreements with respect to U.S. government securities
and each other Portfolio may engage in repurchase agreement
transactions on portfolio securities, in each case with banks which
are the issuers of instruments acceptable for purchase by the
Portfolio and with certain dealers listed on the Federal Reserve
Bank of New York's list of reporting dealers. Under the terms of
a typical repurchase agreement, a Portfolio would acquire an
underlying debt obligation for a relatively short period (usually
not more than one week) subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the obligation at an
agreed-upon price and time, thereby determining the yield during
the Portfolio's holding period. This arrangement results in a
fixed rate of return that is not subject to market fluctuations
during the Portfolio's holding period. The value of the underlying
securities will be monitored by the relevant Portfolio's investment
adviser to ensure that it at least equals at all times the total
amount of the repurchase obligation, including interest. A
Portfolio bears a risk of loss in the event that the other party to
a repurchase agreement defaults on its obligations and the
Portfolio is delayed or prevented from exercising its rights to
dispose of the collateral securities, including the risk of a
possible decline in the value of the underlying securities during
the period while the Portfolio seeks to assert these rights. Each
Portfolio's investment adviser, acting under the supervision of the
Fund's Board of Trustees, reviews on an ongoing basis the value of
the collateral and the creditworthiness of those banks and dealers
with which the Portfolio enters into repurchase agreements to
evaluate potential risks. A repurchase agreement is considered to
be a loan collateralized by the underlying securities under the
1940 Act.
Lending of Securities. Each Portfolio, other than the Money Market
Portfolio, may lend its portfolio securities to brokers, dealers
and other financial organizations. By lending its securities, a
Portfolio can increase its income by continuing to receive interest
on the loaned securities as well as by either investing the cash
collateral in short-term instruments or obtaining yield in the form
of interest paid by the borrower when U.S. government securities
are used as collateral. Loans of portfolio securities, if and when
made, by a Portfolio may not exceed 33?% of the Portfolio's total
assets, taken at value. Loans of portfolio securities will be
collateralized by cash, letters of credit or U.S. government
securities, which are maintained at all times in an amount equal to
the current market value of the loaned securities. Any gain or
loss in the market price of the securities loaned that might occur
during the term of the loan would be for the account of the
Portfolio involved.
Futures and Options on Futures. When deemed advisable by their
respective investment advisers, the Intermediate High Grade,
Diversified Strategic Income, Equity Income, Emerging Growth,
International Equity, Total Return and Growth & Income Portfolios
may enter into interest rate futures contracts, the Equity Index,
Emerging Growth, International Equity, Total Return and Growth &
Income Portfolios may enter into stock index futures contracts, the
Diversified Strategic Income, International Equity and Emerging
Growth Portfolios may enter into foreign currency futures
contracts, and each such Portfolio may enter into related options
that are traded on a U.S. exchange or board of trade. These
transactions will be made solely for the purpose of hedging against
the effects of changes in the value of portfolio securities due to
anticipated changes in interest rates, market conditions and
currency values, as the case may be. The Equity Index, Emerging
Growth, International Equity, Total Return Portfolios will enter
into futures and options on futures to purchase stock indexes in
anticipation of future purchases of securities ("long positions").
All futures and options contracts will be entered into only when
the transactions are economically appropriate to the reduction of
risks inherent in the management of the Portfolio involved.
An interest rate futures contract provides for the future sale by
one party and the purchase by the other party of a specified amount
of a particular financial instrument (debt security) at a specified
price, date, time and place. Similarly, a foreign currency futures
contract provides for the future sale by one party and the purchase
by another party of a certain amount of a particular currency at a
specified price, date, time and place. Stock index futures
contracts are based on indexes that reflect the market value of
common stock of the firms included in the indexes. An index
futures contract is an agreement pursuant to which two parties
agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last
trading day of the contract and the price at which the index
contract was originally entered into. An option on an interest
rate, stock index or currency futures contract gives the purchaser
the right, in return for the premium paid, to assume a position in
a futures contract (a long position if the option is a call and a
short position if the option is a put) at a specified exercise
price at any time prior to the expiration date of the option.
The use of futures contracts and options on futures contracts as a
hedging device involves several risks. There can be no assurance
that there will be a correlation between price movements in the
underlying securities, index or currency, on the one hand, and
price movements in the securities that are the subject of the
hedge, on the other hand. Positions in futures contracts and
options on futures contracts may be closed out only on the exchange
or board of trade on which they were entered into, and there can be
no assurance that an active market will exist for a particular
contract or option at any particular time.
A Portfolio may not enter into futures and options contracts for
which aggregate initial margin deposits and premiums paid for
unexpired options to establish such positions that are not bona
fide hedging positions (as defined by the Commodity Futures Trading
Commission) exceed 5% of the fair market value of the Portfolio's
assets, after taking into account unrealized profits and unrealized
losses on futures contracts into which it has entered. With
respect to long positions in futures or options on futures, a
Portfolio will "cover" the position in a manner consistent with SEC
guidance.
When-Issued Securities and Delayed Delivery Transactions. The
Intermediate High Grade, Diversified Strategic Income, Equity
Income, Growth & Income, Total Return, Emerging Growth and
International Equity Portfolios may purchase and sell securities on
a when-issued basis, which calls for the purchase (or sale) of
securities at an agreed-upon price on a specified future date. A
Portfolio will enter into a when-issued transaction for the purpose
of acquiring portfolio securities and not for the purpose of
leverage. In such transactions, delivery of the securities occurs
beyond the normal settlement periods, but no payment or delivery is
made by, and no interest accrues to, a Portfolio prior to the
actual delivery or payment by the other party to the transaction.
Due to fluctuations in the value of securities purchased or sold on
a when-issued or delayed delivery basis, the returns obtained on
such securities may be higher or lower than the returns available
in the market on the dates when the investments are actually
delivered to the buyers. A Portfolio will establish a segregated
account consisting of cash, U.S. government securities or other
high-grade debt obligations in an amount equal to the amount of its
when-issued and delayed delivery commitments. Placing securities
rather than cash in the segregated account may have a leveraging
effect on the Portfolio's net assets. A Portfolio will not accrue
income with respect to a when-issued security prior to its stated
delivery date.
Purchasing Options on Securities and Stock Indexes. The
Intermediate High Grade, Diversified Strategic Income, Total
Return, Emerging Growth, International Equity and Equity Income
Portfolios may purchase put and call options that are traded on a
U.S. securities exchange, and the Total Return, Emerging Growth,
International Equity and Diversified Strategic Income Portfolios
may also purchase such options on foreign exchanges and in the
over-the-counter market. The Portfolios may utilize up to 10% of
their respective assets to purchase put options on portfolio
securities and may do so at or about the same time that they
purchase the underlying security or at a later time. By buying a
put, a Portfolio limits its risk of loss from a decline in the
market value of the underlying security until the put expires. Any
appreciation in the value of and yield otherwise available from the
underlying security, however, will be partially offset by the
amount of the premium paid for the put option and any related
transaction costs. The Portfolios may utilize up to 10% of their
respective assets to purchase call options on portfolio securities.
Call options may be purchased by a Portfolio in order to acquire
the underlying securities for the Portfolio at a price that avoids
any additional cost that would result from a substantial increase
in the market value of a security. A Portfolio also may purchase
call options to increase its return to investors at a time when the
call is expected to increase in value due to anticipated
appreciation of the underlying security.
Prior to their expirations, put and call options may be sold in
closing sale transactions (sales by a Portfolio, prior to the
exercise of options that it has purchased, of options of the same
series), and profit or loss from the sale will depend on whether
the amount received is more or less than the premium paid for the
option plus the related transaction costs.
The Equity Index, Total Return, Emerging Growth and International
Equity Portfolios may purchase call options on stock indexes. The
Total Return Portfolio may also write call options and buy put
options on stock indexes. Options on stock indexes are similar to
options on securities. However, options on stock indexes do not
involve the delivery of an underlying security; rather, the options
represent the holder's right to obtain from the writer in cash a
fixed multiple of the amount by which the exercise price exceeds
(in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the exercise date.
A stock index measures the movement of a certain group of stocks by
assigning relative values to the common stocks included in the
index. In purchasing put options on a stock index, the Total
Return Portfolio seeks to benefit from a decline in the value of
the stocks underlying the index or seeks to hedge against the risk
of loss on securities that it holds. In purchasing call options on
a stock index, the Portfolio seeks to participate in an advancing
market in anticipation of becoming more fully invested in equity
securities.
The advisability of using stock index options to hedge against the
risk of marketwide movements will depend on the extent of
diversification of the stock investments of the Fund and the
sensitivity of its stock investments to factors influencing the
underlying index. The effectiveness of purchasing or writing stock
index options as a hedging technique will depend upon the extent to
which price movements in the Portfolio's securities investments
correlate with price movements in the stock index selected.
Covered Option Writing. The Intermediate High Grade, Diversified
Strategic Income, Equity Income, Equity Index, Total Return,
International Equity, Emerging Growth and Growth & Income
Portfolios may write put and call options on securities. Each
Portfolio realizes fees (referred to as "premiums") for granting
the rights evidenced by the options. A put option embodies the
right of its purchaser to compel the writer of the option to
purchase from the option holder an underlying security at a
specified price at any time during the option period. In contrast,
a call option embodies the right of its purchaser to compel the
writer of the option to sell to the option holder an underlying
security at a specified price at any time during the option period.
Thus, the purchaser of a put option written by a Portfolio has the
right to compel the Portfolio to purchase from it the underlying
security at the agreed-upon price for a specified time period,
while the purchaser of a call option written by a Portfolio has the
right to purchase from the Portfolio the underlying security owned
by the Portfolio at the agreed-upon price for a specified time
period.
Upon the exercise of a put option written by a Portfolio, the
Portfolio may suffer a loss equal to the difference between the
price at which the Portfolio is required to purchase the underlying
security plus the premium received for writing the option and its
market value at the time of the option exercise. Upon the exercise
of a call option written by a Portfolio, the Portfolio may suffer
a loss equal to the difference between the security's market value
at the time of the option exercise less the premium received for
writing the option and the Portfolio's acquisition cost of the
security.
The Portfolios with option-writing authority will write only
covered options. Accordingly, whenever a Portfolio writes a call
option, it will continue to own or have the present right to
acquire the underlying security for as long as it remains obligated
as the writer of the option. To support its obligation to purchase
the underlying security if a put option is exercised, a Portfolio
that has written a put option will either (a) deposit with Boston
Safe in a segregated account cash, U.S. government securities or
other high grade debt obligations having a value at least equal to
the exercise price of the underlying securities or (b) continue to
own an equivalent number of puts of the same "series" (that is,
puts on the same underlying security having the same exercise
prices and expiration dates as those written by the Portfolio) or
an equivalent number of puts of the same "class" (that is, puts on
the same underlying security) with exercise prices greater than
those that it has written (or, if the exercise prices of the puts
that it holds are less than the exercise prices of those that it
has written, it will deposit the difference with Boston Safe in a
segregated account).
A Portfolio may engage in a closing purchase transaction to realize
a profit, to prevent an underlying security from being called or
put or, in the case of a call option, to unfreeze an underlying
security (thereby permitting its sale or the writing of a new
option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, a Portfolio
would purchase, prior to the holder's exercise of an option that
the Portfolio has written, an option of the same series as that on
which the Portfolio desires to terminate its obligation. The
obligation of a Portfolio under an option that it has written would
be terminated by a closing purchase transaction, but the Portfolio
would not be deemed to own an option as the result of the
transaction. There can be no assurance that a Portfolio will be
able to effect closing purchase transactions at a time when it
wishes to do so. To facilitate closing purchase transactions,
however, the Portfolios with option-writing authority ordinarily
will write options only if a secondary market for the options
exists on a U.S. securities exchange or in the over-the-counter
market. The staff of the SEC considers most over-the-counter
options to be illiquid. The ability to terminate options positions
established in the over-the-counter market may be more limited than
in the case of exchange-traded options and may also involve the
risk that securities dealers participating in such transactions
would fail to meet their obligations to the Portfolio involved.
Short Sales Against the Box. The Equity Income, Total Return,
International Equity and Emerging Growth Portfolios may make short
sales of common stock if, at all times when a short position is
open, the Portfolio owns the stock or owns preferred stocks or debt
securities convertible or exchangeable into the shares of common
stock sold short. Short sales of this kind are referred to as
short sales "against the box." The broker-dealer that executes a
short sale generally invests cash proceeds of the sale until they
are paid to the Portfolio. Arrangements may be made with the
broker-dealer to obtain a portion of the interest earned by the
broker on the investment of short sale proceeds. The Portfolio
will segregate the common stock or convertible or exchangeable
preferred stock or debt securities in a special account with Boston
Safe.
Forward Roll Transactions. In order to enhance current income, the
Intermediate High Grade and Diversified Strategic Income Portfolios
may enter into forward roll transactions with respect to
mortgage-related securities issued by GNMA, FNMA and FHLMC. In a
forward roll transaction, a Portfolio sells a mortgage security to
a financial institution, such as a bank or broker-dealer, and
simultaneously agrees to repurchase a similar security from the
institution at a later date at an agreed-upon price. The mortgage
securities that are repurchased will bear the same interest rate as
those sold, but generally will be collateralized by different pools
of mortgages with different prepayment histories than those sold.
During the period between the sale and repurchase, the Portfolio
will not be entitled to receive interest and principal payments on
the securities sold. Proceeds of the sale will be invested in
short-term instruments, particularly repurchase agreements, and the
income from these investments, together with any additional fee
income received on the sale, will generate income for the Portfolio
exceeding the yield on the securities sold. Forward roll
transactions involve the risk that the market value of the
securities sold by a Portfolio may decline below the repurchase
price of those securities. At the time a Portfolio enters into a
forward roll transaction, it will place in a segregated custodial
account cash, U.S. government securities or high grade debt
obligations having a value equal to the repurchase price (including
accrued interest) and will subsequently monitor the account to
insure that such equivalent value is maintained. Forward roll
transactions are considered to be borrowings by a Portfolio.
Currency Exchange Transactions and Options on Foreign Currencies.
The Diversified Strategic Income, International Equity and Emerging
Growth Portfolios may engage in currency exchange transactions and
purchase exchange-traded put and call options on foreign currencies
in order to protect against uncertainty in the level of future
currency exchange rates. The Portfolio will conduct its currency
exchange transactions either on a spot (i.e., cash) basis at the
rate prevailing in the current exchange market or through entering
into forward contracts to purchase or sell currencies. The
Portfolio's dealings in forward currency exchange and options on
foreign currencies are limited to hedging involving either specific
transactions or portfolio positions. A forward currency contract
involves an obligation to purchase or sell a specific currency for
an agreed-upon price at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the
parties. These contracts are entered into in the interbank market
conducted directly between currency traders (usually large
commercial banks) and their customers. An option on a foreign
currency gives the purchaser, in return for a premium, the right to
sell, in the case of a put, and buy, in the case of a call, the
underlying currency at a specified price during the term of the
option.
Reverse Repurchase Agreements. The Intermediate High Grade,
Diversified Strategic Income, Equity Income and International
Equity Portfolios may enter into reverse repurchase agreement
transactions with member banks of the Federal Reserve System or
with certain dealers listed on the Federal Reserve Bank of New
York's list of reporting dealers. A reverse repurchase agreement,
which is considered a borrowing by the Portfolio, involves a sale
by the Portfolio of securities that it holds concurrently with an
agreement by the Portfolio to repurchase the same securities at an
agreed-upon price and date. The Portfolio typically will invest
the proceeds of a reverse repurchase agreement in money market
instruments or repurchase agreements maturing not later than the
expiration of the reverse repurchase agreement. This use of the
proceeds is known as leverage. The Portfolio will enter into a
reverse repurchase agreement for leverage purposes only when the
interest income to be earned from the investment of the proceeds is
greater than the interest expense of the transaction. The
Portfolio also may use the proceeds of reverse repurchase
agreements to provide liquidity to meet redemption requests when
the sale of the Portfolio's securities is considered to be
disadvantageous. At the time a Portfolio enters into a reverse
repurchase agreement with a broker-dealer (but not a bank), it will
place in a segregated custodial account cash, U.S. government
securities or high grade debt obligations having a value equal to
its obligations under the reverse repurchase agreements.
Index Strategy. The Equity Index Portfolio will invest in the
common stocks of the companies represented in the S&P 500 with the
goal of matching, before deduction of operating expenses, the price
and yield performance of the S&P 500. The S&P 500 is composed of
500 selected common stocks, most of which are listed on the NYSE.
S&P chooses the stocks to be included in the S&P 500 solely on a
statistical basis. The S&P 500 is a trademark of S&P and inclusion
of a stock in the S&P 500 in no way implies an opinion by S&P as to
its attractiveness as an investment. S&P is neither a sponsor nor
in any way affiliated with the Portfolio.
The weightings of stocks in the S&P 500 are based on each stock's
relative total market value; that is, its market price per share
times the number of shares outstanding. The Portfolio's investment
adviser generally will select stocks for the Portfolio in the order
of their weightings in the S&P 500, beginning with the heaviest
weighted stocks.
The Portfolio's investment adviser expects that, once the
Portfolio's assets reach $25 million, the correlation between the
performance of the Index Portfolio and that of the S&P 500 will be
above .95, with a figure of 1.00 indicating perfect correlation.
Perfect correlation would be achieved when the Portfolio's net
asset value per share increases and decreases in exact proportion
to changes in the S&P 500. The Portfolio's ability to replicate
the performance of the S&P 500 will depend to some extent on the
size of cash flows into and out of the Portfolio. Investment
changes to accommodate these cash flows will be made to maintain
the similarity of the Portfolios's assets to the S&P 500 to the
maximum practicable extent.
Investment in Utility Securities. The Equity Income Portfolio is
subject to risks that are inherent in the utility industry,
including difficulty in obtaining an adequate return on invested
capital, difficulty in financing large construction programs during
an inflationary period, restrictions on operations and increased
cost and delays attributable to environmental considerations and
regulation, difficulty in raising capital in adequate amounts on
reasonable terms in periods of high inflation and unsettled capital
markets, increased costs and reduced availability of certain types
of fuel, occasionally reduced availability and high costs of
natural gas for resales, the effects of energy conservation, the
effects of a national energy policy and lengthy delays and greatly
increased costs and other problems associated with the design,
construction, licensing, regulation and operation of nuclear
facilities for electric generation, including, among other
considerations, the problems associated with the use of radioactive
materials and the disposal of radioactive wastes. Costs incurred
by utilities, such as fuel costs, are subject to immediate market
action resulting from political or military forces operating in
geographic regions, such as the Persian Gulf, where oil production
is concentrated, while the rates of return of utility companies
generally are subject to review and limitation by state public
utility commissions, which results ordinarily in a lag between
costs and return. There are substantial differences between the
regulatory practices and policies of various jurisdictions, and any
given regulatory agency may make major shifts in policy from time
to time. There is no assurance that regulatory authorities will
grant rate increases in the future or that such increases will be
adequate to permit the payment of dividends on common stocks.
Additionally, existing and possible future regulatory legislation
may make it even more difficult for these utilities to obtain
adequate relief. Certain of the issuers of securities in the
Portfolio may own or operate nuclear generating facilities.
Governmental authorities may from time to time review existing
policies and impose additional requirements governing the
licensing, construction and operation of nuclear power plants.
Each of the risks referred to above could adversely affect the
ability and inclination of public utilities to declare or pay
dividends and the ability of holders of common stock to realize any
value from the assets of the issuer upon liquidation or bankruptcy.
Many, if not all, of the utilities that are issuers of the
securities expected to be included in the Portfolio have been
experiencing one or more of these problems in varying degrees.
Moreover, price disparities within selected utility groups and
discrepancies in relation to averages and indexes have occurred
frequently for reasons not directly related to the general
movements or price trends of utility common stocks. Causes of
these discrepancies include changes in the overall demand for and
supply of various securities (including the potentially depressing
effect of new stock offerings) and changes in investment
objectives, market expectations or cash requirements of other
purchasers and sellers of securities.
No person has been authorized to give any information or to make
any representations other than those contained in this Prospectus,
the Statement of Additional Information or the Fund's official
sales literature in connection with the offering of the Fund's
shares, and, if given or made, such other information or
representations must not be relied upon as having been authorized
by the Fund. This Prospectus does not constitute an offer in any
state in which, or to any person to whom, the offer may not
lawfully be made.
