File Nos. 33-40682
811-6312
As filed with the Securities and Exchange Commission on May 1, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No.
Post-Effective Amendment No. 12 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 14 |X|
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THE LAZARD FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
30 Rockefeller Plaza, New York, New York 10020
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 632-6000
William G. Butterly, III
Lazard Freres & Co. LLC
30 Rockefeller Plaza, New York, New York 10020
(Name and address of agent for service)
It is proposed that this filing will become effective (check appropriate box)
___x__ immediately upon filing pursuant to paragraph (b)
_______on (date) pursuant to paragraph (b)
_______60 days after filing pursuant to paragraph (a)(i)
_______on (date) pursuant to paragraph (a)(i)
_______75 days after filing pursuant to paragraph (a)(ii)
_______on (date) pursuant to paragraph a(ii) of Rule 485
If appropriate, check the following box:
_______ this post-effective amendment designates a new effective date for a
previously filed post effective amendment.
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Registrant has registered an indefinite number of shares pursuant to Rule
24f-2 under the Investment Company Act of 1940. On February 28, 1997, Registrant
filed the notice required by such Rule for its fiscal year completed on December
31, 1996.
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THE LAZARD FUNDS, INC.
CROSS REFERENCE SHEET
(as required by Rule 495(c))
TABLE OF CONTENTS
<TABLE>
N-1A Item No. ................................................................Location in Prospectus (Caption)
<S> <C> <C>
PART A
Item 1. Cover Page Cover Page
Item 2. Synopsis Fee Table; Summary
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant Summary; Investment Objectives and Policies:
Investment Restrictions
Item 5. Management of the Fund Management; Account Services; Fee Table
Item 5A. Management's Discussion of Fund Performance Not Applicable
Item 6. Capital Stock and Other Securities Taxation; Organization and Description of
Capital Stock
Item 7. Purchase of Securities Being Offered Purchase of Shares; Determination of Net Asset
Value
Item 8. Redemption of Repurchase Redemption of Shares
Item 9. Pending Legal Proceedings Not Applicable
Location in Statement of Additional Information (Caption)
PART B
Item 10. Cover Page Cover Page
Item 11. Table of Contents Cover Page
Item 12. General Information and History Not Applicable
Item 13. Investment Objectives and Policies Additional Permitted Investment Activities and Risk Factors
Investment Restrictions
Item 14. Management of the Fund Management
Item 15. Control Persons and Principal Holders of Organization and Description of Capital Stock
Securities
Item 16. Investment Advisory and Other Services Management
Item 17. Brokerage Allocation and Other Practices Portfolio Transactions
Item 18. Capital Stock and Other Securities Organization and Description of Capital Stock
Item 19. Purchase, Redemption and Pricing of Determination of Net Asset Value; Redemption of
Securities Being Offered Shares
Item 20. Tax Status Taxation
Item 21. Underwriters Not Applicable
Item 22. Calculation of Performance Data Yield and Total Return Quotations
Item 23. Financial Statements Financial Statements
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LAZARD FUNDS
PROSPECTUS
MAY 1, 1997
<PAGE>
May 1, 1997
PROSPECTUS
THE LAZARD FUNDS, INC.
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Lazard Equity Portfolio
Lazard International Equity Portfolio
Lazard International Fixed-Income Portfolio
Lazard Bond Portfolio
Lazard Strategic
Yield Portfolio
Lazard Small Cap Portfolio
Lazard International Small Cap Portfolio
Lazard Emerging Markets Portfolio
Lazard Global Equity Portfolio
Lazard Bantam Value Portfolio
Lazard Emerging World Funds Portfolio
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30 Rockefeller Plaza,
New York, New York 10020
(800) 823-6300
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the portfolios. A Statement of Additional
Information dated May 1, 1997, which may be revised from time to time,
containing additional and more detailed information about the portfolios, has
been filed with the Securities and Exchange Commission and is incorporated by
reference into this Prospectus. It is available without charge and can be
obtained by writing or calling the Fund at the address and telephone number
printed above. The Securities and Exchange Commission maintains a Website
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding the
portfolios.
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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.
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The Lazard Funds, Inc. is a no-load, open-end management investment company that
currently has eleven separate investment portfolios. The portfolios are
professionally managed by Lazard Asset Management, a division of Lazard Freres &
Co. llc.
By this Prospectus, the Fund is offering Institutional Shares and Open Shares of
each portfolio. Institutional Shares and Open Shares are identical, except as to
minimum investment requirements and the services offered to and expenses borne
by each class of shares.
LAZARD EQUITY PORTFOLIO seeks capital appreciation through investing primarily
in equity securities of companies with relatively large capitalizations that
appear to the investment manager to be inexpensively priced relative to the
return on total capital or equity.
LAZARD INTERNATIONAL EQUITY PORTFOLIO seeks capital appreciation through
investing primarily in the equity securities of non-United States companies. The
companies selected are those that the investment manager believes are
inexpensively priced relative to the return on total capital or equity.
LAZARD INTERNATIONAL FIXED-INCOME PORTFOLIO seeks high total return from a
combination of current income and capital appreciation, consistent with what the
investment manager considers to be prudent investment risk, through investing
primarily in foreign fixed-income securities of varying maturities.
LAZARD BOND PORTFOLIO seeks to build and preserve capital through investing in a
range of bonds, including obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities, mortgage-backed securities,
asset-backed securities, municipal securities and corporate fixed-income
securities.
LAZARD STRATEGIC YIELD PORTFOLIO seeks to obtain a total return on its assets by
placing approximately equal emphasis on capital appreciation and current income
through investing principally in high-yielding fixed-income securities. The
Lazard Strategic Yield Portfolio may invest up to 50% of its total assets in
non-U.S. dollar denominated securities of foreign issuers. Many of the
high-yielding securities in which the Lazard Strategic Yield Portfolio invests
are rated in the lower rating categories (i.e., below investment grade) by the
nationally recognized securities rating services. These securities, which are
often referred to as "junk bonds," are subject to greater risk of loss of
principal and interest than higher rated securities and are considered to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal.
LAZARD SMALL CAP PORTFOLIO seeks capital appreciation through investing
primarily in equity securities of companies with market capitalizations under $1
billion that are believed by the investment manager to be inexpensively priced
relative to the return on total capital or equity.
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LAZARD INTERNATIONAL SMALL CAP PORTFOLIO seeks capital appreciation through
investing primarily in equity securities of non-United States companies with
market capitalizations under $1 billion that are believed by the investment
manager to be inexpensively priced relative to the return on total capital or
equity. The Lazard International Small Cap Portfolio operates similarly to the
Lazard Small Cap Portfolio, except that this Portfolio will invest primarily in
the equity securities of non-United States issuers and, therefore, investment
determinations include, among other items, the effect of currency fluctuations
and the political and economic factors of other jurisdictions.
LAZARD EMERGING MARKETS PORTFOLIO seeks capital appreciation through investing
primarily in equity securities of non-United States issuers who are located, or
doing significant business, in emerging market countries. Emerging market
countries include countries where political and economic trends have produced
recently, or are producing, a more stable economy, or countries that have
developed recently, or are developing, financial markets and investment
liquidity. The Lazard Emerging Markets Portfolio seeks securities of issuers
whose potential is significantly enhanced by their relationship to the emerging
markets country and are believed to be inexpensively priced relative to the
productivity of their equity or assets.
LAZARD GLOBAL EQUITY PORTFOLIO seeks capital appreciation through investing
primarily in equity securities of companies with relatively large
capitalizations that are located anywhere in the world which the investment
manager believes to be inexpensively priced relative to the return on total
capital or equity. In addition to security specific factors, investment
determinations include, among other items, analysis of U.S. and non-U.S.
markets.
LAZARD BANTAM VALUE PORTFOLIO seeks capital appreciation through investing
primarily in equity securities of companies with market capitalizations under
$500 million that are believed by the investment manager to be inexpensively
priced relative to the return on total capital or equity and which are likely to
increase market capitalization as a result of growth or are likely to be the
subject of acquisitions or other events.
LAZARD EMERGING WORLD FUNDS PORTFOLIO seeks capital appreciation through
investing primarily in securities of closed-end funds, generally at discounts to
net asset value, which in turn invest in emerging market securities. The
securities in which the Portfolio will invest will be principally listed on
recognized international exchanges or traded in recognized international
markets. Shares of the Lazard Emerging World Funds Portfolio currently are not
being offered.
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This page intentionally left blank.
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TABLE OF CONTENTS
Fee Table .............................................................. 6
Summary ................................................................ 9
Financial Highlights ................................................... 13
Investment Objectives and Policies ..................................... 20
Additional Permitted Investment Activities and Risk Factors ............ 52
Investment Restrictions ................................................ 67
Management ............................................................. 68
Determination of Net Asset Value ....................................... 73
Purchase of Shares ..................................................... 74
Redemption of Shares ................................................... 77
Distribution and Servicing Plan ........................................ 80
Exchange Privilege ..................................................... 80
Dividends and Distributions ............................................ 81
Taxation ............................................................... 82
Account Services ....................................................... 85
Shareholder Services ................................................... 85
Organization and Description of Capital Stock .......................... 85
Custodian; Transfer and Dividend Disbursing Agent ..................... 86
Reports to Shareholders ................................................ 87
Performance Information ................................................ 87
Appendix (Bond and Commercial Paper Ratings) ........................... 88
5
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FEE TABLE
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TOTAL
SHAREHOLDER PORTFOLIO
TRANSACTION MANAGEMENT 12B-1 OTHER OPERATING
EXPENSE FEES FEES EXPENSES* EXPENSES*
----------- ----------- ------ --------- ---------
EQUITY PORTFOLIO
Institutional Shares None .75% None .14% .89%
Open Shares None .75 .25% .22 1.22
INTERNATIONAL
EQUITY PORTFOLIO
Institutional Shares None .75 None .16 .91
Open Shares None .75 .25 .25 1.25
INTERNATIONAL FIXED-INCOME
PORTFOLIO
Institutional Shares None .75 None .30 1.05
Open Shares None .75 .25 .35 1.35
BOND PORTFOLIO
Institutional Shares None .50 None .30 .80
Open Shares None .50 .25 .35 1.10
STRATEGIC YIELD PORTFOLIO
Institutional Shares None .75 None .33 1.08
Open Shares None .75 .25 .39 1.39
SMALL CAP PORTFOLIO
Institutional Shares None .75 None .09 .84
Open Shares None .75 .25 .14 1.14
INTERNATIONAL SMALL CAP
PORTFOLIO
Institutional Shares None .75 None .37 1.12
Open Shares None .75 .25 .43 1.43
EMERGING MARKETS PORTFOLIO
Institutional Shares None 1.00 None .48 1.48
Open Shares None 1.00 .25 .35 1.60
GLOBAL EQUITY PORTFOLIO
Institutional Shares None .75 None .30 1.05
Open Shares None .75 .25 .35 1.35
BANTAM VALUE PORTFOLIO
Institutional Shares None .75 None .30 1.05
Open Shares None .75 .25 .35 1.35
EMERGING WORLD FUNDS
PORTFOLIO
Institutional Shares None .75 None .30 1.05
Open Shares None .75 .25 .35 1.35
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* See footnote on page 8.
6
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EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return (cumulatively through the end of each time period):
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EQUITY PORTFOLIO
Institutional Shares $ 9 $28 $49 $110
Open Shares 13 39 67 148
INTERNATIONAL EQUITY PORTFOLIO
Institutional Shares 9 29 51 112
Open Shares 13 40 69 152
INTERNATIONAL FIXED-INCOME
PORTFOLIO
Institutional Shares 11 33 58 128
Open Shares 14 43 74 163
BOND PORTFOLIO
Institutional Shares 8 26 44 99
Open Shares 11 35 61 135
STRATEGIC YIELD PORTFOLIO
Institutional Shares 11 35 60 132
Open Shares 14 44 77 168
SMALL CAP PORTFOLIO
Institutional Shares 9 27 47 104
Open Shares 12 36 63 139
INTERNATIONAL SMALL
CAP PORTFOLIO
Institutional Shares 11 36 62 137
Open Shares 15 46 79 172
EMERGING MARKETS PORTFOLIO
Institutional Shares 15 47 81 178
Open Shares 16 51 88 191
GLOBAL EQUITY PORTFOLIO
Institutional Shares 11 33 58 128
Open Shares 14 43 74 163
BANTAM VALUE PORTFOLIO
Institutional Shares 11 33 58 128
Open Shares 14 43 74 163
EMERGING WORLD FUNDS
PORTFOLIO
Institutional Shares 11 33 58 128
Open Shares 14 43 74 163
These examples should not be considered a representation of past or future
expenses which may be more or less than those shown. Moreover, while these
examples assume a 5% annual return, a Portfolio's actual performance will vary
and may result in an actual return greater or less than 5%.
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* See footnote on page 8.
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FEE TABLE
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FOOTNOTE
* The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in a Portfolio will bear directly
or indirectly. Long-term investors in Open Shares could pay more in 12b-1
fees than the economic equivalent of paying a front-end sales charge. With
respect to Institutional Shares, "Other Expenses" and "Total Portfolio
Operating Expenses" reflect the undertaking of Lazard Asset Management to
bear, excluding class specific expenses, (i) with respect to each of the
International Fixed-Income Portfolio, Global Equity Portfolio, Bantam Value
Portfolio and Emerging World Funds Portfolio total operating expenses in
excess of 1.05% of each such Portfolio's average net assets, and (ii) with
respect to the Bond Portfolio total operating expenses in excess of .80% of
that Portfolio's average net assets, in each case, until the earlier of
December 31, 1997 or such time as the respective Portfolio reaches total net
assets of $100 million. Had Lazard Asset Management not undertaken to bear
certain expenses, total portfolio operating expenses for the fiscal year
ended December 31, 1996 for Institutional Shares would have been 1.21% for
the International Fixed-Income Portfolio, .88% for the Bond Portfolio, 5.06%
for the Global Equity Portfolio and 1.91% for the Bantam Value Portfolio.
With respect to Open Shares of each Portfolio, "Other Expenses" and "Total
Portfolio Operating Expenses" reflect the undertaking by Lazard Asset
Management to bear, excluding 12b-1 fees and other class specific expenses,
total operating expenses in excess of the "Total Portfolio Operating
Expenses" noted in the table above for Open Shares of such Portfolio. The
information in the table does not reflect any other fee waivers or expense
reimbursement arrangements that were in effect for the Portfolios during the
last fiscal year or may be in effect during the current fiscal year. "Other
Expenses" for Institutional Shares with respect to the Emerging World Funds
Portfolio and "Other Expenses" for Open Shares with respect to each Portfolio
are based on estimated amounts for the current fiscal year. Investors may
purchase Fund shares without a sales charge directly from Lazard Freres & Co.
LLC. Securities dealers and other institutions effecting transactions in Fund
shares for the accounts of their clients may charge their clients direct fees
in connection with such transactions.
8
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SUMMARY
The Lazard Funds, Inc. (the "Fund") is a Maryland corporation incorporated on
May 17, 1991. The Fund is a no-load, open-end management investment company,
known as a "series fund," that currently offers two classes of shares in the
following eleven separate series referred to as portfolios (individually, a
"Portfolio" and collectively, the "Portfolios"): Lazard Equity Portfolio (the
"Equity Portfolio"), Lazard International Equity Portfolio (the "International
Equity Portfolio"), Lazard International Fixed-Income Portfolio (the
"International Fixed-Income Portfolio"), Lazard Bond Portfolio (the "Bond
Portfolio"), Lazard Strategic Yield Portfolio (the "Strategic Yield Portfolio"),
Lazard Small Cap Portfolio (the "Small Cap Portfolio"), Lazard International
Small Cap Portfolio (the "International Small Cap Portfolio"), Lazard Emerging
Markets Portfolio (the "Emerging Markets Portfolio"), Lazard Global Equity
Portfolio (the "Global Equity Portfolio"), Lazard Bantam Value Portfolio (the
"Bantam Value Portfolio") and Lazard Emerging World Funds Portfolio (the
"Emerging World Funds Portfolio"). The Equity Portfolio is operated as a
"diversified" portfolio as that term is defined in the Investment Company Act of
1940, as amended (the "Investment Company Act"). The remaining Portfolios are
"non-diversified." Non-diversified portfolios typically invest in a smaller
number of securities than diversified portfolios and, therefore, may present a
slightly greater degree of risk than diversified portfolios. See "Additional
Permitted Investment Activities and Risk Factors -- Diversification."
Each Portfolio is a separate pool of assets constituting, in effect, a separate
fund with its own investment objectives and policies. Each Portfolio's shares
are classified into two classes--Institutional Shares and Open Shares (each such
class being referred to as a "Class"). The Classes are identical, except for the
minimum investment requirements and the services offered to and expenses borne
by each Class. Open Shares are subject to an annual distribution and service fee
at the rate of .25% of the value of the average daily net assets of the Open
Class. The fee is payable for advertising, marketing and distributing Open
Shares and for ongoing personal services relating to Open Class shareholder
accounts and services related to the maintenance of such shareholder accounts
pursuant to a Distribution and Servicing Plan adopted in accordance with Rule
12b-1 under the Investment Company Act. See "Distribution and Servicing Plan."
The amounts payable pursuant to the Distribution and Servicing Plan will cause
9
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the Open Class to have a higher expense ratio and to pay lower dividends than
the Institutional Class. A shareholder in a Portfolio will be entitled to his
pro rata share of all dividends and distributions arising from that Portfolio's
assets and, upon redeeming shares of that Portfolio, will receive the then
current net asset value of the applicable Class of that Portfolio represented by
the redeemed shares. See "Purchase of Shares" and "Redemption of Shares." The
Fund is empowered to establish, without shareholder approval, additional
portfolios which may have different investment objectives, policies or
restrictions.
Lazard Asset Management, a division of Lazard Freres & Co. llc ("Lazard
Freres"), serves as the investment manager (the "Investment Manager") to each of
the Portfolios. For a description of the Investment Manager, the services it
provides and the management fees, see "Management."
The Equity Portfolio seeks capital appreciation through investing primarily in
equity securities of companies with relatively large capitalizations that appear
to the Investment Manager to be inexpensively priced relative to the return on
total capital or equity.
The International Equity Portfolio seeks capital appreciation through investing
primarily in the equity securities of non-United States companies. The companies
selected are those that the Investment Manager believes are inexpensively priced
relative to the return on total capital or equity.
The International Fixed-Income Portfolio seeks high total return from a
combination of current income and capital appreciation, consistent with what the
Investment Manager considers to be prudent investment risk, through investing
primarily in foreign fixed-income securities of varying maturities.
The Bond Portfolio seeks to build and preserve capital through investing in a
range of bonds including obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities, mortgage-backed securities,
asset-backed securities, municipal securities and corporate fixed-income
securities.
The Strategic Yield Portfolio seeks to obtain a total return on its assets by
placing approximately equal emphasis on capital appreciation and current income
through investing principally in high-yielding fixed-income securities. The
Strategic Yield Portfolio may invest up to 50% of its total assets in non-U.S.
dollar denominated securities of foreign issuers. The Portfolio may invest
10
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without limitation in U.S. dollar denominated fixed-income securities of foreign
issuers. The types of securities in which the Strategic Yield Portfolio invests,
which are often referred to as "junk bonds," are subject to greater risk of loss
of principal and interest than higher rated securities and are considered to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal.
The Small Cap Portfolio seeks capital appreciation through investing primarily
in equity securities of companies with market capitalizations under $1 billion
that are believed by the Investment Manager to be inexpensively priced relative
to the return on total capital or equity. Investing in small capitalization
stocks can involve greater risk than is customarily associated with larger, more
established companies.
The International Small Cap Portfolio seeks capital appreciation through
investing primarily in equity securities of non-United States companies with
market capitalizations under $1 billion that are believed by the Investment
Manager to be inexpensively priced relative to the return on total capital or
equity. Investing in small capitalization stocks can involve greater risk than
is customarily associated with larger, more established companies. Investing in
non-United States issuers involves risks associated with currency fluctuation
and other political or economic risks in other countries.
The Emerging Markets Portfolio seeks capital appreciation through investing
primarily in equity securities of non-United States issuers located, or doing
significant business, in emerging market countries. Investing in emerging
markets involves greater risk than in developed markets due to uncertain
political and economic factors.
The Global Equity Portfolio seeks capital appreciation through investing
primarily in equity securities of companies with relatively large
capitalizations that are located anywhere in the world which the Investment
Manager believes to be inexpensively priced relative to the return on total
capital or equity. In addition to security specific factors, investment
determinations include, among other items, analysis of U.S. and non-U.S.
markets.
The Bantam Value Portfolio seeks capital appreciation through investing
primarily in equity securities of companies with market capitalizations under
$500 million that are believed by the Investment Manager to be inexpensively
priced relative to the return on total capital or equity and which are likely to
increase market capitalization as a result of growth or are likely to be the
subject of acquisitions or other events.
11
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The Emerging World Funds Portfolio seeks capital appreciation through investing
primarily in securities of closed-end funds, generally at discounts to net asset
value, which in turn invest in emerging market securities. The securities in
which the Portfolio will invest will be principally listed on recognized
international exchanges or traded in recognized international markets.
An investment in any one or more of the Portfolios is not intended to constitute
a complete investment program. Each of the Portfolios has separate investment
objectives and policies and, accordingly, there may be different risks
associated with an investment in each of the Portfolios. For a description of
each Portfolio's investment objectives and policies and certain risks attendant
to investing in each Portfolio, see "Investment Objectives and Policies" and
"Additional Permitted Investment Activities and Risk Factors." No assurance can
be given that any of the Portfolios will achieve its respective investment
objective.
Except as noted below, the Fund's policy with respect to turnover of securities
held in the Portfolios is to purchase securities for investment purposes and not
for the purpose of realizing short-term trading profits. Although a Portfolio
cannot accurately predict its annual portfolio turnover rate, the Investment
Manager anticipates that the annual portfolio turnover rate of the Equity
Portfolio, International Equity Portfolio, Small Cap Portfolio, Emerging Markets
Portfolio, International Small Cap Portfolio, Global Equity Portfolio, Bantam
Value Portfolio and Emerging World Funds Portfolio will not exceed 100%. The
annual turnover of the Bond Portfolio, Strategic Yield Portfolio and
International Fixed-Income Portfolio may be in excess of 200% (but is not
expected to exceed 300%). A 200% turnover rate is greater than that of most
other investment companies. A high rate of portfolio turnover involves
correspondingly greater transaction expenses than a lower rate, which expenses
are borne by the Portfolio and its shareholders and also may result in the
realization of substantial net short-term capital gains. See "Additional
Permitted Investment Activities and Risk Factors--Portfolio Turnover" and
"Taxation."
Shares of any Portfolio may be purchased and redeemed through Boston Financial
Data Services Inc., the Fund's transfer agent (the "Transfer Agent") or through
a brokerage account with Lazard Freres or through certain other agents. The
minimum initial investment for Open Shares of each Portfolio is $10,000 unless
the investor is a client of a securities dealer or other institution which has
made an aggregate minimum initial purchase for its clients of at least $10,000.
12
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The minimum initial investment for Institutional Shares of each Portfolio is
$1,000,000. The minimum subsequent investment is $1,000 for Open Shares and
$5,000 for Institutional Shares. For more information, see "Purchase of Shares"
and "Redemption of Shares."
Dividends on shares of the International Fixed-Income Portfolio, Bond Portfolio
and Strategic Yield Portfolio are declared daily and paid monthly. Dividends on
shares of the Equity Portfolio are declared and paid quarterly. Dividends on
shares of the International Equity Portfolio, Small Cap Portfolio, Emerging
Markets Portfolio, International Small Cap Portfolio, Global Equity Portfolio,
Bantam Value Portfolio and Emerging World Funds Portfolio are generally declared
and paid annually but may be declared and paid twice annually. Capital gain
distributions for each Portfolio, if any, generally will be declared and paid
annually but may be declared and paid twice annually. See "Dividends and
Distributions."
FINANCIAL HIGHLIGHTS
The financial highlights set forth below for Institutional Shares have been
audited by ABA Seymour Schneidman Financial Services Group, a division of
Anchin, Block & Anchin LLP, Independent Accountants. The financial highlights
set forth below for the Equity Portfolio for periods prior to January 1, 1992
were audited by other independent public accountants. Additional financial
information, related notes and report of independent accountants accompany the
Statement of Additional Information, which is available upon request. The
Emerging World Funds Portfolio had not commenced operations, and Open Shares had
not been offered with respect to any Portfolio, as of the date of the financials
and, therefore, no financial data are provided for such Portfolio or Class.