SMITH BARNEY SHEARSON SERIES FUND
Two World Trade Center New York, New York 10048 (212) 720-9218
STATEMENT OF ADDITIONAL INFORMATION
April 29, 1994
This Statement of Additional Information expands upon and supplements
the information contained in the current Prospectus of Smith Barney Shearson
Series Fund (the "Fund"), relating to ten investment portfolios offered by the
Fund (the "Portfolios"), dated April 29, 1994 , as amended or
supplemented from time to time, and should be read in conjunction with the
Fund's Prospectus. The Fund's Prospectus may be obtained from your Smith
Barney Shearson Financial Consultant or by writing or calling the Fund at the
address or telephone number listed above. This Statement of Additional
Information, although not in itself a prospectus, is incorporated by reference
into the Prospectus in its entirety.
CONTENTS
For ease of reference, the same section headings are used in both the
Prospectus and this Statement of Additional Information, except where shown
below.
Investment Goals and Policies of the Portfolios 2
Management of the Fund 28
Purchase of Shares (See in the Prospectus
"How to Use the Fund") 38
Redemption of Shares (See in the Prospectus "How
to Use the Fund") 38
Net Asset Value 39
Performance Data (See in the Prospectus "The
Portfolios' Performance")
40
Taxes (See in the Prospectus "Dividends and Taxes") 45
Custodian and Transfer Agent 47
Financial Statements 48
Appendix 49
INVESTMENT GOALS AND POLICIES OF THE PORTFOLIOS
The Fund's Prospectus discusses the investment goals of each of the ten
Portfolios currently offered by the Fund and the policies to be employed to
achieve those goals. This section contains supplemental information
concerning the types of securities and other instruments in which the
Portfolios may invest, the investment policies and portfolio strategies that
the Portfolios may utilize and certain risks attendant to such investments,
policies and strategies.
United States Government Securities (All Portfolios)
United States government securities include debt obligations of varying
maturities issued or guaranteed by the United States government or its
agencies or instrumentalities ("U.S. government securities"). Direct
obligations of the United States Treasury include a variety of securities that
differ in their interest rates, maturities and dates of issuance.
U.S. government securities include not only direct obligations of the
United States Treasury but also include securities issued or guaranteed by the
Federal Housing Administration, Federal Financing Bank, Export-Import Bank of
the United States, Small Business Administration, Government National Mortgage
Association, General Services Administration, Federal Home Loan Banks, Federal
Home Loan Mortgage Corporation, Federal National Mortgage Association,
Maritime Administration, Tennessee Valley Authority, Resolution Trust
Corporation, District of Columbia Armory Board, Student Loan Marketing
Association and various institutions that previously were or currently are
part of the Farm Credit System (which has been undergoing a reorganization
since 1987). Because the United States government is not obligated by law to
provide support to an instrumentality that it sponsors, a Portfolio will
invest in obligations issued by such an instrumentality only if its investment
adviser ("Adviser") determines that the credit risk with respect to the
instrumentality does not make its securities unsuitable for investment by a
Portfolio.
Bank Obligations (All Portfolios)
U.S. commercial banks organized under Federal law are supervised and
examined by the U.S. Comptroller of the Currency and are required to be
members of the Federal Reserve System and to be insured by the Federal Deposit
Insurance Corporation ("FDIC"). U.S. banks organized under state law are
supervised and examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. Most state banks are
insured by the FDIC (although such insurance may not be of material benefit to
a Portfolio, depending upon the principal amount of certificates of deposit
("CDs") of each bank held by the Portfolio) and are subject to Federal
examination and to a substantial body of Federal law and regulation. As a
result of government regulations, U.S. branches of U.S. banks are, among other
things, generally required to maintain specified levels of reserves and are
subject to other supervision and regulation designed to promote financial
soundness.
Obligations of foreign branches of U.S. banks and of foreign branches of
foreign banks, such as CDs and time deposits ("TDs"), may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and governmental regulation.
Such obligations are subject to different risks than are those of U.S. banks
or U.S. branches of foreign banks. These risks include foreign economic and
political developments, foreign governmental restrictions that may adversely
affect payment of principal and interest on the obligations, foreign exchange
controls and foreign withholding and other taxes on interest income. Foreign
branches of U.S. banks and foreign branches of foreign banks are not
necessarily subject to the same or similar regulatory requirements that apply
to U.S. banks, such as mandatory reserve requirements, loan limitations and
accounting, auditing and financial record keeping requirements. In addition,
less information may be publicly available about a foreign branch of a U.S.
bank or about a foreign bank than about a U.S. bank.
Obligations of U.S. branches of foreign banks may be general obligations
of the parent bank, in addition to being general obligations of the issuing
branch, or may be limited by the terms of specific obligations and by
governmental regulation as well as governmental action in the country in which
the foreign bank has its head office. A U.S. branch of a foreign bank with
assets in excess of $1 billion may or may not be subject to reserve
requirements imposed by the Federal Reserve System or by the state in which
the branch is located if the branch is licensed in that state. In addition,
branches licensed by the Comptroller of the Currency and branches licensed by
certain states may or may not be required to (a) pledge to the regulator, by
depositing assets with a designated bank within the state, an amount of its
assets equal to 5% of its total liabilities and (b) maintain assets within the
state in an amount equal to a specified percentage of the aggregate amount of
liabilities of the foreign bank payable at or through all of its agencies or
branches within the state. The deposits of state branches may not necessarily
be insured by the FDIC. In addition, there may be less publicly available
information about a U.S. branch of a foreign bank than about a U.S. bank.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign branches of U.S. banks, by U.S. branches of foreign
banks or by foreign branches of foreign banks, the Advisers will carefully
evaluate such investments on a case-by-case basis.
The Money Market Portfolio will not purchase TDs maturing in more than
seven calendar days and will limit its investment in TDs maturing from two
business days through seven calendar days to 10% of its total assets. Except
when maintaining a temporary defensive position, the Portfolio will invest
more than 25% of its assets in short-term bank instruments of the types
discussed above.
The Money Market Portfolio may purchase a CD issued by a bank, savings
and loan association or similar institution with less than $1 billion in
assets (a "Small Issuer CD") so long as (a) the issuer is a member of the FDIC
or Office of Thrift Supervision and is insured by the Savings Association
Insurance Fund ("SAIF"), which is administered by the FDIC and is backed by
the full faith and credit of the U.S. government, and (b) the principal amount
of the Small Issuer CD is fully insured and is no more than $100,000. The
Money Market Portfolio will at any one time hold only one Small Issuer CD from
any one issuer.
Savings and loan associations whose CDs may be purchased by the
Portfolios are supervised by the Office of Thrift Supervision and are insured
by SAIF. As a result, such savings and loan associations are subject to
regulation and examination.
Commercial Paper (All Portfolios)
Commercial paper consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to finance their
current operations. A variable amount master demand note (which is a type of
commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender, such as a Portfolio,
pursuant to which the lender may determine to invest varying amounts.
Transfer of such notes is usually restricted by the issuer, and there is no
secondary trading market for such notes. A Portfolio, therefore, may not
invest in a master demand note, if as a result more than 10% of the value of
the Portfolio's total assets would be invested in such notes and other
illiquid securities.
Ratings as Investment Criteria (All Portfolios)
In general, the ratings of Moody's Investors Services, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P") and other nationally recognized
statistical rating organizations ("NRSROs") represent the opinions of these
agencies as to the quality of securities that they rate. Such ratings,
however, are relative and subjective and are not absolute standards of quality
and do not evaluate the market value risk of the securities. These ratings
will be used by the Portfolios as initial criteria for the selection of
portfolio securities, but the Portfolios also will rely upon the independent
advice of their respective Advisers to evaluate potential investments. Among
the factors that will be considered are the long- term ability of the issuer
to pay principal and interest and general economic trends. The Appendix to
this Statement of Additional Information contains further information
concerning the ratings of Moody's, S&P and other NRSROs and their
significance.
Subsequent to its purchase by a Portfolio, an issue of securities may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Portfolio. In addition, it is possible that Moody's, S&P or
another NRSRO might not change its rating of a particular issue to reflect
subsequent events. None of these events will require sale of such securities
by the Portfolio, but the relevant Adviser will consider such events in its
determination of whether the Portfolio should continue to hold the securities.
In addition, to the extent that the rating given by Moody's, S&P or
another NRSRO changes as a rescue of changes in such organization or its
rating system, or due to a corporate reorganization of such organization, a
Portfolio will attempt to use comparable ratings as standards for its
investments in accordance with its investment goal and policies.
The Money Market Portfolio is prohibited from purchasing a security
unless that security is (a) rated by at least two NRSROs (such as Moody's or
S&P) with the highest rating assigned to short-term debt securities (or, if
not rated or rated by only one agency, is determined to be of comparable
quality) or (b) rated by at least two NRSROs within the two highest ratings
assigned to short-term debt securities (or, if not rated or rated by only one
agency, is determined to be of comparable quality), and not more than 5% of
the assets of the Portfolio will be invested in such securities.
Determinations of comparable quality shall be made in accordance with
procedures established by the Board of Trustees of the Fund.
Reverse Repurchase Agreements ( International Equity Portfolio)
The Fund does not currently intend to commit more than 5% of the
International Equity Portfolio's net assets to reverse repurchase agreements.
The Portfolio may enter into reverse repurchase agreements with broker/dealers
and other financial institutions. Such agreements involve the sale of
Portfolio securities with an agreement to repurchase the securities at an
agreed-upon price, date and interest payment and have the characteristics of
borrowing. Since the proceeds of reverse repurchase agreements are invested,
this would introduce the speculative factor known as "leverage." The
securities purchased with the funds obtained from the agreement and securities
collateralizing the agreement will have maturity dates no later than the
repayment date. Generally the effect of such a transaction is that the
Portfolio can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
in many cases it will be able to keep some of the interest income associated
with those securities. Such transactions are only advantageous if the
Portfolio has an opportunity to earn a greater rate of interest on the cash
derived from the transaction than the interest cost of obtaining the cash.
Opportunities to realize earnings from the use of the proceeds equal to or
greater than the interest required to be paid may not always be available, and
the Portfolio intends to use the reverse repurchase technique only when its
Adviser believes it will be advantageous to the Portfolio. The use of reverse
repurchase agreements may exaggerate any interim increase or decrease in the
value of the participating Portfolio's assets. The Fund's custodian will
maintain a separate account for the Portfolio with securities having a value
equal to or greater than such commitments.
Lending of Portfolio Securities (Intermediate High Grade, Diversified
Strategic Income, Equity Income, Equity Index, Growth & Income, Appreciation,
Total Return, International Equity and Emerging Growth Portfolios)
These Portfolios have the ability to lend portfolio securities to
brokers, dealers and other financial organizations. Such loans, if and when
made, may not excee
33-1/3% of a Portfolio's total assets, taken at value. A Portfolio will not
lend portfolio securities to Smith Barney Shearson Inc. ("Smith Barney
Shearson") or its affiliates unless it has applied for and received specific
authority to do so from the Securities and Exchange Commission ("SEC"). Loans
of portfolio securities will be collateralized by cash, letters of credit or
U.S. government securities, which will be maintained at all times in an amount
at least equal to the current market value of the loaned securities. From
time to time, a Portfolio may pay a part of the interest earned from the
investment of collateral received for securities loaned to the borrower and/or
a third party that is unaffiliated with the Portfolio and is acting as a
"finder."
By lending its portfolio securities, a Portfolio can increase its income
by continuing to receive interest on the loaned securities as well as by
either investing the cash collateral in short-term instruments or obtaining
yield in the form of interest paid by the borrower when U.S. government
securities are used as collateral. A Portfolio will comply with the following
conditions whenever its portfolio securities are loaned: (a) the Portfolio
must receive at least 100% cash collateral or equivalent securities from the
borrower; (b) the borrower must increase such collateral whenever the market
value of the securities loaned rises above the level of such collateral; (c)
the Portfolio must be able to terminate the loan at any time; (d) the
Portfolio must receive reasonable interest on the loan, as well as an amount
equal to any dividends, interest or other distributions on the loaned
securities, and any increase in market value; (e) the Portfolio may pay only
reasonable custodian fees in connection with the loan; and (f) voting rights
on the loaned securities may pass to the borrower; however, if a material
event adversely affecting the investment in the loaned securities occurs, the
Fund's Board of Trustees must terminate the loan and regain the right to vote
the securities. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in receiving
additional collateral or in the recovery of the securities or possible loss of
rights in the collateral should the borrower fail financially. Loans will be
made to firms deemed by each Adviser to be of good standing and will not be
made unless, in the judgment of the relevant Adviser, the consideration to be
earned from such loans would justify the risk.
Hedging Transactions
As described in the Prospectus, certain of the Portfolios may enter into
various types of securities, index and currency futures, options and related
contracts in order to hedge the existing or anticipated value of its
portfolio. Further information about certain of these techniques follows.
No Portfolio is required to enter into hedging transactions with regard
to its foreign currency-denominated securities and a Portfolio will not do so
unless deemed appropriate by its investment adviser. This method of
protecting the value of the Portfolio's securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange which one can
achieve at some future point in time.
A Portfolio will not, however, enter into such transactions in a manner
which would adversely affect its status as an investment company for Federal
securities law or income tax purposes. Each Portfolio will invest in these
instruments only in markets believed by its investment adviser to be active
and sufficiently liquid.
Options on Securities (Intermediate High Grade, Diversified Strategic
Income, Equity Income, Equity Index, Growth & Income Total Return,
International Equity and Emerging Growth Portfolios)
These Portfolios may engage in the writing of covered put and call
options, and the Intermediate High Grade, Diversified Strategic Income, Equity
Income, Total Return, International Equity, and Emerging Growth Portfolios may
also purchase put and call options, and these Portfolios all may enter into
closing transactions.
The principal reason for writing covered call options on securities is
to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. In return for a premium, the
writer of a covered call option forfeits the right to any appreciation in the
value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected).
Nevertheless, the call writer retains the risk of a decline in the price of
the underlying security. Similarly, the principal reason for writing covered
put options is to realize income in the form of premiums. The writer of a
covered put option accepts the risk of a decline in the price of the
underlying security. The size of the premiums that a Portfolio may receive
may be adversely affected as new or existing institutions, including other
investment companies, engage in or increase their option-writing activities.
Options written by a Portfolio normally will have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of- the-money," respectively. A Portfolio may write (a) in-the-money
call options when its Adviser expects that the price of the underlying
security will remain flat or decline moderately during the option period, (b)
at-the-money call options when its Adviser expects that the price of the
underlying security will remain flat or advance moderately during the option
period and (c) out-of-the- money call options when its Adviser expects that
the price of the underlying security may increase but not above a price equal
to the sum of the exercise price plus the premiums received from writing the
call option. In any of the preceding situations, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the-money, at- the-money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be utilized in the same market environments that such call options are
used in equivalent transactions.
So long as the obligation of a Portfolio as the writer of an option
continues, the Portfolio may be assigned an exercise notice by the broker-
dealer through which the option was sold, requiring the Portfolio to deliver,
in the case of a call, or take delivery of, in the case of a put, the
underlying security against payment of the exercise price. This obligation
terminates when the option expires or the Portfolio effects a closing purchase
transaction. A Portfolio can no longer effect a closing purchase transaction
with respect to an option once it has been assigned an exercise notice. To
secure its obligation to deliver the underlying security when it writes a call
option, or to pay for
the underling security when it writes a put option, a Portfolio will be
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the Options Clearing Corporation ("Clearing
Corporation") and of the securities exchange on which the option is written.
An option position may be closed out only where there exists a secondary
market for an option of the same series on a recognized securities exchange or
in the over-the-counter market. In light of this fact and current trading
conditions, the Intermediate High Grade, Diversified Strategic Income, Equity
Income, Total Return, International Equity and Emerging Growth Portfolios
expect to purchase not only call or put options issued by the Clearing
Corporation, but also options in the domestic and foreign over-the-counter
markets. The Portfolios expect to write options only on U.S. securities
exchanges, except that the Diversified Strategic Income, Total Return,
International Equity and Emerging Growth Portfolios may write options in the
over-the-counter market and options on U.S. government securities may be
written in the over-the-counter market by each of the Portfolios with option
writing authority.
A Portfolio may realize a profit or loss upon entering into a closing
transaction. In cases in which a Portfolio has written an option, it will
realize a profit if the cost of the closing purchase transaction is less than
the premium received upon writing the original option and will incur a loss if
the cost of the closing purchase transaction exceeds the premium received upon
writing the original option. Similarly, when a Portfolio has purchased an
option and engages in a closing sale transaction, whether the Portfolio
realizes a profit or loss will depend upon whether the amount received in the
closing sale transaction is more or less than the premium that the Portfolio
initially paid for the original option plus the related transaction costs.
Although a Portfolio generally will purchase or write only those options
for which its Adviser believes there is an active secondary market, so as to
facilitate closing transactions, there is no assurance that sufficient trading
interest to create a liquid secondary market on a securities exchange will
exist for any particular option or at any particular time, and for some
options no such secondary market may exist. A liquid secondary market in an
option may cease to exist for a variety of reasons. In the past, for example,
higher than anticipated trading activity or order flow or other unforeseen
events have at times rendered inadequate certain of the facilities of the
Clearing Corporation and securities exchanges and resulted in the institution
of special procedures, such as trading rotations, restrictions on certain
types of orders or trading halts or suspensions in one or more options. There
can be no assurance that similar events, or events that may otherwise
interfere with the timely execution of customers' orders, will not recur. In
such event, it might not be possible to effect closing transactions in
particular options. If, as a covered call option writer, a Portfolio is
unable to effect a closing purchase transaction in a secondary market, it will
not be able to sell the underlying security until the option expires or it
delivers the underlying security upon exercise.
Securities exchanges generally have established limitations governing
the maximum number of calls and puts of each class which may be held or
written, or exercised within certain time periods, by an investor or group of
investors acting in concert (regardless of whether the options are written on
the same or different securities exchanges or are held, written or exercised
in one or more accounts or through one or more brokers). It is possible that
the Portfolios and other clients of their respective Advisers and certain of
their affiliates may be considered to be such a group. A securities exchange
may order the liquidation of positions found to be in violation of these
limits and it may impose certain other sanctions.
In the case of options written by a Portfolio that are deemed covered by
virtue of the Portfolio's holding convertible or exchangeable preferred stock
or debt securities, the time required to convert or exchange and obtain
physical delivery of the underlying common stocks with respect to which the
Portfolio has written options may exceed the time within which the Portfolio
must make delivery in accordance with an exercise notice. In these instances,
a Portfolio may purchase or temporarily borrow the underlying securities for
purposes of physical delivery. By so doing, the Portfolio will not bear any
market risk, because the Portfolio will have the absolute right to receive
from the issuer of the underlying security an equal number of shares to
replace the borrowed stock, but the Portfolio may incur additional transaction
costs or interest expenses in connection with any such purchase or borrowing.
Additional risks exist with respect to certain of the U.S. government
securities for which a Portfolio may write covered call options. If a
Portfolio writes covered call options on mortgage-backed securities, the
securities that it holds as cover may, because of scheduled amortization or
unscheduled prepayments, cease to be sufficient cover. The Portfolio will
compensate for the decline in the value of the cover by purchasing an
appropriate additional amount of those securities.
Stock Index Options (Equity Index, Total Return, International Equity, and
Emerging Growth Portfolios)
The Equity Index, Total Return, International Equity and Emerging Growth
Portfolios may purchase call options on stock indexes listed on U.S.
securities exchanges for the purpose of hedging its portfolio. The Total
Return Portfolio may also write call and buy put options on stock indexes.
A stock index fluctuates with changes in the market values of the stocks
included in the index. Stock index options may be based on a broad market
index such as the New York Stock Exchange Composite Index or a narrower market
index such as the Standard & Poor's Daily Price Index of 500 Common Stock
("S&P 500"). Indexes also may be based on an industry or market segment.
Options on stock indexes are generally similar to options on stock
except that the delivery requirements are different. Instead of giving the
right to take or make delivery of stock at a specified price, an option on a
stock index gives the holder the right to receive a cash "exercise settlement
amount" equal to (a) the amount, if any, by which the fixed exercise price of
the option exceeds (in the case of a put) or is less than (in the case of a
call) the closing value of the underlying index on the date of exercise,
multiplied by (b) a fixed "index multiplier." Receipt of this cash amount will
depend upon the closing level of the stock index upon which the option is
based being greater than, in the case of a call, or less than, in the case of
a put, the exercise price of the option. The amount of cash received will be
equal to such difference between the closing price of the index and the
exercise price of the option, expressed in dollars, times a specified
multiple. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. The writer may offset its position
in stock index options prior to expiration by entering into a closing
transaction on an exchange, or it may let the option expire unexercised.
The effectiveness of purchasing stock index options as a hedging
technique will depend upon the extent to which price movements in the portion
of a securities portfolio being hedged correlate with price movements of the
stock index selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular
stock, whether the Portfolio will realize a gain or loss from the purchase or
writing of options on an index depends upon movements in the level of stock
prices in the stock market generally or, in the case of certain indexes, in an
industry or market segment, rather than movements in the price of a particular
stock. Accordingly, successful use by the Portfolio of options on stock
indexes will be subject to its Adviser's ability to predict correctly
movements in the direction of the stock market generally or of a particular
industry. This requires different skills and techniques than predicting
changes in the price of individual stocks.
A Portfolio will engage in stock index options transactions only when
determined by its Adviser to be consistent with the Portfolio's efforts to
control risk. There can be no assurance that such judgment will be accurate
or that the use of these portfolio strategies will be successful.
Futures Activities (Intermediate High Grade, Diversified Strategic Income,
Equity Income, Growth & Income, Total Return, International Equity and
Emerging Growth Portfolios)
The Intermediate High Grade, Diversified Strategic Income, Equity
Income, Growth & Income, Total Return, International Equity and Emerging
Growth Portfolios may enter into interest rate futures contracts, the Equity
Index, Growth & Income, Total Return, International Equity and Emerging Growth
Portfolios may enter into stock index futures contracts, the Diversified
Strategic Income and International Equity Portfolios may enter into foreign
currency futures contracts, and each such Portfolio may enter into related
options that are traded on a U.S. exchange or board of trade.
An interest rate futures contract provides for the future sale by one
party and the purchase by another party of a certain amount of a specific
financial instrument (debt security) at a specified price, date, time and
place. Similarly, a foreign currency futures contract provides for the future
sale by one party and the purchase by another party of a certain amount of a
particular currency at a specified price, date, time and place. A stock index
futures contract is an agreement pursuant to which two parties agree to take
or make delivery of an amount of cash equal to the difference between the
value of the index at the close of the last trading day of the contract and
the price at which the index contract was originally written. No physical
delivery of the underlying securities in the index is made.
The purpose of the acquisition or sale of a futures contract by a
Portfolio, other than the Equity Index, Total Return, International Equity and
Emerging Growth Portfolios, is to mitigate the effects of fluctuations in the
value of its securities caused by anticipated changes in interest rates,
market conditions or currency values without actually buying or selling the
securities. Of course, because the value of portfolio securities will far
exceed the value of the futures contracts entered into by a Portfolio, an
increase in the value of the futures contracts could only mitigate - but not
totally offset - the decline in the value of the Portfolio.
No consideration is paid or received by a Portfolio upon entering into a
futures contract. Initially, a Portfolio will be required to deposit with the
broker an amount of cash or cash equivalents equal to approximately 1% to 10%
of the contract amount (this amount is subject to change by the board of trade
on which the contract is traded and members of such board of trade may charge
a higher amount). This amount, known as "initial margin," is in the nature of
a performance bond or good faith deposit on the contract and is returned to a
Portfolio upon termination of the futures contract, assuming all contractual
obligations have been satisfied. Subsequent payments, known as "variation
margin, to and from the broker will be made daily as the price of the
securities, currency or index underlying the futures contract fluctuates,
making the long and short positions in the futures contract more or less
valuable, a process known as "marking-to-market." At any time prior to
expiration of a futures contract, a Portfolio may elect to close the position
by taking an opposite position, which will operate to terminate the
Portfolio's existing position in the contract.
Several risks are associated with the use of futures contracts as a
hedging device. Successful use of futures contracts by a Portfolio is subject
to the ability of its Adviser to predict correctly movements in interest
rates, changes in market conditions or fluctuations in currency values. These
predictions involve skills and techniques that may be different from those
involved in the management of the Portfolio being hedged. In addition, there
can be no assurance that there will be a correlation between movements in the
price of the underlying securities, index or currency and movements in the
price of the securities or currency that is the subject of a hedge. A
decision of whether, when and how to hedge involves the exercise of skill and
judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of market
behavior or unexpected trends in interest rates or currency values.
Although the Portfolios intend to enter into futures contracts only if
there is an active market for such contracts, there is no assurance that an
active market will exist for the contracts at any particular time. Most U.S.
futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the
daily limit has been reached in a particular contract, no trades may be made
that day at a price beyond that limit. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures
positions and subjecting some futures traders to substantial losses. In such
event, and in the event of adverse price movements, a Portfolio would be
required to make daily cash payments of variation margin, and an increase in
the value of the portion of the Portfolio being hedged, if any, may partially
or completely offset losses on the futures contract. As described above,
however, there is no guarantee that the price of the securities or value of
the currency being hedged will, in fact, correlate with the price movements in
a futures contract and thus provide an offset to losses on the futures
contract.
If a Portfolio has hedged against the possibility of a change in
interest rates, market conditions or currency values adversely affecting the
value of securities held in its portfolio and interest rates, market
conditions or currency values move in a direction opposite to that which has
been anticipated, the Portfolio will lose part or all of the benefit of the
increased value of securities or currencies that it has hedged because it will
have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio had insufficient cash, it may have to sell
securities to meet daily variation margin requirements at a time when it may
be disadvantageous to do so. These sales of securities may, but will not
necessarily, be at increased prices that reflect the change in interest rates,
market conditions or currency values, as the case may be.
Options on Futures Contracts. An option on a futures contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in the
underlying futures contract at a specified exercise price at any time prior to
the expiration date of the option. Upon exercise of an option, the delivery
of the futures position by the writer of the option to the holder of the
option will be accompanied by delivery of the accumulated balance in the
writer's futures margin account, which represents the amount by which the
market price of the futures contract exceeds, in the case of a call, or is
less than, in the case of put, the exercise price of the option on the futures
contract. The potential for loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the point of
sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and
that change would be reflected in the net asset value of a Portfolio holding
the options.
The Portfolios may purchase and write put and call options on futures
contracts that are traded on a U.S. exchange or board of trade as a hedge
against changes in the value of their portfolio securities, or, in the case of
the Equity Index Portfolio, in anticipation of the purchase of securities, and
may enter into closing transactions with respect to such options to terminate
existing positions. There is no guarantee that such closing transactions can
be effected.
Several risks are associated with options on futures contracts. The
ability to establish and close out positions on such options will be subject
to the existence of a liquid market. In addition, the purchase of put or call
options will be based upon predictions by an Adviser as to anticipated trends,
which predictions could prove to be incorrect. Even if the expectations of an
Adviser are correct, there may be an imperfect correlation between the change
in the value of the options and of the portfolio securities being hedged.
When-Issued Securities and Delayed Delivery Transactions (Intermediate High
Grade, Diversified Strategic Income, Equity Income, Growth & Income, Emerging
Growth, International Equity and Total Return Portfolios)
To secure an advantageous price or yield, these Portfolios may purchase
certain securities on a when-issued basis or purchase or sell securities for
delayed-delivery. A Portfolio will enter into such transactions for the
purpose of acquiring portfolio securities and not for the purpose of leverage.
Delivery of the securities in such cases occurs beyond the normal settlement
periods, but no payment or delivery is made by a Portfolio prior to the
reciprocal delivery or payment by the other party to the transaction. In
entering into a when-issued or delayed delivery transaction, a Portfolio will
rely on the other party to consummate the transaction and may be disadvantaged
if the other party fails to do so.
U.S. government securities normally are subject to changes in value
based upon changes, real or anticipated, in the level of interest rates and,
to a lesser extent, the public's perception of the creditworthiness of the
issuers. In general, U.S. government securities tend to appreciate when
interest rates decline and depreciate when interest rates rise. Purchasing
these securities on a when-issued or delayed-delivery basis, therefore, can
involve the risk that the yields available in the market when the delivery
takes place may actually be higher than those obtained in the transaction
itself. Similarly, the sale of U.S. government securities for delayed
delivery can involve the risk that the prices available in the market when the
delivery is made may actually be higher than those obtained in the transaction
itself.
In the case of the purchase by a Portfolio of securities on a when-
issued or delayed-delivery basis, a segregated account in the name of the
Portfolio consisting of cash or liquid debt securities equal to the amount of
the when-issued or delayed-delivery commitments will be established at Boston
Safe Deposit and Trust Company ("Boston Safe"), the Fund's custodian. For the
purpose of determining the adequacy of the securities in the account, the
deposited securities will be valued at market or fair value. If the market or
fair value of the securities declines, additional cash or securities will be
placed in the account daily so that the value of the account will equal the
amount of such commitments by the Portfolio involved. On the settlement date,
the Portfolio will meet its obligations from then-available cash flow, the
sale of securities held in the segregated account, the sale of other
securities or, although it would not normally expect to do so, from the sale
of the securities purchased themselves (which may have a greater or lesser
value than the Portfolio's payment obligations).
Mortgage Related Securities (Intermediate High Grade, Diversified Strategic
Income and Growth & Income Portfolios)
The mortgage pass-through securities in which these Portfolios may
invest may be backed by adjustable-rate, as well as conventional, mortgages.
Those backed by adjustable-rate mortgages bear interest at a rate that is
adjusted monthly, quarterly or annually. The average maturity of pass-through
pools of mortgage related securities varies with the maturities of the
underlying mortgage instruments. In addition, a pool's stated maturity may be
shortened by unscheduled payments on the underlying mortgages. Factors
affecting mortgage prepayments include the level of interest rates, general
economic and social conditions, the location of the mortgaged property and the
age of the mortgage. Because prepayment rates of individual mortgage pools
vary widely, it is not possible to accurately predict the average life of a
particular pool. Pools of mortgages with varying maturities or different
characteristics will have varying average life assumptions and the prepayment
experience of securities backed by adjustable- rate mortgages may vary from
those backed by fixed-rate mortgages.
Mortgage related securities may be classified as private, governmental
or government-related, depending on the issuer or guarantor. Private mortgage
related securities represent pass-through pools consisting principally of
conventional residential mortgage loans created by non-governmental issuers,
such as commercial banks, savings and loan associations and private mortgage
insurance companies. Government mortgage related securities are backed by the
full faith and credit of the United States. Government National Mortgage
Association ("GNMA"), the principal guarantor of such securities, is a wholly
owned U.S. government corporation within the Department of Housing and Urban
Development. Government-related mortgage related securities are not backed by
the full faith and credit of the United States. Issuers of such securities
include Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC"). FNMA is a government-sponsored corporation
owned entirely by private stockholders, which is subject to general regulation
by the Secretary of Housing and Urban Development. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest
by FNMA. FHLMC is a corporate instrumentality of the United States, the stock
of which is owned by the Federal Home Loan Banks. Participation certificates
representing interests in mortgages from FHLMC national portfolio are
guaranteed as to the timely payment of interest and ultimate collection of
principal by FHLMC.
The Portfolios expect that private, governmental or government-related
entities may create mortgage loan pools offering pass-through investments in
addition to those described above. The mortgages underlying these securities
may be alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may be
shorter than previously customary. As new types of mortgage related
securities are developed and offered to investors, the Portfolios, consistent
with their investment goals and policies, will consider making investments in
such new types of securities.
American, European and Continental Depositary Receipts (Equity Income, Growth
& Income, Appreciation, Total Return, International Equity and Emerging Growth
Portfolios)
These Portfolios may invest in the securities of foreign and U.S.
issuers in the form of American Depositary Receipts ("ADRs") and European
Depositary Receipts ("EDRs"). These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by a U.S. bank or trust company
that evidence ownership of underlying securities issued by a foreign
corporation. EDRs, which sometimes are referred to as Continental Depositary
Receipts ("CDRs"), are receipts issued in Europe, typically by foreign banks
and trust companies, that evidence ownership of either foreign or U.S.
securities. Generally, ADRs, in registered form, are designed for use in U.S.
securities markets and EDRs and CDRs, in bearer form, are designed for use in
European securities markets.
Currency Exchange Transactions (Diversified Strategic Income, International
Equity and Emerging Growth Portfolio)
The Diversified Strategic Income, Emerging Growth and International
Equity Portfolios' dealings in forward currency exchange will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the forward purchase or sale of currency with respect
to specific receivables or payables of the Portfolio, generally arising in
connection with the purchase or sale of its portfolio securities. Position
hedging is the forward sale of currency with respect to portfolio security
positions denominated or quoted in the currency. The Portfolios may not
position hedge with respect to a particular currency to an extent greater than
the aggregate market value at any time of the securities held in its portfolio
denominated or quoted in or currently convertible (such as through exercise of
an option or consummation of a forward contract) into that particular
currency. If a Portfolio enters into a transaction hedging or position
hedging transaction, it will cover the transaction through one or more of the
following methods: (a) ownership of the underlying currency or an option to
purchase such currency (b) ownership of an option to enter into an offsetting
forward contract, (c) entering into a forward contract to purchase currency
being sold or to sell currency being purchased, provided that such covering
contract is itself covered by one of these methods, unless the covering
contract closes out the first contract, or (d) depositing into a segregated
account with Boston Safe cash or readily marketable securities in an amount
equal to the value of the Portfolio's total assets committed to the
consummation of the forward contract and not otherwise covered. In the case
of transaction hedging, any securities placed in the account must be liquid
debt securities. In any case, if the value of the securities placed in the
segregated account declines, additional cash or securities will be placed in
the account so that the value of the account will equal the above amount.
Hedging transactions may be made from any foreign currency into U.S. dollars
or into other appropriate currencies.
At or before the maturity of a forward contract, the Portfolio either
may sell a portfolio security and make delivery of the currency, or retain the
security and offset its contractual obligation to deliver the currency by
purchasing a second contract pursuant to which the Portfolio will obtain, on
the same maturity date, the same amount of the currency that it is obligated
to deliver. If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio, at the time of execution of the
offsetting transaction, will incur a gain or loss to the extent that movement
has occurred in forward contract prices. Should forward prices decline during
the period between the Portfolio's entering into a forward contract for the
sale of a currency and the date that it enters into an offsetting contract for
the purchase of the currency, the Portfolio will realize a gain to the extent
that the price of the currency that it has agreed to sell exceeds the price of
the currency that it has agreed to purchase. Should forward prices increase,
the Portfolio will realize a loss to the extent that the price of the currency
that it has agreed to purchase exceeds the price of the currency that it has
agreed to sell.
The cost to a Portfolio of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract period and
the market conditions then prevailing. Because transactions in currency
exchange are usually conducted on a principal basis, no fees or commissions
are involved. The use of forward currency contracts does not eliminate
fluctuations in the underlying prices of the securities, but it does establish
a rate of exchange that can be achieved in the future. In addition, although
forward currency contracts limit the risk of loss due to a decline in the
value of the hedged currency, at the same time they limit any potential gain
that might result should the value of the currency increase.
If a devaluation is generally anticipated, a Portfolio may not be able
to contract to sell the currency at a price above the devaluation level it
anticipates.
Foreign Currency Options (Diversified Strategic Income, International Equity
and Emerging Growth Portfolios)
The Diversified Strategic Income, Emerging Growth and International
Equity Portfolios may purchase put and call options on foreign currencies for
the purpose of hedging against changes in future currency exchange rates. Put
options convey the right to sell the underlying currency at a price that is
anticipated to be higher than the spot price of the currency at the time the
option expires. Call options convey the
right to buy the underlying currency at a price that is expected to be lower
than the spot price of the currency at the time the option expires.
A Portfolio may use foreign currency options under the same
circumstances that it could use forward currency exchange transactions. A
decline in the U.S. dollar value of a foreign currency in which the
Portfolio's securities are denominated, for example, will reduce the U.S.
dollar value of the securities, even if their value in the foreign currency
remains constant. In order to protect against such diminution's in the value
of securities it holds, the Portfolio may purchase put options on the foreign
currency. If the value of the currency does decline, the Portfolio will have
the right to sell the currency for a fixed amount in U.S. dollars and will
thereby offset, in whole or in part, the adverse effect on its securities that
otherwise would have resulted. Conversely, if a rise in the U.S. dollar value
of a currency in which securities to be acquired are denominated is projected,
thereby potentially increasing the cost of the securities, the Portfolio may
purchase call options on the particular currency. The purchase of these
options could offset, at least partially, the effects of the adverse movements
in exchange rates. The benefit to the Portfolio derived from purchases of
foreign currency options, like the benefit derived from other types of
options, will be reduced by the amount of the premium and related transaction
costs. In addition, if 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 that would require it to forego a
portion or all of the benefits of advantageous changes in the rates.
Floating Rate and Variable Rate Obligations (Money Market Portfolio)
The Money Market Portfolio may purchase floating rate and variable rate
obligations, including participation interests therein. Variable rate
obligations provide for a specified periodic adjustment in the interest rate,
while floating rate obligations have an interest rate that changes whenever
there is a change in the external interest rate. The Portfolio may purchase
floating rate and variable rate obligations that carry a demand feature that
would permit the Portfolio to tender them back to the issuer or remarketing
agent at par value prior to maturity. Frequently, floating rate and variable
rate obligations are secured by letters of credit or other credit support
arrangements provided by banks.
Convertible Securities (International High Grade, Equity Income, Growth &
Income, Appreciation, Total Return, Emerging Growth and International Equity
Portfolios)
These Portfolios may invest in convertible securities, which are fixed-
income securities that may be converted at either a stated price or stated
rate into underlying shares of common stock. Convertible securities have
general characteristics similar to both fixed-income and equity securities.
Although to a lesser extent than with fixed-income securities generally, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion feature, the market value of convertible
securities tends to vary with fluctuations in the market value of the
underlying common stocks and, therefore, also will react to variations in the
general market for equity securities. A unique feature of convertible
securities is that as the market price of the underlying common stock
declines, convertible securities tend to trade increasingly on a yield basis
and so may not experience market value declines to the same extent as the
underlying common stock. When the market price of the underlying common stock
increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
As fixed-income securities, convertible securities provide for a stable
stream of income with generally higher yields than common stocks. Of course,
like all fixed-income securities, there can be no assurance of current income
because the issuers of the convertible securities may default on their
obligations. Convertible securities, however, generally offer lower interest
or dividend yields than non-convertible securities of similar quality because
of the potential for capital appreciation. A convertible security, in
addition to providing fixed income, offers the potential for capital
appreciation through the conversion feature, which enables the holder to
benefit from increases in the market price of the underlying common stock.
There can be no assurance of capital appreciation, however, because securities
prices fluctuate.
Convertible securities generally are subordinated to other similar but
non- convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible
securities.
Preferred Stock (Intermediate High Grade, Diversified Strategic Income, Equity
Income, Appreciation, Total Return, Emerging Growth, and International Equity
Portfolios)
These Portfolios may invest in preferred stocks, which, like debt
obligations, are generally fixed-income securities. Shareholders of preferred
stocks normally have the right to receive dividends at a fixed rate when and
as declared by the issuer's board of directors, but do not participate in
other amounts available for distribution by the issuing corporation.
Dividends on the preferred stock may be cumulative, and all cumulative
dividends usually must be paid prior to common shareholders receiving any
dividends. Preferred stock dividends must be paid before common stock
dividends and, for that reason, preferred stocks generally entail less risk
than common stocks. Upon liquidation, preferred stocks are entitled to a
specified liquidation preference, which is generally the same as the par or
stated value, and are senior in right of payment to common stock. Preferred
stocks are, however, equity securities in the sense that they do not represent
a liability of the issuer and, therefore, do not offer as great a degree of
protection of capital or assurance of continued income as investments in
corporate debt securities. In addition, preferred stocks are subordinated in
right of payment to all debt obligations and creditors of the issuer and
convertible preferred stocks may be subordinated to other preferred stock of
the same issuer.
Warrants (Equity Income, Appreciation, Growth & Income, Total Return,
International Equity and Emerging Growth Portfolios)
These Portfolios may invest in warrants. Because a warrant does not
carry with it the right to dividends or voting rights with respect to the
securities that the warrant holder is entitled to purchase, and because it
does not represent any rights to the assets of the issuer, warrants may be
considered more speculative than certain other types of investments. Also,
the value of a warrant does not necessarily change with the value of the
underlying securities and a warrant ceases to have value if it is not
exercised prior to its expiration date.
Repurchase Agreements
The Portfolios may enter into repurchase agreements with banks,
which are the issuers of instruments acceptable for purchase by the
Fund , and with certain dealers on the Federal Reserve Bank of New
York's list of reporting dealers. A repurchase agreement is a short-term
investment in which the purchaser (i.e., the Portfolio) acquires ownership of
a debt security and the seller agrees to repurchase the obligation at a future
time and set price, usually not more than seven days from the date of
purchase, thereby determining the yield during the purchaser's holding period.