13
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THE LAZARD FUNDS, INC. - FINANCIAL HIGHLIGHTS
INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
------------------------------------------- LESS:
TOTAL ----------------------------
NET FROM DIVIDENDS DISTRIBU- NET
ASSET NET REALIZED INVEST- FROM AND TIONS ASSET
VALUE, AND UNREALIZED MENT IN EXCESS OF FROM VALUE,
BEGINNING INVESTMENT GAIN (LOSS) OPERA- INVESTMENT REALIZED END OF
PERIOD OF PERIOD INCOME-NET ON INVESTMENTS TIONS INCOME-NET GAINS PERIOD
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<S> <C> <C> <C> <C> <C> <C> <C>
LAZARD EQUITY PORTFOLIO
Year ended
12/31/96................. $ 17.41 $ 0.331 $ 3.064 $ 3.395 $(0.329) $(1.236) $19.24
12/31/95................. 13.75 0.226 4.931 5.157 (0.175) (1.322) 17.41
12/31/94................. 13.89 0.141 0.441 0.582 (0.152) (0.574) 13.75
12/31/93................. 12.74 0.158 2.172 2.330 (0.165) (1.015) 13.89
12/31/92................. 12.34 0.123 0.518 0.641 (0.132) (0.109) 12.74
12/31/91................. 11.53 0.107 3.051 3.158 (0.082) (2.266) 12.34
12/31/90................. 12.34 0.191 (0.778) (0.587) (0.223)(a) -- 11.53
12/31/89................. 10.32 0.204 2.231 2.435 (0.214) (0.201) 12.34
12/31/88................. 8.73 0.181 1.597 1.778 (0.188) -- 10.32
6/1/87* to 12/31/87...... 10.00 0.110 (1.280) (1.170) (0.100) -- 8.73
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LAZARD INTERNATIONAL EQUITY PORTFOLIO
Year ended
12/31/96................. 12.50 0.166 1.767 1.933 (0.191) (0.622) 13.62
12/31/95................. 11.23 0.187 1.288 1.475 (0.091) (0.114) 12.50
12/31/94................. 12.32 0.078 (0.049) 0.029 -- (1.123) 11.23
12/31/93................. 9.48 0.021 2.919 2.940 (0.021) (0.079) 12.32
12/31/92................. 10.30 0.097 (0.779) (0.682) (0.138) -- 9.48
10/29/91* to 12/31/91.... 10.00 0.020 0.300 0.320 (0.020) -- 10.30
- ----------------------------------------------------------------------------------------------------------------------------------
LAZARD INTERNATIONAL FIXED-INCOME PORTFOLIO
Year ended
12/31/96................. 10.85 0.539 0.032 0.571 (0.592) (0.049) 10.78
12/31/95................. 10.23 0.701 1.250 1.951 (1.129) (0.202) 10.85
12/31/94................. 10.51 0.592 (0.161) 0.431 (0.593) (0.116) 10.23
12/31/93................. 9.79 0.571 0.912 1.483 (0.570) (0.193) 10.51
12/31/92................. 10.28 0.614 (0.403) 0.211 (0.614) (0.087) 9.79
11/8/91* to 12/31/91..... 10.00 0.110 0.280 0.390 (0.110) -- 10.28
- ----------------------------------------------------------------------------------------------------------------------------------
LAZARD BOND PORTFOLIO
Year ended
12/31/96................. 10.10 0.559 (0.141) 0.418 (0.568) (0.070) 9.88
12/31/95................. 9.24 0.595 0.863 1.458 (0.594) (0.004) 10.10
12/31/94................. 10.28 0.584 (1.010) (0.426) (0.584) (0.029) 9.24
12/31/93................. 10.21 0.551 0.302 0.853 (0.551) (0.232) 10.28
12/31/92................. 10.25 0.577 (0.004) 0.573 (0.577) (0.036) 10.21
11/12/91* to 12/31/91.... 10.00 0.140 0.250 0.390 (0.140) -- 10.25
- ----------------------------------------------------------------------------------------------------------------------------------
* See footnotes on page 18.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
NET
INVEST- ASSETS,
MENT PORTFOLIO AVERAGE END OF
TOTAL INCOME- TURNOVER COMMISSIONS PERIOD
PERIOD RETURN++ EXPENSES NET RATE RATE** (000'S)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LAZARD EQUITY PORTFOLIO
Year ended
12/31/96................. 19.9% 0.89%(h),(i) 1.87% 65.80% $0.0582 $278,605
12/31/95................. 37.7 0.92(g) 1.45 80.72 163,787
12/31/94................. 4.2 1.05 1.15 66.52 89,105
12/31/93................. 18.6 1.05(d) 1.31 63.92 47,123
12/31/92................. 5.3 1.05(c) 1.19 174.45 24,646
12/31/91................. 27.5 1.93 0.84 90.00 14,821
12/31/90................. (4.7) 1.77 1.62 70.00 14,397
12/31/89................. 23.6 1.78 1.71 78.00 16,239
12/31/88................. 20.4 1.84 1.86 111.00 12,336
6/1/87* to 12/31/87...... (11.7) 1.68+ 1.93+ 97.00 10,186
- ---------------------------------------------------------------------------------------------------------------------
LAZARD INTERNATIONAL EQUITY PORTFOLIO
Year ended
12/31/96................. 15.6 0.91(h),(i) 1.93 38.59 0.0219 1,816,173
12/31/95................. 13.1 0.95(g) 1.82 62.54 1,299,549
12/31/94................. 0.2 0.94 0.75 106.15 831,877
12/31/93................. 31.0 0.99 1.13 86.95 603,642
12/31/92................. (6.6) 1.05(c) 2.13 60.37 176,005
10/29/91* to 12/31/91.... 3.2 1.05+(b) 2.19+ 0.18 4,967
- ---------------------------------------------------------------------------------------------------------------------
LAZARD INTERNATIONAL FIXED-INCOME PORTFOLIO
Year ended
12/31/96................. 5.5 1.05(h) 5.54 241.85 -- 88,430
12/31/95................. 19.4 1.05(f),(g) 5.99 189.97 45,624
12/31/94................. 4.2 1.05(e) 5.68 65.90 35,803
12/31/93................. 15.7 1.05(d) 5.50 115.84 13,546
12/31/92................. 2.0 1.05(c) 6.08 256.20 8,183
11/8/91* to 12/31/91..... 3.9 1.05+,(b) 4.82+ 6.43 1,427
- ---------------------------------------------------------------------------------------------------------------------
LAZARD BOND PORTFOLIO
Year ended
12/31/96................. 4.4 0.80(h),(i) 5.77 460.29 -- 69,906
12/31/95................. 16.2 0.80(f),(g) 6.07 244.28 46,083
12/31/94................. (4.2) 0.80(e) 6.11 120.51 24,494
12/31/93................. 8.6 0.80(d) 5.22 174.63 13,562
12/31/92................. 5.7 0.80(c) 5.59 131.38 8,532
11/12/91* to 12/31/91.... 3.9 0.80+,(b) 5.50+ 10.46 3,256
- ---------------------------------------------------------------------------------------------------------------------
* See footnotes on page 18.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS
------------------------------------------- LESS:
TOTAL ----------------------------
NET FROM DIVIDENDS DISTRIBU- NET
ASSET NET REALIZED INVEST- FROM AND TIONS ASSET
VALUE, AND UNREALIZED MENT IN EXCESS OF FROM VALUE,
BEGINNING INVESTMENT GAIN (LOSS) OPERA- INVESTMENT REALIZED END OF
PERIOD OF PERIOD INCOME-NET ON INVESTMENTS TIONS INCOME-NET GAINS PERIOD
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
LAZARD STRATEGIC YIELD PORTFOLIO
Year ended
12/31/96................. $ 9.52 $ 0.758 $ 0.498 $ 1.256 $ (0.766) $ 0.000 $10.01
12/31/95................. 9.10 0.748 0.430 1.178 (0.758) -- 9.52
12/31/94................. 10.13 0.762 (0.990) (0.228) (0.761) (0.039) 9.10
12/31/93................. 9.50 0.644 0.738 1.382 (0.633) (0.119) 10.13
12/31/92................. 9.97 1.049 (0.450) 0.599 (1.049) (0.020) 9.50
10/1/91* to 12/31/91..... 10.00 0.250 (0.030) 0.220 (0.250) -- 9.97
- ----------------------------------------------------------------------------------------------------------------------------------
LAZARD SMALL CAP PORTFOLIO
Year ended
12/31/96***.............. 15.95 0.105 3.680 3.785 (0.105) (1.190) 18.44
12/31/95................. 14.35 0.126 2.951 3.077 (0.154) (1.323) 15.95
12/31/94................. 15.26 0.070 0.220 0.290 (0.042) (1.158) 14.35
12/31/93................. 12.98 0.019 3.830 3.849 (0.020) (1.549) 15.26
12/31/92................. 10.42 0.019 2.560 2.579 (0.019) -- 12.98
10/30/91* to 12/31/91.... 10.00 0.030 0.420 0.450 (0.030) -- 10.42
- ----------------------------------------------------------------------------------------------------------------------------------
LAZARD INTERNATIONAL SMALL CAP PORTFOLIO
Year ended
12/31/96................. 10.52 0.079 1.551 1.630 (0.082) (0.138) 11.93
12/31/95................. 10.38 0.139 0.056 0.195 -- (0.055) 10.52
12/31/94................. 10.86 0.072 (0.548) (0.476) -- -- 10.38
12/1/93* to 12/31/93..... 10.00 0.004 0.859 0.863 (0.003) -- 10.86
- ----------------------------------------------------------------------------------------------------------------------------------
LAZARD EMERGING MARKETS PORTFOLIO
Year ended
12/31/96................. 9.24 0.074 2.107 2.181 (0.083) (0.128) 11.21
12/31/95................. 9.86 0.080 (0.660) (0.580) (0.040) -- 9.24
12/1/93* to 12/31/93..... 10.00 0.010 (0.154) (0.144) -- -- 9.86
- ----------------------------------------------------------------------------------------------------------------------------------
LAZARD GLOBAL EQUITY PORTFOLIO
1/4/96* to 12/31/96...... 10.00 0.085 1.492 1.577 (0.097) (0.000) 11.48
- ----------------------------------------------------------------------------------------------------------------------------------
LAZARD BANTAM VALUE PORTFOLIO
3/5/96* to 12/31/96...... 10.00 0.218 3.108 3.326 (0.218) (0.528) 12.58
- ----------------------------------------------------------------------------------------------------------------------------------
* See footnotes on page 8.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
NET
INVEST- ASSETS,
MENT PORTFOLIO AVERAGE END OF
TOTAL INCOME- TURNOVER COMMISSIONS PERIOD
PERIOD RETURN++ EXPENSES NET RATE RATE** (000'S)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LAZARD STRATEGIC YIELD PORTFOLIO
Year ended
12/31/96................. 13.7% 1.08%(h),(i) 7.88% 188.88% -- $199,083
12/31/95................. 13.6 1.09(g) 8.02 205.33 78,474
12/31/94................. (2.3) 1.05(e) 8.03 195.18 62,328
12/31/93................. 15.6 1.05(d) 6.36 215.60 34,943
12/31/92................. 6.0 1.05(c) 10.57 122.88 9,641
10/1/91* to 12/31/91..... 2.1 1.05+,(b) 9.52+ 11.26 4,256
---------------------------------------------------------------------------------------------------------------------
LAZARD SMALL CAP PORTFOLIO
Year ended
12/31/96***.............. 23.9 0.84(h),(i) 0.60 50.58 0.0575 981,405
12/31/95................. 21.5 0.84(g) 0.90 69.68 646,371
12/31/94................. 2.0 0.85 0.51 70.11 429,673
12/31/93................. 30.1 0.88 0.16 98.47 350,952
12/31/92................. 24.8 1.05(c) 0.29 106.91 168,171
10/30/91* to 12/31/91.... 4.5 1.05+,(b) 2.47+ 5.50 2,512
- ---------------------------------------------------------------------------------------------------------------------
LAZARD INTERNATIONAL SMALL CAP PORTFOLIO
Year ended
12/31/96................. 15.6 1.12 1.67 100.98 0.0150 126,973
12/31/95................. 1.9 1.13(g) 1.56 117.53 115,534
12/31/94................. (4.5) 1.05(e) 0.95 112.92 83,432
12/1/93* to 12/31/93..... 8.7 1.05+,(d) 1.76+ 0.84 13,522
- ---------------------------------------------------------------------------------------------------------------------
LAZARD EMERGING MARKETS PORTFOLIO
Year ended
12/31/96................. 23.6 1.38(h),(i) 1.40 50.87 0.0042 145,328
12/31/95................. (5.9) 1.30(f),(g) 1.22 102.22 35,216
12/1/93* to 12/31/93..... (1.4) 1.30+,(e) 0.31+ 30.68 17,025
- ---------------------------------------------------------------------------------------------------------------------
LAZARD GLOBAL EQUITY PORTFOLIO
1/4/96* to 12/31/96...... 15.8 1.05+,(h),(i) 1.70+ 73.71 0.0422 9,784
- ---------------------------------------------------------------------------------------------------------------------
LAZARD BANTAM VALUE PORTFOLIO
3/5/96* TO 12/31/96...... 33.3 1.05+,(h),(i) 2.80+ 261.60 0.0402 34,549
- ---------------------------------------------------------------------------------------------------------------------
* See footnotes on page 18.
</TABLE>
17
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
FOOTNOTES
* Commencement of operations.
** The average commission rate paid is applicable for Portfolios that invest
greater than 10% of average assets in equity security transactions on which
commissions are charged. This disclosure is required for fiscal periods
beginning on or after September 1, 1995.
*** Does not include the operations of the Special Equity Portfolio from
January 1, 1996 through June 28, 1996 (acquisition date).
+ Annualized.
++ Total return represents aggregate total return for the periods indicated.
(a) Includes $.032 per share of distributions from paid-in capital, none of
which is a return of capital for tax purposes. (b) If the Investment
Manager had not waived management fees and reimbursed certain expenses the
ratio of expenses to average net assets (and net investment income per
share) would have been 10.84%+ ($0.056) for the International Equity
Portfolio, 20.70%+ ($0.293) for the International Fixed-Income Portfolio,
7.80%+ ($0.114) for the Bond Portfolio, 6.22%+ ($0.075) for the Strategic
Yield Portfolio, and 11.05%+ ($0.085) for the Small Cap Portfolio.
(c) If the Investment Manager had not waived management fees and reimbursed
certain expenses the ratio of expenses to average net assets (and net
investment income per share) would have been 1.53% ($0.050) for the Equity
Portfolio, 1.37% ($0.014) for the International Equity Portfolio, 2.80%
($0.176) for the International Fixed-Income Portfolio, 3.23% ($0.251) for
the Bond Portfolio, 2.99% ($0.192) for the Strategic Yield Portfolio, and
1.14% ($0.006) for the Small Cap Portfolio.
(d) If the Investment Manager had not waived management fees and reimbursed
certain expenses the ratio of expenses to average net assets (and net
investment income per share) would have been 1.18% ($0.020) for the Equity
Portfolio, 2.87%+ ($0.010) for the International Small Cap Portfolio, 2.08%
($0.119) for the International Fixed-Income Portfolio, 1.76% ($0.101) for
the Bond Portfolio, and 1.63% ($0.058) for the Strategic Yield Portfolio.
(e) If the Investment Manager had not waived management fees and reimbursed
certain expenses the ratio of expenses to average net assets (and net
investment income per share) would have been 1.26% ($0.016) for the
International Small Cap Portfolio, 1.51% ($0.048) for the International
18
<PAGE>
Fixed-Income Portfolio, 1.23% ($0.041) for the Bond Portfolio, 1.15%
($0.009) for the Strategic Yield Portfolio and 2.31%+ ($0.034) for the
Emerging Markets Portfolio.
(f) If the Investment Manager and the Administrator had not waived certain fees
and reimbursed certain expenses and the Portfolios had not paid fees
indirectly the ratio of expenses to average net assets (and net investment
income per share) would have been 1.25% ($0.678) for the International
Fixed-Income Portfolio, .97% ($0.578) for the Bond Portfolio, and 2.00%
($0.034) for the Emerging Markets Portfolio.
(g) Includes fees paid indirectly. Excluding fees paid indirectly, the expense
ratios would have been 0.92% for the Equity Portfolio, 0.95% for the
International Equity Portfolio, 1.05% for the International Fixed-Income
Portfolio, 0.80% for the Bond Portfolio, 1.08% for the Strategic Yield
Portfolio, 0.84% for the Small Cap Portfolio, 1.13% for the International
Small Cap Portfolio and 1.30% for the Emerging Markets Portfolio.
(h) If the Investment Manager and the Administrator had not waived certain fees
and reimbursed certain expenses and the Portfolios had not paid fees
indirectly the ratio of expenses to average net assets (and net investment
income per share) would have been 0.89% ($0.331) for the Equity Portfolio,
0.91% ($0.166) for the International Equity Portfolio, 1.21% ($0.523) for
the International Fixed Income Portfolio, 0.88% ($0.551) for the Bond
Portfolio, 1.08% ($0.756) for the Strategic Yield Portfolio, 0.84% ($0.105)
for the Small Cap Portfolio, 1.48% ($0.068) for the Emerging Markets
Portfolio, 5.06% ($-0.115) for the Global Equity Portfolio, and 1.91%
($0.151) for the Bantam Value Portfolio.
(i) Includes fees paid indirectly. Excluding fees paid indirectly the expense
ratio would have been 0.89% for the Equity Portfolio, 0.90% for the
International Equity Portfolio, 0.80% for the Bond Portfolio, 1.05% for the
Strategic Yield Portfolio, 0.84% for the Small Cap Portfolio, 1.36% for the
Emerging Markets Portfolio, 1.05% for the Global Equity Portfolio, and
1.05% for the Bantam Value Portfolio. Further information about each such
Portfolio's performance is contained in the Fund's annual report for the
fiscal year ended December 31, 1996 which may be obtained without charge by
writing to the address or calling the appropriate number set forth on the
cover page of this Prospectus.
19
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Portfolio has a different investment objective which it pursues through
separate investment policies as described herein. The differences in objectives
and policies among the Portfolios determine the types of portfolio securities in
which each Portfolio invests, and can be expected to affect the degree of risk
to which each Portfolio is subject and its yield or return. The following
investment objectives and related policies and activities of each of the
Portfolios, except as otherwise indicated, are not fundamental and may be
changed by the Fund's Board of Directors without the approval of shareholders.
If there is a change in the investment objective of a Portfolio, shareholders
should consider whether that Portfolio remains an appropriate investment in
light of their then-current financial position and needs. The types of portfolio
securities in which each Portfolio may invest are described in greater detail
below. There can be no assurance, of course, that any of the Portfolios will
achieve its respective investment objective.
EQUITY PORTFOLIO
The investment objective of the Equity Portfolio is to seek capital appreciation
through investing primarily in equity securities of companies with relatively
large capitalizations that appear to the Investment Manager to be inexpensively
priced relative to the return on total capital or equity. The Equity Portfolio
engages in a value-oriented search for equity securities before they have
attracted wide investor interest. The Investment Manager attempts to identify
inexpensive securities through traditional measures of value, including low
price to earnings ratio, high yield, unrecognized assets, potential for
management change and/or the potential to improve profitability. The Investment
Manager focuses on individual stock selection (a "bottom-up" approach) rather
than on forecasting stock market trends (a "top-down" approach). Risk is
tempered by diversification of investments.
Under normal market conditions, the Equity Portfolio will invest at least 65% of
its total assets in equity securities, including, in addition to common stocks,
preferred stocks and securities convertible into or exchangeable for common
stocks. In addition, at times judged by the Investment Manager to be
appropriate, the Equity Portfolio may hold up to 20% of its total assets in U.S.
Government Securities (as described below in "Bond Portfolio") and debt
obligations of domestic corporations rated BBB or better by Standard & Poor's
20
<PAGE>
Ratings Group ("S&P"), or Baa or better by Moody's Investors Service, Inc.
("Moody's"). Obligations rated BBB by S&P or Baa by Moody's are considered
investment grade obligations that may have speculative characteristics, and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than is the case
with higher grade bonds. See the Appendix attached hereto for a description of
the ratings of S&P and Moody's. The Equity Portfolio may also invest without
limitation in short-term money market instruments of the types described in
"Additional Permitted Investment Activities and Risk Factors--Short-Term Money
Market Instruments," including non-convertible corporate debt securities such as
notes, bonds and debentures that have remaining maturities of not more than 12
months and are rated AA or better by S&P or Aa or better by Moody's.
The Equity Portfolio may also invest up to 10% of its total assets in foreign
equity or debt securities. For a description of the risks associated with
investing in foreign securities, see "Additional Permitted Investment Activities
and Risk Factors--Investment in Foreign Securities."
The Equity Portfolio may borrow up to one-half of the market value of its
assets, less liabilities, in order to increase its investment in portfolio
securities, but has no present intention to do so. Any such borrowing will be
made only from banks, and will be made only to the extent that the value of the
Equity Portfolio's assets less its liabilities other than borrowings, is equal
to at least 300% of all borrowings. See "Additional Permitted Investment
Activities and Risk Factors--Borrowing for Investment" in the Statement of
Additional Information.
Securities owned by the Equity Portfolio are kept under continuing supervision,
and changes may be made whenever such securities no longer seem to meet the
Equity Portfolio's objective. Changes in the securities owned by the Portfolio
also may be made to increase or decrease investments in anticipation of changes
in security prices in general or to provide funds required for redemptions,
distributions to shareholders or other corporate purposes.
INTERNATIONAL EQUITY PORTFOLIO
The investment objective of the International Equity Portfolio is to seek
capital appreciation through investing primarily in the equity securities of
non-United States companies (i.e., incorporated or organized outside the United
States). The International Equity Portfolio expects to invest its assets
principally in common stocks of non-United States companies, although the
International Equity Portfolio may have substantial investments in American
21
<PAGE>
Depositary Receipts and Global Depositary Receipts and in convertible bonds and
other convertible securities. There is no requirement, however, that the
International Equity Portfolio invest exclusively in common stocks or other
equity securities, and, if deemed advisable, the International Equity Portfolio
may invest up to 20% of the value of its total assets in fixed-income securities
and short-term money market instruments. See "Additional Permitted Investment
Activities and Risk Factors--Short-Term Money Market Instruments." The Portfolio
will not invest in fixed-income securities rated lower than investment grade.
It is the present intention of the Investment Manager to invest the
International Equity Portfolio's assets in companies based in Continental
Europe, the United Kingdom, the Pacific Basin and in such other areas and
countries as the Investment Manager may determine from time to time. Under
normal market conditions, the Portfolio will invest at least 80% of the value of
its total assets in the equity securities of companies within not less than
three different countries (not including the United States). The percentage of
the International Equity Portfolio's assets invested in particular geographic
sectors may shift from time to time in accordance with the judgment of the
Investment Manager. For a description of the risks associated with investing in
foreign securities see "Additional Permitted Investment Activities and Risk
Factors--Investment in Foreign Securities."
In selecting investments for the International Equity Portfolio, the Investment
Manager attempts to identify inexpensive markets world-wide through traditional
measures of value, including low price to earnings ratio, high yield,
unrecognized assets, potential for management change and/or the potential to
improve profitability. In addition, the Investment Manager seeks to identify
companies that it believes are financially productive and undervalued in those
markets. The Investment Manager focuses on individual stock selection (a
"bottom-up" approach) rather than on forecasting stock market trends (a
"top-down" approach).
The Investment Manager recognizes that some of the best opportunities are in
securities not generally followed by investment professionals. Thus, the
Investment Manager relies on its research capability and also maintains a
dialogue with foreign brokers and with the management of foreign companies in an
effort to gather the type of "local knowledge" that it believes is critical to
22
<PAGE>
successful investment abroad. To this end, the Investment Manager communicates
with its affiliates in Paris, London and Tokyo, for information concerning
current business trends, as well as for a better understanding of the management
of local businesses. The information supplied by these affiliates of the
Investment Manager will be limited to statistical and factual information,
advice regarding economic factors and trends or advice as to occasional
transactions in specific securities.
The International Equity Portfolio may enter into foreign currency forward
exchange contracts in order to protect against anticipated changes in foreign
currency exchange rates. See "Additional Permitted Investment Activities and
Risk Factors--Foreign Currency Forward Exchange Contracts."
When, in the judgment of the Investment Manager, business or financial
conditions warrant, the International Equity Portfolio may assume a temporary
defensive position and invest without limit in the equity securities of U.S.
companies or short-term money market instruments or hold its assets in cash. See
"Additional Permitted Investment Activities and Risk Factors--Short-Term Money
Market Instruments."
INTERNATIONAL FIXED-INCOME PORTFOLIO
The investment objective of the International Fixed-Income Portfolio is to seek
high total return from a combination of current income and capital appreciation,
consistent with what the Investment Manager considers to be prudent investment
risk, through investing primarily in foreign fixed-income securities of varying
maturities. The Portfolio seeks high current yields by investing in a portfolio
of fixed-income securities denominated in a range of foreign currencies and in
the U.S. Dollar. Under normal market conditions, the Portfolio will invest at
least 65% of the value of its total assets in the fixed-income securities of
companies within, or governments, political subdivisions, authorities, agencies
or instrumentalities of, not less than three different countries (not including
the United States). The Portfolio has the flexibility to invest in any region of
the world. It is the present intention of the Investment Manager, however, to
invest the International Fixed-Income Portfolio's assets principally in
fixed-income securities of companies within, or governments of, Continental
Europe, the United Kingdom, Canada, the Pacific Basin and in such other areas
and countries as the Investment Manager may determine from time to time,
including countries that are considered emerging market countries at the time of
23
<PAGE>
investment. For a description of the risks associated with investing in foreign
securities, see "Additional Permitted Investment Activities and Risk Factors--
Investment in Foreign Securities."
In pursuing its investment objective, the International Fixed-Income Portfolio
invests in a broad range of fixed-income securities. Under normal market
conditions, the Investment Manager anticipates that the Portfolio will be
invested principally in fixed-income securities with maturities of greater than
one year. A longer average maturity is generally associated with a higher level
of volatility in the market value of a fixed-income security. The maturity of a
security measures only the time until final payment is due; it takes no account
of the pattern of the security's cash flows over time, including how cash flow
is affected by prepayments and by changes in interest rates. Since the
International Fixed-Income Portfolio's objective is to seek total return, the
Portfolio will invest in fixed-income obligations with an emphasis on return
rather than stability of the Portfolio's net asset value, and the average
"duration" of the Portfolio will vary depending on anticipated market
conditions. The Portfolio's average "duration" is a measure of the price
sensitivity of its investment portfolio, including expected cash flow,
redemptions and mortgage prepayments under a wide range of interest rate
conditions. In computing the duration of the Portfolio's investment portfolio,
the Investment Manager will estimate the duration of obligations that are
subject to prepayment or redemption by the issuer taking into account the
influence of interest rates. The Portfolio's average duration generally will be
shorter than the Portfolio's average maturity. Under normal market conditions,
the Investment Manager anticipates that the average weighted duration of the
Portfolio will be in the range of two to eight years.
In order to reduce the International Fixed-Income Portfolio's exposure to
foreign currency fluctuations versus the U.S. Dollar, the Portfolio may utilize
the following investment strategies: the purchase and sale of foreign currency
forward exchange contracts, options on foreign currencies and options on foreign
currency futures. The Portfolio may also utilize options and futures contracts
for speculative purposes consistent with the Portfolio's investment objective or
to reduce market risk. Options and futures are forms of derivative securities.
See "Additional Permitted Investment Activities and Risk Factors-- Foreign
Currency Forward Exchange Contracts; Options on Foreign Currencies; Futures
Contracts and Options on Futures Contracts."
24
<PAGE>
The Portfolio's investments consist of: (i) obligations issued or guaranteed by
foreign governments or any of their political subdivisions, authorities,
agencies, or instrumentalities, or by supranational entities; (ii) corporate
fixed-income securities issued by foreign or U.S. companies; (iii) certificates
of deposit and bankers' acceptances issued or guaranteed by, or time deposits
maintained at, banks (including foreign branches of U.S. banks or U.S. or
foreign branches of foreign banks) having total assets of more than $500
million; (iv) commercial paper issued by foreign or U.S. companies; and (v) U.S.
Government Securities (as defined below in "Bond Portfolio"). At least 85% of
the International Fixed-Income Portfolio's assets will be invested in (i)
fixed-income securities rated BBB or better by S&P or Baa or better by Moody's;
(ii) commercial paper issued by foreign or U.S. companies rated A or better by
S&P or Prime-2 or better by Moody's; or (iii) fixed-income securities or
commercial paper that, if unrated, is determined by the Investment Manager to be
of comparable quality. Up to 15% of the value of the Portfolio's assets may be
invested in high yield, high risk fixed-income securities that are rated below
BBB by S&P and below Baa by Moody's (i.e., below investment grade) or, if
unrated, are determined by the Investment Manager to be of comparable quality.
Fixed-income securities rated below investment grade (commonly known as "junk
bonds") are considered to be predominantly speculative as regards the issuer's
capacity to pay interest and repay principal which may, in any case, decline
during sustained periods of deteriorating economic conditions or rising interest
rates. The Portfolio has no current intention of investing more than 5% of its
total assets in securities that are in default. See the Appendix attached hereto
for a description of the ratings of fixed-income securities and commercial
paper. For a description of the special risks associated with investing in
fixed-income securities rated below investment grade, see "Strategic Yield
Portfolio--Special Risk Considerations."
The International Fixed-Income Portfolio may also invest in the fixed-income
securities in which the Bond Portfolio may invest, including mortgage-backed
securities and asset-backed securities which are forms of derivative securities,
as described below. The International Fixed-Income Portfolio also may invest in
American or Global Depositary Receipts issued in relation to a pool of
fixed-income securities in which the Portfolio could invest directly.
When, in the judgment of the Investment Manager, business or financial
conditions warrant, the International Fixed-Income Portfolio may assume a
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temporary defensive position and invest without limit in high quality short-term
debt securities or hold its assets in cash. See "Additional Permitted Investment
Activities and Risk Factors--Short-Term Money Market Instruments."
BOND PORTFOLIO
The investment objective of the Bond Portfolio is to build and preserve capital
through investing in a range of bonds and fixed-income securities. It is
expected that the Portfolio will invest in the following sectors of the bond and
fixed-income market: (i) U.S. Government Securities and repurchase agreements
pertaining to U.S. Government Securities, and (ii) other fixed-income
securities, including mortgage-backed securities, asset-backed securities,
municipal securities and corporate fixed-income securities, including preferred
stock of corporate issuers. The percentage of the Portfolio's assets invested in
a particular fixed-income sector may shift from time to time in accordance with
the judgment of the Investment Manager.
Under normal market conditions, the Portfolio will invest at least 65% of the
value of its total assets in bonds or other debt instruments with maturities of
greater than one year. The Portfolio believes that its investment objective and
policies may best be implemented by investing the major portion of the
Portfolio's assets in bonds and fixed-income securities rated at least BBB by
S&P or Baa by Moody's. The Portfolio may also invest up to 10% of the value of
its total assets in bonds and fixed-income securities rated BB or lower by S&P
and Ba or lower by Moody's or non-rated bonds and fixed-income securities.
Securities in the lower rating categories (commonly known as "junk bonds") are
subject to greater risk of loss of principal and interest than higher-rated
securities and are considered to be predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal, which may in any case
decline during sustained periods of deteriorating economic conditions. For a
description of the risks associated with investing in securities in the lower
rating categories, see "Strategic Yield Portfolio--Special Risk Considerations."
The Portfolio may invest in fixed-income securities that have not received a
rating but are determined by the Investment Manager to be of comparable quality
to the other securities in which the Bond Portfolio may invest.
When, in the judgment of the Investment Manager, business or financial
conditions warrant, the Bond Portfolio may assume a temporary defensive position
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and invest without limit in short-term money market instruments or hold its
assets in cash. See "Additional Permitted Investment Activities and Risk
Factors--Short-Term Money Market Instruments."
It is anticipated that under normal market conditions, the average duration of
the Bond Portfolio's securities will vary from between two to seven years.
However, there may be times when, in the Investment Manager's judgment, the
average duration of the Portfolio may extend beyond this range, because of
extreme economic conditions or extreme undervaluation or overvaluation in the
fixed-income markets. See "International Fixed-Income Portfolio" above for a
discussion of duration.
The Investment Manager analyzes sectors of the fixed-income market based on
yield spread premiums relative to the U.S. Treasury obligations market. Using a
variety of valuation techniques, the Investment Manager establishes a yield
spread it believes represents the fair value compensation or yield spread
premium required to justify the risk of investing in a given sector. Sectors of
the fixed-income market which offer compensation in excess of the fair value
yield spread will be emphasized by the Portfolio.
The Investment Manager selects individual securities based on maturity, duration
and sector characteristics, including yield spread premium relative to risk
characteristics. In determining the risk characteristics of a particular
security, the Investment Manager analyzes credit quality, event risk, call
features and diversification as well as the terms of the bond indenture pursuant
to which the security is issued.
Once securities are purchased, performance will be evaluated by the Investment
Manager on an on-going basis and a security may be sold if: (i) its yield spread
premium as compared to U.S. Treasury obligation yields declines to a level the
Investment Manager believes no longer reflects value; (ii) the investment
expectations underlying that security are no longer valid; or (iii) the
Investment Manager believes another security offers better value.
The Investment Manager's research capability is an important aspect of its
program for managing the Bond Portfolio's securities. In addition to the
qualitative analysis of sectors and securities, the Investment Manager applies
quantitative valuation models to search for value across the entire fixed-income
market for securities that meet the Portfolio's investment criteria. Special
attention is paid to the valuation of call features and other options.
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The Bond Portfolio may utilize options and futures contracts for speculative
purposes consistent with its investment objective or to reduce market risk.
Options and futures are forms of derivative securities. See "Additional
Permitted Investment Activities and Risk Factors--Futures Contracts and Options
on Futures Contracts."
U.S. GOVERNMENT SECURITIES. U.S. Government Securities include: (i) the
following U.S. Treasury obligations: U.S. Treasury bills (initial maturities of
one year or less), U.S. Treasury notes (initial maturities of one to 10 years),
and U.S. Treasury bonds (generally initial maturities of greater than 10 years),
all of which are backed by the full faith and credit of the United States; and
(ii) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, including government guaranteed mortgage-related securities,
some of which are backed by the full faith and credit of the U.S. Treasury,
e.g., direct pass-through certificates of the Government National Mortgage
Association; some of which are supported by the right of the issuer to borrow
from the U.S. Government, e.g., obligations of Federal Home Loan Banks; and some
of which are backed only by the credit of the issuer itself, e.g., obligations
of the Student Loan Marketing Association. Although U.S. Government Securities
are backed by the full faith and credit of the U.S. Government or guaranteed by
the issuing agency or instrumentality and, therefore, there is generally
considered to be no risk as to the issuer's capacity to pay interest and repay
principal, due to fluctuations in interest rates there is no guarantee as to the
market value of U.S. Government Securities. See "Additional Permitted Investment
Activities and Risk Factors" in, and Appendix A to, the Statement of Additional
Information for a further description of obligations issued or guaranteed by
U.S. Government agencies or instrumentalities.
CORPORATE FIXED-INCOME SECURITIES. The Bond Portfolio may invest in corporate
fixed-income securities, including preferred stocks of corporate issuers.
MUNICIPAL SECURITIES. In circum-stances where the Investment Manager determines
that investment in municipal obligations would facilitate the Bond Portfolio's
ability to accomplish its investment objective, it may invest its assets in such
obligations, including municipal bonds issued at a discount. Dividends on shares
attributable to interest on municipal securities held by the Portfolio will not
be exempt from Federal income taxes. Municipal securities are susceptible to
risks arising from the financial condition of the states, public bodies or
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municipalities issuing the securities. To the extent that state or local
governmental entities are unable to meet their financial obligations, the income
derived by the Portfolio from municipal securities could be impaired.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The Bond Portfolio may invest
without limitation in mortgage-backed and asset-backed securities.
Mortgage-backed and asset-backed securities arise through the grouping by
governmental, government-related and private organizations of loans, receivables
and other assets originated by various lenders. Interests in pools of these
assets differ from other forms of debt securities, which normally provide for
periodic payment of interest in fixed amounts with principal paid at maturity or
specified call dates. Instead, these securities provide periodic payments which
generally consist of both interest and principal payments. The estimated life of
a mortgage-backed or asset-backed security and the average maturity of a
portfolio including such securities varies with the prepayment experience with
respect to the underlying debt instruments. Mortgage-backed and asset-backed
securities are each a form of derivative security.
MORTGAGE-BACKED SECURITIES--GENERAL. Mortgage-backed securities are securities
that directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans secured by real property. There are currently three
basic types of mortgage-backed securities: (i) those issued or guaranteed by the
U.S. Government or one of its agencies or instrumentalities, such as the
Government National Mortgage Association ("Ginnie Mae" or "GNMA"), the Federal
National Mortgage Association ("Fannie Mae" or "FNMA") and the Federal Home Loan
Mortgage Corporation ("Freddie Mac" or "FHLMC"); (ii) those issued by private
issuers that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the U.S. Government or one of its
instrumentalities; and (iii) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or mortgage-backed
securities without a government guarantee by usually having some form of private
credit enhancement. An issuer of mortgage-backed securities meeting certain
conditions may elect to be treated as a Real Estate Mortgage Investment Conduit
(a "REMIC") under the Internal Revenue Code of 1986, as amended (the "Code").
See "Taxation."
Ginnie Maes are pass-through interests in pools of mortgage loans insured by the
Federal Housing Administration or by the Farmer's Home Administration or
guaranteed by the Veterans Administration. GNMA is a U.S. Government corporation
within the Department of Housing and Urban Development. Ginnie Maes are backed
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by the full faith and credit of the United States, which means that the U.S.
Government guarantees that interest and principal will be paid when due. Fannie
Mae is a U.S. Government-sponsored corporation owned entirely by private
stockholders. Pass-through securities issued by Fannie Mae are guaranteed as to
timely payment of principal and interest by Fannie Mae. FHLMC issues
mortgage-related securities representing interests in residential mortgage loans
pooled by it. FHLMC is a corporate instrumentality of the U.S. Government. FHLMC
guarantees the timely payment of interest and ultimate collection of principal.
Fannie Maes and Freddie Macs are not backed by the full faith and credit of the
United States.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES.
Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities. Typically,
CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac Certificates,
but also may be collateralized by whole loans or private mortgage pass-through
securities (such collateral will be collectively referred to herein as "Mortgage
Assets"). Multiclass pass-through securities are equity interests in a trust
composed of Mortgage Assets. Unless the context indicates otherwise, all
references herein to CMOs include multiclass pass-through securities. Payments
of principal of and interest on the Mortgage Assets, and any reinvestment income
thereon, provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass- through securities. CMOs may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche," is issued at a specific fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semiannual basis. The principal of and interest on the Mortgage Assets may be
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allocated among the several classes of a series of a CMO in a number of
different ways. In a common structure, the purpose of the allocation of the cash
flow of a CMO to the various classes is to obtain a more predictable cash flow
to the separate tranches than exists with the underlying collateral of the CMO.
Generally, the more predictable the cash flow is on a CMO tranche, the lower the
anticipated yield will be on that tranche at the time of issuance relative to
prevailing market yields on mortgage-backed securities.
The Bond Portfolio may also invest in, among others, parallel pay CMOs and
Planned Amortization Class CMOs ("PAC" Bonds). Parallel pay CMOs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds are parallel pay
CMOs with the required principal on such securities having the highest priority
after interest has been paid to all classes.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed securities
("SMBS") are derivative multiclass mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks, and special purpose
subsidiaries of the foregoing.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions on a pool of Mortgage Assets. A
common type of SMBS will have one class (the principal-only or "PO" class)
receiving some of the interest and most of the principal from the Mortgage
Assets, while the other class (the interest-only or "IO" class) will receive
most of the interest and the remainder of the principal. In the most extreme
case, the IO class will receive all of the interest, while the PO class will
receive all of the principal. The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
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related underlying Mortgage Assets, and a rapid rate of principal payments in
excess of that considered in pricing the securities will have a material adverse
effect on an IO security's yield to maturity. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, the Portfolio may
fail to fully recoup its initial investment in IO securities. Due to their
structure and underlying cash flows, SMBS may be more volatile than
mortgage-backed securities that are not stripped. The staff of the Securities
and Exchange Commission (the "Commission") currently considers certain SMBS to
be illiquid securities. See "Additional Permitted Investment Activities and Risk
Factors--Illiquid Securities" and "Investment Restrictions" below.
CMO RESIDUALS. CMO Residuals are derivative mortgage securities issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing.
The cash flow generated by the Mortgage Assets underlying series of CMOs is
applied first to make required payments of principal of and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO Residual represents dividend or
interest income and/or a return of capital. The amount of residual cash flow
resulting from a CMO will depend on, among other things, the characteristics of
the Mortgage Assets, the coupon rate of each class of CMOs, prevailing interest
rates, the amount of administrative expenses and the prepayment experience on
the Mortgage Assets. In particular, the yield to maturity on CMO Residuals is
extremely sensitive to prepayments on the related underlying Mortgage Assets in
the same manner as an IO class of SMBS. See "Stripped Mortgage-Backed
Securities," above. In addition, if a series of a CMO includes a class that
bears interest at an adjustable rate, the yield to maturity on the related CMO
residual will also be extremely sensitive to the level of the index upon which
interest rate adjustments are based. As described above with respect to SMBS, in
certain circumstances, the Portfolio may fail to fully recoup its initial
investment in a CMO Residual.
CMO Residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. CMO
Residuals may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO Residuals are generally completed
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only after careful review of the characteristics of the securities in question.
In addition, CMO Residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933 (the "Securities Act").
CMO Residuals, whether or not registered under the Securities Act, may be
subject to certain restrictions on transferability. Ownership of certain CMO
Residuals imposes liability for certain of the expenses of the related CMO
issuer on the purchaser. The Investment Manager will not purchase any CMO
Residual that imposes such liability on the Portfolio.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage pass-through
securities ("Private Pass-Throughs") are structured similarly to the Ginnie Mae,
Fannie Mae and Freddie Mac mortgage pass-through securities described above and
are issued by originators of and investors in mortgage loans, including savings
and loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. Private Pass-Throughs are usually
backed by a pool of conventional fixed rate or adjustable rate mortgage loans.
The estimated life of Private Pass-Throughs varies with the rate of prepayment
on the underlying mortgage loans. See "Special Risk Considerations" below. Since
Private Pass-Throughs typically are not guaranteed by an entity having the
credit status of Ginnie Mae, Fannie Mae or Freddie Mac, such securities
generally are structured with one or more types of credit enhancement. See
"Types of Credit Support" below.
TYPES OF CREDIT SUPPORT. Mortgage-backed securities are often backed by a pool
of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make payments,
such securities may contain elements of credit support. Such credit support
falls into two categories--(i) liquidity protection and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures ultimate payment of the obligations on
at least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
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transaction or through a combination of such approaches. The Portfolio will not
pay any additional fees for such credit support, although the existence of
credit support may increase the price of a security.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceeds that required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information regarding
the level of credit risk associated with the underlying assets. Delinquency or
loss in excess of that anticipated could adversely affect the return on an
investment in such a security.
ASSET-BACKED SECURITIES. The Bond Portfolio also may invest in asset-backed
securities including interests in pools of receivables, such as motor vehicle
installment purchase obligations and credit card receivables. These securities
may be in the form of pass-through instruments or asset-backed bonds. The
securities, all of which are issued by non-governmental entities and carry no
direct or indirect government guarantee, are structurally similar to the
collateralized mortgage obligations and mortgage pass-through securities
described above. As with mortgage-backed securities, asset-backed securities are
often backed by a pool of assets representing the obligations of a number of
different parties and use similar credit enhancement techniques.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most organizations that issue asset-backed securities
relating to motor vehicle installment purchase obligations perfect their
interests in their respective obligations only by filing a financing statement
and by having the servicer of the obligations, which is usually the originator,
take custody thereof. In such circumstances, if the servicer were to sell the
same obligations to another party, in violation of its duty not to so do, there
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is a risk that such party could acquire an interest in the obligations superior
to that of the holders of the securities. Also, although most such obligations
grant a security interest in the motor vehicle being financed, in most states
the security interest in a motor vehicle must be noted on the certificate of
title to perfect such security interest against competing claims of other
parties. Due to the large number of vehicles involved, however, the certificate
of title to each vehicle financed, pursuant to the obligations underlying the
securities, usually is not amended to reflect the assignment of the seller's
security interest for the benefit of the holders of the securities. Therefore,
there is the possibility that recoveries on repossessed collateral may not, in
some cases, be available to support payments on those securities. In addition,
various state and federal laws give the motor vehicle owner the right to assert
against the holder of the owner's obligation certain defenses such owner would
have against the seller of the motor vehicle. The assertion of such defenses
could reduce payments on the related securities.
SPECIAL RISK CONSIDERATIONS. The yield characteristics of mortgage-backed and
asset-backed securities differ from traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently,
usually monthly, and that principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
As a result, if the Bond Portfolio purchases such a security at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield to maturity. Conversely, if the Portfolio purchases
these securities at a discount, faster than expected prepayments will increase,
while slower than expected prepayments will reduce, yield to maturity.
Prepayments on a pool of mortgage loans are influenced by a variety of economic,
geographic, social and other factors, including changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgage
properties and servicing decisions. An acceleration in prepayments in response
to sharply falling interest rates will shorten the security's average maturity
and limit the potential appreciation in the security's value relative to a
conventional debt security. As a result, mortgage-backed securities are not as
effective in locking in high long-term yields. Conversely, in periods of sharply
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rising rates, prepayments generally slow, increasing the security's average life
and its potential for price depreciation. Amounts available for reinvestment by
the Portfolio are therefore likely to be greater during a period of declining
interest rates and, as a result, likely to be reinvested at lower interest rates
than during a period of rising interest rates. Slower prepayments effectively
may change a mortgage-backed security that was considered short- or
intermediate-term at the time of purchase into a long-term security. The values
of long-term securities generally fluctuate more widely in response to changes
in interest rates than short- or intermediate-term securities. Were the
prepayments on the Portfolio's mortgage-backed securities to decrease broadly,
the Portfolio's effective duration, and thus sensitivity to interest rate
fluctuations, would increase. Generally, asset-backed securities are less likely
to experience substantial prepayments than are mortgage-backed securities,
primarily because the collateral supporting asset-backed securities is of
shorter maturity than mortgage loans; however, certain of the factors that
affect the rate of prepayments on mortgage-backed securities (e.g., fluctuations
in interest rates and unemployment), affect asset-backed securities, but to a
lesser degree.
The Bond Portfolio's return will also be affected by the yields on instruments
in which the Portfolio is able to reinvest the proceeds of payments and
prepayments. Accelerated prepayments on securities purchased by the Portfolio at
a premium also impose a risk of loss of principal because the premium may not
have been fully amortized at the time the principal is repaid in full.
New types of mortgage-backed securities and asset-backed securities are
developed and marketed from time to time. Consistent with its investment
limitations, the Bond Portfolio expects to invest in those new types of
instruments that the Investment Manager believes may assist the Portfolio in
achieving its investment objective and to supplement this prospectus to
appropriately describe such instruments.
YANKEE SECURITIES. The Bond Portfolio may invest without limitation in so-called
"Yankee Securities" which are securities issued by non-U.S. issuers which are
denominated in U.S. dollars and which trade and are capable of settlement in
U.S. markets. Issuers of Yankee Securities may be corporate or government
entities.
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Non-rated securities may be considered for investment by the Portfolio when the
Investment Manager believes that the financial condition of the issuers of the
securities, or the protection afforded by the terms of the securities
themselves, limits the risk to the Portfolio to a degree comparable to that of
rated securities which are consistent with the Portfolio's objective and
policies.
STRATEGIC YIELD PORTFOLIO
The investment objective of the Strategic Yield Portfolio is to seek to obtain a
total return on its assets by placing approximately equal emphasis on capital
appreciation and current income through investing principally in high-yielding
fixed-income securities. Capital appreciation may result, for example, from an
improvement in the credit standing of an issuer whose securities are held by the
Portfolio or from a general decline in interest rates or both. Conversely,
capital depreciation may result, for example, from a lowered credit standing or
a general rise in interest rates, or a combination of both.
The Strategic Yield Portfolio will seek to achieve its objective through
investing, under normal market conditions, at least 65% of the value of its
total assets in fixed-income securities, such as bonds, debentures, notes,
convertible debt obligations, convertible preferred stocks and the types of
mortgage-backed and asset-backed securities in which the Bond Portfolio may
invest. The issuers of these obligations include governments, their political
subdivisions, agencies or municipalities, and corporations. At least 95% of
these obligations when purchased by the Portfolio will have a rating of at least
CCC by S&P or Caa by Moody's (commonly known as "junk bonds") or, if not rated,
will be of comparable quality as determined by the Investment Manager. The
Strategic Yield Portfolio may invest up to 50% of its total assets in non-U.S.
dollar denominated fixed-income securities of the types described above of
foreign issuers. The Strategic Yield Portfolio may invest without limitation in
U.S. dollar denominated fixed-income securities of foreign issuers. See
"Additional Permitted Investment Activities and Risk Factors--Investment in
Foreign Securities."
During the year ended December 31, 1996 the percentages of the Portfolio's
assets invested in securities (other than U.S. Treasury obligations or
obligations of foreign governments or U.S. or foreign government agencies) rated
in particular rating categories by S&P were, on a weighted average basis, as
follows:
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Percentage of
S&P Ratings Total Investments
----------- ---------------
TSY 5.3%
AGY 8.6%
AAA 11.4%
AA+ 0.2%
AA 2.0%
AA- 0.6%
A+ 1.0%
A 1.1%
A- 1.4%
BBB+ 0.7%
BBB 0.4%
BBB- 0.1%
BB+ 1.0%
BB 1.6%
BB- 2.2%
B+ 4.9%
B 6.6%
B- 10.8%
CCC+ 0.6%
CCC- 0.3%
No Rating* 39.4%
*The Investment Manager estimates these securities to have an average rating of
BBB-.
The Strategic Yield Portfolio invests in lower-rated fixed-income securities
that are commonly referred to as "high-yield securities" or "junk bonds." The
Investment Manager believes these securities offer the potential for attractive
returns because the yields they afford are generally higher than those of
investment grade fixed-income securities. The Investment Manager expects most of
the Portfolio's investment securities will pay cash income. In a limited number
of cases, however, "zero coupon" or "payment-in-kind" high-yield securities may
be purchased when, in the opinion of the Investment Manager, they offer
exceptional value relative to their risk. See, "Zero Coupon, `Pay-in-Kind' and
`Stripped' U.S. Treasury Securities," below. The Strategic Yield Portfolio also
may invest in American or Global Depositary Receipts issued in relation to a
pool of fixed-income securities in which the Portfolio could invest directly.
The Investment Manager will attempt to minimize the risk inherent in the
high-yield market through investing in a broad range of high-yielding
fixed-income securities. In structuring its portfolio of investment securities,
the Investment Manager will take into consideration several factors including
the issuer, industry, credit rating, currency, country and, in certain cases,
the terms of a security's indenture. Security selection techniques used by the
Investment Manager will focus on individual issues with appropriate maturity,
duration, currency and sector characteristics. Individual securities will be
selected by the Investment Manager based on their yield relative to their risk
characteristics. In determining the risk characteristics of a particular
security, the Investment Manager will analyze the creditworthiness of the issuer
as well as the terms of the indenture pursuant to which the security is issued.
Performance of the Portfolio's investments will be continually evaluated by the
Investment Manager and a security may be sold if: (i) its yield spread premium
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as compared to U.S. Treasury obligation yields declines to a level the
Investment Manager believes no longer reflects value; (ii) the investment
expectations underlying that security are no longer valid; or (iii) the
Investment Manager believes another security offers better value.
The Strategic Yield Portfolio may invest up to 5% of the value of its total
assets, represented by the premium paid, in the purchase of call and put options
on the types of securities in which the Portfolio may invest. The Portfolio may
write covered call and put options contracts to the extent that the value of the
call or put options, represented by the premium paid, does not exceed 10% of the
value of the covered assets. The Strategic Yield Portfolio may purchase and sell
call and put options on equity securities and stock indices, to the same extent
as it is permitted to purchase and sell call and put options on the types of
securities in which it may invest. Options are a form of derivative security.
See "Additional Permitted Investment Activities and Risk Factors--Stock or Bond
Options."
The Strategic Yield Portfolio may engage in foreign exchange transactions either
on a spot basis (for settlement in two business days) at the prevailing rate in
the interbank foreign exchange market or through entering into foreign currency
forward exchange contracts. A foreign currency forward exchange contract
involves the obligation to purchase an amount of a specific currency in return
for delivering a different amount of another currency on the specified
settlement date. These contracts are entered into in the interbank market
conducted directly between currency traders (typically commercial banks or other
financial institutions) and their customers.
When used for hedging purposes, foreign currency forward exchange contracts will
tend to minimize the Portfolio's risk of loss on its foreign securities holdings
due to a decline in the value of the underlying currency. However, at the same
time, foreign currency forward exchange contracts will tend to limit any
potential gain which might result should the value of the underlying currency
increase during the contract period. See "Additional Permitted Investment
Activities and Risk Factors--Foreign Currency Forward Exchange Contracts."
The Strategic Yield Portfolio may also purchase and sell call and put options on
foreign currencies.
ZERO COUPON, "PAY-IN-KIND" AND "STRIPPED" U.S. TREASURY SECURITIES. The
Strategic Yield Portfolio may invest in "zero coupon" securities. A zero coupon
security pays no interest to its holder during its life. An investor acquires a
zero coupon security at a price which is generally an amount based upon its
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present value, and which, depending upon the time remaining until maturity, may
be significantly less than its face value (sometimes referred to as a "deep
discount" price). Upon maturity of the zero coupon security, the investor
receives the face value of the security. The Strategic Yield Portfolio may also
invest in "pay-in-kind" securities (i.e., debt obligations the interest on which
may be paid in the form of additional obligations of the same type rather than
cash) which have characteristics similar to zero coupon securities.
As noted above, zero coupon securities do not entitle the holder to any periodic
payments of interest prior to maturity. Accordingly, such securities usually
trade at a deep discount from their face or par value. Zero coupon securities
and "pay-in-kind" securities may be more speculative and subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities which make periodic distributions of
interest. On the other hand, because there are no periodic interest payments to
be reinvested prior to maturity, zero coupon securities eliminate the
reinvestment risk and lock in a rate of return to maturity.