Repurchase agreements are collateralized by the underlying debt securities and
may be considered to be loans under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Portfolio will make payment for such securities
only upon physical delivery or evidence of book entry transfer to the account
of a custodian or bank acting as agent. The seller under a repurchase
agreement will be required to maintain the value of the underlying securities
marked to market daily at not less than the repurchase price. The underlying
securities (securities of the U.S. Government, or its agencies and
instrumentalities), may have maturity dates exceeding one year. The
Portfolios do not bear the risk of a decline in value of the underlying
security unless the seller defaults under its repurchase obligation. See
"Appendix - Certain Investment Strategies" in the Prospectus for further
information.
Restricted Securities
Each Portfolio may invest up to 10% (15% in the case of the Total
Return, Emerging Growth and International Equity Portfolios) of the value of
its net assets in restricted securities (i.e., securities which may not be
sold without registration under the Securities Act of 1933, as amended) and in
other securities that are not readily marketable, including repurchase
agreements maturing in more than seven days. Restricted securities are
generally purchased at a discount from the market price of unrestricted
securities of the same issuer. Investments in restricted securities are not
readily marketable without some time delay. Investments in securities which
have no readily available market value are valued at fair value as determined
in good faith by the Fund's Board of Trustees. Ordinarily, a Portfolio would
invest in restricted securities only when it receives the issuer's commitment
to register the securities without expense to the Portfolio. However,
registration and underwriting expenses (which may range from 7% to 15% of the
gross proceeds of the securities sold) may be paid by the Portfolio. A
Portfolio position in restricted securities might adversely affect the
liquidity and marketability of such securities, and the Portfolio might not be
able to dispose of its holdings in such securities at reasonable price levels.
Short Sales Against the Box
(Equity Income, International Equity, Emerging Growth and Total Return
Portfolios). Each of these Portfolios may enter into a short sale of common
stock such that when the short position is open the Portfolio involved owns an
equal amount of preferred stocks or debt securities, convertible or
exchangeable, without payment of further consideration, into an equal number
of shares of the common stock sold short. This kind of short sale, which is
described as "against the box," will be entered into by a Portfolio for the
purpose of receiving a portion of the interest earned by the executing broker
from the proceeds of the sale. The proceeds of the sale will be held by the
broker until the settlement date when the Portfolio delivers the convertible
securities to close out its short position. Although prior to delivery a
Portfolio will have to pay an amount equal to any dividends paid on the common
stock sold short, the Portfolio will receive the dividends from the preferred
stock or interest from the debt securities convertible into the stock sold
short, plus a portion of the interest earned from the proceeds of the short
sale. The Portfolio will deposit, in a segregated account with the Fund's
custodian, convertible preferred stock or convertible debt securities in
connection with short sales against the box.
Investment Restrictions
The investment restrictions numbered 1 through 14 have been adopted by
the Fund with respect to the Portfolios as fundamental policies for protection
of shareholders. Under the 1940 Act, a fundamental policy may not be changed
without the vote of a majority of the outstanding voting securities of the
Fund, as defined in the 1940 Act. Majority is defined in the 1940 Act as the
lesser of (a) 67% or more of the shares present at a Fund meeting, if the
holders of more than 50% of the outstanding shares of the Fund are present or
represented by proxy, or (b) more than 50% of the outstanding shares. A
fundamental policy affecting a particular Portfolio may not be changed without
the vote of a majority of the outstanding shares of that Portfolio.
Investment restrictions 15 through 21 may be changed by vote of a majority of
the Fund's Board of Trustees at any time.
The investment policies adopted by the Fund prohibit a Portfolio from:
1. Purchasing the securities of any issuer (other than U.S. government
securities) if as a result more than 5% of the value of the Portfolio's total
assets would be invested in the securities of the issuer, except that, with
respect to each Portfolio other than the Money Market Portfolio, up to 25% of
the value of the Portfolio's total assets may be invested without regard to
this 5% limitation.
2. Purchasing more than 10% of the voting securities of any one issuer
or more than 10% of the securities of any class of any one issuer; provided
that this limitation shall not apply to investments in U.S. government
securities.
3. Purchasing securities on margin, except that the Portfolio may
obtain any short-term credits necessary for the clearance of purchases and
sales of securities. For purposes of this restriction, the deposit or payment
of initial or variation margin in connection with futures contracts or related
options will not be deemed to be a purchase of securities on margin.
4. Making short sales of securities or maintaining a short position,
except for "short sales against the box."
5. Borrowing money or issuing senior securities, except that (a) the
Portfolio may borrow from banks for temporary or emergency (not leveraging)
purposes including the meeting of redemption requests that might otherwise
require the untimely disposition of securities in an amount not exceeding 30%
of the value of the Portfolio's total assets (including the amount borrowed),
valued at market less liabilities (not including the amount borrowed) at the
time the borrowing is made, (b) one or more of the Portfolios may enter into
futures contracts, reverse repurchase agreements and forward roll transactions
and (c) the International Equity Portfolio may borrow up to one-third of the
Portfolio's assets. In the event that the asset coverage for a Portfolio's
borrowings falls below 300%, the Portfolio would reduce, within three days
(excluding Saturdays, Sundays and holidays), the amount of its borrowings in
order to provide for 300% asset coverage. Whenever borrowings pursuant to (a)
exceed 5% of the value of a Portfolio's total assets, the Portfolio (other
than the International Equity Portfolio) will not make any additional
investments.
6. Pledging, hypothecating, mortgaging or otherwise encumbering more
than 30% of the value of the Portfolio's total assets. For purposes of this
restriction, (a) the deposit of assets in escrow in connection with the
writing of options and the purchase of securities on a when-issued or delayed
delivery basis, (b) the International Equity Portfolio's pledge of its assets
to secure permitted borrowings and (c) collateral arrangements with respect to
(i) the purchase and sale of stock options, options on foreign currencies and
options on stock indexes and (ii) initial or variation margin for futures
contracts will not be deemed to be pledges of a Portfolio's assets.
7. Underwriting the securities of other issuers, except insofar as the
Portfolio may be deemed an underwriter under the Securities Act of 1933, as
amended, by virtue of disposing of portfolio securities.
8. Purchasing or selling real estate or interests in real estate,
except that the Portfolio may purchase and sell securities that are secured,
directly or indirectly, by real estate and may purchase securities issued by
companies that invest or deal in real estate.
9. Investing in commodities, except that one or more of the Portfolios
may invest in futures contracts and options on futures contracts.
10. Investing in oil, gas or other mineral exploration or development
programs, except that the Portfolio may invest in the securities of companies
that invest in or sponsor these programs.
11. Making loans to others, except through the purchase of qualified
debt obligations, loans of portfolio securities and entry into repurchase
agreements.
12. Investing in securities of other investment companies registered or
required to be registered under the 1940 Act, except as they may be acquired
as part of a merger, consolidation, reorganization, acquisition of assets or
an offer of exchange or as otherwise permitted by law.
13. Purchasing any securities that would cause more than 25% of the
value of the Portfolio's total assets at the time of purchase to be invested
in the securities of issuers conducting their principal business activities in
the same industry; provided that this limitation shall not apply to the
purchase of (a) U.S. government securities or (b) with respect to the Money
Market Portfolio, U.S. dollar-denominated bank instruments such
as certificates of deposit, time deposits, bankers' acceptances and letters
of credit that have been issued by U.S. banks or (c) with respect to the
Equity Income Portfolio, the securities of companies within the utility
industry.
14. Purchasing, writing or selling puts, calls, straddles, spreads or
combinations thereof, except as permitted under the Portfolio's investment
goals and policies.
15. Purchasing restricted securities, illiquid securities or other
securities that are not readily marketable if more than 10% (15% in the case
of the Total Return, International Equity and Emerging Growth Portfolios) of
the total assets of the Portfolio would be invested in such securities.
16. Investing more than 10% of its total assets in time deposits
maturing in more than seven calendar days.
17. Purchasing any security if as a result the Portfolio would then
have more than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for less than
three years. (For purposes of this limitation, issuers include predecessors,
sponsors, controlling persons, general partners, guarantors and originators of
underlying assets which have less than three years of continuous operation or
relevant business experience.)
18. Making investments for the purpose of exercising control or
management.
19. Purchasing or retaining securities of any company if, to the
knowledge of the Fund, any of the Fund's officers or Trustees or any officer
or director of an Adviser or sub-investment adviser individually owns more
than 1/2 of 1% of the outstanding securities of such company and together they
own beneficially more than 5% of the securities.
20. Investing in warrants (except as permitted under the Portfolio's
investment goals and policies or other than warrants acquired by the Portfolio
as part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed
5% of the value of the Portfolio's net assets or if, as a result, more than 2%
(5% in the case of the International Equity Portfolio) of the Portfolio's net
assets would be invested in warrants not listed on a recognized U.S. or
foreign exchange to the extent permitted by applicable state securities laws.
21. With regard to the Equity Income Portfolio, purchase 10% or more of
the voting securities of a public utility or public utility holding company,
so as to become a public utility holding company as defined in the Public
Utility Holding Company Act of 1935, as amended.
The Fund may make commitments more restrictive than the restrictions
listed above with respect to a Portfolio so as to permit the sale of shares of
the Portfolio in certain states. Should the Fund determine that any such
commitment is no longer in the best interests of the Portfolio and its
shareholders, the Fund will revoke the commitment by terminating the sale of
shares of the Portfolio in the state involved. Except for investment
restriction number 5, the percentage limitations contained in the restrictions
listed above apply at the time of purchases of securities.
Portfolio Turnover
The Money Market Portfolio may attempt to increase yields by trading to
take advantage of short-term market variations, which results in high
portfolio turnover. Because purchases and sales of money market instruments
are usually effected as principal transactions, this policy does not result in
high brokerage commissions to the Portfolio. The other Portfolios do not
intend to seek profits through short-term trading. Nevertheless, the
Portfolios will not consider portfolio turnover rate a limiting factor in
making investment decisions.
A Portfolio's turnover rate is calculated by dividing the lesser of
purchases or sales of its portfolio securities for the year by the monthly
average value of the portfolio securities. Securities or options with
remaining maturities of one year or less on the date of acquisition are
excluded from the calculation. Under certain market conditions, a Portfolio
authorized to engage in transactions in options may experience increased
portfolio turnover as a result of its investment strategies. For instance,
the exercise of a substantial number of options written by a Portfolio (due to
appreciation of the underlying security in the case of call options or
depreciation of the underlying security in the case of put options) could
result in a turnover rate in excess of 100%. A portfolio turnover rate of
100% would occur if all of a Portfolio's securities that are included in the
computation of turnover were replaced once during a period of one year.
The Portfolios cannot accurately predict their portfolio turnover rates
but anticipate that annual turnover for each Portfolio will not exceed the
following percentages: Intermediate High Grade Portfolio - 100%; Diversified
Strategic Income Portfolio - 100%; Equity Income Portfolio - 100%; Equity
Index Portfolio - 20%; Growth & Income Portfolio - 50%; Appreciation
Portfolio - 50%; Total Return Portfolio - 100%; Emerging Growth Portfolio -
100%; and International Equity Portfolio - 100%. For regulatory purposes, the
portfolio turnover rate for the Money Market Portfolio will be considered 0%.
However, the Portfolios will not consider portfolio turnover rate a limiting
factor in making investment decisions consistent with their respective
investment goals and policies.
For the 1993 and 1992 fiscal years, the portfolio turnover rates for
Portfolios having operations during the stated periods were as follows:
Portfolio
Fiscal Year Ended
December 31, 1993
Fiscal Year Ended
December 31, 1992
Intermediate High Grade
Portfolio
139%
124%
Diversified Strategic Income
Portfolio
94%
65%
Equity Income Portfolio
4%
4%
Equity Index Portfolio
1%
8%
Growth & Income Portfolio
78%
78%
Appreciation Portfolio
33%
14%
Total Return Portfolio
0%
- --
Emerging Growth Portfolio
0%
- --
International Equity Portfolio
0%
- --
Certain other practices that may be employed by a Portfolio also could
result in high portfolio turnover. For example, portfolio securities may be
sold in anticipation of a rise in interest rates (market decline) or purchased
in anticipation of a decline in interest rates (market rise) and later sold.
In addition, a security may be sold and another of comparable quality
purchased at approximately the same time to take advantage of what an Adviser
believes to be a temporary disparity in the normal yield relationship between
the two securities. These yield disparities may occur for reasons not
directly related to the investment quality of particular issues or the general
movement of interest rates, such as changes in the overall demand for, or
supply of, various types of securities. Higher portfolio turnover rates can
result in corresponding increases in brokerage commissions and short-term
gains realized from portfolio transactions are taxable to shareholders as
ordinary income. See "Dividends and Taxes."
Portfolio turnover rates may vary greatly from year to year as well as
within a particular year and may be affected by cash requirements for
redemptions of a Portfolio's shares as well as by requirements that enable the
Portfolio to receive favorable tax treatment.
Investment decisions for a portfolio are made independently from those
of others accounts advised by the relevant investment adviser. If such other
accounts are prepared to invest in, or desire to dispose of, securities at the
same time as the Portfolio, however, available investments or opportunities
for sales will be allocated equitably to each entity. In some cases, this
procedure may adversely affect the size of the position obtained for or
disposed of by the Portfolio or the price paid or received by the Portfolio.
The Fund's Board of Trustees will review periodically the commissions
paid by the Portfolios to determine if the commissions paid over
representative periods of time were reasonable in relation to the benefits
inuring to the Portfolios.
Portfolio Transactions
Most of the purchases and sales of securities for a Portfolio, whether
effected on a securities exchange or over-the-counter, will be effected in the
primary trading market for the securities. Decisions to buy and sell
securities for a Portfolio are made by its Adviser, which also is responsible
for placing these transactions, subject to the overall review of the Fund's
Trustees. With respect to the Diversified Strategic Income Portfolio,
however, decisions to buy and sell U.S. securities for the Portfolio are made
by Greenwich Street Advisors, the Portfolio's Adviser, which is also
responsible for placing these transactions; the responsibility to make
investment decisions with respect to foreign securities and to place these
transactions rests with Smith Barney Global Capital Management, Inc. ("Global
Capital Management"), the Portfolio's sub-investment adviser. Although
investment decisions for each Portfolio are made independently from those of
the other accounts managed by its Adviser, investments of the type the
Portfolio may make also may be made by those other accounts. When a Portfolio
and one or more other accounts managed by its Adviser are prepared to invest
in, or desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by the Adviser
to be equitable to each. In some cases, this procedure may adversely affect
the price paid or received by a Portfolio or the size of the position obtained
or disposed of by the Portfolio.
Transactions on U.S. stock exchanges and some foreign stock exchanges
involve the payment of negotiated brokerage commissions. On exchanges on
which commissions are negotiated, the cost of transactions may vary among
different brokers. Commissions generally are fixed on most foreign exchanges.
There is generally no stated commission in the case of securities traded in
U.S. or foreign over-the-counter markets, but the prices of those securities
include undisclosed commissions or mark-ups. The cost of securities purchased
from underwriters includes an underwriting commission or concession and the
prices at which securities are purchased from and sold to dealers include a
dealer's mark- up or mark-down. U.S. government securities generally are
purchased from underwriters or dealers, although certain newly issued U.S.
government securities may be purchased directly from the United States
Treasury or from the issuing agency or instrumentality.
The following table sets forth certain information regarding each
Portfolio's payment of brokerage commissions with the exception of the Money
Market Portfolio, Intermediate High Grade Portfolio, and Diversified Strategic
Income Portfolio, which did not pay any brokerage commissions during these
time periods.
Fiscal Year Ended
December 31, 1993
Equity
Income
Portfolio
Equity
Index
Portfolio
Growth &
Income
Portfolio
Appreciat
ion
Portfolio
Total Brokerage Commission
$52,560
$2,727
$42,972
$67,361
Commission paid to
Shearson Lehman Brothers
Inc.
and/or Smith Barney
Shearson
$ 7,518
$ ------
$ 4,818
$ 2,499
Total
Return
Portfolio
Emerging
Growth
Portfolio
Internati
onal
Equity
Portfolio
Total Brokerage Commission
$1,410
$1,342
$7,413
Commission paid to
Shearson Lehman Brothers
Inc.
and/or Smith Barney
Shearson
$ ------
$ ------
$ 416
Fiscal Year Ended
December 31, 1992
Equity
Income
Portfolio
Equity
Index
Portfolio
Growth &
Income
Portfolio
Appreciat
ion
Portfolio
Total Brokerage Commission
$30,510
$1,142
$22,980
$48,003
Commission paid to
Shearson Lehman Brothers
Inc.
$ 7,884
$ ------
$ 6,786
$ 8,664
Fiscal Year Ended
December 31, 1991
Equity
Income
Portfolio
Equity
Index
Portfolio
Growth &
Income
Portfolio
Appreciat
ion
Portfolio
Total Brokerage Commission
$2,040
$1,131
$2,028
$10,398
Commission paid to
Shearson Lehman Brothers
Inc.
$ ------
$ 456
$2,028
$ 6,816
Fiscal Year Ended
December 31, 1993
Equity
Income
Portfolio
Growth &
Income
Portfolio
Appreciat
ion
Portfolio
Intern
ational
Equity
Portfolio
% of Total Brokerage
Commission paid to
Shearson Lehman Brothers
and/or Smith Barney
Shearson
14%</R
>
11%</R
>
4%
6%
% of Total Transactions
involving Commissions paid
to Shearson Lehman
Brothers
and/or Smith Barney
Shearson
15%</R
>
9%
3%
18%
The large difference in brokerage commissions between the period ended
December 31, 1991 and the fiscal year ended December 31, 1992 can be explained
by the fact that the Portfolios had only completed two months of operations
(commencement of operations was on October 16, 1991) at the end of 1991.
In selecting brokers or dealers to execute securities transactions on
behalf of a Portfolio, its Adviser seeks the best overall terms available. In
assessing the best overall terms available for any transaction, each Adviser
will consider the factors that the Adviser deems relevant, including the
breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on
a continuing basis. In addition, each advisory agreement between the Fund and
an Adviser authorizes the Adviser, in selecting brokers or dealers to execute
a particular transaction and in evaluating the best overall terms available,
to consider the brokerage and research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934) provided to the Fund,
the other Portfolios and/or other accounts over which the Adviser or its
affiliates exercise investment discretion. The fees under the advisory
agreements and the sub-investment advisory and/or administration agreements
between the Fund and the Advisers and the sub-investment advisers and/or
administrator, respectively, are not reduced by reason of their receiving such
brokerage and research services. The Fund's Board of Trustees in its
discretion may authorize the Advisers to cause the Portfolios to pay a broker
that provides such brokerage and research services a brokerage commission in
excess of that which another broker might have charged for effecting the same
transaction, in recognition of the value of such brokerage and research
services. The Fund's Board of Trustees periodically will review the
commissions paid by the Portfolios to determine if the commissions paid over
representative periods of time were reasonable in relation to the benefits
inuring to the Fund.
To the extent consistent with applicable provisions of the 1940 Act and
the rules and exemptions adopted by the SEC thereunder, the Fund's Board of
Trustees has determined that portfolio transactions for a Portfolio may be
executed through Smith Barney Shearson and other affiliated broker-dealers if,
in the judgment of its Adviser, the use of such broker-dealer is likely to
result in price and execution at least as favorable as those of other
qualified broker-dealers, and if, in the transaction, such broker-dealer
charges the Portfolio a rate consistent with that charged to comparable
unaffiliated customers in similar transactions. In addition, under rules
recently adopted by the SEC, Smith Barney Shearson may directly execute
transactions for a Portfolio of the Fund on the floor of any national
securities exchange, provided: (i) the Board of Trustees has expressly
authorized Smith Barney Shearson to effect such transactions; and (ii) Smith
Barney Shearson annually advises the Fund of the Aggregate compensation it
earned on such transactions. Over-the-counter purchases and sales are
transacted directly with principal market makers except in those cases in
which better prices and executions may be obtained elsewhere.
The Portfolios will not purchase any security, including U.S. government
securities, during the existence of any underwriting or selling group relating
thereto of which Smith Barney Shearson is a member, except to the extent
permitted by the SEC.
The Portfolios may use Smith Barney Shearson as a commodities broker in
connection with entering into futures contracts and options on futures
contracts. Smith Barney Shearson has agreed to charge the Portfolios
commodity commissions at rates comparable to those charged by Smith Barney.
Shearson to its most favored clients for comparable trades in comparable
accounts.