Federal tax law requires that a holder (such as the Strategic Yield Portfolio)
of a zero coupon security accrue a portion of the discount at which the security
was purchased (or, in the case of a "pay-in-kind" security, the difference
between the issue price and the sum of all the amounts payable on redemption) as
income each year even though the Strategic Yield Portfolio receives no interest
payment in cash on the security during the year. As a regulated investment
company, the Strategic Yield Portfolio must pay out substantially all of its net
investment income each year. Accordingly, in any year the Portfolio may be
required to pay out as an income distribution an amount which is greater than
the total amount of cash interest the Portfolio actually received. Such
distributions would be made from the cash assets of the Portfolio or by
liquidation of portfolio securities, if necessary. If a distribution of cash
necessitates the liquidation of portfolio securities, the Investment Manager
will select which securities to sell. The Portfolio may realize a gain or loss
from such sales. In the event the Portfolio realized net capital gains from such
transactions, its shareholders might receive a larger capital gain distribution,
and incur a potentially greater tax liability, than they would in the absence of
such transactions.
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The Strategic Yield Portfolio may invest in "stripped" U.S. Treasury securities,
which are U.S. Treasury bills issued without interest coupons, U.S. Treasury
notes and bonds which have been stripped of their unmatured interest coupons,
and receipts or certificates representing interests in such stripped debt
obligations and coupons. Currently, the only U.S. Treasury security issued
without coupons is the Treasury bill. Although the U.S. Treasury does not itself
issue Treasury notes and bonds without coupons, under the U.S. Treasury STRIPS
program, interest and principal payments on certain long-term Treasury
securities may be maintained separately in the Federal Reserve book entry system
and may be separately traded and owned. In addition, in the last few years a
number of banks and brokerage firms have stripped the principal portions from
the coupon portions of U.S. Treasury bonds and notes and sold them separately in
the form of receipts or certificates representing undivided interests in these
instruments (which instruments are generally held by a bank in a custodial or
trust account). The staff of the Commission has indicated that, in its view,
these receipts or certificates should be considered as securities issued by the
bank or brokerage firm involved and, therefore, should not be included in the
Strategic Yield Portfolio's categorization of U.S. Government Securities.
RESTRICTED SECURITIES. The Strategic Yield Portfolio may invest in restricted
securities and in other assets having no ready market if such purchases at the
time thereof would not cause more than 10% of the value of the Portfolio's net
assets to be invested in all such restricted or not readily marketable (or other
illiquid) assets. See "Additional Permitted Investment Activities and Risk
Factors--Illiquid Securities" and "Investment Restrictions" below.
SPECIAL RISK CONSIDERATIONS. Securities in the lower rating categories are
subject to greater risk of loss of principal and interest than higher-rated
securities and are considered to be predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal, which may in any case
decline during sustained periods of deteriorating economic conditions or rising
interest rates. There has been unprecedented growth in the size of the market
for lower-rated securities over the past several years, although most recently
that market has declined in size. This growth occurred during a period of
general economic expansion. Lower-rated securities are generally considered to
be subject to greater market risk than higher-rated securities in times of
deteriorating economic conditions. In addition, lower-rated securities may be
more susceptible to real or perceived adverse economic and competitive industry
conditions than investment grade securities.
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The market for lower-rated securities may be thinner and less active than that
for higher-quality securities, which can adversely affect the prices at which
these securities can be sold. To the extent that there is no established
secondary market for lower-rated securities, the Investment Manager may
experience difficulty in valuing such securities and, in turn, the Portfolio's
assets. In addition, adverse publicity and investor perceptions about
lower-rated securities, whether or not based on fundamental analysis, may tend
to decrease the market value and liquidity of such lower-rated securities.
Finally, it is noted that the transaction costs with respect to lower-rated
securities may be higher, and in some cases information less available, than is
the case with investment grade securities.
The use of credit ratings as a method for evaluating lower-rated securities
involves certain risks. The ratings of fixed-income securities by S&P and
Moody's are a generally accepted barometer of credit risk. They are, however,
subject to certain limitations from an investor's standpoint. The rating of an
issuer is heavily weighted by past developments and does not necessarily reflect
probable future conditions. There is frequently a lag between the time a rating
is assigned and the time it is updated. In addition, there may be varying
degrees of difference in credit risk of securities within each rating category.
Non-rated securities may be considered for investment by the Strategic Yield
Portfolio when the Investment Manager believes that the financial condition of
the issuers of the securities, or the protection afforded by the terms of the
securities themselves, limits the risk to the Portfolio to a degree comparable
to that of rated securities which are consistent with the Portfolio's objectives
and policies.
When, in the judgment of the Investment Manager, business or financial
conditions warrant, the Strategic Yield Portfolio may assume a temporary
defensive position and invest without limit in investment grade debt securities
or hold its assets in cash. See "Additional Permitted Investment Activities and
Risk Factors--Short-Term Money Market Instruments."
SMALL CAP PORTFOLIO
The investment objective of the Small Cap Portfolio is to seek capital
appreciation through investing primarily in equity securities of United States
companies with market capitalizations under $1 billion that are believed by the
Investment Manager to be inexpensively priced relative to the return on total
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capital or equity. The equity securities in which the Small Cap Portfolio may
invest include, common stocks, preferred stocks, securities convertible into or
exchangeable for common stocks, rights and warrants listed on national or
regional securities exchanges or traded over-the-counter. Investments are
generally made in equity securities of companies which in the Investment
Manager's opinion have one or more of the following characteristics (the "Small
Cap Factors"): (i) are undervalued relative to their earnings power, cash flow,
and/or asset values; (ii) have an attractive price/value relationship, i.e. have
high returns on equity and/or assets with correspondingly low price-to-book
and/or price-to-asset value as compared to the market generally or the
companies' industry groups in particular, with expectations that some catalyst
will cause the perception of value to change within a 24-month time horizon;
(iii) have experienced significant relative underperformance and are out of
favor due to a set of circumstances which are unlikely to harm a company's
franchise or earnings power over the longer term; (iv) have low projected
price-to-earnings or price-to-cash-flow multiples relative to their industry
peer group and/or the market in general; (v) have the prospect, or the industry
in which the company operates has the prospect, to allow it to become a larger
factor in the business and receive a higher valuation as such; (vi) have
significant financial leverage but have high levels of free cash flow used to
reduce leverage and enhance shareholder value; and (vii) have a relatively short
corporate history with the expectation that the business may grow to generate
meaningful cash flow and earnings over a reasonable investment horizon.
Under normal market conditions, the Small Cap Portfolio will invest at least 80%
of the value of its total assets in the small capitalization equity securities
described above.
The Investment Manager believes that the issuers of small capitalization stocks
often have sales and earnings growth rates which exceed those of larger
companies, and that such growth rates may in turn be reflected in more rapid
share price appreciation, however, investing in smaller capitalization stocks
can involve greater risk than is customarily associated with larger, more
established companies. For example, smaller capitalization companies often have
limited product lines, markets or financial resources. They may be dependent for
management on one or a few key persons, and can be more susceptible to losses
and risks of bankruptcy. Also, securities in the small capitalization sector may
be thinly traded (and therefore have to be sold at a discount from current
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market prices or sold in small lots over an extended period of time), may be
followed by fewer investment research analysts and may be subject to wider price
swings and thus may create a greater chance of loss than investing in securities
of larger capitalization companies.
The Investment Manager continually evaluates the securities owned by the Small
Cap Portfolio, and changes may be made whenever the Investment Manager
determines such securities no longer meet the Small Cap Portfolio's objective.
Portfolio changes also may be made to increase or decrease investments in
anticipation of changes in security prices in general or to provide funds
required for redemptions, distributions to shareholders or other corporate
purposes.
When, in the judgment of the Investment Manager, business or financial
conditions warrant, the Small Cap Portfolio may assume a temporary defensive
position and invest without limitation in large capitalization companies or
short-term money market instruments or hold its assets in cash. See "Additional
Permitted Investment Activities and Risk Factors-- Short-Term Money Market
Instruments."
INTERNATIONAL SMALL CAP PORTFOLIO
The investment objective of the International Small Cap Portfolio is to seek
capital appreciation. The Portfolio will invest primarily in equity securities
of non-United States companies with market capitalizations under $1 billion that
are believed by the Investment Manager to be inexpensively priced relative to
the return on total capital or equity. The Portfolio will invest in equity
securities listed on national or regional securities exchanges or traded
over-the-counter of companies based in Continental Europe, the United Kingdom,
the Pacific Basin, Latin America, Canada and such other areas as the Investment
Manager may determine from time to time. The International Small Cap Portfolio
may also invest in American Depositary Receipts and Global Depositary Receipts
and in convertible bonds and other convertible securities. In selecting
investments for the International Small Cap Portfolio, the Investment Manager
will attempt to ascertain inexpensive markets world-wide through traditional
measures of value, including low price-to-earnings ratio, low price-to-book
ratio and/or low price-to-cash flow ratio and high yield. The Investment
Manager, following a bottom-up approach, seeks to identify securities within
such undervalued markets which in the Investment Manager's opinion have one or
more of the characteristics listed in the Small Cap Factors. Under normal market
conditions, the International Small Cap Portfolio will invest at least 80% of
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the value of its total assets in the small capitalization equity securities
described above. Assets not invested in such small capitalization equity
securities would generally be invested in large capitalization equity securities
or debt securities, including cash equivalents. For a description of the risks
associated with investing in small capitalization equity securities see "Small
Cap Portfolio" above.
Under normal market conditions, the Portfolio will invest at least 65% of the
value of its total assets in the equity securities of companies in not less than
three different countries (not including the United States). The remaining
portion of the assets of the Portfolio may be invested in the same or different
countries. The percentage of the International Small Cap Portfolio's assets in a
particular geographic sector may shift from time to time in accordance with the
judgment of the Investment Manager. For a description of the risks associated
with investing in foreign securities see "Additional Permitted Investment
Activities and Risk Factors--Investment in Foreign Securities."
The International Small Cap Portfolio may enter into futures contracts, options
on futures contracts, and foreign currency forward exchange contracts in order
to protect against anticipated changes in foreign currency exchange rates.
Options and futures are forms of derivative securities. See "Additional
Permitted Investment Activities and Risk Factors--Futures Contracts and Options
on Futures Contracts, Foreign Currency Forward Exchange Contracts."
When, in the judgment of the Investment Manager, business or financial
conditions warrant, the International Small Cap Portfolio may assume a temporary
defensive position and invest without limit in the equity securities of U.S.
companies or short-term money market instruments or hold its assets in cash. See
"Additional Permitted Investment Activities and Risk Factors--Short-Term Money
Market Instruments."
EMERGING MARKETS PORTFOLIO
The investment objective of the Emerging Markets Portfolio is to seek long-term
capital appreciation. The Portfolio will invest primarily in securities of
issuers who are located, or doing significant business, in emerging market
countries. Emerging markets include countries where political and economic
trends have produced or are producing a more stable economic environment,
developed or developing financial markets and investment liquidity. Factors
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affecting a determination of an emerging market include a legitimate program to
reduce government spending and deficits and reduce excessive regulation of
commercial activity, including reducing confiscatory tax rates, control of
inflation, lower trade barriers, stability of currency exchange rates,
increasing foreign and domestic investment, privatization of state-owned
companies and expansion of developed financial product exchanges.
Although the Emerging Markets Portfolio may invest in any issuer in an emerging
market, the Emerging Markets Portfolio is likely to focus on, but not be limited
to, Latin America, the Pacific Basin and Europe.
Under normal market conditions, the Emerging Markets Portfolio will invest at
least 65% of its total assets in securities of companies in not less than three
different countries (not including the United States). The remaining portion of
the assets of the Emerging Markets Portfolio may be invested in the same or
different countries. The percentage of the Emerging Markets Portfolio's assets
invested in particular emerging markets may shift from time to time in
accordance with the judgment of the Investment Manager. Emerging market
countries generally will include any countries (i) having an "emerging stock
market" as defined by the International Finance Corporation; (ii) with low- to
middle-income economies according to the World Bank; or (iii) listed in World
Bank publications as developing. Currently, the countries not included in these
categories are Canada, United Kingdom, France, Germany, Australia, New Zealand,
Austria, Belgium, Denmark, Finland, Ireland, Italy, Japan, Netherlands, Norway,
Spain, Sweden, Switzerland and United States. For a description of the risks
associated with investing in emerging markets see "Additional Permitted
Investment Activities and Risk Factors--Investment in Foreign Securities."
The Portfolio invests primarily in equity securities of issuers located, or
doing significant business, in emerging markets including: issuers organized
under the laws of the emerging market country or for which the principal trading
market for such securities is located in the emerging market country or issuers,
wherever organized, when at least 50% of the issuer's non-current assets,
capitalization, gross revenue or profit in any one of the two most recent fiscal
years represents (directly or indirectly through subsidiaries) assets or
activities located in the emerging market country. The Portfolio will also
invest in closed-end investment companies investing in emerging market
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securities. The Emerging Markets Portfolio may also invest in American
Depositary Receipts and Global Depositary Receipts with respect to emerging
market securities.
Although the Emerging Markets Portfolio expects to invest principally in equity
securities of emerging markets issuers, there is no requirement that the
Emerging Markets Portfolio invest exclusively in equity securities. If deemed
advisable, the Emerging Markets Portfolio may invest in fixed-income securities
and short-term money market instruments. See "Additional Permitted Investment
Activities and Risk Factors -- Short-Term Money Market Instruments."
Following a bottom-up approach, the Investment Manager focuses on individual
stock selection rather than on forecasting stock market trends. In selecting a
specific stock for the Emerging Markets Portfolio, the Investment Manager relies
on its own research capability as well as information obtained from brokers
located in the emerging market country and information from affiliates of the
Investment Manager.
The Emerging Markets Portfolio may enter into futures contracts, options on
futures contracts and foreign currency forward exchange contracts to protect
against anticipated changes in foreign currency exchange rates. See "Additional
Permitted Investment Activities and Risk Factors--Futures Contracts and Options
on Futures Contracts, Foreign Currency Forward Exchange Contracts."
When, in the judgment of the Investment Manager, business or financial
conditions warrant, the Emerging Markets Portfolio may assume a temporary
defensive position and invest in the equity securities of U.S. companies or
short-term money market instruments or hold its assets in cash. See "Additional
Permitted Investment Activities and Risk Factors--Short-Term Money Market
Instruments."
GLOBAL EQUITY PORTFOLIO
The investment objective of the Global Equity Portfolio is to seek capital
appreciation. The Portfolio will invest primarily in equity securities of
companies, both U.S. and non-U.S., that the Investment Manager believes are
inexpensively priced relative to the return on total capital or equity. The
Global Equity Portfolio engages in a value-oriented search for equity securities
of issuers located anywhere in the world. In selecting investments for the
Global Equity Portfolio, the Investment Manager attempts to identify inexpensive
markets worldwide, including the U.S., through traditional measures of value,
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including low price to earnings ratio, high yield, unrecognized assets,
potential for management change and/or potential to improve profitability. In
addition, the Investment Manager seeks to identify companies that it believes
are financially productive and undervalued in those markets.
At least 80% of the assets of the Global Equity Portfolio are expected to be
invested in the equity securities of companies within not less than four
countries, including the United States. The percentage of the Global Equity
Portfolio's assets invested in particular geographic sectors may shift from time
to time in accordance with the judgment of the Investment Manager. With a focus
on stock picking, the country allocation decision is an outgrowth of stock
selection and is used as an overlay and risk control mechanism to enhance
diversification. Nonetheless, it is the current intention of the Investment
Manager that not less than 25% of the assets of the Portfolio be invested in
securities of U.S. issuers. For a description of the risks associated with
investing in foreign securities see "Additional Permitted Investment Activities
and Risk Factors--Investment in Foreign Securities. "
The assets of the Global Equity Portfolio are expected to be invested
principally in equity securities, including American Depositary Receipts and
Global Depositary Receipts and in convertible bonds and other convertible
securities. There is no requirement, however, that the Global Equity Portfolio
invest exclusively in equity securities, and, if deemed advisable, the Global
Equity Portfolio may invest up to 20% of the value of its total assets in
fixed-income securities and short-term money market instruments. See "Additional
Permitted Investment Activities and Risk Factors--Short-Term Money Market
Instruments." The Global Equity Portfolio will not invest in fixed-income
securities rated lower than investment grade.
The Global Equity Portfolio may enter into foreign currency forward exchange
contracts, options and futures contracts in order to protect against anticipated
changes in foreign currency exchange rates. Options and futures are forms of
derivative securities. See "Additional Permitted Investment Activities and Risk
Factors--Foreign Currency Forward Exchange Contracts."
When, in the judgment of the Investment Manager, business or financial
conditions warrant, the Global Equity Portfolio may assume a temporary defensive
position and invest without limit in the equity securities of U.S. companies or
short-term money market instruments or hold its assets in cash. See "Additional
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Permitted Investment Activities and Risk Factors--Short-Term Money Market
Instruments."
BANTAM VALUE PORTFOLIO
The investment objective of the Bantam Value Portfolio is to seek capital
appreciation. The Portfolio will invest primarily in equity securities of
companies with market capitalizations under $500 million that are believed by
the Investment Manager to be inexpensively priced relative to the return on
total capital or equity. The equity securities in which the Bantam Value
Portfolio may invest include common stocks, preferred stocks, securities
convertible into or exchangeable for common stocks, rights and warrants and
American Depositary Receipts and Global Depositary Receipts. Investments are
generally made in equity securities of companies which, in the Investment
Manager's opinion, have one or more of the characteristics listed in the Small
Cap Factors, as well as a potential for increasing recognition, market
capitalization and value. See "Small Cap Portfolio" above.
Under normal market conditions, the Bantam Value Portfolio will invest at least
80% of the value of its total assets in the small capitalization equity
securities described above. Assets not invested in such small capitalization
equity securities would generally be invested in large capitalization equity
securities or debt securities, including cash equivalents. For a description of
the risks associated with investing in small capitalization equity securities,
see "Small Cap Portfolio" above.
When, in the judgment of the Investment Manager, business or financial
conditions warrant, the Bantam Value Portfolio may assume a temporary defensive
position and invest without limit in larger capitalization companies or
short-term money market instruments or hold its assets in cash. See "Additional
Permitted Investment Activities and Risk Factors--Short-Term Money Market
Instruments."
EMERGING WORLD FUNDS PORTFOLIO
The investment objective of the Emerging World Funds Portfolio is to seek
capital appreciation. The Portfolio will invest primarily in equity securities
of investment funds ("Emerging Markets Funds") that will largely invest in
equity securities of companies in one or more emerging markets countries as
defined for purposes of the Emerging Markets Portfolio.
The securities of the Emerging Market Funds in which the Portfolio will invest
generally will be listed on internationally recognized stock exchanges or trade
in international markets, and will generally be trading at a discount to net
asset value. The Portfolio may, however, invest directly in equity securities of
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emerging market companies when shares of Emerging Market Funds are selling at a
premium, or when a particular emerging market country is not represented in a
suitable Emerging Market Fund. The Portfolio may also invest in warrants or
options on, and securities convertible into, equity securities of Emerging
Market Funds.
The Emerging World Funds Portfolio combines a "top-down" approach to country or
market valuation with a "bottom-up" approach to Emerging Market Fund security
selection. An emerging market for this purpose is described under "Emerging
Markets Portfolio" above. The Investment Manager will concentrate on countries
and regions that appear to be fundamentally undervalued using traditional
measures of value, which include low price to earnings ratios, high yield and
low price to cash flow and price to book value. The Investment Manager will
focus on those Emerging Market Funds that are trading at a discount to net asset
value where the discount has the prospect for being narrowed or eliminated due
to improved performance of the securities held by such fund and/or structural
changes to the Emerging Markets Fund such as conversion to an open-end fund.
The assets of the Emerging World Funds Portfolio are expected to be invested
principally in equity securities. There is no requirement, however, that the
Emerging World Funds Portfolio invest exclusively in equity securities, and, if
deemed advisable, the Emerging World Funds Portfolio may invest up to 20% of the
value of its total assets in fixed-income securities and short-term money market
instruments. See "Additional Permitted Investment Activities and Risk
Factors--Short-Term Money Market Instruments." The Emerging World Funds
Portfolio will not invest in fixed-income securities rated lower than investment
grade. At least 65% of the Portfolio's assets will be invested in Emerging
Market Funds.
The Emerging World Funds Portfolio, together with any "affiliated person" (as
defined in the Investment Company Act), may purchase only up to 3% of the total
outstanding stock of any Emerging Market Fund. Consequently, when affiliated
persons of the Portfolio hold shares of an Emerging Market Fund, the Portfolio's
ability to invest fully in shares of such Emerging Market Fund is restricted,
and the Investment Manager must then select, in some instances, alternative
investments that would not have been its first preference. Investment decisions
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by the investment advisers of the Emerging Market Funds are made independently
of the Emerging World Funds Portfolio and the Investment Manager. The investment
adviser of one Emerging Market Fund may be purchasing securities of the same
issuer the securities of which are being sold by the investment adviser of
another Emerging Market Fund. The result of this would be an indirect expense to
the Portfolio without accomplishing any investment purpose. In addition,
Emerging Market Funds typically pay asset management and other fees.
Shareholders of the Emerging World Funds Portfolio may pay, in effect, two fees
with respect to the assets of the Portfolio invested in such Emerging Market
Funds.
The Emerging World Funds Portfolio may enter into foreign currency forward
exchange contracts, options and futures contracts in order to protect against
anticipated changes in foreign currency exchange rates. Options and futures are
forms of derivative securities. See "Additional Permitted Investment Activities
and Risk Factors--Foreign Currency Forward Exchange Contracts."
When, in the judgment of the Investment Manager, business or financial
conditions warrant, the Emerging World Funds Portfolio may assume a temporary
defensive position and invest without limit in the equity securities of U.S.
companies or short-term money market instruments or hold its assets in cash. See
"Additional Permitted Investment Activities and Risk Factors--Short-Term Money
Market Instruments."
* * * *
References to maximum or minimum investment limitations with respect to dollar
amounts or percentages of each Portfolio's assets mean that such limitations are
followed at the time of an investment purchase and that subsequent changes in
such dollar amounts or percentages resulting in such maximum or minimum
investment limitations being exceeded are not considered violations of such
limitations.
Each Portfolio may purchase obligations that are not rated if, in the opinion of
the Investment Manager, the obligations are of investment quality comparable to
other rated investments that are permitted by each such Portfolio. After
purchase by any of the Portfolios, a security may cease to be rated or its
rating may be reduced below the minimum required for purchase by such Portfolio.
Neither event will require a sale of such security by a Portfolio. To the extent
the ratings given by S&P or Moody's may change as a result of changes in such
organizations or their rating systems, each Portfolio will attempt to use
comparable ratings as standards for investments in accordance with the
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investment policies contained in this Prospectus and in the Statement of
Additional Information. The ratings of S&P and Moody's are more fully described
in the Appendix attached hereto.
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES AND RISK FACTORS
Except as otherwise noted below, the following description of additional
permitted investment activities is applicable to all of the Portfolios.
SHORT-TERM MONEY MARKET INSTRUMENTS
Each Portfolio may at any time invest funds awaiting investment or held as
reserves for the purposes of satisfying redemption requests, payment of
dividends or making other distributions to shareholders, in cash and short-term
money market instruments; provided, however, that, with the exception of the
Equity Portfolio, such investments will not ordinarily exceed 5% of the total
assets of any Portfolio. Short-term money market instruments in which each
Portfolio except the Equity Portfolio may invest include (i) short-term U.S.
Government Securities and, in the case of the International Equity Portfolio,
International Fixed-Income Portfolio, International Small Cap Portfolio,
Emerging Markets Portfolio, Strategic Yield Portfolio, Global Equity Portfolio
and Emerging World Funds Portfolio, short-term obligations of foreign sovereign
governments and their agencies and instrumentalities, (ii) interest bearing
savings deposits on, and certificates of deposit and bankers' acceptances of,
United States and foreign banks, (iii) commercial paper of U.S. or, in the case
of the International Equity Portfolio, International Fixed-Income Portfolio,
International Small Cap Portfolio, Emerging Markets Portfolio, Strategic Yield
Portfolio, Global Equity Portfolio and Emerging World Funds Portfolio, of
foreign issuers rated A-1 or higher by S&P or Prime-1 by Moody's, issued by
companies which have an outstanding debt issue rated AA or higher by S&P or Aa
or higher by Moody's or, if not rated, determined by the Investment Manager to
be of comparable quality to those rated obligations which may be purchased by
the Portfolio and (iv) repurchase agreements relating to the foregoing.
Short-term money market instruments in which the Equity Portfolio may invest
have remaining maturities of not more than 12 months and include bank
obligations, corporate commercial paper subject to the same quality restrictions
as that purchased by the other Portfolios, non-convertible corporate debt
securities such as notes, bonds and debentures that are rated AA or better by
S&P or Aa or better by Moody's and variable amount master demand notes. For this
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purpose, bank obligations include negotiable certificates of deposit, bankers'
acceptances, fixed time deposits and other short-term bank obligations. The
Equity Portfolio limits its investments in United States bank obligations to
obligations of United States banks (including foreign branches and thrift
institutions, the obligations of which are guaranteed by the U.S. parent) that
have more than $1 billion in total assets at the time of investment and are
members of the Federal Reserve System or are examined by the Comptroller of the
Currency or whose deposits are insured by the Federal Deposit Insurance
Corporation ("United States banks"). The Equity Portfolio limits its investments
in foreign bank obligations to United States dollar denominated obligations of
foreign banks (including United States branches), which banks at the time of
investment (i) have more than $10 billion, or the equivalent in other
currencies, in total assets; (ii) are among the 100 largest banks in the world,
as determined on the basis of assets; and (iii) have branches or agencies in the
United States; and which obligations, in the opinion of the Investment Manager,
are of an investment quality comparable to obligations of United States banks
that may be purchased by the Portfolio. For a description of variable amount
master demand notes, see "Additional Permitted Investment Activities and Risk
Factors--Variable Amount Master Demand Notes" in the Statement of Additional
Information.
TEMPORARY BANK BORROWING
Each Portfolio may borrow from banks for temporary purposes, including the
meeting of redemption requests which might require the untimely disposition of
securities.
With respect to the International Equity Portfolio, International Fixed-Income
Portfolio, Bond Portfolio, Strategic Yield Portfolio, International Small Cap
Portfolio, Emerging Markets Portfolio, Small Cap Portfolio, Global Equity
Portfolio, Bantam Value Portfolio and Emerging World Funds Portfolio, temporary
or emergency borrowing in the aggregate may not exceed 15%, and borrowing for
purposes other than meeting redemptions may not exceed 5%, of the value of the
relevant Portfolio's total assets (including the amount borrowed) less
liabilities (including the amount borrowed) at the time the borrowing is made.
Securities may not be purchased by any of these Portfolios while borrowings in
excess of 5% of the value of such Portfolio's total assets are outstanding.
For temporary purposes only in order to meet redemptions, the Equity Portfolio
may borrow from banks up to 10% of the current value of its total net assets.
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Such borrowings may be secured by the pledge of not more than 10% of the value
of the Portfolio's total net assets and investments may not be purchased by the
Equity Portfolio while any such borrowing exists. Temporary borrowing by the
Equity Portfolio will be included in calculating the Portfolio's required 300%
coverage described in "Additional Permitted Investment Activities and Risk
Factors--Borrowing for Investment" in the Statement of Additional Information.
FLOATING AND VARIABLE RATE INSTRUMENTS
Certain of the obligations that the Portfolios may purchase have a floating or
variable rate of interest. Such obligations bear interest at rates that are not
fixed, but vary with changes in specified market rates or indices, such as the
Prime Rate, and at specified intervals. Certain of these obligations may carry a
demand feature that would permit the holder to tender them back to the issuer at
par value prior to maturity. Each Portfolio limits its purchases of floating and
variable rate obligations to those of the same quality as it otherwise is
allowed to purchase. The Investment Manager monitors on an ongoing basis the
ability of an issuer of a demand instrument to pay principal and interest on
demand. A Portfolio's right to obtain payment at par on a demand instrument can
be affected by events occurring between the date such Portfolio elects to demand
payment and the date payment is due that may affect the ability of the issuer of
the instrument to make payment when due, except when such demand instruments
permit same-day settlement. To facilitate settlement, these same-day demand
instruments may be held in book entry form at a bank other than the Fund's
custodian, subject to a subcustodian agreement approved by the Fund between that
bank and the Fund's custodian.
The floating and variable rate obligations that the Portfolios may purchase
include certificates of participation in obligations purchased from banks. A
certificate of participation gives the Portfolio an undivided interest in the
underlying obligations in the proportion that such Portfolio's interest bears to
the total principal amount of such obligations. Certain of such certificates of
participation may carry a demand feature that would permit the holder to tender
them back to the issuer prior to maturity.
To the extent that floating and variable rate instruments without demand
features are not readily marketable, they will be subject to the investment
restriction that no Portfolio may invest an amount equal to 10% or more of the
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current value of its net assets in illiquid securities. See "Illiquid
Securities" and "Investment Restrictions" below.
LETTERS OF CREDIT
Municipal obligations, certificates of participation therein, commercial paper
and other short-term obligations may be backed by irrevocable letters of credit
issued by banks which assume the obligation for payment of principal and
interest in the event of default by an issuer. Only banks the securities of
which, in the opinion of the Investment Manager, are of investment quality
comparable to other permitted investments of the Portfolios may be used for
letter of credit-backed investments.
LOANS OF PORTFOLIO SECURITIES
In order to increase income, each Portfolio may lend securities from its
portfolio to brokers, dealers and financial institutions if cash or cash
equivalent collateral, including letters of credit, marked-to-market daily and
equal to at least 100% of the current market value of the securities loaned
(including accrued interest and dividends thereon) plus the interest payable to
the Portfolio with respect to the loan is maintained by the borrower with the
Portfolio in a segregated account. In determining whether to lend a security to
a particular broker, dealer or financial institution, the Investment Manager
will consider all relevant facts and circumstances, including the
creditworthiness of the broker, dealer or financial institution. No Portfolio
will enter into any portfolio security lending arrangement having a duration of
longer than one year. Any securities that a Portfolio may receive as collateral
will not become part of such Portfolio's investment portfolio at the time of the
loan and, in the event of a default by the borrower, the Portfolio will, if
permitted by law, dispose of such collateral except for such part thereof that
is a security in which such Portfolio is permitted to invest. During the time
securities are on loan, the borrower will pay the Portfolio any accrued income
on those securities, and the Portfolio may invest the cash collateral and earn
additional income or receive an agreed upon fee from a borrower that has
delivered cash equivalent collateral. No Portfolio will lend securities having a
value that exceeds 10% (331/3% in the case of the International Small Cap
Portfolio, Emerging Markets Portfolio, Global Equity Portfolio, Bantam Value
Portfolio and Emerging World Funds Portfolio) of the current value of its total
assets. Loans of securities by a Portfolio will be subject to termination at the
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Portfolio's or the borrower's option. Each Portfolio may pay reasonable
administrative and custodial fees in connection with a securities loan and may
pay a negotiated portion of the interest or fee earned with respect to the
collateral to the borrower or the placing broker. Borrowers and placing brokers
may not be affiliated, directly or indirectly, with the Fund or the Investment
Manager.
The Equity Portfolio has no present intention to enter into loans of portfolio
securities.
REPURCHASE AGREEMENTS
Each Portfolio may enter into repurchase agreements in order to permit the
Portfolio to keep all of its assets at work while retaining "overnight" or
short-term flexibility in pursuit of investments of a longer-term nature. A
repurchase agreement arises when the seller of a security to the Portfolio
agrees to repurchase that security from the Portfolio at a mutually agreed upon
time and price. The period of maturity is usually quite short, often overnight
or a few days, although it may extend over a number of months. A Portfolio may
enter into repurchase agreements only with respect to obligations that could
otherwise be purchased by that Portfolio. If the seller defaults and the value
of the underlying securities has declined, the Portfolio may incur a loss. In
addition, if bankruptcy proceedings are commenced with respect to the seller of
the security, the Portfolio's disposition of the security may be delayed or
limited.
A Portfolio may not enter into a repurchase agreement if, as a result, more than
10% of the value of that Portfolio's net assets would be invested in repurchase
agreements with a maturity of more than seven days and other illiquid
securities. See "Illiquid Securities" and "Investment Restrictions" below. The
Portfolios will enter into repurchase agreements only with broker-dealers and
commercial banks that meet guidelines established by the Board of Directors.
WHEN-ISSUED SECURITIES
Each Portfolio may purchase securities on a when-issued basis, in which case
delivery and payment normally take place within 45 days after the date of the
commitment to purchase. A Portfolio will make commitments to purchase securities
on a when-issued basis only with the intention of actually acquiring the
securities but may sell them before the settlement date if it is deemed
advisable. When-issued securities are subject to market fluctuations and no
income accrues to the purchaser prior to issuance. The purchase price and the
interest rate that will be received on debt securities are fixed at the time the
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purchaser enters into the commitment. Purchasing a security on a when-issued
basis can involve a risk that the market price at the time of delivery may be
lower than the agreed upon purchase price, in which case there could be an
unrealized loss at the time of delivery.
Each Portfolio will establish a segregated account in which it will maintain
liquid assets in an amount at least equal in value to the Portfolio's
commitments to purchase when-issued securities. If the value of these assets
declines, the Portfolio will place additional liquid assets in the account on a
daily basis so that the value of the assets in the account remains equal to the
amount of such commitments.
ILLIQUID SECURITIES
Each Portfolio may invest up to 10% of the value of its net assets in illiquid
securities. For this purpose illiquid securities include, among others, (i)
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale, (ii) with respect to the
International Fixed-Income Portfolio, Bond Portfolio and Strategic Yield
Portfolio, options purchased by each of these Portfolios over-the-counter and
the cover for options written by each of these Portfolios over-the-counter, and
(iii) repurchase agreements not terminable within seven days. Securities
eligible for resale under Rule 144A under the Securities Act that have legal or
contractual restrictions on resale but have a readily available market are not
deemed illiquid securities for this purpose. The Equity Portfolio may invest up
to 5% of the value of its assets, taken at cost, in such securities which must
be registered under the Securities Act before they may be offered or sold to the
public.
The Investment Manager will monitor the liquidity of such restricted securities
with respect to each Portfolio under the supervision of the Fund's Board of
Directors. See the Statement of Additional Information for further discussion of
illiquid securities.
INVESTMENT IN UNSEASONED COMPANIES
Assets of each Portfolio may be invested in securities of companies that have
operated for less than three years, including the operations of predecessors
("Unseasoned Companies"). Each Portfolio has undertaken that it will not make
investments that will result in more than 5% (10% in the case of the Small Cap
Portfolio, International Small Cap Portfolio and Emerging Markets Portfolio) of
its total assets being invested in the securities of Unseasoned Companies and
equity securities that are not readily marketable. See "Illiquid Securities"
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above. Investing in securities of Unseasoned Companies may, under certain
circumstances, involve greater risk than is customarily associated with
investment in more established companies. Such securities may have limited
marketability and, therefore, may be subject to wide fluctuations in market
value. In addition, certain issuers of such securities may lack a significant
operating history and be dependent on products or services without an
established market share.
AMERICAN AND GLOBAL DEPOSITARY RECEIPTS
Certain of the Portfolios may invest in the securities of foreign issuers in the
form of American Depositary Receipts ("ADRs"), and Global Depositary Receipts
("GDRs"). 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 United States bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. GDRs are
receipts issued outside the United States, typically by non-United States, banks
and trust companies, that evidence ownership of either foreign or domestic
securities. Generally, ADRs in registered form are designed for use in the
United States securities markets and GDRs in bearer form are designed for use
outside the United States.
INVESTMENT IN FOREIGN SECURITIES
The International Equity Portfolio, International Fixed-Income Portfolio,
International Small Cap Portfolio, Emerging Markets Portfolio, Global Equity
Portfolio and Emerging World Funds Portfolio may invest without limitation in
foreign securities. The Strategic Yield Portfolio may invest up to 50% of its
total assets in non-U.S. dollar denominated, and may invest without limitation
in U.S. dollar denominated, fixed-income securities of foreign issuers. The
Equity Portfolio and Bantam Value Portfolio may each invest up to 10% of its
total assets in foreign equity and debt securities provided that they are
trading in U.S. markets or are listed on a domestic securities exchange or
represented by American Depositary Receipts or Global Depositary Receipts.
Investing in securities issued by foreign governments and corporations or
entities involves considerations and possible risks not typically associated
with investing in obligations issued by the U.S. government and domestic
corporations. The values of foreign investments are affected by changes in
currency rates or exchange control regulations, application of foreign tax laws,
including withholding taxes, changes in governmental administration or economic
or monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are incurred in connection with conversions
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between various currencies. In addition, foreign brokerage commissions are
generally higher than in the United States, and foreign securities markets may
be less liquid, more volatile and less subject to governmental supervision than
in the United States. Investments in foreign countries could be affected by
other factors not present in the United States, including expropriation,
confiscatory taxation, lack of uniform accounting and auditing standards and
potential difficulties in enforcing contractual obligations, and could be
subject to extended settlement periods.
In addition, many emerging market countries have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain of these countries.
In an attempt to control inflation, wage and price controls have been imposed in
certain countries. In many cases, emerging market countries are among the
world's largest debtors to commercial banks, foreign governments, international
financial organizations and other financial institutions. In recent years, the
governments of some of these countries have encountered difficulties in
servicing their external debt obligations, which led to defaults on certain
obligations and the restructuring of certain indebtedness.
FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS
Each of the International Equity Portfolio, International Fixed-Income
Portfolio, International Small Cap Portfolio, Emerging Markets Portfolio,
Strategic Yield Portfolio, Global Equity Portfolio and Emerging World Funds
Portfolio may purchase or sell foreign currency forward exchange contracts
("forward contracts") for speculative purposes consistent with such Portfolio's
investment objective or to attempt to minimize the risk from adverse changes in
the relationship between the U.S. Dollar and foreign currencies. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date which is individually negotiated and privately traded by
currency traders and their customers. Each Portfolio may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
Dollar price of the security ("transaction hedge"). Additionally, when the
Portfolio believes that a foreign currency may suffer a substantial decline
against the U.S. Dollar, it may, for example, enter into a forward sale contract
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to sell an amount of that foreign currency approximating the value of some or
all of the Portfolio's investment securities denominated in such foreign
currency, or when the Portfolio believes that the U.S. Dollar may suffer a
substantial decline against a foreign currency, it may enter into a forward
purchase contract to buy that foreign currency for a fixed dollar amount
("position hedge"). In this situation the Portfolio may, in the alternative,
enter into a forward contract to sell a different foreign currency for a fixed
U.S. Dollar amount where the Portfolio believes that the U.S. Dollar value of
the currency to be sold pursuant to the forward contract will fall whenever
there is a decline in the U.S. Dollar value of the currency in which portfolio
securities of the Portfolio are denominated ("cross-hedge").
Under certain conditions, Commission guidelines require investment companies to
set aside permissible liquid assets in a segregated custodial account to cover
forward contracts. As required by Commission guidelines, the Portfolios will
segregate assets to cover forward contracts, if any, whose purpose is
essentially speculative. The Portfolios will not segregate assets to cover
forward contracts entered into for hedging purposes.
DERIVATIVES
Certain of the Portfolios may invest in derivative securities ("Derivatives").
These are financial instruments which derive their performance, at least in
part, from the performance of an underlying asset, index or interest rate. The
Derivatives a Portfolio may use, to the extent described above, may include
options and futures, mortgage-related securities and asset-backed securities.
While Derivatives can be used effectively in furtherance of a Portfolio's
investment objective, under certain market conditions, they can increase the
volatility of the Portfolio's net asset value, decrease the liquidity of the
Portfolio's investments and make more difficult the accurate pricing of the
Portfolio's investment securities.
Derivatives can be volatile and involve various types and degrees of risk,
depending upon the characteristics of the particular Derivative and the
portfolio as a whole. Derivatives permit a Portfolio to increase or decrease the
level of risk, or change the character of the risk, to which its investments are
exposed in much the same way as a Portfolio can increase or decrease the level
of risk, or change the character of the risk, of its portfolio by making
investments in specific securities.
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Derivatives may entail investment exposures that are greater than their cost
would suggest, meaning that a small investment in Derivatives could have a large
potential impact on a Portfolio's performance.
If a Portfolio invests in Derivatives at inappropriate times or judges market
conditions incorrectly, such investments may lower the Portfolio's return or
result in a loss. A Portfolio also could experience losses if its Derivatives
were poorly correlated with its other investments, or if the Portfolio were
unable to liquidate its position because of an illiquid secondary market. The
market for many Derivatives is, or suddenly can become, illiquid. Changes in
liquidity may result in significant, rapid and unpredictable changes in the
prices for Derivatives.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The International Fixed-Income Portfolio, Bond Portfolio, International Small
Cap Portfolio, Emerging Markets Portfolio, Global Equity Portfolio and Emerging
World Funds Portfolio may enter into contracts for the purchase or sale for
future delivery of fixed-income securities or contracts based on financial
indices including any index of U.S. Government Securities or corporate debt
securities ("futures contracts") and may purchase and write "covered" put and
call options to buy or sell futures contracts ("options on futures contracts").
The International Fixed-Income Portfolio, International Small Cap Portfolio,
Emerging Markets Portfolio, Global Equity Portfolio and Emerging World Funds
Portfolio may also enter into contracts for the purchase or sale for future
delivery of foreign currencies. A "sale" of a futures contract means the
acquisition of a contractual obligation to deliver the securities or foreign
currencies called for by the contract at a specified price on a specified date.
A "purchase" of a futures contract means the incurring of a contractual
obligation to acquire the securities or foreign currencies, called for by the
contract at a specified price on a specified date. The purchaser of a futures
contract on an index agrees to take or make delivery of an amount of cash equal
to the difference between a specified dollar multiple of the value of the index
on the expiration date of the contract ("current contract value") and the price
at which the contract was originally struck. No physical delivery of the
fixed-income securities underlying the index is made. Options on futures
contracts to be written or purchased by the Bond Portfolio will be traded on
U.S. exchanges or over-the-counter. At the time a futures contract is purchased
or sold, the Portfolio must allocate cash or securities as a deposit payment
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based on a percentage of a contract's face value. The futures contract is valued
daily thereafter and the Portfolio may be required to contribute additional cash
or securities that reflects any decline in the contract's value. These
investment techniques will be used only to hedge against anticipated future
changes in interest rates which otherwise might either adversely affect the
value of the portfolio securities of the Portfolio or adversely affect the
prices of securities or foreign currencies, which the Portfolio intends to
purchase at a later date. See "Additional Permitted Investment Activities and
Risk Factors" in the Statement of Additional Information for further discussion
of the use, risks and costs of futures contracts and options on futures
contracts.
WARRANTS
Each of the Equity Portfolio, Strategic Yield Portfolio, International Small Cap
Portfolio, Small Cap Portfolio, Emerging Markets Portfolio, Global Equity
Portfolio, Bantam Value Portfolio and Emerging World Funds Portfolio may invest
not more than 5% of its total assets at the time of purchase in warrants (other
than those that have been acquired in units or attached to other securities). In
addition, not more than 2% of the assets of any of these Portfolios may, at the
time of purchase, be invested in warrants that are not listed on an exchange.
Warrants represent rights to repurchase equity securities and debt securities at
a specific price valid for a specific period of time. The prices of warrants do
not necessarily correlate with the prices of the underlying securities. The
Equity Portfolio may only purchase warrants on securities in which it may invest
directly.
STOCK OR BOND OPTIONS
The Equity Portfolio, International Small Cap Portfolio, Emerging Markets
Portfolio, Global Equity Portfolio, Bantam Value Portfolio and Emerging World
Funds Portfolio may for hedging purposes purchase put and call options and write
covered put and call options on securities in which it may invest directly and
that, in the case of the Equity Portfolio, are traded on registered domestic
securities exchanges. The Strategic Yield Portfolio may invest up to 5% of its
total assets, represented by the premium paid, in the purchase of call and put
options on the types of securities in which the Portfolio may invest. The
Strategic Yield Portfolio may also write covered call and put options contracts
to the extent that the value of the call or put options, represented by the
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premium paid, does not exceed 10% of the value of the covered assets. The
Strategic Yield Portfolio may purchase and sell call and put options on equity
securities and stock indices, to the same extent as it is permitted to purchase
and sell call and put options on the types of securities in which it may invest.
The writer of a call option, who receives a premium, has the obligation, upon
exercise of the option, to deliver the underlying security against payment of
the exercise price during the option period. The writer of a put option, who
receives a premium, has the obligation to buy the underlying security, upon
exercise, at the exercise price during the option period.
Each of the Equity Portfolio, Strategic Yield Portfolio, International Small Cap
Portfolio, Emerging Markets Portfolio, Global Equity Portfolio, Bantam Value
Portfolio and Emerging World Funds Portfolio may write put and call options only
if they are "covered," and such options must remain "covered" as long as the
Portfolio is obligated as a writer. A call option is "covered" if the Portfolio
owns the underlying security covered by the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or for additional cash consideration if held in a segregated account by the
Fund's custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also covered if the Portfolio holds on a
share-for-share or equal principal amount basis a call on the same security as
the call written where the exercise price of the call held is equal to or less
than the exercise price of the call written or greater than the exercise price
of the call written if the difference is maintained by the Portfolio in
permissible liquid assets in a segregated account with the Fund's custodian. A
put option is "covered" if the Portfolio maintains permissible liquid assets
with a value equal to the exercise price in a segregated account with the Fund's
custodian, or else owns on a share-for-share or equal principal amount basis a
put on the same security as the put written where the exercise price of the put
held is equal to or greater than the exercise price of the put written.
The principal reason for writing call options is to attempt to realize, through
the receipt of premiums, a greater current return than would be realized on the
underlying securities alone. In return for the premium, the Portfolio would give
up the opportunity for profit from a price increase in the underlying security
above the exercise price so long as the option remains open, but retains the
risk of loss should the price of the security decline. Upon exercise of a call
option when the market value of the security exceeds the exercise price, the
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Portfolio would incur a loss equal to the difference between the exercise price
and the market value, less the premium received for writing the option.
The principal reason for purchasing put options is to protect the value of a
security owned against an anticipated decline in market value. Exercise of a put
option will generally be profitable only if the market price of the underlying
security declines sufficiently below the exercise price to offset the premium
paid and the transaction costs. If the market price of the underlying security
increases, the Portfolio's profit upon the sale of the security will be reduced
by the premium paid for the put option less any amount for which the put is
sold.
The Equity Portfolio, International Small Cap Portfolio, Emerging Markets
Portfolio, Global Equity Portfolio, Bantam Value Portfolio and Emerging World
Funds Portfolio may purchase and sell put and call options on stock indices
traded on national, domestic or foreign, securities exchanges, although the
Equity Portfolio currently intends to limit investments in options on stock
indices to no more than 5% of its total assets. See "Additional Permitted
Investment Activities and Risk Factors--Investment in Options on Stock Indices"
in the Statement of Additional informtion for a description of options on stock
indices.
OPTIONS ON FOREIGN CURRENCIES
The International Fixed-Income Portfolio, Strategic Yield Portfolio,
International Small Cap Portfolio, Emerging Markets Portfolio, Global Equity
Portfolio and Emerging World Funds Portfolio may purchase and write put and call
options on foreign currencies for the purpose of protecting against declines in
the U.S. Dollar value of foreign currency denominated portfolio securities and
against increases in the U.S. Dollar cost of such securities to be acquired. As
in the case of other kinds of options, however, the writing of an option on a
foreign currency constitutes only a partial hedge, up to the amount of the
premium received, and the Portfolios could be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring losses.
The purchase of an option on a foreign currency may constitute an effective
hedge against fluctuations in exchange rates although, in the event of rate
movements adverse to a Portfolio's position, it may forfeit the entire amount of
the premium plus related transaction costs. Options on foreign currencies to be
written or purchased by a Portfolio are traded on U.S. and foreign exchanges or
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over-the-counter. There is no specific percentage limitation on a Portfolio's
investments in options on foreign currencies, although the International
Fixed-Income Portfolio will limit its investments in options traded on the
over-the-counter market to no more than 10% of the market value of the
Portfolio's net assets. See the Statement of Additional Information for further
discussion of the use, risks and costs of options on foreign currencies.
DIVERSIFICATION
The Equity Portfolio is operated as a "diversified" portfolio as that term is
defined in the Investment Company Act. As such, the Portfolio has at least 75%
of the value of its total assets invested in cash and cash items (including
receivables), U.S. Government Securities, securities of other investment
companies and "other securities." For these purposes, "other securities" are
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the total assets of the Portfolio and to not more
than 10% of the outstanding voting securities of such issuer.
The International Equity Portfolio, International Fixed-Income Portfolio, Bond
Portfolio, Strategic Yield Portfolio, International Small Cap Portfolio,
Emerging Markets Portfolio, Small Cap Portfolio, Global Equity Portfolio, Bantam
Value Portfolio and Emerging World Funds Portfolio are "non-diversified," which
means that none of the Portfolios is limited in the proportion of its assets
that may be invested in the securities of a single issuer. Because these
Portfolios are non-diversified and each may invest in a smaller number of
individual issuers than a diversified investment company, an investment in any
of these Portfolios may, under certain circumstances, present greater risk to an
investor than an investment in a diversified company.
Each of the Portfolios intends to conduct its operations so as to qualify as a
"regulated investment company" for purposes of the Code, which will relieve the
Portfolio of any liability for Federal income tax to the extent its earnings are
distributed to shareholders. To so qualify, among other requirements, each
Portfolio will limit its investments so that, at the close of each quarter of
the taxable year, (i) not more than 25% of the market value of the Portfolio's
total assets will be invested in the securities of a single issuer, and (ii)
with respect to 50% of the market value of its total assets, not more than 5% of
the market value of its total assets will be invested in the securities of a
single issuer and the Portfolio will not own more than 10% of the outstanding
voting securities of a single issuer. A Portfolio's investments in U.S.
Government Securities are not subject to these limitations.
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PORTFOLIO TURNOVER
Except as noted below, the Fund's policy with respect to turnover of securities
held in the Portfolios is to purchase securities for investment purposes and not
for the purpose of realizing short-term trading profits. When circumstances
warrant, however, securities may be sold without regard to the length of time
held.
Although a Portfolio cannot accurately predict its annual portfolio turnover
rate, the Investment Manager does not expect the annual portfolio turnover of
the Equity Portfolio, Small Cap Portfolio, International Equity Portfolio,
International Small Cap Portfolio, Emerging Markets Portfolio, Global Equity
Portfolio, Bantam Value Portfolio or Emerging World Funds Portfolio to exceed
100%. A 100% annual portfolio turnover rate would occur, for example, if all of
the stocks in a portfolio were replaced in a period of one year. A 100% turnover
rate is greater than that of many other investment companies, including those
which emphasize capital appreciation as a basic policy, and may result in
correspondingly greater brokerage commissions being paid by the Portfolio.
The International Fixed-Income Portfolio, Bond Portfolio and Strategic Yield
Portfolio will actively use trading to benefit from yield disparities among
different issues of fixed-income securities or otherwise to achieve its
investment objective and policies. The Investment Manager anticipates that the
annual turnover in the International Fixed-Income Portfolio, Bond Portfolio and
Strategic Yield Portfolio may be in excess of 200% in future years (but is not
expected to exceed 300%). A 200% turnover rate is greater than that of most
other investment companies. A high rate of portfolio turnover involves
correspondingly greater transaction expenses than a lower rate, which expenses
are borne by the Portfolio and its shareholders. High portfolio turnover also
may result in the realization of substantial net short-term capital gains.
However, in order for each Portfolio to continue to qualify as a regulated
investment company for Federal tax purposes, less than 30% of the annual gross
income of each Portfolio must be derived from the sale of securities held by the
Portfolio for less than three months. See "Taxation."
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The foregoing investment objectives and related policies and activities of each
of the Portfolios, except as indicated above, are not fundamental and may be
changed by the Board of Directors of the Fund without the approval of the
shareholders.
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INVESTMENT RESTRICTIONS
The following investment restrictions and, except as otherwise noted, those
specifically so described in the Statement of Additional Information, are
fundamental policies of each of the Portfolios that may be changed only when
permitted by law and approved by the holders of a majority of such Portfolio's
outstanding voting securities, as defined in the Investment Company Act and as
described under "Organization and Description of Capital Stock" in the Statement
of Additional Information. The Fund is empowered to establish, without
shareholder approval, additional portfolios which may have different fundamental
investment restrictions.