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the
organizations that provide services to the Fund. These organizations are as
follows:
Name Service
PanAgora Asset Management, Inc. Investment Adviser to
("PanAgora Management") Equity Index Portfolio
Smith Barney Shearson Asset Investment Adviser to
Management Division of Smith, Appreciation and
Barney Advisers, Inc. Total Return Portfolios
("Asset Management")
Smith, Barney Advisers, Inc. Investment Adviser to
International Equity Portfolio
Greenwich Street Advisors Investment Adviser to
Money Market Portfolio,
Intermediate High Grade
Portfolio, Diversified Strategic
Income, Equity
Income and Growth &
Income Portfolios
American Capital Asset Investment Adviser to Emerging
Management Inc. Growth Portfolio
Global Capital Management Sub-Investment Adviser to
Diversified Strategic Income
Portfolio
The Boston Company Advisors,
Inc. ("Boston Advisors") Administrator to each
Portfolio
Smith Barney Shearson Inc. Distributor
Boston Safe Custodian
The Shareholder Services Group,
Inc. ("TSSG"), a subsidiary
of First Data Corporation Transfer and Dividend Paying
Agent
These organizations and the functions that they perform for the Fund are
discussed in the Prospectus and in this Statement of Additional Information.
Trustees and Officers of the Fund
The names of the Trustees and executive officers of the Fund, together
with information as to their principal business occupations during the past
five years, are set forth below. Each Trustee who is an "interested person"
of the Fund, as defined in the 1940 Act, is indicated by an asterisk. As of
March 31, 1994 , Trustees and officers of the Fund as a group owned less
than 1% of the shares of the Fund.
Burt N. Dorsett, Trustee. Managing Partner of Dorsett, McCabe
Management, Inc., an investment counseling firm; Director of Research
Corporation Technologies, Inc., a non-profit patent-clearing and licensing
firm. His address is 201 East 62nd Street, New York, New York 10021.
Elliot S. Jaffe, Trustee. Chairman of the Board and President of The
Dress Barn, Inc. His address is 88 Hamilton Avenue, Stamford, Connecticut
06904.
Harry W. Knight, Trustee. Chairman of the Board of Hillsboro Associates
Inc., a private investment and management firm; formerly Senior Partner with
Booz, Allen & Hamilton Inc.; among the corporations of which he has served in
the past as Director are Burlington Industries, Inc., The Foxboro Company, The
Waldorf-Astoria Hotel and Menlo Ventures. His address is The Dorchester, 110
East 57th Street, Suite 11H, New York, New York 10022.
* Heath B. McLendon, Chairman of the Board and Investment Officer.
Executive Vice President of Smith Barney Shearson; Chairman of Smith Barney
Shearson Strategy Advisers Inc.; prior to July 1993, Executive Vice President
of Shearson Lehman Brothers Inc.; Vice Chairman of Shearson Asset Management,
a member of the Asset Management Group of Shearson Lehman Brothers Inc.; a
Director of PanAgora Management and PanAgora Asset Management Limited. His
address is Two World Trade Center, New York, New York 10048.
Cornelius C. Rose, Jr., Trustee. President, Cornelius C. Rose
Associates, Inc., financial consultants, and Chairman and Director of
Performance Learning Systems, an educational consultant. His address is Fair
Oaks, Enfield, New Hampshire 03748.
David L. Beckedorff, Vice President and Investment Officer. Senior
Manager-- Equities of PanAgora Management. His address is 260 Franklin
Street, Boston, Massachusetts 02110.
John C. Bianchi, Vice President and Investment Officer. Managing
Director of Greenwich Street Advisors; prior to July 1993, Managing
Director of Shearson Lehman Advisors. His address is Two World Trade
Center, New York, New York 10048.
Harry D. Cohen, Vice President and Investment Officer. President of
Asset Management; Managing Director of Smith Barney Shearson; prior to July
1993, Executive Vice President of Shearson Lehman Brothers. His address is
Two World Trade Center, New York, New York 10048.
James C. Conroy, Vice President and Investment Officer. Managing
Director of Greenwich Street Advisors; prior to July 1993, Managing
Director of Shearson Lehman Advisors. His address is Two World Trade
Center, New York, New York 10048.
Paul A. Hilstad, Vice President. Senior Vice President, General Counsel
and Director of American Capital Management & Research, Inc.; Senior Vice
President and General Counsel of American Capital; formerly Vice President and
Deputy General Counsel, IDS Financial Services Inc. His address is 2800 Post
Oak Boulevard, Houston, Texas 77056.
Jack S. Levande, Vice President and Investment Officer. Managing
Director of Greenwich Street Advisors; prior to July 1993, Managing
Director of Shearson Lehman Advisors. His address is Two World
Trade Center, New York, New York 10048.
Gary Lewis, Vice President and Investment Officer. Portfolio Manager at
American Capital Management. His address is 2800 Post Oak Boulevard, Houston,
Texas 77056.
George Mueller, Vice President and Investment Officer. Senior Vice
President of Greenwich Street Advisors; prior to July 1993, Managing
Director of Shearson Lehman Advisors. His address is Two World Trade
Center, New York, New York 10048.
Richard P. Roelofs, Executive Vice President. Managing Director of
Smith Barney Shearson; President of Smith Barney Shearson Strategy Advisers
Inc.; prior to July 1993, Senior Vice President of Shearson Lehman Brothers
Inc.; Vice President of Shearson Lehman Investment Strategy Advisors Inc., an
investment advisory affiliate of Shearson Lehman Brothers Inc. His address is
Two World Trade Center, New York, New York 10048.
Alan T. Sachtleben, Vice President and Investment Officer. Senior Vice
President - Chief Investment Officer/Equity and Director of American Capital.
Executive Vice President and Director, American Capital Management & Research,
Inc. His address is 2800 Post Oak Boulevard, Houston, Texas 77056.
Stephen J. Treadway, President. Executive Vice President and Director
of Smith Barney Shearson Inc., Director and President of Mutual Management
Corp. and Smith, Barney Advisers, Inc. ; Director and Chairman of
Corporate Realty Advisers, Inc. and Trustee of Corporate Realty Income Trust
I. His address is 1345 Avenue of the Americas, New York, New York 10105.
William G. Zink, Vice President and Investment Officer. Manager --
Equities of PanAgora Management. His address is 260 Franklin Street, Boston,
Massachusetts 02110.
Harold L. Williamson, Jr., Vice President and Investment Officer. Vice
Chairman of Asset Management; prior to July 1993, Managing Director of
Shearson Lehman Brothers. His address is Two World Trade Center, New
York, New York 10048.
Phyllis Zahorodny, Vice President and Investment Officer. Managing
Director of Greenwich Street Advisors; prior to July 1993 Managing Director
of Shearson Lehman Advisors. Her address is Two World Trade Center, New
York, New York 10048.
Vincent Nave, Treasurer. Senior Vice President of Boston Advisors and
Boston Safe. His address is One Boston Place, Boston, Massachusetts 02108.
Francis J. McNamara, III, Secretary. Senior Vice President and General
Counsel of Boston Advisors; prior to June 1989, Vice President and Associate
Counsel of Boston Advisors. His address is One Boston Place, Boston,
Massachusetts 02108.
Each Trustee also serves as a director, trustee or general partner of
certain other mutual funds for which Smith Barney Shearson serves as
distributor.
No officer, director or employee of Smith Barney Shearson, the Advisers,
Global Capital Management, Boston Advisors or any of their affiliates receives
any compensation from the Fund for serving as an officer or Trustee of the
Fund. The Fund pays each Trustee who is not a director, officer or employee
of Smith Barney Shearson, the Advisers, Global Capital Management, Boston
Advisors or any of their affiliates a fee of $5,000 per annum plus $500 per
meeting attended and reimburses them for travel and out-of-pocket expenses.
For the fiscal year ended December 31, 1993 , such fees and expenses
totaled $30,607 .
Advisers, Sub-Investment Adviser and Administrator
Each Adviser serves as investment adviser to one or more Portfolios
pursuant to a separate written agreement with each Portfolio (an "Advisory
Agreement"). The Advisory Agreements for the Money Market Portfolio,
Intermediate High Grade Portfolio, Equity Income Portfolio, Equity Index
Portfolio, Appreciation Portfolio, Diversified Strategic Income Portfolio and
Growth & Income Portfolio were most recently approved by the Board of Trustees
on July 14 , 1993. The Advisory Agreements for the Total Return,
International Equity and Emerging Growth Portfolios were approved by the
Fund's Board of Trustees on October 13, 1993. Boston Advisors serves as
administrator to each Portfolio pursuant to a separate written agreement with
each Portfolio (an "Administration Agreement").
Prior to the close of business on May 21, 1993, Boston Advisors acted in
the capacity as the Fund's sub-investment adviser and administrator. The
Administration Agreement for each Portfolio (other than the Total Return,
International Equity and Emerging Growth Portfolios, which were approved on
October 13, 1993) was most recently approved by the Fund's Board of Trustees
on July 14, 1993. Global Capital Management serves as sub-investment adviser
to the Diversified Strategic Income Portfolio pursuant to a sub-investment
advisory agreement with that Portfolio, which was first approved by the Fund's
Board of Trustees on July 14 , 1993. Certain of the services provided
by, and the fees paid by the Fund to, the Advisers under the Advisory
Agreements, Boston Advisors under its Administration Agreements and Global
Capital Management under its sub-investment advisory Agreement are described
in the Prospectus.
Asset Management is a division of Smith, Barney Advisers, Inc. ("SBA").
SBA is a wholly owned subsidiary of Smith Barney Shearson Holdings Inc.
("Holdings"), which in turn, is a subsidiary of The Travelers Inc.
("Travelers"). Travelers is a diversified financial services holding company
principally engaged in the business of providing investment, consumer finance
and insurance services. Greenwich Street Advisors, a division of Mutual
Management Corp., provides investment advisory and management services to
investment companies affiliated with Smith Barney Shearson. Mutual Management
Corp. is wholly owned subsidiary of Holdings.
American Capital Asset Management, Inc. is a wholly owned subsidiary of
American Capital Management & Research, Inc., an indirect wholly owned
subsidiary of Travelers.
Smith Barney Shearson, the Fund's distributor, and Global Capital
Management, sub-investment adviser to Diversified Strategic Income Portfolio,
are subsidiaries of Holdings.
Certain of the services provided to the Fund by Boston Advisors are
described in the Prospectus under "Management of the Fund." In addition to
those services, Boston Advisors pays the salaries of all officers and
employees who are employed by both it and the Fund, maintains office
facilities for the Fund, furnishes the Fund with statistical and research
data, clerical help and accounting, data processing, bookkeeping, internal
auditing and legal services and certain other services required by the Fund,
prepares reports to the Fund's shareholders and prepares tax returns, reports
to and filings with the SEC and state blue sky authorities. Boston Advisors
bears all expenses in connection with the performance of its services.
Each Adviser and Global Capital Management pay the salaries of all
officers and employees who are employed by both them and the Fund, maintain
office facilities for the Fund and bear all expenses in connection with the
performance of their respective services under their Agreements with the Fund.
The Portfolios incurred the following investment advisory fees for
the past three years , which were totally waived for the period ended
December 31, 1991 and partially waived for the years ended December 31, 1992
and 1993 , by their respective Adviser:
Portfolio
Fiscal Year
Ended
December 31,
1993
Fiscal Year
Ended
December 31,
1992
Period Ended
December 31,
1991
Money Market Portfolio
$
7,643
$
6,123
$
174
Intermediate High Grade
Portfolio
25,734
8,818
180
Diversified Strategic
Income Portfolio
133,663
36,728
521
Equity Income Portfolio
206,623
62,981
706
Equity Index Portfolio
25,538
13,325
895
Growth & Income Portfolio
79,917
28,401
306
Appreciation Portfolio
364,632
196,339
2,968
Total Return Portfolio
419
----
- ---
----
- ---
Emerging Growth Portfolio
431
----
- ---
----
- ---
International Equity
Portfolio
1,422
----
- ---
----
- ---
For the fiscal period from commencement of operations on October 16,
1991 through December 31, 1991 and for the fiscal year ended December 31,
1992, the Diversified Strategic Income Portfolio incurred $261, all of which
was waived by Lehman Brothers Global Asset Management Limited ("LBGAM"), the
sub-investment adviser of the Portfolio prior to March 22 , 1994 and
$18,364, $4,407 of which was waived by LBGAM, respectively, in sub-investment
advisory fees. For the fiscal year ended December 31, 1993, the
Diversified Strategic Income Portfolio incurred $44,556, $515 of which was
waived by LBGAM.
The Portfolios, then in existence incurred the following sub-investment
advisory and administration fees
for the past three years , which were
totally waived for the period ended December 31, 1991 and partially waived for
the year ended December 31, 1992, respectively, by Boston Advisors; and the
Portfolios incurred administration fees, which were partially waived for the
year ended December 31, 1993 as follows:
Fiscal Year
Ended
December 31,
1993
Fiscal Year
Ended
December 31,
1992
Period Ended
December 31,
1991
Money Market Portfolio
$
5,096
$
4,082
$
116
Intermediate High Grade
Portfolio
12,867
4,409
90
Diversified Strategic
Income Portfolio
59,406
24,485
347
Equity Income Portfolio
91,832
27,991
314
Equity Index Portfolio
12,769
6,662
447
Growth & Income Portfolio
35,519
12,623
136
Appreciation Portfolio
132,593
71,396
1,079
Total Return Portfolio
152
---
- ---
---
- ---
Emerging Growth Portfolio
115
---
- ---
---
- ---
International Equity
Portfolio
335
---
- ---
---
- ---
For the year ended December 31, 1992, the investment advisers and sub-
investment adviser waived fees for the Portfolios then in existence as
follows:
Investment
Advisers
Boston
Advisors
Money Market Portfolio
$ 4,280
$ 2,853
Intermediate High Grade
Portfolio
5,928
2,964
Diversified Strategic Income
Portfolio
8,816
5,877
Equity Income Portfolio
11,122
4,943
Equity Index Portfolio
6,974
3,487
Growth & Income Portfolio
9,382
4,170
Appreciation Portfolio
19,370
7,044
For the year ended December 31, 1992, IDS Life reimbursed expenses for
the Portfolios then in existence as follows:
Money Market Portfolio
$14,624
Intermediate High Grade Portfolio
15,865
Diversified Strategic Income Portfolio
25,396
Equity Income Portfolio
19,510
Equity Index Portfolio
31,633
Growth & Income Portfolio
20,683
Appreciation Portfolio
29,950
For the year ended December 31, 1993, the investment adviser and
administrator waived fees for the Portfolio as follows:
Investment
Adviser
Boston
Advisors
Money Market Portfolio
$ 5,078
$ 3,385
Intermediate High Grade
Portfolio
8,383
4,191
Diversified Strategic Income
Portfolio
1,544
685
Equity Index Portfolio
8,795
4,397
Growth & Income Portfolio
630
280
Total Return Portfolio
419
152
Emerging Growth Portfolio
308
82
International Equity Portfolio
1,048
246
For the year ended December 31, 1993, the investment adviser and
administrator reimbursed expenses in the amounts of $52 and $19, respectively,
for the Total Return Portfolio.
For the year ended December 31, 1993, IDS Life reimbursed expenses for
the Portfolios as follows:
Money Market Portfolio
$17,889
Intermediate High Grade Portfolio
16,459
Diversified Strategic Income Portfolio
2,816
Equity Index Portfolio
28,169
Growth & Income Portfolio
1,085
Total Return Portfolio
1,472
Emerging Growth Portfolio
2,915
International Equity Portfolio
1,902
The Fund bears expenses incurred in its operation, including taxes,
interest, brokerage fees and commissions, if any; fees of Trustees who are not
officers, directors, shareholders or employees of the Advisers, Global Capital
Management, Boston Advisors or Smith Barney Shearson; SEC fees and state blue
sky qualification fees; charges of custodians; transfer and dividend
disbursing agents' fees; certain insurance premiums; outside auditing and
legal expenses; costs of maintenance of corporate existence; investor services
(including allocated telephone and personnel expenses); and costs of
preparation of corporate meetings and of preparation and printing of
prospectuses and shareholder reports for regulatory purposes and for
distribution to shareholders.
Each Adviser, Global Capital Management and Boston Advisors have agreed
that if in any fiscal year the aggregate expenses of any Portfolio that they
serve (including fees payable pursuant to their service agreements with the
Fund, but excluding interest, taxes, brokerage and, if permitted by the
relevant state securities commissions, extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over the Portfolio, the
relevant Adviser, Global Capital Management and Boston Advisors, as
appropriate, will reduce their fees for the Portfolio for that excess expense
to the extent required by state law in the same proportion as their respective
fees bear to the combined fees for investment advice and administration. A
fee reduction, if any, will be reconciled on a monthly basis. The most
restrictive annual expense limitation applicable to any Portfolio is 2.5% of
the first $30 million of the Portfolio's average net assets, 2% of the next
$70 million of the average net assets and 1.5% of the remaining average net
assets of each Portfolio. No fee reduction was required for the fiscal year
ended December 31, 1993.
Counsel and Auditors
Willkie Farr & Gallagher serves as counsel to the Fund. Sullivan &
Cromwell serves as counsel to the Trustees who are not interested persons of
the Fund.
Coopers & Lybrand, independent accountants, One Post Office Square,
Boston, Massachusetts 02109, serves as auditors of the Fund and renders an
opinion on the Fund's financial statements annually.
Organization of the Fund
The Fund was organized as a business trust under the laws of the
Commonwealth of Massachusetts pursuant to a Master Trust Agreement dated May
13, 1991, as amended from time to time (the "Trust Agreement"). On July 30,
1993 the Trust changed its name to its current name, Smith Barney Shearson
Series Fund. As of the date of this Statement of Additional Information, the
Subaccounts owned all of the outstanding shares of each of the Portfolios,
with the exception of a nominal amount owned by an IDS affiliate.
In the interest of economy and convenience, certificates representing
shares in the Fund are not physically issued. Boston Safe maintains a record
of each shareholder's ownership of Fund shares. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Trustees can elect all of the Trustees. Shares are
transferable but have no preemptive, conversion or subscription rights.
Annuity owners generally vote by Portfolio, except with respect to the
election of Trustees and the selection of independent public accountants. The
Variable Account will vote the shares of the Fund held by the Variable Account
at regular and special meetings of the shareholders of the various Portfolios
in accordance with instructions received from the owners of the Symphony
Annuity, an individual flexible premium deferred combination fixed and
variable annuity contract or a certificate evidencing interest in a master
group flexible premium deferred variable annuity (the "Annuity"), having a
voting interest in the relevant Subaccount. Prior to the retirement date of
each Annuity, the number of votes that may be cast by an Annuity owner is
based on the owner's Accumulation Units in each Subaccount invested in shares
of the Fund as of the record date of the meeting.
There will be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders, at which time the Trustees
then in office will call a shareholders' meeting for the election of Trustees.
Under the 1940 Act, shareholders of record of no less than two-thirds of the
outstanding shares of the Fund may remove a Trustee through a declaration in
writing or by vote cast in person or by proxy at a meeting called for that
purpose. Under the Trust Agreement, the Trustees are required to call a
meeting of shareholders for the purpose of voting upon the question of removal
of any such Trustee when requested in writing to do so by the shareholders of
record of not less than 10% of the Fund's outstanding shares.
Massachusetts law provides that shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Trust Agreement disclaims shareholder liability for acts or
obligations of the Fund and requires that notice of such disclaimer be given
in each agreement, obligation or instrument entered into or executed by the
Fund or a Trustee. The Trust Agreement provides for indemnification from the
Fund's property for all losses and expenses of any shareholder held personally
liable for the obligations of the Fund. Thus, the risk of an Annuity Owner
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund would be unable to meet its obligations, a
possibility that the Fund's management believes is remote. Upon payment of
any liability incurred by the Fund, the shareholder paying the liability will
be entitled to reimbursement from the general assets of the Fund. The
Trustees intend to conduct the operations of the Fund in such a way so as to
avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Fund.
PURCHASE OF SHARES
The Fund offers its shares of capital stock on a continuous basis. You
cannot buy shares of the Fund directly. You can invest only by buying an
Annuity from either IDS Life Insurance Company ("IDS Life") or IDS Life
Insurance Company of New York ("IDS Life of New York") and directing the
allocation of part or all of your net purchase payment to one or more of the
ten Subaccounts. Each Subaccount invests only in a single Portfolio of the
Fund. Investors should read this Statement of Additional Information and the
Fund's Prospectus along with the Annuity prospectus dated April 29,
1994.
Sales Charges and Surrender Charges
The Fund does not assess any sales charge, either when it sells or when
it redeems shares of the Portfolio. Surrender charges may be assessed under
the Annuity, as described in the Annuity prospectus. Mortality and expense
risk fees and other charges are also described in that prospectus.
REDEMPTION OF SHARES
The Fund will redeem any shares presented by the Subaccounts, its sole
shareholders, for redemption. The Subaccounts' policy on when or whether to
buy or redeem Fund shares is described in the Annuity prospectus.