In addition to the fundamental investment restrictions listed in the Statement
of Additional Information, no Portfolio may:
(i) issue senior securities, borrow money or pledge or mortgage its assets,
except that (A) each Portfolio may borrow from banks for temporary purposes,
including the meeting of redemption requests which might require the untimely
disposition of securities, as described above in "Additional Permitted
Investment Activities and Risk Factors--Temporary Bank Borrowing", (B) the
International Small Cap Portfolio, Emerging Markets Portfolio, Global Equity
Portfolio, Bantam Value Portfolio or Emerging World Funds Portfolio also may
borrow money to the extent permitted under the Investment Company Act and, as a
non-fundamental policy, may pledge, hypothecate, mortgage or otherwise encumber
its assets to secure permitted borrowings; provided, however, that the
International Small Cap Portfolio, the Emerging Markets Portfolio, Global Equity
Portfolio, Bantam Value Portfolio or Emerging World Funds Portfolio will not
make new investments to the extent borrowings exceed 5% of the total assets of
the Portfolio, except for borrowings that are covered within the interpretations
of Section 18(f) of the Investment Company Act and (C) the Equity Portfolio may
additionally utilize leverage as described in "Additional Permitted Investment
Activities and Risk Factors-- Borrowing for Investment" in the Statement of
Additional Information. For purposes of this investment restriction, a
Portfolio's entry into options, forward contracts, futures contracts, including
those related to indexes, shall not constitute borrowing;
(ii) make loans, except loans of portfolio securities not having a value in
excess of 10% (331/3% in the case of the International Small Cap Portfolio,
Emerging Markets Portfolio, Global Equity Portfolio, Bantam Value Portfolio or
Emerging World Funds Portfolio) of a Portfolio's total assets and except that
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each Portfolio may purchase debt obligations in accordance with its investment
objectives and policies;
(iii) invest in illiquid securities as defined in "Additional Permitted
Investment Activities and Risk Factors--Illiquid Securities" if immediately
after such investment more than 10% of the value of the Portfolio's net assets,
or, in the case of the Equity Portfolio, more than 10% of the value of that
Portfolio's total assets, taken at market value, would be invested in such
securities (this restriction is not a fundamental policy of the Global Equity
Portfolio, Bantam Value Portfolio and Emerging World Funds Portfolio); or
(iv) purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization; provided, however,
that, this restriction is not a fundamental policy of the International Small
Cap Portfolio, Emerging Markets Portfolio, Global Equity Portfolio, Bantam Value
Portfolio or Emerging World Funds Portfolio and provided, further, that (A) the
International Small Cap Portfolio, Emerging Markets Portfolio, Global Equity
Portfolio, Bantam Value Portfolio and Emerging World Funds Portfolio may
purchase securities of other investment companies to the extent permitted under
the Investment Company Act (this restriction is not a fundamental policy of
these Portfolios) and (B) the Equity Portfolio, International Equity Portfolio
and Small Cap Portfolio may purchase securities in an amount up to 5% of the
value of the Portfolio's total assets in any one closed-end fund and may
purchase in the aggregate securities of closed-end funds in an amount of up to
10% of the value of the Portfolio's total assets.
MANAGEMENT
DIRECTORS
The Board of Directors, under applicable laws of the State of Maryland, in
addition to supervising the actions of the Investment Manager, as set forth
below, decides upon matters of general policy.
INVESTMENT MANAGER AND INVESTMENT MANAGEMENT AGREEMENTS
Lazard Asset Management, 30 Rockefeller Plaza, New York, New York 10020, has
entered into investment management agreements with the Fund on behalf of each of
the Portfolios. The investment management agreements entered into by Lazard
Asset Management will collectively be referred to herein as the "Management
Agreements" and, where appropriate, individually as the "Management Agreement."
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Pursuant to the Management Agreements, the Investment Manager will regularly
provide the Portfolios with investment research, advice and supervision and
furnish continuously an investment program for each Portfolio consistent with
its investment objectives and policies, including the purchase, retention and
disposition of securities.
The Investment Manager is also responsible for the selection of brokers and
dealers to effect securities transactions and the negotiation of brokerage
commissions, if any. Purchases and sales of securities on a securities exchange
are effected through brokers who charge a negotiated commission for their
services. Orders may be directed to any broker including, to the extent and in
the manner permitted by applicable law, Lazard Freres. The Investment Manager
has selected Lazard Freres as a broker for certain portfolio securities
transactions with respect to the Portfolios. Lazard Freres performs such
brokerage services in conformity with Rule 17e-1 under the Investment Company
Act and procedures adopted by the Fund's Board of Directors. In addition, the
Investment Manager may allocate brokerage transactions to brokers who direct to
the Investment Manager persons who purchase Portfolio shares.
The Investment Manager is a division of Lazard Freres, a New York limited
liability company, which is registered as an investment adviser with the
Commission and is a member of the New York, American and Midwest Stock
Exchanges. Lazard Freres provides its clients with a wide variety of investment
banking, brokerage and related services. The Investment Manager provides
investment management services to client discretionary accounts with assets
totalling approximately $38.1 billion as of December 31, 1996. Its clients are
both individuals and institutions, some of whose accounts have investment
policies similar to those of several of the Portfolios.
Under the terms of each Management Agreement, the Investment Manager will pay
the compensation of all personnel of the Fund except the fees of Directors of
the Fund who are not employees or affiliated persons of the Investment Manager.
The Investment Manager will make available to the Portfolios such of the
Investment Manager's members, directors, officers and employees as are
reasonably necessary for the operations of each Portfolio, or as may be duly
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elected officers or directors of the Fund. Under the Management Agreements, the
Investment Manager also pays each Portfolio's office rent and provides
investment advisory research and statistical facilities and all clerical
services relating to research, statistical and investment work. The Investment
Manager, including its employees who serve the Portfolios, may render investment
advice, management and other services to others.
Each of the Portfolios pays the Investment Manager an investment management fee
at the annual rate set forth below as a percentage of the average daily value of
the net assets of the relevant Portfolio: Equity Portfolio, .75%; International
Equity Portfolio, .75%; International Fixed-Income Portfolio, .75%; Bond
Portfolio, .50%; Strategic Yield Portfolio, .75%; Small Cap Portfolio, .75%;
International Small Cap Portfolio, .75%; Emerging Markets Portfolio, 1.00%;
Global Equity Portfolio, .75%; Bantam Value Portfolio, .75%; and Emerging World
Funds Portfolio, .75%. The investment management fees are accrued daily and paid
monthly.
Each Portfolio will bear all expenses not specifically assumed by the Investment
Manager, including, among others, the fee payable to the Portfolio's Investment
Manager, the fees of the Directors who are not "affiliated persons" of the
Investment Manager, the expenses of all Directors and the fees and out-of-pocket
expenses of the Fund's custodian and the transfer and dividend disbursing agent.
For a more detailed description of the expenses to be borne by the Portfolios,
see "Management" in the Statement of Additional Information. For a description
of expense reimbursement arrangements see "Fee Table."
Each of the Management Agreements provides that the Investment Manager will
reimburse each Portfolio for the Portfolio's expenses (exclusive of interest,
taxes, brokerage, distribution expenditures and extraordinary expenses, all to
the extent permitted by applicable state securities law and regulations) which
in any year exceed the limits prescribed by any state in which the Portfolio's
shares are qualified for sale. The Fund may not qualify the shares of each
Portfolio for sale in every state.
ADMINISTRATOR
State Street Bank and Trust Company ("State Street"), located at 225 Franklin
Street, Boston, Massachusetts 02110, serves as each Portfolio's administrator
pursuant to an Administration Agreement with the Fund. Under the Administration
Agreement, State Street receives from each Portfolio, an annual fee of $45,000
plus .02% of the value of such Portfolio's average daily net assets up to $1
billion and .01% of such assets in excess of $1 billion.
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DISTRIBUTOR
Under the terms of a distribution agreement with the Fund, Lazard Freres acts as
distributor for the Portfolios and bears the cost of printing and mailing
prospectuses to potential investors.
PRINCIPAL MANAGERS
The name and title of each of the principal persons employed by or associated
with the Investment Manager who are primarily responsible for the day-to-day
management of the assets of each of the Portfolios are as follows:
EQUITY PORTFOLIO: Herbert W. Gullquist. (Since inception). Mr. Gullquist is a
Managing Director of the Investment Manager and has been with the Investment
Manager since 1982.
MICHAEL S. ROME. (Since 1991). Mr. Rome is a Managing Director of the Investment
Manager and has been with the Investment Manager since 1991.
SMALL CAP PORTFOLIO: Herbert W. Gullquist. (Since inception). Mr. Gullquist's
biographical information is described under "Equity Portfolio".
MICHAEL S. ROME. (Since January 1, 1995). Mr. Rome's biographical information is
described under "Equity Portfolio".
EILEEN ALEXANDERSON. (Since inception). Ms. Alexanderson is a Managing Director
of the Investment Manager and has been with the Investment Manager since 1979.
LEONARD M. WILSON. (Since inception). Mr. Wilson has been a Senior Vice
President of the Investment Manager since 1988.
BRADLEY J. PURCELL. (Since inception). Mr. Purcell is a Vice President of the
Investment Manager and has been with the Investment Manager since 1991.
INTERNATIONAL EQUITY PORTFOLIO: Herbert W. Gullquist. (Since inception). Mr.
Gullquist's biographical information is described under "Equity Portfolio".
JOHN R. REINSBERG. (Since January 1992). Mr. Reinsberg is a Managing Director of
the Investment Manager and has been with the Investment Manager since 1992.
INTERNATIONAL FIXED-INCOME PORTFOLIO: Thomas F. Dunn. (Since January 1, 1995).
Mr. Dunn is a Managing Director of the Investment Manager and has been with the
Investment Manager since January 1, 1995. Prior thereto, he was a Senior Vice
President of Goldman Sachs Asset Management.
IRA O. HANDLER. (Since 1992). Mr. Handler is a Senior Vice President of the
Investment Manager and has been a Global & Emerging Fixed-Income Portfolio
Manager of the Investment Manager since 1992.
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BOND PORTFOLIO: Thomas F. Dunn. (Since January 1, 1995). Mr. Dunn's biographical
information is described under "International Fixed-Income Portfolio".
STRATEGIC YIELD PORTFOLIO: Thomas F. Dunn. (Since January 1, 1995). Mr. Dunn's
biographical information is described under "International Fixed-Income
Portfolio".
IRA O. HANDLER. (Since 1993). Mr. Handler's biographical information is
described under "International Fixed-Income Portfolio".
INTERNATIONAL SMALL CAP PORTFOLIO: HERBERT W. GULLQUIST. (Since inception). Mr.
Gullquist's biographical information is described under "Equity Portfolio".
JOHN R. REINSBERG. (Since inception). Mr. Reinsberg's biographical information
is described under "International Equity Portfolio".
EMERGING MARKETS PORTFOLIO: HERBERT W. GULLQUIST. (Since inception). Mr.
Gullquist's biographical information is described under "Equity Portfolio".
JOHN R. REINSBERG. (Since inception). Mr. Reinsberg's biographical information
is described under "International Equity Portfolio".
GLOBAL EQUITY PORTFOLIO: HERBERT W. GULLQUIST. (Since inception). Mr.
Gullquist's biographical information is described under "Equity Portfolio."
JOHN R. REINSBERG. (Since inception). Mr. Reinsberg's biographical information
is described under "International Equity Portfolio".
MICHAEL S. ROME. (Since inception). Mr. Rome's biographical information is
described under "Equity Portfolio".
BANTAM VALUE PORTFOLIO: HERBERT W. GULLQUIST. (Since inception). Mr. Gullquist's
biographical information is described under "Equity Portfolio."
MICHAEL S. ROME. (Since inception). Mr. Rome's biographical information is
described under "Equity Portfolio".
EILEEN ALEXANDERSON. (Since inception). Ms. Alexanderson's biographical
information is described under "Small Cap Portfolio".
LEONARD M. WILSON. (Since inception). Mr. Wilson's biographical information is
described under "Small Cap Portfolio".
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BRADLEY J. PURCELL. (Since inception). Mr. Purcell's biographical information is
described under "Small Cap Portfolio".
EMERGING WORLD FUNDS PORTFOLIO: ALEXANDER E. ZAGOREOS. (Since inception). Mr.
Zagoreos is a Managing Director of the Investment Manager and has been with the
Investment Manager since 1977.
DETERMINATION OF NET ASSET VALUE
Net asset value per share of each Class for each Portfolio is determined by the
Fund's custodian, State Street Bank and Trust Company (the "Custodian"), on each
day the New York Stock Exchange is open for trading. The net asset value per
share of each Class of each Portfolio is computed by dividing the value of the
total assets of the Portfolio represented by such Class, less all liabilities,
by the total number of Portfolio shares of such Class outstanding.
The value of securities, other than options listed on national securities
exchanges and debt securities maturing in 60 days or less, is determined as of
the close of regular trading on the New York Stock Exchange. Options on stocks
and stock indices traded on national securities exchanges are valued as of the
close of options trading on such exchanges (which is currently 4:10 p.m. New
York time). Debt securities maturing in 60 days or less are valued at amortized
cost, except where to do so would not reflect accurately their fair value, in
which case such securities would be valued at their fair value as determined
under the supervision of the Board of Directors. Each security for which the
primary market is on a national securities exchange is valued at the last sale
price on the principal exchange on which it is traded, or, if no sales are
reported on such exchange on that day, at the closing bid price.
Any security held by any Portfolio for which the primary market is the National
Association of Securities Dealers Automated Quotations National Market System,
is valued at the last sale price as quoted by such system or, in the absence of
any sale on the valuation date, at the closing bid price. Any other unlisted
security for which current over-the-counter market quotations or bids are
readily available is valued at its last quoted bid price or, if available, the
mean of two such prices.
All other securities and other assets for which current market quotations are
not readily available are valued at fair value as determined in good faith by
the Fund's Board of Directors and in accordance with procedures adopted by the
Board of Directors. The portfolio securities of any of the Portfolios may also
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be valued on the basis of prices provided by a pricing service when such prices
are believed by the Investment Manager to reflect the fair market value of such
securities.
The Small Cap Portfolio, International Small Cap Portfolio and Bantam Value
Portfolio invest primarily in equity securities of companies with relatively
small market capitalizations. Because of the difference between the bid and
asked prices of over-the-counter securities, there may be an immediate reduction
in the net asset value of the shares of the Small Cap Portfolio, International
Small Cap Portfolio or Bantam Value Portfolio after such Portfolio has completed
a purchase of securities that will be valued by the relevant Portfolio at their
bid price, since those securities usually will have been purchased at or near
the asked price.
PURCHASE OF SHARES
The minimum initial investment is $10,000 for Open Shares of each Portfolio,
unless the investor is a client of a securities dealer or other institution
which has made an aggregate minimum initial purchase for its clients of a least
$10,000, and $1,000,000 for Institutional Shares of each Portfolio. Investments
in Institutional Shares made by directors, members and employees of Lazard
Freres and affiliated companies and their relatives or by the trustees of
benefit plans covering those individuals are subject to a $5,000 minimum initial
investment requirement for each Portfolio. The minimum initial investment for an
IRA (Open Shares Only) opened directly with the Fund is $10,000.00 with
subsequent IRA investment minimum of $1,000.00. All minimums may, however, be
waived in the sole discretion of the Fund. The minimum subsequent investment for
all investors is $1,000 for Open Shares and $5,000 for Institutional Shares. The
minimum investment requirements may be waived or lowered for investments
effected through banks and other institutions that have entered into special
arrangements with the Fund or the Distributor and for investments effected on a
group basis by certain other entities and their employees, such as pursuant to a
payroll deduction plan. Fund shares are sold without a sales charge. Securities
dealers and other institutions effecting transactions in Fund shares for the
accounts of their clients may charge their clients direct fees in connection
with such transactions.
Shares of any Portfolio may be purchased in exchange for securities which are
permissible investments of that Portfolio, subject to the Investment Manager's
determination that the securities are acceptable. Securities accepted in
exchange will be valued at the mean between their bid and asked quotations. In
addition, securities accepted in exchange are required to be liquid securities
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that are not restricted as to transfer and have a value that is readily
ascertainable (and not established only by valuation procedures) as evidenced by
a listing on the American Stock Exchange, the New York Stock Exchange, NASDAQ, a
recognized non-U.S. exchange or non NASDAQ listing with at least two market
makers. The Fund and Lazard Freres reserve the right to reject any purchase
order. All funds will be invested in full and fractional shares.
PURCHASES THROUGH THE TRANSFER AGENT
Orders for shares of all of the Portfolios will become effective at the net
asset value per share next determined after receipt by the Transfer Agent or
other agent of a check drawn on any member of the Federal Reserve System or
after receipt by the Custodian or other agent of a bank wire or Federal Reserve
Wire. Checks must be payable in United States dollars and will be accepted
subject to collection at full face value. See "Determination of Net Asset
Value." The Transfer Agent and the Distributor may, in certain cases, agree to
next day settlement for certain purchases through the Transfer Agent.
By investing in a Portfolio, a shareholder appoints the Transfer Agent, as
agent, to establish an open account to which all shares purchased will be
credited, together with any dividends and capital gain distributions that are
paid in additional shares. See "Dividends and Distributions."
INITIAL PURCHASE BY WIRE
1. Telephone toll free from any continental state: (800) 986-3455. Give the
Portfolio(s) and Class of shares to be invested in, name(s) in which shares are
to be registered, address, social security or tax identification number (where
applicable), dividend payment election, amount to be wired, name of the wiring
bank and name and telephone number of the person to be contacted in connection
with the order. An account number will be assigned.
2. Instruct the wiring bank to transmit the specified amount in federal funds
($10,000 or more for Open Shares or $1,000,000 or more for Institutional
Shares), giving the wiring bank the account name(s) and assigned account number,
to the Custodian:
ABA #: 011000028 State Street Bank and Trust Company
Boston, Massachusetts
Custody and Shareholder Services Division
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DDA 9905-2375
Attention: (Name of Portfolio and Class of Shares)
The Lazard Funds, Inc.
Shareholder's Name and Account Number
3. Complete a Purchase Application. Indicate the services to be used. Mail the
Purchase Application to the Transfer Agent:
Boston Financial Data Services Inc.
P.O. Box 9363
Boston, Massachusetts 02205-9363
Attention: (Name of Portfolio and Class of Shares)
The Lazard Funds, Inc.
ADDITIONAL PURCHASES BY WIRE
Instruct the wiring bank to transmit the specified amount ($1,000 or more for
Open Shares, or $5,000 or more for Institutional Shares) in federal funds to
State Street Bank and Trust Company as instructed in Item 2 above.
INITIAL PURCHASE BY MAIL
1. Complete a Purchase Application. Indicate the services to be used.
2. Mail the Purchase Application and a check for $10,000 or more for Open
Shares, or $1,000,000 or more for Institutional Shares, payable to the Portfolio
whose shares are to be purchased, to Boston Financial Data Services Inc. at the
address set forth in Item 3 above.
ADDITIONAL PURCHASES BY MAIL
1. Make a check ($1,000 or more for Open Shares, or $5,000 or more for
Institutional Shares) payable to the Portfolio whose shares are to be purchased.
Write the shareholder's account number on the check.
2. Mail the check and the detachable stub from the Statement of Account (or a
letter providing the account number) to Boston Financial Data Services Inc. at
the address set forth in Item 3 above.
All purchases made by check should be in U.S. dollars and made payable to The
Lazard Funds, Inc. Third party checks will not be accepted. When purchases are
made by check or periodic account investment, redemptions will not be allowed
until the investment being redeemed has been in the account for 15 calendar
days.
PURCHASES THROUGH A LAZARD FRERES BROKERAGE ACCOUNT
Shares of all of the Portfolios are sold by Lazard Freres only to customers of
Lazard Freres, without a sales charge, on a continuing basis at the net asset
value of the Portfolio next determined after receipt of a purchase order by
Lazard Freres. Payments must be made to Lazard Freres within three business days
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of the order. Because Lazard Freres does not forward investors' funds until the
business day on which the order is settled, it may benefit from temporary use of
these funds. See "Management" in the Statement of Additional Information.
PURCHASE BY AUTOMATIC INVESTMENT (OPEN SHARES ONLY)
Investors may participate in the Automatic Investment Plan, which is an
investment plan that automatically debits money from the shareholder's
designated bank account and invests it in one or more of the Portfolios through
the use of electronic fund transfers or automatic bank drafts. Shareholders may
elect to make investment at almost any interval by transfers of a minimum of
$250 into their established Fund Account on any day the New York Stock
Exchange is open for trading. Contact the Fund to obtain an Automatic
Investment Plan application or should you require more information.
INDIVIDUAL RETIREMENT ACCOUNTS (OPEN SHARES ONLY)
The Fund may be used as an investment for existing IRAs. Shares may be
purchased for IRAs established with other authorized custodians using a regular
fund application.
DIRECT IRA ACCOUNT
A Direct IRA rollover account may be established with the Lazard Funds through a
custodial account with State Street. Completion of a Lazard Funds IRA
application is required in order to create such an account. The minimum initial
investment for an IRA rollover account is $10,000. Contributions to IRAs are
subject to limits set by the Internal Revenue Service. For a Direct IRA Account
a $5 establishment fee and an annual $12 maintenance and custody fee is payable
to State Street for each IRA Fund account; in addition, a $10.00 termination fee
will be charged and paid to State Street when the account is closed. For more
information on IRA's call the Fund toll free at 1-800-823-6300.
REDEMPTION OF SHARES
Upon receipt by the Transfer Agent, Lazard Freres or other agent of a redemption
request in proper form, shares of any Portfolio will be redeemed at their next
determined net asset value. See "Determination of Net Asset Value." For the
shareholder's convenience, the Fund has established several different redemption
procedures.
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REDEMPTIONS THROUGH THE TRANSFER AGENT
SHAREHOLDERS OF A PORTFOLIO WHO DO NOT HAVE A BROKERAGE ACCOUNT WITH LAZARD
FRERES SHOULD SUBMIT THEIR REDEMPTION REQUESTS TO THE TRANSFER AGENT BY MAIL
(SEE ITEMS 1-4 BELOW). Redemption requests should be mailed to the Transfer
Agent at the address set forth in Item 4 below. Upon receipt by the Transfer
Agent of a redemption request in proper form, shares of a Portfolio will be
redeemed at their next determined net asset value. See "Determination of Net
Asset Value." Shares held in securities accounts at Lazard Freres may be
redeemed through Lazard Freres. See "Redemptions through a Lazard Freres
Brokerage Account."
1. Write a letter of instruction to the Fund. Indicate the dollar amount or
number and Class of shares to be redeemed, and the shareholder's Portfolio
account number, and social security or taxpayer identification number (where
applicable).
2. Sign the letter in exactly the same way the account is registered. If there
is more than one owner of the shares, all must sign.
3. If shares to be redeemed have a value of $50,000 or more, the signature(s)
must be guaranteed by a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System, broker-dealer,
registered securities association or clearing agency, or other participant in a
signature guarantee program. Signature guarantees by a notary public are not
acceptable. Further documentation, such as copies of corporate resolutions and
instruments of authority, may be requested from corporations, administrators,
executors, personal representatives, trustees or custodians to evidence the
authority of the person or entity making the redemption request.
4. Mail the letter to the Transfer Agent at the following address:
Boston Financial Data Services Inc.
P.O. Box 9363
Boston, Massachusetts 02205-9363
Attention: (Name of Portfolio and Class of Shares)
The Lazard Funds, Inc.
Checks for redemption proceeds normally will be mailed within seven days, where
the shares to be redeemed have been purchased by check, the redemption request
will be returned if the purchasing check has not cleared the 15 day holding
period. Unless other instructions are given in proper form, a check for the
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proceeds of a redemption will be sent to the shareholder's address of record.
The Custodian may benefit from the use of redemption proceeds until the check
issued to a redeeming shareholder for such proceeds has cleared.
When proceeds of a redemption are to be paid to someone other than the
shareholder, either by wire or check, the signature(s) on the letter of
instruction must be guaranteed regardless of the amount of the redemption.
REDEMPTIONS THROUGH A LAZARD FRERES BROKERAGE ACCOUNT
Redemption requests for shares of a Portfolio submitted to and received by
Lazard Freres are effected at the net asset value of the Portfolio next
determined after redemption instructions are received from a customer by Lazard
Freres. The Fund imposes no charges when shares are redeemed. Securities dealers
and other institutions may charge their clients a fee for effecting redemptions
of Fund shares.
Lazard Freres may benefit from the use of the redemption proceeds prior to the
clearance of a check issued to a redeeming shareholder for such proceeds or
prior to disbursement or reinvestment of such proceeds on behalf of the
shareholder.
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Payment of redemption proceeds may be made in securities, subject to regulation
by some state securities commissions. The Fund may suspend the right of
redemption during any period when (i) trading on the New York Stock Exchange is
restricted or that Exchange is closed, other than customary weekend and holiday
closings, (ii) the Commission has by order permitted such suspension or (iii) an
emergency, as defined by rules of the Commission, exists making disposal of
portfolio securities or determination of the value of the net assets of the
Portfolios not reasonably practicable.
The proceeds of redemption may be more or less than the amount invested and,
therefore, a redemption may result in a gain or loss for federal income tax
purposes.
The Fund has secured a $50 million committed line of credit from State Street to
assist in meeting redemption requests when deemed necessary.
REDEMPTION OF SMALL ACCOUNTS (OPEN SHARES ONLY)
Due to the disproportionately higher cost of servicing small accounts, each Fund
reserved the right to redeem, on not less than 30 days; notice, an account that
through redemptions has a value of $500 ($250 for IRAs) or less. However, if
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during the 30 day notice period the shareholder purchases sufficient shares to
bring the value of the account above $500 ($250 for IRAs). This restriction will
not apply.
DISTRIBUTION AND SERVICING PLAN
(OPEN SHARES ONLY)
Open Shares are subject to a Distribution and Servicing Plan adopted pursuant to
Rule 12b-1 under the Investment Company Act. Under the Distribution and
Servicing Plan, the Fund pays Lazard Freres for advertising, marketing and
distributing each Portfolio's Open Shares and for the provision of certain
services to the holders of Open Shares a fee at an annual rate of .25% of the
value of the average daily net assets of the Portfolio's Open Class. The
services provided may include personal services relating to shareholder
accounts, such as answering shareholder inquiries regarding the Fund and
providing reports and other information, and services related to the maintenance
of shareholder accounts. The fee payable for such services is intended to be a
"service fee" as defined in Contest Rules of the NASD. Under the Distribution
and Servicing Plan, Lazard Freres may make payments to third parties in respect
of these services. From time to time, Lazard Freres may defer or waive receipt
of fees under the Distribution and Servicing Plan while retaining the ability to
be paid by the Fund under the Distribution and Servicing Plan thereafter. The
fees payable to Lazard Freres under the Distribution and Servicing Plan for
advertising, marketing and distributing Open Shares and for payments to third
parties are payable without regard to actual expenses incurred.
EXCHANGE PRIVILEGE
Shares of any of the Portfolios that have been held for seven days or more may
be exchanged for shares of the same Class of one of the other Portfolios in an
identically registered account. All exchanges are subject to the minimum initial
and minimum subsequent investment requirements.
A shareholder may exchange shares by writing or, if the shareholder has so
elected, by calling the Transfer Agent. To elect to initiate exchanges by
telephone the shareholder must have properly completed either a Purchase
Application authorizing such exchanges or a Telephone Exchange Authorization
Form and submitted either to the Transfer Agent in advance of the first such
exchange. The Transfer Agent's toll-free number for exchanges is (800) 986-3455.
In order to confirm that telephone instructions for exchanges are genuine, the
Fund has established reasonable procedures to be employed by the Fund and the
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Transfer Agent, including the requirement that a form of personal identification
be provided. If either the Fund or the Transfer Agent fails to follow these
procedures, the Fund may be liable for any losses due to unauthorized or
fraudulent instructions. None of the Portfolios, Lazard Freres nor the Transfer
Agent will be liable, however, for any loss, liability, cost or expense for
acting upon telephone instructions for exchanges reasonably believed to be
genuine, and the investor accordingly bears the risk of unauthorized telephone
requests for exchanges in these circumstances.
Procedures applicable to redemption of a Portfolio's shares are also applicable
to exchanging shares. The exchange privilege with respect to the shares of any
of the Portfolios is available only in states in which shares of that Portfolio
may be legally sold. The Fund reserves the right to limit the number of times
shares may be exchanged between Portfolios, to reject any telephone exchange
order or otherwise to modify or discontinue exchange privileges at any time. A
capital gain or loss for tax purposes will be realized upon an exchange,
depending upon the cost or other basis of shares redeemed.
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income on shares of the International Fixed-Income
Portfolio, Bond Portfolio and Strategic Yield Portfolio will be declared each
business day and paid monthly. Shares of the International Fixed-Income
Portfolio, Bond Portfolio and Strategic Yield Portfolio will begin earning
dividends once the purchase amount for such shares has been accepted and
converted into Federal Funds and will continue to earn dividends through the day
a redemption order for such shares is executed. Dividends from net investment
income on shares of the Equity Portfolio will be declared and paid quarterly.
Dividends from net investment income on shares of the International Equity
Portfolio, Small Cap Portfolio, International Small Cap Portfolio, Emerging
Markets Portfolio, Global Equity Portfolio, Bantam Value Portfolio and Emerging
World Funds Portfolio generally will be declared and paid annually but may be
declared and paid twice annually. Investment income for a Portfolio includes,
among other things, interest income, accretion of market and original issue
discount and amortization of premium and, in the case of the Equity Portfolio,
International Equity Portfolio, Small Cap Portfolio, International Small Cap
Portfolio, Emerging Markets Portfolio, Global Equity Portfolio, Bantam Value
Portfolio and Emerging World Funds Portfolio would also include dividends. Net
realized capital gains from each of the Portfolios, if any, generally will be
distributed annually but may be distributed twice annually.
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Dividends paid by each Class will be calculated at the same time and in the same
manner and will be of the same amount, except that certain expenses will be
borne exclusively by one Class and not by the other, such as fees payable under
the Distribution and Servicing Plan. Open Shares will receive lower per share
dividends than Institutional Shares because of the higher expenses borne by Open
Shares. See "Fee Table."
Dividends and distributions will be invested in additional shares of the same
Portfolio at net asset value and credited to the shareholder's account on the
payment date or, at the shareholder's election, paid in cash. Dividend checks
and Statements of Account will be mailed approximately two business days after
the payment date. Each Portfolio forwards to the Custodian the monies for
dividends to be paid in cash on the payment date.
TAXATION
U.S. FEDERAL INCOME TAXES
It is intended that each Portfolio will qualify as a regulated investment
company under Subchapter M of the Code. Each Portfolio will be treated as a
separate entity for tax purposes and thus the provisions of the Code applicable
to regulated investment companies generally will be applied to each Portfolio
separately, rather than to the Fund as a whole. In addition, net capital gains,
net investment income, and operating expenses will be determined separately for
each Portfolio. By qualifying as a regulated investment company under the Code,
a Portfolio will not be subject to federal income taxes with respect to net
investment income and net capital gains distributed to its shareholders. In
order to qualify as a regulated investment company for any taxable year, each
Portfolio must, among other things, (i) derive at least 90% of its gross income
from dividends, interest, certain payments with respect to securities loans and
gains from the sale or other disposition of stock or securities or foreign
currencies or other income (including, but not limited to, gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies and (ii) derive less than 30% of its
gross income from the sale or other disposition of stock or securities held for
less than three months.
Dividends from net investment income (including net short-term capital gains)
will be taxable to the shareholders as ordinary income, whether received in cash
or reinvested in additional shares. Distributions of net long-term capital
gains, if any, will be taxable to the shareholders as long-term capital gains,
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whether received in cash or reinvested in additional shares, regardless of how
long the shareholder has held the shares.
Any dividend or distribution received by a shareholder on shares of a Portfolio
shortly after the purchase of such shares by him will have the effect of
reducing the net asset value of such shares by the amount of such dividend or
distribution. Such dividend or distribution, although in effect a return of
capital, is subject to applicable taxes to the extent that the investor is
subject to such taxes. If a shareholder holds shares less than six months and
during that period receives a distribution taxable to such shareholder as
long-term capital gain, any loss realized on the sale of such shares during such
six-month period would be a long-term loss to the extent of such gain.
Corporate shareholders of the Equity Portfolio, Small Cap Portfolio, Global
Equity Portfolio and Bantam Value Portfolio will be eligible for the
dividends-received deduction on the dividends (excluding the net capital gain
dividends) paid by the Portfolio, to the extent that the Portfolio's income is
derived from certain dividends received from domestic corporations. A
corporation's dividends-received deduction will be disallowed unless the
corporation holds shares in the Portfolio at least 46 days. Furthermore, a
corporation's dividends-received deduction will be disallowed to the extent a
corporation's investment in shares of the Portfolio is financed with
indebtedness. It is anticipated that distributions from Portfolios other than
the Equity Portfolio, Small Cap Portfolio, Global Equity Portfolio and Bantam
Value Portfolio will not qualify for the dividends-received deduction. Each year
the Fund will notify shareholders of the federal income tax status of
distributions.
The International Fixed-Income Portfolio and the Bond Portfolio may invest in
REMICs. Interests in REMICs are classified as either "regular" interests or
"residual" interests. Under the Code, special rules apply with respect to the
treatment of a portion of the Portfolio's income from REMIC residual interests.
(Such portion is referred to herein as "Excess Inclusion Income.") Excess
Inclusion Income generally cannot be offset by net operating losses and, in
addition, constitutes unrelated business taxable income to entities which are
subject to the unrelated business income tax. The Code provides that a portion
of Excess Inclusion Income attributable to REMIC residual interests held by
regulated investment companies such as the Portfolios shall, pursuant to
regulations, be allocated to the shareholders of such regulated investment
company in proportion to the dividends received by such shareholders.
Accordingly, shareholders of the International Fixed-Income Portfolio and the
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Bond Portfolio generally will not be able to use net operating losses to offset
such Excess Inclusion Income. In addition, if a shareholder of one of the
Portfolios is an entity subject to the unrelated business income tax (including
a qualified pension plan, an IRA, a 401(k) plan, a Keogh plan, or another
tax-exempt entity) and is allocated any amount of Excess Inclusion Income, such
a shareholder may be required to file a return and pay a tax on such Excess
Inclusion Income even though a shareholder might not have been required to pay
such tax or file such return absent the receipt of such Excess Inclusion Income.
It is anticipated that only a small portion, if any, of the assets of the
International Fixed-Income Portfolio and the Bond Portfolio will be invested in
REMIC residual interests. Accordingly, the amount of Excess Inclusion Income, if
any, received by the Portfolios and allocated to their shareholders should be
quite small. Shareholders that are subject to the unrelated business income tax
should consult their own tax advisor regarding the treatment of their income
derived from the Portfolios.
Except as discussed above with respect to Excess Inclusion Income, a dividend or
capital gains distribution with respect to shares held by a tax-deferred or
qualified plan, such as an IRA, 403(b)(7) retirement plan or corporate pension
or profit sharing plan, will not be taxable to the plan. Distributions from such
plans will be taxable to individual participants under applicable tax rules
without regard to the character of the income earned by the qualified plan.
Dividends and distributions paid by a Portfolio may be subject to state and
local taxes. Prior to investing in shares of a Portfolio a prospective
shareholder should consult his tax adviser concerning the federal, state and
local tax consequences of such an investment.
The foregoing discussion relates only to U.S. federal income tax law as it
affects shareholders who are U.S. citizens or residents or U.S. corporations or
trusts. The effects of federal income tax law on shareholders who are
non-resident aliens or foreign corporations or trusts may be substantially
different. Foreign investors should consult their counsel for further
information as to the U.S. tax consequences of receipt of income from a
Portfolio.
FOREIGN INCOME TAXES
Investment income received by a Portfolio from sources within foreign countries
may be subject to foreign income taxes withheld at the source. It is anticipated
that the International Equity Portfolio, International Small Cap Portfolio,
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Emerging Markets Portfolio, Global Equity Portfolio and Emerging World Funds
Portfolio will be operated so as to meet the requirements of the Code to "pass
through" to such Portfolio's shareholders credits for foreign income taxes paid,
but there can be no assurance that it will qualify. It is possible that the
credit for foreign taxes will pass through to shareholders of the International
Fixed-Income Portfolio and the Strategic Yield Portfolio.
ACCOUNT SERVICES
Shareholders will be sent a Statement of Account from Lazard Freres, as agent of
the Fund, whenever a share transaction is effected in the accounts. Shareholders
can write or call the Fund at the address and telephone number on the cover of
this Prospectus with any questions relating to their investment shares of any of
the Portfolios.
SHAREHOLDERS SERVICES
A special service is available to banks, brokers, investment advisers, trust
companies and others who have a number of accounts in one or more of the
Portfolios. A monthly summary of accounts can be provided, showing for each
account the account number, the month-end share balance and the dividends and
distributions paid during the month.
ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Fund consists of 1,550,000,000 shares of
common stock, $.001 par value. The Fund's Board of Directors has authorized the
following eleven portfolios: Equity Portfolio, International Equity Portfolio,
International Fixed-Income Portfolio, Bond Portfolio, Strategic Yield Portfolio,
Small Cap Portfolio, International Small Cap Portfolio, Emerging Markets
Portfolio, Global Equity Portfolio, Bantam Value Portfolio and Emerging World
Funds Portfolio. Shares of each Portfolio are classified into two classes of
shares--Open Shares and Institutional Shares. The Fund's Board of Directors may,
in the future, designate and authorize additional portfolios or the issuance of
other classes of capital stock. All shares of the Fund have equal voting rights
and will be voted in the aggregate, and not by class, except where voting by
class is required by law or where the matter involved affects only one class. A
more complete statement of the voting rights of shareholders is contained in the
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Statement of Additional Information. All shares of the Fund, will be validly
issued, fully paid and non-assessable. As of April 15, 1997, the Investment
Manager had the power to vote a sufficient number of the outstanding shares of
the Fund so that the Investment Manager would be deemed to be a controlling
person of the Fund.
On January 1, 1992, the Fund on behalf of the Equity Portfolio acquired the
assets and liabilities of Lazard Equity Fund, formerly a portfolio of Scudder
Fund, Inc. ("Scudder Fund") an open-end, diversified management investment
company.
Lazard Freres has agreed to indemnify Scudder Fund and its directors from any
and all claims arising out of the transfer of assets to the maximum extent that
Scudder Fund would be so permitted by the Maryland General Corporation Law,
subject to the limitations of the Investment Company Act. In addition, the Fund
has agreed to indemnify, with respect to the Equity Portfolio, the Scudder Fund
and its directors and officers from claims arising out of acts or omissions
occurring prior to the transfer to the same extent that such individuals could
have been indemnified by Scudder Fund. If, however, the Fund (or the Equity
Portfolio) ceases to exist, Lazard Freres has agreed, in lieu of the Fund, to
indemnify the directors and officers of Scudder Fund as set forth in the next
preceding sentence.
Maryland law does not require annual meetings of shareholders except under
certain specified circumstances and it is anticipated that shareholder meetings
will be held only when required by federal or Maryland law. A meeting of
shareholders will be called, however, for the purpose of voting upon the
question of removal of a director of the Fund, upon the written request of
holders of not less than 10% of all votes entitled to be cast at the meeting.
The Fund will assist shareholders in communications concerning the removal of
any director of the Fund.
CUSTODIAN; TRANSFER AND DIVIDEND DISBURSING AGENT
State Street has been retained to act as Custodian of the Portfolios'
investments. Boston Financial Data Services Inc. serves as the Fund's Transfer
and Dividend Disbursing Agent. Neither the Custodian nor the Transfer Agent has
any part in deciding any of the Portfolio's investment policies or which
securities are to be purchased or sold for any Portfolios. Subject to the
supervision of the Fund's Board of Directors, the Custodian may enter into
subcustodial arrangements on behalf of any of the Portfolios for the holding of
foreign securities.
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REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on December 31 of each year. The Fund sends to
the shareholders of each Portfolio, at least semi-annually, reports showing the
investments in each of the Portfolios and other information (including unaudited
financial statements) pertaining to each Portfolio. An annual report, containing
financial statements audited by the Fund's independent accountants, is sent to
shareholders each year.
PERFORMANCE INFORMATION
From time to time the Portfolios may advertise their "average annual total
return" and their "actual total return." THESE FIGURES ARE BASED ON HISTORICAL
EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. These total
returns show what the investment results of each Class of the Portfolio would
have been over a specified period of time (such as one, five, or ten years, or
the period of time since commencement of operations, if shorter) assuming that
all distributions and dividends by the Portfolio were reinvested on their
reinvestment dates during the period less all recurring fees. Both types of
total return are computed in the same manner, except that the "average annual
total return" requires the additional step of determining the annual rate of
return required for the initial investment to equal the "actual total return" at
the end of the relevant period.
In addition, from time to time, the Fund may advertise "yield" and "actual
distribution rate" quotations for one or more Portfolios. A Portfolio's "yield"
for any 30-day period is computed by dividing the net investment income per
share earned during such period by the maximum public offering price per share
on the last day of the period, and then annualizing such 30-day yield in
accordance with a formula prescribed by the Commission which provides for
compounding on a semi-annual basis. A Portfolio's "actual distribution rate" is
computed in the same manner as yield except that actual income dividends
declared per share during the period in question is substituted for net
investment income per share.
Performance of each Class will be calculated separately and will take into
account any applicable distribution and service fees. As a result, at any given
time, the performance of Open Shares should be expected to be lower than that of
Institutional Shares. See "Distribution and Servicing Plan."
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APPENDIX
BOND AND COMMERCIAL PAPER RATINGS
S&P BOND RATINGS
A S&P corporate debt rating is a current assessment of the creditworthiness of
an obligor with respect to a specific obligation. Debt rated AAA has the highest
rating assigned by S&P. Capacity to pay interest and repay principal is
extremely strong. Debt rated AA has a very strong capacity to pay interest and
to repay principal and differs from the highest rated issues only in small
degree. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt of a higher rated category. Debt
rated BBB is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and to repay principal for debt in this
category than for higher rated categories.
Debt rated BB, B, CCC or CC is 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 indicates the lowest degree of
speculation and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions. The rating C
is reserved for income bonds on which no interest is being paid. Debt rated D is
in default and payments of interest and/or repayment of principal is in arrears.
The ratings from AA to B may be modified by the addition of a plus or minus sign
to show relative standing within the major rating categories.
MOODY'S BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings are as follows:
Aaa--judged to be the best quality, carry the smallest degree of investment
risk; Aa--judged to be of high quality by all standards; A--possess many
favorable investment attributes and are to be considered as higher medium grade
obligations; Baa--considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured and have speculative characteristics as
well; Ba, B, Caa, Ca, C--protection of interest and principal payments is
questionable; Ba indicates some speculative elements while Ca represents a high
degree of speculation and C represents the lowest rated class of bonds; Caa, Ca
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and C bonds may be in default. Moody's applies the numerical modifiers 1, 2, and
3 in each generic rating classification from Aa to B in its corporate bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks at the lower end of
its generic rating category.
S&P'S COMMERCIAL PAPER RATINGS
A is the highest commercial paper rating category utilized by S&P, which uses
the numbers 1+, l, 2 and 3 to denote relative strength within its A
classification. Commercial paper issues rated A by S&P have the following
characteristics: liquidity ratios are better than industry average, long-term
debt rating is A or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow are in an upward trend.
Typically, the issuer is a strong company in a well-established industry and has
superior management. Issues rated B are regarded as having only an adequate
capacity for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities. The rating C is assigned to short-term
debt obligations with a doubtful capacity for repayment. An issue rated D is
either in default or is expected to be in default upon maturity.
MOODY'S COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity normally will be evidenced by the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This normally will
be evidenced by many of the characteristics cited above 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 alternate liquidity is maintained.
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Issuers rated Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
The rating category Not Prime encompasses all other rated commercial paper
issuers.
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The Lazard Funds, Inc.
30 Rockefeller Plaza
New York, New York 10020
Telephone: (800) 823-6300
Investment Manager
Lazard Asset Management
30 Rockefeller Plaza
New York, New York 10020
Distributor
Lazard Freres & Co. llc
30 Rockefeller Plaza
New York, New York 10020
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Transfer Agent and
Dividend Disbursing Agent
Boston Financial Data Services Inc.
P.O. Box 9363
Boston, Massachusetts 02205-9363
Independent Public Accountants
ABA Seymour Schneidman Financial Services
Group, a division of Anchin, Block & Anchin LLP
1375 Broadway New York, New
York 10018
Legal Counsel
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038-4982
<PAGE>
LAZARD FUNDS
30 Rockefeller Plaza
58th Floor
New York, NY 10020
Telephone 800.823.6300
NO SALES OR REDEMPTION CHARGES
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, and information or
representations not contained herein must not be relied upon as having been
authorized by the Fund or the Distributor. This Prospectus does not constitute
an offer of any security other than the registered securities to which it
relates or an offer to any person in any jurisdiction where such offer would be
unlawful.
<PAGE>
THE LAZARD FUNDS, INC.
30 Rockefeller Plaza
New York, New York 10020
(800) 823-6300
STATEMENT OF ADDITIONAL INFORMATION
The Lazard Funds, Inc. (the "Fund") is a no-load, open-end management
investment company that currently offers two classes of shares in the following
investment portfolios (collectively, the "Portfolios"): Lazard Equity Portfolio
(the "Equity Portfolio"); Lazard International Equity Portfolio (the
"International Equity Portfolio"); Lazard International Fixed-Income Portfolio
(the "International Fixed-Income Portfolio"); Lazard Bond Portfolio (the "Bond
Portfolio"); Lazard Strategic Yield Portfolio (the "Strategic Yield Portfolio");
Lazard Small Cap Portfolio (the "Small Cap Portfolio"); Lazard International
Small Cap Portfolio (the "International Small Cap Portfolio"); Lazard Emerging
Markets Portfolio (the "Emerging Markets Portfolio"); Lazard Global Equity
Portfolio (the "Global Equity Portfolio"); Lazard Bantam Value Portfolio (the
"Bantam Value Portfolio"); and Lazard Emerging World Funds Portfolio (the
"Emerging World Funds Portfolio"). Lazard Asset Management, a division of Lazard
Freres & Co. LLC ("Lazard Freres"), serves as the investment manager
("Investment Manager") to each of the Portfolios.
The Fund currently offers Institutional Shares and Open Shares of each
Portfolio. Institutional Shares and Open Shares are identical, except as to
minimum investment requirements and the services offered to and expenses borne
by each class of shares.
This Statement of Additional Information is not a prospectus and is authorized
for distribution only when preceded or accompanied by the Fund's Prospectus
dated May 1, 1997. This Statement of Additional Information contains
additional and more detailed information than that set forth in the Prospectus
and should be read in conjunction with the Prospectus, additional copies of
which may be obtained without charge by writing or calling the Fund at the
address and telephone number given above.
May 1, 1997
<PAGE>
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TABLE OF CONTENTS PAGE
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Additional Permitted Investment Activities and Risk Factors....................3
Investment Restrictions.......................................................15
Management....................................................................18
Determination of Net Asset Value..............................................23
Portfolio Transactions........................................................24
Redemption of Shares..........................................................26
Distribution and Servicing Plan...............................................26
Dividends and Distributions...................................................26
Taxation......................................................................27
Shareholder Services..........................................................29
Organization and Description of Capital Stock.................................29
Other.........................................................................31
Custodian.....................................................................31
Counsel and Independent Accountants...........................................31
Yield and Total Return Quotations.............................................32
Appendices
Financial Statements and Report of Independent Auditors.......................41
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ADDITIONAL PERMITTED INVESTMENT ACTIVITIES AND RISK FACTORS
The following supplements, and should be read in conjunction with, the
information regarding the investment objectives and policies of each Portfolio
set forth in the Prospectus. Except as noted below, the investment policies
described below are not designated "fundamental policies" within the meaning of
the Investment Company Act of 1940, as amended (the "Investment Company Act"),
and may be changed by the Board of Directors of the Fund without the approval of
the shareholders of the affected Portfolio or Portfolios; however, shareholders
will be notified prior to a material change in such policies.
U.S. GOVERNMENT SECURITIES
Each Portfolio may invest in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities ("U.S. Government Securities").
For a description of obligations issued or guaranteed by U.S. Government
agencies or instrumentalities, see Appendix A hereto.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES
Each Portfolio may invest in certificates of deposit and bankers'
acceptances which are considered to be short-term money market instruments.
Certificates of deposit are receipts issued by a depository institution in
exchange for the deposit of funds. The issuer agrees to pay the amount deposited
plus interest to the bearer of the receipt on the date specified on the
certificate. The certificate usually can be traded in the secondary market prior
to maturity. Bankers' acceptances typically arise from short-term credit
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity.
COMMERCIAL PAPER
Each Portfolio may purchase commercial paper. Commercial paper consists of
short-term unsecured promissory notes issued by corporations in order to finance
their current operations. For a description of commercial paper ratings, see the
Appendix to the Prospectus.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Each Portfolio may purchase securities offered on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. Normally, the settlement date occurs
within two months after the transaction, but delayed settlements beyond two
months may be negotiated. During the period between a commitment by the
Portfolio and settlement, no payment is made for the securities purchased by the
purchaser and, thus, no interest accrues to the purchaser from the transaction.
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The use of when-issued transactions and forward commitments enables a
Portfolio to hedge against anticipated changes in interest rates and prices. For
instance, in anticipation of rising interest rates and falling market prices,
the Portfolio might sell securities in its portfolio on a forward commitment
basis to limit its exposure to falling prices. In periods of falling interest
rates and rising market prices, the Portfolio might sell a security it owns and
purchase the same or a similar security on a when-issued basis, thereby
obtaining the benefit of currently higher cash yields. In either instance, if
the Investment Manager's expectation were to prove incorrect, the Portfolio
could in some cases be obliged to purchase or sell securities at prices inferior
to current market prices.
When-issued securities and forward commitments may be sold prior to the
settlement date, but a Portfolio enters into when-issued and forward commitments
only with the intention of actually receiving or delivering the securities, as
the case may be. To facilitate such transactions, the Fund's custodian will
maintain, in a separate account, permissible liquid assets held by the Portfolio
having value equal to, or greater than, any commitments to purchase securities
on a when-issued or forward commitment basis and, with respect to forward
commitments to sell portfolio securities of the Portfolio, the portfolio
securities themselves.
If a Portfolio chooses to dispose of the right to acquire a when-issued
security prior to its acquisition or dispose of its right to deliver or receive
against a forward commitment, it can incur a gain or loss. At the time the
Portfolio makes the commitment to purchase or sell a security on a when-issued
or forward commitment basis, it records the transaction and reflects the value
of the security purchased or, if a sale, the proceeds to be received, in
determining its net asset value.
Each Portfolio may purchase securities on a "when, as and if issued" basis
under which the issuance of the security depends upon the occurrence of a
subsequent event, such as approval of a merger, corporate reorganization or debt
restructuring. The commitment for the purchase of any such security will not be
recognized in a Portfolio until the Investment Manager determines that issuance
of the security is probable. At such time, the Portfolio will record the
transaction and, in determining its net asset value, will reflect the value of
the security daily. At such time, the Portfolio will also establish a segregated
account with the Fund's custodian bank in which it will maintain cash or cash
equivalents or other high-grade debt portfolio securities equal in value to
recognized commitments for such securities. The value of the Portfolio's
commitments to purchase the securities of any one issuer, together with the
value of all securities of such issuer owned by the Portfolio, may not exceed 5%
of the value of the Portfolio's total assets at the time the initial commitment
to purchase such securities is made. Subject to the foregoing restrictions,
these Portfolios may purchase securities on such basis without limit. An
increase in the percentage of the Portfolio's assets committed to the purchase
of securities on a "when, as and if issued" basis may increase the volatility of
its net asset value. The Investment Manager and the Directors of the Fund do not
believe that the net asset value of any Portfolio will be adversely affected by
its purchase of securities on such basis.
ILLIQUID SECURITIES
No Portfolio will invest in illiquid securities if immediately after such
investment more than 10% of the value of the Portfolio's net assets would be
invested in such securities. The Equity Portfolio may invest up to 5% of the
value of its assets, taken at cost, in securities which must be registered under
the Securities Act of 1933, as amended (the "Securities Act"), before they may
be offered or sold to the public. For this purpose, illiquid securities include,
among others,
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securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale. Securities that have
legal or contractual restrictions on resale but have a readily available market
are not deemed illiquid for purposes of this limitation.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act, and securities which are otherwise not
readily marketable. Securities which have not been registered under the
Securities Act are referred to as private placements or restricted securities
and may be purchased directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted securities
in order to dispose of them resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
The Securities and Exchange Commission (the "Commission") has adopted
Rule 144A which allows a broader institutional trading market for securities
otherwise subject to restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the Securities
Act of resales of certain securities to qualified institutional buyers.
The Investment Manager will monitor the liquidity of restricted
securities in the Portfolios under the supervision of the Board of Directors.