Payment upon redemption of shares of a Portfolio is normally made within
seven days of receipt of such request. The right of redemption of shares of a
Portfolio may be suspended or the date of payment postponed (a) for any
periods during which the NYSE is closed (other than for customary weekend and
holiday closings), (b) when trading in the markets the Portfolio customarily
utilizes is restricted, or an emergency, as defined by the rules and
regulations of the SEC, exists, making disposal of the Portfolio's investments
or determination of its net asset value not reasonably practicable, or (c) for
such other periods as the SEC by order may permit for the protection of the
Portfolio's shareholders.
Should the redemption of shares of a Portfolio be suspended or
postponed, the Fund's Board of Trustees may make a deduction from the value of
the assets of the Portfolio to cover the cost of future liquidation's of the
assets so as to distribute fairly these costs among all owners of the Annuity.
NET ASSET VALUE
As noted in the Prospectus, the Fund will not calculate the net asset
value of the Portfolios on certain holidays. On those days, securities held
by a Portfolio may nevertheless be actively traded, and the value of the
Portfolio's shares could be significantly affected.
Because of the need to obtain prices as of the close of trading on
various exchanges throughout the world, the calculation of the net asset
values of certain Portfolios may not take place contemporaneously with the
determination of the prices of some of their respective portfolio securities
used in such calculation. A security that is listed or traded on more than
one exchange is valued at the quotation on the exchange determined to be the
primary market for such security. All assets and liabilities initially
expressed in foreign currency values will be converted into U.S. dollar values
at the mean between the bid and offered quotations of such currencies against
U.S. dollars as last quoted by any recognized dealer. If such quotations are
not available, the rate of exchange will be determined in good faith by the
Fund's Board of Trustees. In carrying out the Board's valuation policies,
Boston Advisors as administrator, may consult with an independent pricing
service (the "Pricing Service") retained by the Fund.
Debt securities of U.S. issuers (other than U.S. government securities
and short-term investments) are valued by Boston Advisors, after consultation
with the Pricing Service. When, in the judgment of the Pricing Service,
quoted bid prices for investments are readily available and are representative
of the bid side of the market, these investments are valued at the mean
between the quoted bid prices and asked prices. Investments for which, in the
judgment of the Pricing Service, there are no readily obtainable market
quotations are carried at fair value as determined by the Pricing Service.
The procedures of the Pricing Service are reviewed periodically by the
officers of the Fund under the general supervision and responsibility of the
Fund's Board of Trustees.
The Money Market Portfolio
The valuation of the portfolio securities of the Money Market Portfolio
is based upon their amortized cost, which does not take into account
unrealized capital gains or losses. Amortized cost valuation involves
initially valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium regardless of the impact
of fluctuating interest rates on the market value of the instrument. While
this method provides certainty in valuation, it may result in periods during
which value, as determined by amortized cost, is higher or lower than the
price a Fund would receive if it sold the instrument.
The use by the Money Market Portfolio of the amortized cost method of
valuing its portfolio securities is permitted by a rule adopted by the SEC.
Under this rule, the Portfolio must maintain a dollar-weighted average
portfolio maturity of ninety days or less, purchase only instruments having
remaining maturities of thirteen months or less, and invest only in
securities determined by the Board of Trustees of the Fund to be "Eligible
Securities," as determined by the SEC, with minimal credit risks. Pursuant to
the rule, the Fund's Board of Trustees also has established procedures
designed to stabilize, to the extent reasonably possible, the Portfolio's
price per share as computed for the purpose of sales and redemptions at $1.00.
Such procedures include review of the Portfolio's holdings by the Fund's Board
of Trustees, at such intervals as it may deem appropriate, to determine
whether the Portfolio's net asset value calculated by using available market
quotations or market equivalents deviates from $1.00 per share based on
amortized cost.
The rule also provides that the extent of any deviation between the
Portfolio's net asset value based upon available market quotations or market
equivalents and the $1.00 per share net asset value based on amortized cost
must be examined by the Fund's Board of Trustees. In the event that the
Fund's Board of Trustees determines that a deviation exists that may result in
material dilution or other unfair results to investors or existing
shareholders, pursuant to the rule the Fund's Board of Trustees must cause the
Portfolio to take such corrective action as the Fund's Board of Trustees
regards as necessary and appropriate, including: selling portfolio instruments
prior to maturity to realize capital gains or losses or to shorten average
portfolio maturity; withholding dividends or paying distributions from capital
or capital gains; redeeming shares in kind; or establishing a net asset value
per share by using available market quotations.
PERFORMANCE DATA
From time to time, the Fund may quote yield or total return in
advertisements or in reports and other communications to shareholders.
Yield
For a Portfolio other than the Money Market Portfolio, the thirty-day
yield figure described in the Prospectus and shown below is calculated
according to a formula prescribed by the SEC. The formula can be expressed as
follows:
6
YIELD = 2[(a-b + 1) - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the
period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by the Portfolio at a
discount or premium, the formula generally calls for amortization of the
discount or premium; the amortization schedule will be adjusted monthly to
reflect changes in the market value of the debt obligations.
The yields for the 30-day period ended December 31, 1993 for the
Diversified Strategic Income Portfolio and the Intermediate High Grade
Portfolio were 5.95% and 4.46% , respectively.
The yield for the Money Market Portfolio is computed by (a) determining
the net change, exclusive of capital changes, in the value of a hypothetical
pre- existing account in the Portfolio having a balance of one share at the
beginning of a seven day period for which yield is to be quoted; (b)
subtracting a hypothetical charge reflecting deductions from shareholder
accounts;(c) dividing the difference by the value of the account at the
beginning of the period to obtain the base period return; and (d) annualizing
the results (i.e., multiplying the base period return by 365/7). The net
change in the value of the account reflects the value of additional shares
purchased with dividends declared on the original share and any such
additional shares, but does not include realized gains and losses or
unrealized appreciation and depreciation. In addition, the Portfolio may
calculate a compound effective annualized yield by adding one to the base
period return (calculated as described above), raising the sum to a power
equal to 365/7 and subtracting one. For the seven-day period ended December
31, 1993, the annualized yield for the Money Market Portfolio was
2.51% , and the effective yield was 2.54% . For the same seven-
day period, the Portfolio's average maturity was 17 days.
Investors should recognize that in periods of declining interest rates a
Portfolio's yield will tend to be somewhat higher than prevailing market rates
and in periods of rising interest rates the Portfolio's yield will tend to be
somewhat lower. In addition, when interest rates are falling, the inflow of
net new money to the Portfolio from the continuous sale of its shares will
likely be invested in portfolio instruments producing lower yields than the
balance of such Portfolio's portfolio, thereby reducing the current yield of
the Portfolio. In periods of rising interest rates, the opposite can be
expected to occur.
Average Annual Total Return
A Portfolio's "average annual total return" figure described in the
Prospectus and shown below is computed according to a formula prescribed by
the SEC. The formula can be expressed as follows:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
N = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000
payment made at the beginning of the one-, five- or ten-year
(or other) period at the end of the one-, five- or ten-
year (or other) period (or fractional portion thereof).
The ERV assumes complete redemption of the hypothetical investment at
the end of the measuring period. A Portfolio's net investment income changes
in response to fluctuations in interest rates and the expenses of the
Portfolio.
The average annual total returns for the Portfolios then in existence
were as follows for the periods indicated (reflecting the waivers of
investment advisory and administration fees and reimbursement of expenses):
Portfolio
For the one-year
period ended
December 31, 1993
Per annum for the
period from
commencement of
operations through
December 31, 1993
Intermediate High Grade
Portfolio
8.00%
7.14%
Diversified Strategic Income
Portfolio
12.56%
6.86%
Equity Income Portfolio
10.41%
10.97%
Equity Index Portfolio
8.66%
9.96%
Growth & Income Portfolio
9.09%
8.59%
Appreciation Portfolio
7.03%
8.27%
Total Return Portfolio
N/A
N/A
Emerging Growth Portfolio
N/A
N/A
International Equity Portfolio
N/A
N/A
Portfolio commenced operations on October 16, 1991.
Portfolio commenced operations on December 3 , 1993.
Aggregate Total Return
A Portfolio's aggregate total return figure described in the Prospectus
and shown below represents the cumulative change in the value of an investment
in a Portfolio for the specified period and is computed by the following
formula:
ERV - P
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment made at
the beginning of the one, five- or ten-year period at the end of the one-,
five- or ten-year period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The aggregate total returns for the Portfolios then in existence were as
follows for the periods indicated (reflecting the waiver for investment
advisory and administration fees and reimbursement of expenses):
For the one-year
period ended
December 31, 1993
For the
period from
commencement of
operations through
December 31, 1993
Intermediate High Grade
Portfolio
8.00%
16.43%
Diversified Strategic Income
Portfolio
12.56%
15.76%
Equity Income Portfolio
10.41%
25.83%
Equity Index Portfolio
8.66%
23.16%
Growth & Income Portfolio
9.09%
19.95%
Appreciation Portfolio
7.03%
19.26%
Total Return Portfolio
N/A
3.00%
Emerging Growth Portfolio
N/A
4.10%
International Equity Portfolio
N/A
.50%
Portfolio commenced operations on October 16, 1991.
Portfolio commenced operations on December 3 , 1993.
It is important to note that the yield and total return figures set
forth above are based on historical earnings and are not intended to indicate
future performance.
From time to time, the Fund may quote the performance of a Portfolio in
terms of total return in reports or other communications to shareholders or in
advertising material. A Portfolio's total return combines principal changes
and income dividends and capital gains distributions reinvested for the
periods shown. Principal changes are based on the difference between the
beginning and closing net asset values for the period. The period selected
will depend upon the purpose of reporting the performance.
A Portfolio's performance will vary from time to time depending upon
market conditions, the composition of its portfolio and its operating
expenses. Consequently, any given performance quotation should not be
considered representative of the Portfolio's performance for any specified
period in the future. In addition, because performance will fluctuate, it may
not provide a basis for comparing an investment in a Portfolio with certain
bank deposits or other investments that pay a fixed yield for a stated period
of time.
The following comparative performance information may be used from time
to time in advertising the Fund's shares:
(1) Average of Savings Accounts, which is measure of all kinds of
savings deposits, including longer-term certificates (based on figures
supplied by the U.S. League of Savings Institutions). Savings accounts offer
a guaranteed rate of return on principal, but no opportunity for capital
growth. During a portion of the period, the maximum rates paid on some
savings deposits were fixed by law.
(2) The Consumer Price Index, which is a measure of the average change
in prices over time in a fixed market basket of goods and services (e.g.,
food, clothing, shelter, fuels, transportation fares, charges for doctors' and
dentists' services, prescription medicines, and other goods and services that
people buy for day-to-day living).
(3) Data and mutual fund rankings published or prepared by Lipper
Analytical Services, Inc., which ranks mutual funds by overall performance,
investment objectives and assets.
(4) Bear Stearns Foreign Bond Index, which provides simple average
returns for individual countries and GNP-weighted index, beginning in 1975.
The returns are broken down by local market and currency.
(5) Ibbottson Associates International Bond Index, which provides a
detailed breakdown of local market and currency returns since 1960.
(6) Standard & Poor's Daily Price Index of 500 Common Stocks ("S&P
500") which is a widely recognized index composed of the capitalization-
weighted average of the price of 500 of the largest publicly traded stocks in
the U.S.
(7) Salomon Brothers Broad Investment Grade Index which is a widely
used index composed of U.S. domestic government, corporate and mortgage-back
fixed income securities.
(8) Dow Jones Industrial Average.
(9) Financial News Composite Index.
(10) Morgan Stanley Capital International World Indices, including,
among others, the Morgan Stanley Capital International Europe, Australia, Far
East Index ("EAFE Index"). The EAFE index is an unmanaged index of more than
800 companies of Europe, Australia and the Far East.
(11) Data and comparative performance rankings published or prepared by
CDA Investment Technologies, Inc.
(12) Data and comparative performance rankings published or prepared by
Wiesenberger Investment Company Service.
Indices prepared by the research departments of such financial
organizations as Salomon Brothers, Inc., Merrill Lynch, Pierce, Fenner &
Smith, Inc., Bear Stearns & Co., Inc., Morgan Stanley, and Ibbottson
Associates may be used, as well as information provided by the Federal Reserve
Board. In addition, performance rankings and ratings reported periodically in
national financial publications.
TAXES
Each Portfolio will be treated as a separate taxpayer for federal income
tax purposes with the result that: (a) each Portfolio must qualify separately
as a regulated investment company; and (b) the amounts of investment income
and capital gains earned will be determined on a Portfolio-by-Portfolio
(rather than on a Fund-wide) basis.
Regulated Investment Company Status
The Fund intends that each Portfolio will qualify separately each year
as a "regulated investment company" under Subchapter M of the Code. A
qualified Portfolio will not be liable for federal income taxes to the extent
that its taxable net investment income and net realized capital gains are
distributed to its shareholders, provided that each Portfolio receives
annually at least 90% of its net investment income from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of stock or securities, or foreign currencies, or other income
derived with respect to its business of investing in such stock, securities or
currencies. In addition, each Portfolio must distribute at least 90% of its
net investment income each year.
To qualify as a regulated investment company, a Portfolio must also earn
less than 30% of its gross income from the disposition of certain investments
held for less than three months. The 30% test will limit the extent to which
a Portfolio may: sell stock or securities held for less than three months;
effect short sales of stock or securities held for less than three months (or
of substantially identical securities); write certain options, futures and
forward contracts which expire in less than three months; and effect closing
transactions with respect to call or put options that have been written or
purchased within the preceding three months. (If a Portfolio purchases a put
option for the purpose of hedging an underlying portfolio security, the
acquisition of the option is treated as a short sale of the underlying
security unless, for purposes of the 30% test only, the option and the
security are acquired on the same date.) Finally, as discussed below, this
requirement may also limit investments by certain Portfolios in options on
stock indexes, options on nonconvertible debt securities, futures contracts
and options on futures contracts. Legislation currently pending before the
U.S. Congress would repeal the 30% test. However, it is impossible to predict
whether the legislation will become law, and if so enacted, what form it will
eventually take.
If a Portfolio is the holder of record of any stock on the record date
for any dividends payable with respect to such stock, such dividends are
included in the Portfolio's gross income not as of the date received but as of
the later of (a) the date such stock became ex-dividend with respect to such
dividends (i.e., the date on which a buyer of the stock would not be entitled
to receive the declared, but unpaid, dividends) or (b) the date the Portfolio
acquired such stock.
Taxation of Investment by the Portfolios
The Fund's transactions in foreign currencies, forward contracts,
options, futures contracts (including options and futures contracts on foreign
currencies) and warrants will be subject to special provisions of the Code
that, among other things, may affect the character of gains and losses
realized by the Fund (i.e., may affect whether gains or losses are ordinary or
capital), accelerate recognition of income to the Fund and defer Fund losses.
These rules could therefore affect the character, amount and timing of
distributions to shareholders. These provisions also (a) will require the
Fund to mark-to-market certain types of the positions in its portfolio (i.e.,
treat them as if they were closed out) and (b) may cause the Fund to recognize
income without receiving cash with which to pay dividends or make
distributions in amounts necessary to satisfy the 90% distribution requirement
for avoiding income tax. The Fund will monitor its transactions, will make
the appropriate tax elections and will make the appropriate entries in its
books and records when it acquires any foreign currency, forward contract,
option, futures contract, warrant or hedged investment in order to mitigate
the effect of these rules and prevent disqualification of the Fund as a
regulated investment company.
Segregated Asset Account
The Fund has been informed that IDS Life and IDS Life of New York intend
to qualify each of the Subaccounts as a "segregated asset account" within the
meaning of the Code. For a Subaccount to qualify as a segregated asset
account, the Portfolio in which such Subaccount holds shares must meet the
diversification requirements of Section 817(h) of the Code and the regulations
promulgated thereunder. To meet those requirements, a Portfolio may not
invest more than certain specified percentages of its assets in the securities
of any one, two, three or four issuers. However, certain increases are made
to the percentage limitations to the extent of investments in United States
Treasury obligations. For these purposes, all obligations of the United
States Treasury and each instrumentality are treated as securities of separate
issuers.
Income on assets of a Subaccount qualified as a segregated asset account
whose underlying investments are adequately diversified will not be taxable to
Annuity owners. However, in the event a Subaccount is not so qualified, all
annuities allocating any amount of premiums to such Subaccount will not
qualify as annuities for federal income tax purposes and the holders of such
annuities would be taxed on any income on the annuities during the period of
disqualification.
The Fund has undertaken to meet the diversification requirements of
Section 817(h) of the Code. This undertaking may limit the ability of a
particular Portfolio to make certain otherwise permitted investments. In
particular, the ability of the Money Market and Intermediate High Grade
Portfolios to invest in U.S. government securities other than direct United
States Treasury obligations may be materially limited by these diversification
requirements.
CUSTODIAN AND TRANSFER AGENT
Boston Safe, a wholly owned subsidiary of TBC, is located at One Boston
Place, Boston, Massachusetts 02108, and serves as the custodian of the Fund
pursuant to a custodian agreement. Under the custodian agreement, Boston Safe
holds the Fund's portfolio securities and keeps all necessary accounts and
records. For its services, Boston Safe receives a monthly fee based upon the
month-end market value of securities held in custody and also receives certain
securities transaction charges (including out-of-pocket expenses and costs of
any foreign and U.S. sub-custodians). The assets of the Fund are held under
bank custodianship in compliance with the 1940 Act.
TSSG, a subsidiary of First Data Corporation, which is in turn a
partially owned subsidiary of American Express, is located at Exchange Place,
Boston, Massachusetts 02109, and serves as the Fund's transfer and dividend-
paying agent. Under the transfer agency agreement, TSSG maintains the
shareholder account records for the Fund, handles certain communications
between shareholders and the Fund, distributes dividends and distributions
payable by the Fund and produces statements with respect to account activity
for the Fund and its shareholders. For these services, TSSG receives fees
from the Fund computed on the basis of the number of shareholder accounts that
TSSG maintains for the Fund during the month and is reimbursed for out-of-
pocket expenses.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended December 31, 1993 is
incorporated into this Statement of Additional Information in its entirety.
APPENDIX
DESCRIPTION OF S&P, MOODY'S AND OTHER RATINGS
Description of S&P Corporate Bond Ratings:
AAA - Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in higher rated
categories.
BB, B AND CCC - Bonds rated BB and B are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB represents a
lower degree of speculation than B, and CCC represents the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Descriptions of Moody's Corporate Bond Ratings:
AAA - Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as "high grade bonds." They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
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 in
Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to 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 - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
BA - Bonds which are Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally 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 - Bonds that are rated Caa are of poor standing. These issues may
be in default or present elements of danger may exist with respect to
principal or interest.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic
rating classification from Aa through B. 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.
Description of other Corporate Bond Ratings:
Bonds rated AAA by IBCA Limited or its affiliate IBCA Inc. (together,
"IBCA") are obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly. Bonds
rated AA are obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions
may increase investment risk, albeit not very significantly.
Bonds rated AAA by Fitch Investors Services, Inc. ("Fitch") are
considered to be investment grade and of the highest credit quality. The
obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
Bonds rated AA are considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA.
Bonds rated AAA by Duff & Phelps Inc. ("Duff & Phelps") are deemed to be
of the highest credit quality: the risk factors are negligible, being only
slightly more than for risk-free United States Treasury debt. AA indicates
high credit quality: protection factors are strong, and risk is modest but may
vary slightly from time to time because of economic conditions.
Description of S&P Commercial Paper Ratings:
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted A-1+.
Capacity for timely payment on commercial paper rated A-2 is strong, but the
relative degree of safety is not as high as for issues designated A-1.
Description of Moody's Commercial Paper Ratings:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
of issuers rated Prime-1, but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external
conditions. Ample alternative liquidity is maintained.
Description of other Commercial Paper Ratings:
Short term obligations, including commercial paper, rated A1+ by IBCA
are obligations supported by the highest capacity for timely repayment.
Obligations rated A1 have a very strong capacity for timely repayment.
Obligations rated A2 have a strong capacity for timely repayment, although
such capacity may be susceptible to adverse changes in business, economic or
financial conditions.
Fitch employs the rating F-1+ to indicate issues regarded as having the
strongest degree of assurance for timely payment. The rating F-1 reflects an
assurance of timely payment only slightly less in degree than issues rated F-
1+, while the rating F-2 indicates a satisfactory degree of assurance for
timely payment, although the margin of safety is not as great as indicated by
the F-1+ and F-1 categories.
Duff & Phelps employs the designation of Duff 1 with respect to top
grade commercial paper and bank money instruments. Duff 1+ indicates the
highest certainty of timely payment: short-term liquidity is clearly
outstanding and safety is just below risk-free United States Treasury short-
term obligations. Duff 1- indicates high certainty of timely payment. Duff 2
indicates good certainty of timely payment: liquidity factors and company
fundamentals are sound.
The Thomson Bankwatch ("TBW") Short-Term Ratings apply to commercial
paper, other senior short-term obligations and deposit obligations of the
entities to which the rating has been assigned, and apply only to unsecured
instruments that have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
TBW-1 The highest category; indicates a very high degree of
likelihood that principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
Various of the NRSROs utilize rankings within rating categories
indicated by a + or -. The Fund, in accordance with industry practice,
recognizes such rankings within categories as gradations, viewing for example
S&P's rating of A- 1 + and A-1 as being in S&P's highest rating category.
SMITH BARNEY SHEARSON SERIES FUND
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A:
Financial Highlights
Included in Part B:
The Registrant's Annual Report for the fiscal year ended December 31,
1993 and the Report for Independent Accountants dated February 18, 1994 are
incorporated by reference to the Definitive 30b-2 filed on March 10, 1994 as
Accession # 0000053798-94-000123
Included in Part C:
Consent of Independent Accountants
(b) Exhibits
Exhibit No. Description of Exhibit
All references are to the Registrant's registration statement on Form N-1A
(the "Registration Statement") as filed with the SEC on May 16, 1991. (File
Nos. 33-40603 and 811-6310).
(1) Registrant's Master Trust Agreement and Amendment Nos. 1 and 2 are
incorporated by reference to the Registrant's Registration Statement as filed
with the SEC on December 1, 1993 ("Post-Effective Amendment No. 6").
(2) By-Laws are incorporated by reference to the Registration Statement.
(3) Not applicable.
(4)(a) Specimen certificate for shares of beneficial interest in the
Money Market Portfolio is incorporated by reference to Pre-Effective Amendment
No. 1 to the Registrant's Registration Statement as filed with the SEC on July
10, 1991 ("Pre-Effective Amendment No. 1").
(b) Specimen certificates for shares of beneficial interest in the
Intermediate High Grade Portfolio, Diversified Strategic Income Portfolio,
Equity Income Portfolio, Equity Index Portfolio, Growth & Income Portfolio and
Appreciation Portfolio is incorporated by reference to Pre-Effective Amendment
No. 1.
(c) Specimen certificates for shares of beneficial interest in the
Total Return Portfolio, International Equity Portfolio and Emerging Growth
Portfolio will be filed herein.
(5)(a) Investment Advisory Agreement dated October 16, 1991 between the
Registrant and PanAgora Asset Management, Inc. relating to Equity Index
Portfolio, is incorporated by reference to Pre-Effective Amendment No. 3.
(b) Investment Advisory Agreements dated July 30, 1993 between the
Registrant and Greenwich Street Advisors relating to Money Market,
Intermediate High Grade, Diversified Strategic Income, Equity Income and
Growth and Income Portfolios and between the Registrant and Smith Barney
Shearson Asset Management relating to Appreciation Portfolio dated July 30,
1993, are incorporated by reference to Post-Effective Amendment No. 4 to the
Registrant's Registration Statement as filed with the SEC on October 22, 1993
("Post Effective Amendment No. 4").
(b) Investment Advisory Agreement with Smith Barney Shearson Asset
Management relating to Total Return Portfolio, dated November 23, 1993, is
incorporated by reference to Post-Effective Amendment No. 6.
(c) Investment Advisory Agreement with Smith, Barney Advisers, Inc.
relating to International Equity Portfolio, dated November 23, 1993, is
incorporated by reference to Post-Effective Amendment No. 6.
(d) Investment Advisory Agreement with American Capital Asset
Management, Inc. relating to Emerging Growth Portfolio, dated November 23,
1993, is incorporated by reference to Post-Effective Amendment No. 6.
(e) Form of Investment Advisory Agreement with Greenwich Street
Advisors relating to Diversified Strategic Income Portfolio dated March 21,
1994 is filed herein.
(f)
Form of Sub-Investment Advisory Agreement with Smith Barney Global
Capital Management Inc. relating to Diversified Strategic Income Portfolio
dated March 21, 1994 is filed herein.
(6)(a) Distribution Agreement with Smith Barney Shearson Inc.,
dated July 30, 1993, is incorporated by reference to Post-Effective Amendment
No. 4.
(7) Not Applicable.
(8)(a) Custody Agreement is incorporated by reference to Post-
Effective Amendment No. 1 as filed with the SEC on February 29, 1992 ("Post-
Effective Amendment No. 1").
(b) Form of Subcustodian Agreement is incorporated by reference to Pre-
Effective Amendment No. 2 to the Registrant's Registration Statement as filed
with the SEC on September 24, 1991 ("Pre-Effective Amendment No. 2").
(9)(a) Administration Agreements dated May 21, 1993 with The Boston
Company Advisors, Inc. relating to Money Market, Intermediate High Grade,
Diversified Strategic Income, Equity Income, Equity Index, Growth and Income
and Appreciation Portfolios, are incorporated by reference to Post-Effective
Amendment No. 4.
(b) Administration Agreements dated November 23, 1993 with The Boston
Company Advisors, Inc. relating to Total Return, International Equity and
Emerging Growth Portfolios, is incorporated by reference to Post-Effective
Amendment No. 6.
(c)
Transfer Agency Agreement between the Registrant and The
Shareholder Services Group, Inc. dated August 2, 1993 is incorporated by
reference to Post-Effective Amendment No. 7 to the Registrant's Registration
Statement as filed with the SEC on March 1, 1994 ("Post-Effective Amendment
No. 7").
(10) Not applicable
(11) Consent of Independent Accountants is filed herein.
(12) Not Applicable.
(13) Purchase Agreement is incorporated by reference to Pre-Effective
Amendment No. 3.
(14) Not Applicable.
(15) Not Applicable.
(16) Performance Data is incorporated by reference to Post-Effective
Amendment No. 1.
Item 25. Persons Controlled by or under Common Control with Registrant
Shares of Registrant will be offered to IDS Life Insurance Company ("IDS
Life") and IDS Life Insurance Company of New York ("IDS Life of New York"),
corporations organized under the laws of the State of Minnesota, for
allocation to one or more separate subaccounts of the IDS Life Account
SBS . IDS Life and IDS Life of New York are wholly owned subsidiaries
of IDS Financial Corporation, a corporation organized under the laws of the
State of Delaware.
IDS Financial Corporation is a direct wholly owned subsidiary of
American Express Company, a New York corporation.
Item 26. Number of Holders of Securities
(1) (2)
Number of Record Holders by Class
Title of Class as of March 25, 1994
Shares of beneficial interest,
par value $.001 per share
Money Market Portfolio 3
Intermediate High Grade Portfolio 4
Diversified Strategic Income Portfolio 4
Equity Income Portfolio 4
Equity Index Portfolio 4
Growth & Income Portfolio 4
Appreciation Portfolio 4
Total Return Portfolio 2
Emerging Growth Portfolio 3
International Equity Portfolio 3
Item 27. Indemnification
The response to this item is incorporated by reference to Pre-Effective
Amendment No. 3.
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser - - Greenwich Street Advisors
Greenwich Street Advisors, through its predecessors, has been in the
investment counseling business since 1934 and is a division of Mutual
Management Corp. ("MMC"). MMC was incorporated in 1978 and is a wholly owned
subsidiary of Smith Barney Shearson Holdings Inc. ("Holdings"), which is in
turn a wholly owned subsidiary of The Travelers Inc. (formerly known as
Primerica Corporation) ("Travelers").
The list required by this Item 28 of officers and directors of MMC and
Greenwich Street Advisors, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two fiscal years, is incorporated by
reference to Schedules A and D of FORM ADV filed by MMC on behalf of Greenwich
Street Advisors pursuant to the Advisers Act (SEC File No. 801-14437).
Prior to the close of business on July 30, 1993 (the "Closing"), Shearson
Lehman Advisors, a member of the Asset Management Group of Shearson Lehman
Brothers Inc. ("Shearson Lehman Brothers"), served as the Registrant's
investment adviser. On the Closing, Travelers and Smith Barney Shearson Inc.
acquired the domestic retail brokerage and asset management business of
Shearson Lehman Brothers, which included the business of the Registrant's
prior investment adviser. Shearson Lehman Brothers was a wholly owned
subsidiary of Shearson Lehman Brothers Holdings Inc. ("Shearson Holdings").
All of the issued and outstanding common stock of Shearson Holdings
(representing 92% of the voting stock) was held by American Express Company.
Information as to any past business vocation or employment of a substantial
nature engaged in by officers and directors of Shearson Lehman Advisors can be
located in Schedules A and D of FORM ADV filed by Shearson Lehman Brothers on
behalf of Shearson Lehman Advisors prior to July 30, 1993. (SEC FILE NO. 801-
3701)
3/15/94
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser - - Smith Barney Global Capital Management, Inc.
Investment Adviser - - Smith Barney Global Capital Management, Inc. ("SBGCM")
was incorporated on January 22, 1988 under the laws of the State of Delaware.
SBGCM is an indirect wholly owned subsidiary of Smith Barney Shearson Holdings
Inc., which in turn is a wholly owned subsidiary of The Travelers Inc.
(formerly known as Primerica Corporation) ("Travelers"). SBGCM is an
investment adviser registered with the Securities and Exchange Commission in
the United States and with the Investment Management Regulatory Organization
Limited in the United Kingdom. SBGCM conducts its operations primarily in the
United Kingdom.
The list required by this Item 28 of officers and directors of SBGCM, together
with information as to any other business, profession, vocation or employment
of a substantial nature engaged in by such officers and directors during the
past two years, is incorporated by reference to Schedules A and D of FORM ADV
filed by SBGCM pursuant to the Advisers Act (SEC File No. 801-31824).
3/15/94
Item 28(a.) Business and Other Connections of Investment Adviser
Investment Adviser - - Smith, Barney Advisers Inc.
Smith, Barney Advisers, Inc. ("SBA") was incorporated in December 1968 under
the laws of the State of Delaware. SBA is a wholly owned subsidiary of Smith
Barney Shearson Holdings Inc., which in turn is a wholly owned subsidiary of
The Travelers Inc. (formerly known as Primerica Corporation) ("Travelers").
SBA is registered as an investment adviser under the Investment Advisers Act
of 1940 (the "Advisers Act").
The list required by this Item 28 of officers and directors of SBA together
with information as to any other business, profession, vocation or employment
of a substantial nature engaged in by such officers and directors during the
past two years, is incorporated by reference to Schedules A and D of FORM ADV
filed by SBA pursuant to the Advisers Act (SEC File No. 801-8314).
3/15/94
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser - - American Capital Asset Management, Inc.
American Capital Asset Management Inc. ("American Capital"), is located at
2800 Post Oak Boulevard, Houston, Texas 77056, and through its predecessors,
has been in the investment counseling business since 1926. American Capital
is a wholly owned subsidiary of American Capital Management & Research, Inc.
which is in turn an indirect wholly owned subsidiary of The Travelers Inc.
(formerly known as Primerica Corporation) ("Travelers").
The list required by this Item 28 of officers and directors of American
Capital, together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by such officers and
directors during the past two fiscal years, is incorporated by reference to
Schedules A and D of FORM ADV filed by American Capital pursuant to the
Investment Advisers Act of 1940 (SEC File No. 801-1169).
3/15/94
Item 29. Principal Underwriters
Smith Barney Shearson Inc. ("Smith Barney Shearson") currently acts as
distributor for Smith Barney Shearson Managed Municipals Fund Inc., Smith
Barney Shearson New York Municipals Fund Inc., Smith Barney Shearson
California Municipals Fund Inc., Smith Barney Shearson Massachusetts
Municipals Fund, Smith Barney Shearson Global Opportunities Fund, Smith Barney
Shearson Aggressive Growth Fund Inc., Smith Barney Shearson Appreciation Fund
Inc., Smith Barney Shearson Worldwide Prime Assets Fund, Smith Barney
Shearson Short-Term World Income Fund, Smith Barney Shearson Principal Return
Fund, Smith Barney Shearson Municipal Money Market Fund Inc., Smith Barney
Shearson Daily Dividend Fund Inc., Smith Barney Shearson Government and
Agencies Fund Inc., Smith Barney Shearson Managed Governments Fund Inc., Smith
Barney Shearson New York Municipal Money Market Fund, Smith Barney Shearson
California Municipal Money Market Fund, Smith Barney Shearson Income Funds,
Smith Barney Shearson Equity Funds, Smith Barney Shearson Investment Funds
Inc., Smith Barney Shearson Precious Metals and Minerals Fund Inc., Smith
Barney Shearson Telecommunications Trust, Smith Barney Shearson Arizona
Municipals Fund Inc., Smith Barney Shearson New Jersey Municipals Fund Inc.,
The USA High Yield Fund N.V., Garzarelli Sector Analysis Portfolio N.V., The
Advisors Fund L.P., Smith Barney Shearson Fundamental Value Fund Inc., Smith
Barney Shearson Series Fund, The Trust for TRAK Investments, Smith Barney
Shearson Income Trust, Smith Barney Shearson FMA R Trust, Smith Barney
Shearson Adjustable Rate Government Income Fund, Smith Barney Shearson Florida
Municipals Fund, Smith Barney Funds, Inc., Smith Barney Muni Funds, Smith
Barney World Funds, Inc., Smith Barney Money Funds, Inc., Smith Barney Tax
Free Money Fund, Inc., Smith Barney Variable Account Funds, Smith Barney U.S.
Dollar Reserve Fund (Cayman), Worldwide Special Fund, N.V., Worldwide
Securities Limited, (Bermuda), Smith Barney International Fund (Luxembourg)
and various series of unit investment trusts.
Smith Barney Shearson is a wholly owned subsidiary of Smith Barney
Shearson Holdings Inc., which in turn is a wholly owned subsidiary of The
Travelers Inc. (formerly known as Primerica Corporation) ("Travelers"). The
information required by this Item 29 with respect to each director, officer
and partner of Smith Barney Shearson is incorporated by reference to Schedule
A of FORM BD filed by Smith Barney Shearson pursuant to the Securities
Exchange Act of 1934 (SEC File No. 812-8510).
3/15/94
Item 30. Location of Accounts and Records
(1) PanAgora Asset Management Inc.
260 Franklin Street
22nd Floor
Boston, Massachusetts 02110
(Records relating to its function as Investment Adviser)
(2) Smith Barney Shearson Asset Management
Two World Trade Center
New York, New York 10048
(Records relating to its function as Investment Adviser)
(3) Greenwich Street Advisors
Two World Trade Center
New York, New York 10048
(Records relating to its function as Investment Adviser)
(4) American Capital Asset Management, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056
(Records relating to its function as Investment Adviser)
(5) Smith Barney Global Capital Management Inc.
388 Greenwich Street
New York, New York 10048
(Records relating to its function as Sub-Investment Adviser)
(6) The Boston Company Advisors, Inc.
Exchange Place
53 State Street
Boston, Massachusetts 02109
(Records relating to its function as Administrator)
(7) Boston Safe Deposit and Trust Company
Wellington Business Center
One Cabot Road
Medford, Massachusetts 02155
(Records relating to its function as Custodian)
(8) The Shareholders Services Group, Inc.
One Exchange Place
53 State Street
Boston, Massachusetts 02109
(Records relating to its function as Transfer Agent and
Dividend Paying Agent)
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
None
485(b) Certification
The Registrant hereby certifies that it meets all of the
requirements for effectiveness pursuant to Rule 485(b) under the Securities
Act of 1933, as amended.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant, SMITH
BARNEY SHEARSON SERIES FUND, has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of Boston, Commonwealth of
Massachusetts on the 28th day of April, 1994.
SMITH BARNEY SHEARSON
SERIES FUND
By:/s/ Heath B.
McLendon*
Heath B. McLendon, Chairman of
the Board
WITNESS our hands on the date set forth below.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.*
Signature Title Date
/s/ Heath B. McLendon*
Heath B. McLendon Trustee and Chairman of
the Board (Chief Executive 04/28/94
Officer)
/s/ Vincent Nave*
Vincent Nave Treasurer (Chief Financial
and Accounting Officer) 04/28/94
/s/ Burt N. Dorsett* Trustee
04/28/94
Burt N. Dorsett
/s/ Eliott S. Jaffe* Trustee
04/28/94
Eliott S. Jaffe
/s/ Harry W. Knight* Trustee
04/28/94
Harry W. Knight
/s/ Cornelius C. Rose*
Cornelius C. Rose Trustee 04/28/94
*Signed by Lee D. Augsburger, their
duly authorized attorney-in-fact,
pursuant to power of attorney dated
April 23, 1993;
/s/ Lee D. Augsburger
Lee D. Augsburger
Exhibits
99. (4)(c) Specimen certificates for shares of beneficial interest in the
Total Return Portfolio, International Equity Portfolio and Emerging Growth
Portfolio
99. (5)(e) Form of Investment Advisory Agreement with Greenwich Street
Advisors relating to Diversified Strategic Income Portfolio
99. (5)(f) Form of Sub-Investment Advisory Agreement with Smith Barney Global
Capital Management Inc. relating to Diversified Strategic Income Portfolio
99. (11) Consent of Independent Accountants
shared/domestic/clients/shearson/funds/ssf/pea8.doc
Exhibit 99. 4(c)
SPECIMEN
SMITH BARNEY SHEARSON SERIES FUND
(A MASSACHUSETTS BUSINESS TRUST)
TOTAL RETURN PORTFOLIO
(SHARES OF BENEFICIAL INTEREST)
ACCOUNT NO.
THIS CERTIFIES THAT CUSIP
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES
(PAR VALUE $ .001 PER SHARE)
of SMITH BARNEY SHEARSON SERIES FUND
TOTAL RETURN PORTFOLIO
Shares established and designated under the Master Trust Agreement of SMITH
BARNEY SHEARSON SERIES FUND, a Massachusetts business trust (the "Trust"),
dated May 13, 1991, as amended from time to time (the "Master Trust
Agreement"). The terms of the Master Trust Agreement, a copy of which is on
file with the Secretary of the Commonwealth of Massachusetts, are hereby
incorporated by reference as fully as if set forth herein in their entirety.
The shares have the rights and preferences set forth in the Master Trust
Agreement, and the Trust will furnish to the holder of this certificate upon
written request and without charge a statement of such relative rights and
preferences. This certificate is issued by the Trustees of SMITH BARNEY
SHEARSON SERIES FUND not individually but as Trustees under the Master Trust
Agreement, and represents shares of the Trust and does not bind any of the
Trustees, Stockholders, Officers, Employees or Agents of the Trust personally
but only the assets and property Agreement, the shares represented by this
certificate are transferable upon the books of the Trust by the registered
holder hereof in person or his duly authorized attorney upon surrender of this
certificate.
WITNESS the facsimile signature of the Trust's duly authorized officer.
Dated:
________________________ ___________________________
Secretary President
Exhibit 99. 4(c)
SPECIMEN
SMITH BARNEY SHEARSON SERIES FUND
(A MASSACHUSETTS BUSINESS TRUST)
INTERNATIONAL EQUITY PORTFOLIO
(SHARES OF BENEFICIAL INTEREST)
ACCOUNT NO.
THIS CERTIFIES THAT CUSIP
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES
(PAR VALUE $ .001 PER SHARE)
of SMITH BARNEY SHEARSON SERIES FUND
INTERNATIONAL EQUITY PORTFOLIO
Shares established and designated under the Master Trust Agreement of SMITH
BARNEY SHEARSON SERIES FUND, a Massachusetts business trust (the "Trust"),
dated May 13, 1991, as amended from time to time (the "Master Trust
Agreement"). The terms of the Master Trust Agreement, a copy of which is on
file with the Secretary of the Commonwealth of Massachusetts, are hereby
incorporated by reference as fully as if set forth herein in their entirety.
The shares have the rights and preferences set forth in the Master Trust
Agreement, and the Trust will furnish to the holder of this certificate upon
written request and without charge a statement of such relative rights and
preferences. This certificate is issued by the Trustees of SMITH BARNEY
SHEARSON SERIES FUND not individually but as Trustees under the Master Trust
Agreement, and represents shares of the Trust and does not bind any of the
Trustees, Stockholders, Officers, Employees or Agents of the Trust personally
but only the assets and property Agreement, the shares represented by this
certificate are transferable upon the books of the Trust by the registered
holder hereof in person or his duly authorized attorney upon surrender of this
certificate.
WITNESS the facsimile signature of the Trust's duly authorized officer.
Dated:
________________________ ___________________________
Secretary President
Exhibit 99. 4(c)
SPECIMEN
SMITH BARNEY SHEARSON SERIES FUND
(A MASSACHUSETTS BUSINESS TRUST)
EMERGING GROWTH PORTFOLIO
(SHARES OF BENEFICIAL INTEREST)
ACCOUNT NO.
THIS CERTIFIES THAT CUSIP
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES
(PAR VALUE $ .001 PER SHARE)
of SMITH BARNEY SHEARSON SERIES FUND
EMERGING GROWTH PORTFOLIO
Shares established and designated under the Master Trust Agreement of SMITH
BARNEY SHEARSON SERIES FUND, a Massachusetts business trust (the "Trust"),
dated May 13, 1991, as amended from time to time (the "Master Trust
Agreement"). The terms of the Master Trust Agreement, a copy of which is on
file with the Secretary of the Commonwealth of Massachusetts, are hereby
incorporated by reference as fully as if set forth herein in their entirety.
The shares have the rights and preferences set forth in the Master Trust
Agreement, and the Trust will furnish to the holder of this certificate upon
written request and without charge a statement of such relative rights and
preferences. This certificate is issued by the Trustees of SMITH BARNEY
SHEARSON SERIES FUND not individually but as Trustees under the Master Trust
Agreement, and represents shares of the Trust and does not bind any of the
Trustees, Stockholders, Officers, Employees or Agents of the Trust personally
but only the assets and property Agreement, the shares represented by this
certificate are transferable upon the books of the Trust by the registered
holder hereof in person or his duly authorized attorney upon surrender of this
certificate.
WITNESS the facsimile signature of the Trust's duly authorized officer.
Dated:
________________________ ___________________________
Secretary President
shared/domestic/clients/shearson/funds/ssf/speccert.doc
Exhibit 99.(5)(e)
FORM OF
ADVISORY AGREEMENT
SMITH BARNEY SHEARSON SERIES FUND
(Diversified Strategic Income Portfolio)
March 21, 1994
The Greenwich Street Advisors Division of
Mutual Management Corp.
Two World Trade Center
New York, New York 10048
Dear Sirs:
Smith Barney Shearson Series Fund (the "Company"), a trust organized
under the laws of the Commonwealth of Massachusetts, confirms its agreement
with the Greenwich Street Advisors Division of Mutual Management Corp. (the
"Adviser"), as follows:
1. Investment Description; Appointment
The Company desires to employ its capital relating to its Diversified
Strategic Income Portfolio (the "Portfolio") by investing and reinvesting in
investments of the kind and in accordance with the investment objective(s),
policies and limitations specified in its Master Trust Agreement, as amended
from time to time (the "Master Trust Agreement"), in the prospectus (the
"Prospectus") and the statement of additional information (the "Statement")
filed with the Securities and Exchange Commission as part of the Company's
Registration Statement on Form N-1A, as amended from time to time, and in the
manner and to the extent as may from time to time be approved by the Board of
Trustees of the Company (the "Board"). Copies of the Prospectus, the
Statement and the Master Trust Agreement have been or will be submitted to the
Adviser. The Company agrees to provide copies of all amendments to the
Prospectus, the Statement and the Master Trust Agreement to the Adviser on an
on-going basis. The Company desires to employ and hereby appoints the Adviser
to act as the Portfolio's investment adviser with respect to all assets other
than foreign securities ("domestic assets"), for which Smith Barney Global
Capital Management, Inc. ("Global Captial Management") acts as sub-investment
adviser. The Adviser accepts the appointment and agrees to furnish the
services for the compensation set forth below.
2. Services as Investment Adviser
Subject to the supervision, direction and approval of the Board of the
Company, the Adviser will (a) manage the Portfolio's holdings of domestic
assets in accordance with the Portfolio's investment objective(s) and policies
as stated in the Master Trust Agreement, the Prospectus and the Statement; (b)
make investment decisions concerning domestic assets for the Portfolio; (c)
place purchase and sale orders for portfolio transactions for domestic assets
on behalf of the Portfolio; and (d) employ professional portfolio managers and
securities analysts who provide research services to the Portfolio. In
providing those services, the Adviser will conduct a continual program of
investment, evaluation and, if appropriate, sale and reinvestment of the
Portfolio's domestic assets.
3. Brokerage
In selecting brokers or dealers to execute transactions on behalf of the
Portfolio, the Adviser will seek the best overall terms available. In
assessing the best overall terms available for any transaction, the Adviser
will consider factors it deems relevant, including, but not limited to, the
breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on
a continuing basis. In selecting brokers or dealers to execute a particular
transaction, and in evaluating the best overall terms available, the Adviser
is authorized to consider the brokerage and research services (as those terms
are defined in Section 28(e) of the Securities Exchange Act of 1934), provided
to the Portfolio and/or other accounts over which the Adviser or its
affiliates exercise investment discretion.
4. Information Provided to the Company
The Adviser will keep the Company informed of developments materially
affecting the Portfolio's domestic holdings, and will, on its own initiative,
furnish the Company from time to time with whatever information the Adviser
believes is appropriate for this purpose.
5. Standard of Care
The Adviser shall exercise its best judgment in rendering the services
listed in paragraphs 2 and 3 above. The Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Company in
connection with the matters to which this Agreement relates, provided that
nothing in this Agreement shall be deemed to protect or purport to protect the
Adviser against any liability to the Company or to its shareholders of the
Portfolio to which the Adviser would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence on its part in the performance of
its duties or by reason of the Adviser's reckless disregard of its obligations
and duties under this Agreement.
6. Compensation
In consideration of the services rendered pursuant to this Agreement,
the Portfolio will pay the Adviser on the first business day of each month a
fee for the previous month at the annual rate of .45 of 1.00% of the
Portfolio's average daily net assets. The fee for the period from the
Effective Date (defined below) of the Agreement to the end of the month during
which the Effective Date occurs shall be prorated according to the proportion
that such period bears to the full monthly period. Upon any termination of
this Agreement before the end of a month, the fee for such part of that month
shall be prorated according to the proportion that such period bears to the
full monthly period and shall be payable upon the date of termination of this
Agreement. For the purpose of determining fees payable to the Adviser, the
value of the Portfolio's net assets shall be computed at the times and in the
manner specified in the Prospectus and/or the Statement.
7. Expenses
The Adviser will bear all expenses in connection with the performance of
its services under this Agreement and will pay (a) to Global Capital
Management, as sub-investment adviser to the Portfolio under the Sub-
Investment Advisory Agreement dated of even date herewith among the Company,
the Adviser and Global Capital Management, as amended from time to time, and
(b) to any additional or substitute sub-investment adviser or advisers
retained by the Adviser to provide advisory services to the Portfolio with
respect to non-U.S. investments (together with Global Capital Management, each
a "Sub-Adviser"), the fees required to be paid to each Sub-Adviser. The
Portfolio will bear certain other expenses to be incurred in its operation,
including, but not limited to, investment advisory, sub-advisory and
administration fees, other than those payable to a Sub-Adviser or any
additional or substitute investment adviser; fees for necessary professional
and brokerage services; fees for any pricing service; the costs of regulatory
compliance; and costs associated with maintaining the Company's legal
existence and shareholder relations.
8. Reduction of Fee
If in any fiscal year the aggregate expenses of the Portfolio (including
fees pursuant to this Agreement and the Portfolio's administration agreements,
but excluding interest, taxes, brokerage and extraordinary expenses) exceed
the expense limitation of any state having jurisdiction over the Portfolio,
the Adviser will reduce its fee to the Portfolio by the proportion of such
excess expense equal to the proportion that its fee thereunder bears to the
aggregate of fees paid by the Portfolio for investment advice and
administration in that year, to the extent required by state law. A fee
reduction pursuant to this paragraph 8, if any, will be estimated, reconciled
and paid on a monthly basis.
9. Services to Other Companies or Accounts
The Company understands that the Adviser now acts, will continue to act
and may act in the future as investment adviser to fiduciary and other managed
accounts, and as investment adviser to other investment companies, and the
Company has no objection to the Adviser's so acting, provided that whenever
the Portfolio and one or more other investment companies advised by the
Adviser have available funds for investment, investments suitable and
appropriate for each will be allocated in accordance with a formula believed
to be equitable to each company. The Portfolio recognizes that in some cases
this procedure may adversely affect the size of the position obtainable for
the Portfolio. In addition, the Portfolio understands that the persons
employed by the Adviser to assist in the performance of the Adviser's duties
under this Agreement will not devote their full time to such service and
nothing contained in this Agreement shall be deemed to limit or restrict the
right of the Adviser or any affiliate of the Adviser to engage in and devote
time and attention to other businesses or to render services of whatever kind
or nature.
10. Term of Agreement
This Agreement shall become effective March 21, 1994 (the "Effective
Date") and shall continue for an initial two-year term and shall continue
thereafter so long as such continuance is specifically approved at least
annually by (i) the Board of the Company or (ii) a vote of a "majority" (as
that term is defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of the Portfolio's outstanding voting securities, provided that
in either event the continuance is also approved by a majority of the Board
who are not "interested persons" (as defined in the 1940 Act) of any party to
this Agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval. This Agreement is terminable, without penalty, on 60
days' written notice, by the Board of the Company or by vote of holders of a
majority of the Portfolio's shares, or upon 90 days' written notice, by the
Adviser. This Agreement will also terminate automatically in the event of its
assignment (as defined in the 1940 Act and the rules thereunder).
11. Representation by the Company
The Company represents that a copy of the Master Trust Agreement is on
file with the Secretary of The Commonwealth of Massachusetts.
12. Limitation of Liability
The Company and the Adviser agree that the obligations of the Company
under this Agreement shall not be binding upon any of the members of the
Board, shareholders, nominees, officers, employees or agents, whether past,
present or future, of the Company, individually, but are binding only upon the
assets and property of the Company, as provided in the Master Trust Agreement.
The execution and delivery of this Agreement have been authorized by the Board
and a majority of the holders of the Portfolio's outstanding voting
securities, and signed by an authorized officer of the Company, acting as
such, and neither such authorization by such members of the Board and
shareholders nor such execution and delivery by such officer shall be deemed
to have been made by any of them individually or to impose any liability on
any of them personally, but shall bind only the assets and property of the
Company as provided in the Master Trust Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance of this Agreement by signing and returning the
enclosed copy of this Agreement.
Very truly yours,
SMITH BARNEY SHEARSON
SERIES FUND
By:___________________________________
Name: Heath B. McLendon
Title Chairman of the Board
Accepted:
THE GREENWICH STREET ADVISORS
DIVISION OF MUTUAL MANAGEMENT CORP.
By:__________________________________
Name: Christina T. Sydor
Title: Secretary
5
shared/domestic/clients/shearson/funds/ssf/advisdsp.doc
Exhibit 99.(5)(f)
FORM OF
SUB-INVESTMENT ADVISORY AGREEMENT
SMITH BARNEY SHEARSON SERIES FUND
(Diversified Strategic Income Portfolio)
March 21, 1994
Smith Barney Global Capital Management, Inc.
1345 Avenue of the Americas
New York, New York 10105
Dear Sirs:
Smith Barney Shearson Series Fund (the "Company"), a trust organized
under the laws of the Commonwealth of Massachusetts and the Greenwich Street
Advisors Division of Mutual Management Corp. (the "Adviser"), each confirms
its agreement with Smith Barney Global Capital Management, Inc. (the "Sub-
Adviser"), as follows:
1. Investment Description; Appointment
The Company desires to employ its capital relating to its Diversified
Strategic Income Portfolio (the "Portfolio") by investing and reinvesting in
investments of the kind and in accordance with the investment objective(s),
policies and limitations specified in its Master Trust Agreement, as amended
from time to time (the "Master Trust Agreement"), in the prospectus (the
"Prospectus") and the statement of additional information (the "Statement")
filed with the Securities and Exchange Commission as part of the Company's
Registration Statement on Form N-1A, as amended from time to time, and in the
manner and to the extent as may from time to time be approved by the Board of
Trustees of the Company (the "Board"). Copies of the Prospectus, the
Statement and the Master Trust Agreement have been or will be submitted to the
Sub-Adviser. The Company agrees to provide copies of all amendments to the
Prospectus, the Statement and the Master Trust Agreement to the Sub-Adviser on
an on-going basis. The Company employs the Adviser as the investment adviser
to the Portfolio, and the Company and the Adviser desire to employ and hereby
appoint the Sub-Adviser to act as the sub-investment adviser to the Portfolio.
The adviser accepts the appointment and agrees to furnish the services for the
compensation set forth below.
2. Services as Sub-Investment Adviser
Subject to the supervision, direction and approval of the Board of the
Company and the Adviser, the Sub-Adviser will: (a) manage the Portfolio's
holdings in accordance with the Portfolio's investment objective(s) and
policies as stated in the Master Trust Agreement, the Prospectus and the
Statement; (b) make investment decisions concerning foreign assets for the
Portfolio; (c) place purchase and sale orders for portfolio transactions for
foreign assets on behalf of the Portfolio; and (d) employ professional
portfolio managers and securities analysts who provide research services to
the Portfolio. In providing those services, the Sub-Adviser will conduct a
continual program of investment, evaluation and, if appropriate, sale and
reinvestment of the Portfolio's foreign assets.
3. Brokerage
In selecting brokers or dealers to execute transactions on behalf of the
Portfolio, the Sub-Adviser will seek the best overall terms available. In
assessing the best overall terms available for any transaction, the Sub-
Adviser will consider factors it deems relevant, including, but not limited
to, the breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on
a continuing basis. In selecting brokers or dealers to execute a particular
transaction, and in evaluating the best overall terms available, the Sub-
Adviser is authorized to consider the brokerage and research services (as
those terms are defined in Section 28(e) of the Securities Exchange Act of
1934), provided to the Portfolio and/or other accounts over which the Sub-
Adviser or its affiliates exercise investment discretion.
4. Information Provided to the Company
The Sub-Adviser will keep the Company informed of developments
materially affecting the Portfolio, and will, on its own initiative, furnish
the Company from time to time with whatever information the Sub-Adviser
believes is appropriate for this purpose.
5. Compensation
In consideration of the services rendered pursuant to this Agreement,
the Adviser will pay the Sub-Adviser on the first business day of each month a
fee for the previous month at the annual rate of .15 of 1.00% of the
Portfolio's average daily net assets. The Sub-Adviser shall have no right to
obtain compensation directly from the Company for services provided hereunder
and agrees to look solely to the Adviser for payment of fees due. The fee for
the period from the Effective Date (defined below) of the Agreement to the end
of the month during which the Effective Date occurs shall be prorated
according to the proportion that such period bears to the full monthly period.
Upon any termination of this Agreement before the end of a month, the fee for
such part of that month shall be prorated according to the proportion that
such period bears to the full monthly period and shall be payable upon the
date of termination of this Agreement. For the purpose of determining fees
payable to the Sub-Adviser, the value of the Portfolio's net assets shall be
computed at the times and in the manner specified in the Prospectus and/or the
Statement.
6. Expenses
The Sub-Adviser will bear all expenses in connection with the
performance of its services under this Agreement. The Portfolio will bear
certain other expenses to be incurred in its operation, including, but not
limited to, investment advisory, sub-advisory and administration fees; fees
for necessary professional and brokerage services; fees for any pricing
service; the costs of regulatory compliance; and costs associated with
maintaining the Company's legal existence and shareholder relations.
7. Reduction of Fee
If in any fiscal year the aggregate expenses of the Portfolio (including
fees pursuant to this Agreement and the Portfolio's investment advisory
agreement, but excluding interest, taxes, brokerage and extraordinary
expenses) exceed the expense limitation of any state having jurisdiction over
the Portfolio, the Sub-Adviser will
reduce its fee by the proportion of such excess expense equal to the
proportion that its fee thereunder bears to the aggregate of fees paid by the
Portfolio for investment advice and administration in that year, to the extent
required by state law. A fee reduction pursuant to this paragraph 7, if any,
will be estimated, reconciled and paid on a monthly basis.
8. Standard of Care
The Sub-Adviser shall exercise its best judgment in rendering the
services listed in paragraphs 2 and 3 above. The Sub-Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Portfolio and the Adviser in connection with the matters to which this
Agreement relates, provided that nothing in this Agreement shall be deemed to
protect or purport to protect the Sub-Adviser against any liability to the
Adviser, the Company or to the shareholders of the Portfolio to which the Sub-
Adviser would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or by reason
of the Sub-Adviser's reckless disregard of its obligations and duties under
this Agreement.
9. Term of Agreement
This Agreement shall become effective as of March 21, 1994 (the
"Effective Date") and shall continue for an initial two-year term and shall
continue thereafter so long as such continuance is specifically approved at
least annually by (i) the Board of the Company or (ii) a vote of a "majority"
(as that term is defined in the Investment Company Act of 1940, as amended
(the "1940 Act")) of the Portfolio's outstanding voting securities, provided
that in either event the continuance is also approved by a majority of the
Board who are not "interested persons" (as defined in the 1940 Act) of any
party to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. This Agreement is terminable, without
penalty, on 60 days' written notice, by the Board of the Company or by vote of
holders of a majority of the Portfolio's shares, or upon 90 days' written
notice, by the Sub-Adviser. This Agreement will also terminate automatically
in the event of its assignment (as defined in the 1940 Act and the rules
thereunder).
10. Services to Other Companies or Accounts
The Company understands that the Sub-Adviser now acts, will continue to
act and may act in the future as investment adviser to fiduciary and other
managed accounts, and as investment adviser to other investment companies, and
the Company has no objection to the Sub-Adviser's so acting, provided that
whenever the Portfolio and one or more other investment companies advised by
the Sub-Adviser have available funds for investment, investments suitable and
appropriate for each will be allocated in accordance with a formula believed
to be equitable to each company. The Company recognizes that in some cases
this procedure may adversely affect the size of the position obtainable for
the Portfolio. In addition, the Company understands that the persons employed
by the Sub-Adviser to assist in the performance of the Sub-Adviser's duties
under this Agreement will not devote their full time to such service and
nothing contained in this Agreement shall be deemed to limit or restrict the
right of the Sub-Adviser or any affiliate of the Sub-Adviser to engage in and
devote time and attention to other businesses or to render services of
whatever kind or nature.
11. Representation by the Company
The Company represents that a copy of the Master Trust Agreement is on
file with the Secretary of The Commonwealth of Massachusetts and with the
Boston City Clerk.
12. Limitation of Liability
The Company, the Adviser and the Sub-Adviser agree that the obligations
of the Company under this Agreement shall not be binding upon any of the
members of the Board, shareholders, nominees, officers, employees or agents,
whether past, present or future, of the Company, individually, but are binding
only upon the assets and property of the Portfolio and not upon the assets and
property of any other portfolio of the Company. The execution and delivery of
this Agreement have been authorized by the Board and a majority of the holders
of the Portfolio's outstanding voting securities, and signed by an authorized
officer of the Company, acting as such, and neither such authorization by such
members of the Board and shareholders nor such execution and delivery by such
officer shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the assets
and property of the Portfolio as provided in the Master Trust Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance of this Agreement by signing and returning the
enclosed copy of this Agreement.
Very truly yours,
SMITH BARNEY SHEARSON
SERIES FUND
By:______________________
Name: Heath B. McLendon
Title: Chairman of the Board
THE GREENWICH STREET
ADVISORS DIVISION OF
MUTUAL MANAGEMENT CORP.
By:_______________________
Name: Christina T. Sydor
Title: Secretary
Accepted:
SMITH BARNEY GLOBAL
CAPITAL MANAGEMENT, INC.
By:______________________________
Name: Bruce D. Sargent
Title: President
shared domesic clients shearson funds ssf subadv3.doc
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Policyholders and Trustees of
Smith Barney Shearson Series Fund:
We hereby consent to the following with respect to
Post-Effective Amendment No. 8 to the Registration Statement on
Form N-1A (File No. 33-40603) under the Securities Act of 1933,
as amended, of Smith Barney Shearson Series Fund:
1. The incorporation by reference of our report dated February
18, 1994 accompanying the Annual Report of Smith Barney Shearson
Series Fund (consisting of the Money Market, Intermediate High
Grade, Diversified Strategic Income, Equity Income, Equity
Index, Growth & Income, Appreciation, Total Return,
International Equity, and Emerging Growth Portfolios) as of
December 31, 1993 in the Statement of Additional Information.
2. The reference to our firm under the heading "Financial
Highlights" in the Prospectus.
3. The reference to our firm under the heading "Counsel and
Auditors" in the Statement of Additional Information.
COOPERS & LYBRAND
Boston, Massachusetts
April 26, 1994