BORROWING FOR INVESTMENT
Each of the Equity Portfolio, International Small Cap Portfolio,
Emerging Markets Portfolio, Global Equity Portfolio, Bantam Value Portfolio and
Emerging World Funds Portfolio may from time to time increase its ownership of
securities above the amounts otherwise possible by borrowing from banks on an
unsecured basis and investing the borrowed funds, although none of the
Portfolios has any present intention to do so. Any such borrowing will be made
only from banks, and will only be made to the extent that the value of the
Portfolio's assets, less its liabilities other than borrowings, is equal to at
least 300% of all borrowings, including the proposed borrowing and any emergency
borrowings as described under "Additional Permitted Investment Activities --
Temporary Bank Borrowing" in the Prospectus. If the value of the Portfolio's
assets computed as provided above should fail to meet the 300% asset coverage
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described above, the Portfolio, within three days, is required to reduce its
bank debt to the extent necessary to meet such asset coverage and may have to
sell a portion of its investments at a time when independent investment judgment
would not dictate such action.
Interest on money borrowed by any of the Equity Portfolio, International
Small Cap Portfolio, Emerging Markets Portfolio, Global Equity Portfolio, Bantam
Value Portfolio and Emerging World Funds Portfolio is an expense of that
Portfolio which it would not otherwise incur so that the Portfolio may have
little or no net investment income during periods when its borrowings are
substantial.
Borrowing for investment purposes increases both investment opportunity and
investment risk. Since substantially all of each Portfolio's assets fluctuate in
value, whereas the obligation resulting from the borrowing is a fixed one, the
net asset value per share of the Portfolio will tend to increase more when the
portfolio assets increase in value, and decrease more when the portfolio assets
decrease in value than would otherwise be the case. This is the speculative
factor known as leverage. Such borrowings will be used only for the purchase of
securities.
INVESTMENT IN WARRANTS
The Equity Portfolio, Strategic Yield Portfolio, Small Cap Portfolio,
International Small Cap Portfolio, Emerging Markets Portfolio, Global Equity
Portfolio, Bantam Value Portfolio and Emerging World Funds Portfolio may invest
in warrants. None of these Portfolios may invest more than 5% of its total
assets at the time of purchase in warrants (other than those that have been
acquired in units or attached to other securities). In addition, not more than
2% of the assets of any of these Portfolios may, at the time of purchase, be
invested in warrants that are not listed on an exchange. Warrants represent
rights to purchase equity securities at a specific price valid for a specific
period of time. The prices of warrants do not necessarily correlate with the
prices of the underlying securities. The Equity Portfolio may only purchase
warrants on securities in which it may invest directly.
INVESTMENT IN OPTIONS
The Equity Portfolio, International Small Cap Portfolio, Emerging Markets
Portfolio, Global Equity Portfolio, Bantam Value Portfolio and Emerging World
Funds Portfolio may purchase for hedging purposes put and call options and write
"covered" put and call options on stocks and bonds in which it may invest
directly and that are traded on registered domestic securities exchanges and/or
recognized international stock exchanges, in the case of the International Small
Cap Portfolio, the Emerging Markets Portfolio, Global Equity Portfolio, and
Emerging World Funds Portfolio. The Strategic Yield Portfolio may invest up to
5% of its total assets in the purchase of the time value of call and put options
on the types of securities in which the Portfolio may invest. The time value of
an option is the option premium less the intrinsic value of the option at the
time of purchase. The Strategic Yield Portfolio may also write covered call and
put options contracts to the extent that the time value of the call or put
options does not exceed 10% of the value of the covered assets. The writer of a
call option, who receives a premium, has the obligation, upon exercise of the
option, to deliver
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the underlying security against payment of the exercise price during the option
period. The writer of a put option, who receives a premium, has the obligation
to buy the underlying security, upon exercise, at the exercise price during the
option period.
The Equity Portfolio, Strategic Yield Portfolio, International Small Cap
Portfolio, Emerging Markets Portfolio, Global Equity Portfolio, Bantam Value
Portfolio and Emerging World Funds Portfolio may write put and call options only
if they are covered, and such options must remain covered so long as the
Portfolio is obligated as a writer. A call option is "covered" if the Portfolio
owns the underlying security covered by the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or for additional cash consideration held in a segregated account by the Fund's
custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also covered if the Portfolio holds on a
share-for-share basis a call on the same security as the call written where the
exercise price of the call held is equal to or less that the exercise price of
the call written or greater than the exercise price of the call written if the
difference is maintained by the Portfolio in cash, Treasury bills or other high
grade short-term obligations in a segregated account with the Fund's custodian.
A put option is "covered" if the Portfolio maintains cash, Treasury bills or
other high grade short-term obligations with a value equal to the exercise price
in a segregated account with the Fund's custodian, or else owns on a
share-for-share basis a put on the same security as the put written where the
exercise price of the put held is equal to or greater than the exercise of the
put written.
The principal reason for writing call options is to attempt to realize,
through the receipt of premiums, a greater current return than would be realized
on the underlying securities alone. In return for the premium, the Portfolio
would give up the opportunity for profit from a price increase in the underlying
security above the exercise price so long as the option remains open, but
retains the risk of loss should the price of the security decline. Upon exercise
of a call option when the market value of the security exceeds the exercise
price, the Portfolio would incur a loss equal to the difference between the
exercise price and the market value, less the premium received for writing the
option.
The principal reason for purchasing put options is to protect the value of
a security owned against an anticipated decline in market value. Exercise of a
put option will generally be profitable only if the market price of the
underlying security declines sufficiently below the exercise price to offset the
premium paid and the transaction costs. If the market price of the underlying
security increases, the Portfolio's profit upon the sale of the security will be
reduced by the premium paid for the put option less any amount for which the put
is sold.
Writing of options involves the risk that there will be no market in which
to effect a closing transaction. An exchange-traded option may be closed out
only on an exchange that provides a secondary market for an option of the same
series. Over-the-counter options are not generally terminable at the option of
the writer and may be closed out only by negotiation with the holder. There is
currently no secondary market for over-the-counter options. There is also no
assurance that a liquid secondary market on an exchange will exist.
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INVESTMENT IN OPTIONS ON STOCK INDICES
The Equity Portfolio, International Small Cap Portfolio, Emerging Markets
Portfolio, Global Equity Portfolio, Bantam Value Portfolio and Emerging World
Funds Portfolio may purchase and sell for hedging purposes put and call options
on stock indices traded on national domestic or foreign securities exchanges.
The Strategic Yield Portfolio may purchase and sell put and call options on
equity securities and stock indices, to the same extent as it is permitted to
purchase and sell put and call options on the types of securities in which it
may invest. The Equity Portfolio intends to limit investments in options on
stock indices to no more than 5% of the Portfolio's total assets. Options on
stock indices are similar to options on stock except that, rather than 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, upon exercise of the option, an
amount of cash if the closing level of the stock index upon which the option is
based is greater than, in the case of a call, or less than, in the case of a
put, the exercise price of the option. This amount of cash is 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 "multiplier"). The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike stock options, all settlements are in cash and
gain or loss depends on price movements in the stock market generally (or in a
particular industry or segment of the market) rather than price movements in
individual stocks.
The Equity Portfolio, International Small Cap Portfolio, Emerging Markets
Portfolio, Strategic Yield Portfolio, Global Equity Portfolio, Bantam Value
Portfolio and Emerging World Funds Portfolio will write put options on indices
only if they are covered by segregating with the Fund's custodian an amount of
cash, Treasury bills or other high grade short-term obligations equal to the
aggregate exercise price of the puts.
Except as described below, each of the Equity Portfolio, International
Small Cap Portfolio, Emerging Markets Portfolio, Global Equity Portfolio, Bantam
Value Portfolio and Emerging World Funds Portfolio will write call options on
indices only if on such date the Portfolio holds a portfolio of stocks at least
equal to the value of the index times the multiplier times the number of
contracts. When one of the Portfolios writes a call option on a broadly based
stock market index, it will segregate or put into escrow with the Fund's
custodian, or pledge to a broker as collateral for the option, at least ten
"qualified securities" with a market value at the time the option is written of
not less than 100% of the current index value times the multiplier times the
number of contracts. If one of the Portfolios has written an option on an
industry or market segment index, it will so segregate, escrow, or pledge at
least five "qualified securities," all of which are stocks of issuers in such
industry or market segment, with a market value at the time the option is
written of not less than 100% of the current index value times the multiplier
times the number of contracts. Such stocks will include stocks which represent
at least 50% of the weighting of the industry or market segment index and will
represent at least 50% of the Portfolio's holdings in that industry or market
segment. No individual security will represent more than 15% of the amount so
segregated, escrowed or pledged, in the case of broadly based stock market index
options, or 25% of such amount, in the case of industry or market segment index
options. If at the close of business on any day the market value of such
qualified securities so segregated, escrowed or pledged falls below 100% of the
current index value times the multiplier times the number of contracts, the
Portfolio will so segregate, escrow or pledge an amount in cash, Treasury bills
or other high grade short-term obligations equal in value to the difference. In
addition, when one of the Portfolios writes a call on an index which is
in-the-money at the time the call is written, the Portfolio will segregate with
the Fund's custodian or pledge to the broker as collateral cash, Treasury bills
or other high grade short-term obligations equal in value to the
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amount by which the call is in-the-money times the multiplier times the number
of contracts. Any amount segregated pursuant to the foregoing sentence may be
applied to the Portfolio's obligation to segregate additional amounts in the
event that the market value of the qualified securities falls below 100% of the
current index value times the multiplier times the number of contracts. A
"qualified security" is an equity security which is listed on a national
domestic or foreign securities exchange or quoted on the National Association of
Securities Dealers Automated Quotations System against which the Portfolio has
not written a stock call option; however, if the Portfolio owns a call on the
same index as the call written where the exercise price of the call owned is
equal to or less than the exercise price of the call written, or greater than
the call written if the difference is maintained by the Portfolio in cash,
Treasury bills or other high grade short-term obligations in a segregated
account with the Fund's custodian, it will not be subject to the requirements
described in this paragraph.
FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS
The International Equity Portfolio, International Fixed-Income Portfolio,
International Small Cap Portfolio, Emerging Markets Portfolio, Strategic Yield
Portfolio, Global Equity Portfolio and Emerging World Funds Portfolio may
purchase or sell foreign currency forward exchange contracts. While the purchase
of these contracts is not presently regulated by the Commodity Futures Trading
Commission (the "CFTC") except for certain requirements as to the qualification
of the investor, the CFTC may in the future assert authority to regulate more
broadly the trading of foreign currency pursuant to forward contracts. In such
event, a Portfolio's ability to utilize forward contracts in the manner set
forth in the Prospectus may be restricted. Forward contracts reduce the
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance for the Portfolio if it had not entered
into such contracts. The use of foreign currency forward exchange contracts will
not eliminate fluctuations in the underlying U.S. dollar equivalent value of the
prices of or rates of return on the Portfolio's foreign currency denominated
portfolio securities, and the use of such techniques will subject the Portfolio
to certain risks.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated asset
that is the subject of the hedge generally will not be precise. In addition, a
Portfolio may not always be able to enter into foreign currency forward exchange
contracts at attractive prices and this will limit a Portfolio's ability to use
these contracts to hedge or cross-hedge its assets. Also, with regard to a
Portfolio's use of cross-hedges, there can be no assurance that historical
correlations between the movement of certain foreign currencies relative to the
U.S. dollar will continue. Thus, at any time poor correlation may exist between
movements in the exchange rates of the foreign currencies underlying the
Portfolio's cross-hedges and the movements in the exchange rates of the foreign
currencies in which the Portfolio's assets that are the subject of such
cross-hedges are denominated.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The International Fixed-Income Portfolio, Bond Portfolio, International
Small Cap Portfolio, Emerging Markets Portfolio, Global Equity Portfolio, Bantam
Value Portfolio and Emerging World Funds Portfolio may enter into contracts for
the purchase or sale for future delivery of fixed-income securities or contracts
based on financial indices including any index of U.S. Government Securities or
corporate debt securities and may purchase and write put and call options to buy
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or sell futures contracts. The successful use of futures contracts and options
on futures contracts draws upon the Investment Manager's special skills and
experience with respect to such instruments and usually depends on the
Investment Manager's ability to forecast interest rate and currency exchange
rate movements correctly. Should interest or exchange rates move in an
unexpected manner, the Portfolio may not achieve the anticipated benefits of
futures contracts or options on futures contracts or may realize losses and thus
will be in a worse position than if such strategies had not been used. In
addition, the correlation between movements in the price of futures contracts or
options on futures and movements in the price of the securities and currencies
hedged or used for cover will not be perfect and could produce unanticipated
losses.
The Board of Directors has adopted the requirement that futures contracts
and options on futures contracts be used by the Bond Portfolio or the
International Fixed-Income Portfolio solely as a hedge and not for speculation.
In addition to this requirement, the Board of Directors has also adopted two
percentage restrictions on the use of futures contracts. The first restriction
is that the Bond Portfolio and the International Fixed-Income Portfolio will not
enter into any futures contracts or options on futures contracts if immediately
thereafter the amount of margin deposits on all the futures contracts of the
Portfolio and premiums paid on options on futures contracts would exceed 5% of
the market value of the total assets of the Portfolio. The second restriction is
that the aggregate market value of the outstanding futures contracts purchased
by either the Bond Portfolio or International Fixed-Income Portfolio not exceed
50% of the market value of the total assets of Portfolio. Neither of these
restrictions will be changed by the Fund's Board of Directors without
considering the policies and concerns of the various applicable federal and
state regulatory agencies. Similar restrictions have not been adopted for the
International Small Cap Portfolio and Emerging Markets Portfolio.
For additional information on the use, risks and costs of futures contracts
and options on futures contracts, see Appendix B hereto.
OPTIONS ON FOREIGN CURRENCIES
The International Fixed-Income Portfolio, Strategic Yield Portfolio,
International Small Cap Portfolio, Emerging Markets Portfolio, Global Equity
Portfolio and Emerging World Funds Portfolio may purchase and write options on
foreign currencies for hedging purposes. For additional information on the use,
risks and costs of options on foreign currencies, see Appendix B hereto.
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SPECIAL RISKS OF INVESTMENT IN HIGH-YIELD SECURITIES
As discussed in the Prospectus, the Strategic Yield Portfolio invests
principally in high-yield fixed-income securities. The International
Fixed-Income Portfolio may invest up to 15% of its total assets in fixed-income
securities that are rated below BBB by Standard & Poor's Ratings Group ("S&P")
and Baa by Moody's Investors Service, Inc. ("Moody's"). Bonds rated below BBB by
S&P and Baa by Moody's are generally regarded as speculative and range from
having speculative characteristics to lacking characteristics of a desirable
investment and are commonly called "junk bonds." As a result, investment in such
bonds will generally entail greater speculative risks than those associated with
investment in high-grade bonds (i.e., bonds rated AAA, AA or A by S&P or Aaa, Aa
or A by Moody's).
The ratings of fixed-income securities by S&P and Moody's are a generally
accepted barometer of credit risk. They are, however, subject to certain
limitations from an investor's standpoint. Such limitations include the
following: the rating of an issuer is heavily weighted by past developments and
does not necessarily reflect probable future conditions; there is frequently a
lag between the time a rating is assigned and the time it is updated; and there
may be varying degrees of difference in credit risk of securities in each rating
category.
While ratings provide a generally useful guide to credit risks, they do
not, nor do they purport to, offer any criteria for evaluating interest rate
risk. Changes in the general level of interest rates cause fluctuations in the
prices of fixed-income securities already outstanding and will therefore result
in fluctuations in the net asset value of a Portfolio's shares. The extent of
the fluctuation is determined by a complex interaction of a number of factors.
The Investment Manager will evaluate those factors it considers relevant and
will make portfolio changes when it deems it appropriate in seeking to reduce
the risk of depreciation in the value of the relevant Portfolio.
MORTGAGE-BACKED SECURITIES
GOVERNMENT GUARANTEED MORTGAGE PASS-THROUGH SECURITIES. The International
Fixed-Income Portfolio, Bond Portfolio and Strategic Yield Portfolio may invest
in mortgage pass-through securities representing participation interests in
pools of residential mortgage loans originated by United States governmental or
private lenders and guaranteed, to the extent provided in such securities, by
the U.S. Government or one of its agencies or instrumentalities. Such
securities, which are ownership interests in the underlying mortgage loans,
differ from conventional debt securities, which provide for periodic payment of
interest in fixed amounts (usually semiannually) and principal payments at
maturity or on specified call dates. Mortgage pass-through securities provide
for monthly payments that are a "pass-through" of the monthly interest and
principal payments (including any prepayments) made by the individual borrowers
on the pooled mortgage loans, net of any fees paid to the guarantor of such
securities and the servicer of the underlying mortgage loans.
The guaranteed mortgage pass-through securities in which the Portfolios may
invest include those issued or guaranteed by the Government National Mortgage
Association ("Ginnie Mae" or "GNMA"), the Federal National Mortgage Association
("Fannie Mae" or "FNMA") and the Federal Home Loan Mortgage Corporation
("Freddie Mac" or "FHLMC").
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The National Housing Act of 1934, as amended (the "Housing Act"),
authorizes Ginnie Mae to guarantee the timely payment of the principal of and
interest on certificates that are based on and backed by a pool of mortgage
loans insured by the Federal Housing Administration under the Housing Act or
Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by the Veterans'
Administration under the Servicemen's Readjustment Act of 1944, as amended ("VA
Loans"), or by pools of other eligible mortgage loans. The Housing Act provides
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that the full faith and credit of the U.S. Government is pledged to the payment
of all amounts that may be required to be paid under any guarantee. In order to
meet its obligations under such guarantee, Ginnie Mae is authorized to borrow
from the U.S. Treasury with no limitations as to amount.
The Ginnie Mae Certificates will represent a pro rata interest in one
or more pools of the following types of mortgage loans: (i) fixed rate level
payment mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii)
fixed rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured
by manufactured (mobile) homes; (v) mortgage loans on multifamily residential
properties under construction; (vi) mortgage loans on completed multifamily
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans), (viii) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on one-to
four-family housing units.
FANNIE MAE CERTIFICATES. Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act. Fannie Mae was originally established in 1939 as a U.S.
Government agency to provide supplemental liquidity to the mortgage market and
was transformed into a stockholder owned and privately managed corporation by
legislation enacted in 1968. Fannie Mae provides funds to the mortgage market
primarily by purchasing home mortgage loans from local lenders, thereby
replenishing their funds for additional lending. Fannie Mae acquires funds to
purchase home mortgage loans from many capital market investors that may not
ordinarily invest in mortgage loans directly, thereby expanding the total amount
of funds available for housing.
Each Fannie Mae Certificate will entitle the registered holder thereof to
receive amounts representing such holder's pro rata interest in scheduled
principal payments and interest payments (at such Fannie Mae Certificate's
pass-through rate, which is net of any servicing and guarantee fees on the
underlying mortgage loans), and any principal prepayments, on the mortgage loans
in the pool represented by such Fannie Mae Certificate and such holder's
proportionate interest in the full principal amount of any foreclosed or
otherwise finally liquidated mortgage loan. The full and timely payment of
principal of and interest on each Fannie Mae Certificate will be guaranteed by
Fannie Mae, which guarantee is not backed by the full faith and credit of the
U.S. Government.
Each Fannie Mae Certificate will represent pro rata interests in one or
more pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans, that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate mortgage loans secured by multifamily
projects.
FREDDIE MAC CERTIFICATES. Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). Freddie Mac was established primarily for the purpose
of increasing the availability of mortgage credit for the financing of needed
housing. The principal activity of Freddie Mac currently consists of the
purchase of first lien, conventional, residential mortgage loans and
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participation interests in such mortgage loans and the resale of the mortgage
loans so purchased in the form of mortgage securities, primarily Freddie Mac
Certificates.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate, whether or not received. Freddie Mac also guarantees to
each registered holder of a Freddie Mac Certificate ultimate collection of all
principal of the related mortgage loans, without any offset or deduction, but
does not, generally, guarantee the timely payment of scheduled principal.
Freddie Mac may remit the amount due on account of its guarantee of collection
of principal at any time after default on an underlying mortgage loan, but not
later than 30 days following (i) foreclosure sale, (ii) payment of a claim by
any mortgage insurer, or (iii) the expiration of any right of redemption,
whichever occurs later, but in any event no later than one year after demand has
been made upon the mortgagor for accelerated payment of principal. The
obligations of Freddie Mac under its guarantee are obligations solely of Freddie
Mac and are not backed by the full faith and credit of the U.S. Government.
Freddie Mac Certificates represent pro rata interests in a group of
mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie Mac. The
mortgage loans underlying the Freddie Mac Certificates will consist of fixed
rate or adjustable rate mortgage loans with original terms to maturity of
between ten and thirty years, substantially all of which are secured by first
liens on one- to four-family residential properties or multi-family projects.
Each mortgage loan must meet the applicable standards set forth in the FHLMC
Act. A Freddie Mac Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and
participations comprising another Freddie Mac Certificate group.
VARIABLE AMOUNT MASTER DEMAND NOTES
The Equity Portfolio may invest in variable amount master demand notes. A
variable amount master demand note is a type of commercial paper that differs
from ordinary commercial paper in that it is issued pursuant to a written
agreement between the issuer and the holder. Its amount may from time to time be
increased by the holder (subject to an agreed maximum) or decreased by the
holder or the issuer, it is payable on demand and the rate of interest varies
pursuant to an agreed-upon formula. Generally, master demand notes are not rated
by a rating agency. However, the Equity Portfolio may invest in a master demand
note if, in the opinion of the Investment Manager, it is of investment quality
comparable to rated securities in which the Equity Portfolio may invest. The
Investment Manager monitors the issuers of such master demand notes on a daily
basis. Because transfer of such notes is usually restricted by the issuer, and
there is no secondary trading market for such notes, the Equity Portfolio may
not invest in a master demand note if, as a result, more than 10% of the value
of the Portfolio's net assets would be invested in such notes or other illiquid
securities. See "Illiquid Securities" above.
SECURITIES WITH PUT RIGHTS
The Equity Portfolio may enter into put transactions with respect to
obligations held in its portfolio with broker-dealers and with commercial banks.
The right of the Equity Portfolio to exercise a put is unconditional and
unqualified. A put is not transferable by the Portfolio, although the Portfolio
may sell the underlying securities to a third party at any time. If necessary
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and advisable, the Portfolio may pay for certain puts either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a put (thus reducing the yield to maturity otherwise available for the
same securities). The Portfolio expects, however, that puts generally will be
available without the payment of any direct or indirect consideration.
The Equity Portfolio may enter into puts only with banks or broker-dealers
which, in the opinion of the Investment Manager, present minimal credit risks.
The ability of the Portfolio to exercise a put will depend on the ability of the
bank or broker-dealer to pay for the underlying securities at the time the put
is exercised. In the event that a bank or broker-dealer should default on its
obligation to repurchase an underlying security, the Portfolio might be unable
to recover all or a portion of any loss sustained from having to sell the
securities elsewhere.
The Equity Portfolio intends to enter into puts solely to maintain
liquidity and it does not intend to exercise its rights thereunder for trading
purposes. The puts will be only for periods substantially less than the life of
the underlying securities. The acquisition of a put will not affect the
valuation by the Portfolio of the underlying security. Where the Equity
Portfolio pays directly or indirectly for a put, its cost will be reflected as
an unrealized loss for the period during which the put is held by the Portfolio
and will be reflected in realized gain or loss when the put is exercised or
expires. If the value of the underlying security increases, the potential for
unrealized or realized gain is reduced by the cost of the put.
REITS
The Small Cap Portfolio, Equity Portfolio, Global Equity Portfolio and
Bantam Value Portfolio may invest an unlimited amount of its assets in Real
Estate Investment Trusts ("REITS"), although it currently intends to limit its
investments in REITS to no more than 5% of its net assets. Each of the
Portfolios intends to invest in listed equity REITS, which own properties, and
listed mortgage REITS, which make short-term construction and development
mortgage loans or which invest in long-term mortgages or mortgage pools.
Accordingly, a prospective investor should realize that the Portfolio may be
subject to the considerations associated with the direct ownership of real
estate because of the Portfolio's ability to invest in the securities of
companies that own, construct, manage or sell residential, commercial or
industrial real estate. These include declines in the value of real estate,
factors related to general and local economic conditions, overbuilding and
increased competition, increases in property taxes and operating expenses,
changes in zoning laws, casualty or condemnation losses, limitations on rents,
changes in neighborhood values, the appeal of properties to tenants, and
increases in interest rates. The value of securities of companies that service
the real estate industry also may be affected by such risks.
In addition, equity REITS may be affected by any changes in the value of
the underlying property owned by the trusts, while mortgage REITS may be
affected by the quality of any credit extended. Further, equity and mortgage
REITS are dependent upon management skill, are not diversified and are therefore
subject to the risk of financing single or a limited number of projects. REITS
are also subject to heavy cash flow dependency, defaults by borrowers,
self-liquidation and the possibility of failing to qualify for tax free
pass-through of income under the Internal Revenue Code of 1986, as amended (the
"Code"), and to maintain exemption under the Investment Company Act.
- 14 -
<PAGE>
SUPRANATIONAL ORGANIZATIONS
The International Fixed-Income Portfolio may invest up to 25% of the value
of its total assets in debt securities issued by supranational organizations
such as the World Bank, which finances development projects in member countries
and the European Community, which is a multi-nation organization engaged in
cooperative economic activities.
-------------------------------
Except as noted, the foregoing policies and activities of the Portfolios
are not fundamental and may be changed by the Board of Directors of the Fund
without the approval of shareholders of the affected Portfolio or Portfolios;
however, shareholders will be notified prior to a material change in such
policies.
INVESTMENT RESTRICTIONS
The following investment restrictions, which supplement those set forth in
the Fund's Prospectus, are, except where noted, fundamental policies of each of
the Portfolios and may be changed, as to a Portfolio, only when permitted by law
and approved by the holders of a majority of such Portfolio's outstanding voting
securities, as described under "Organization and Description of Capital Stock."
The Fund is empowered to establish, without shareholder approval, additional
portfolios which may have different fundamental investment policies.
None of the Portfolios may:
(i) purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after the
purchase and as a result thereof, the value of any Portfolio's
investments in that industry would exceed 25% of the current value of
such Portfolio's total assets, provided that there is no limitation
with respect to investments in obligations of the U.S. Government, its
agencies or instrumentalities;
(ii) (a) purchase or sell real estate or real estate limited
partnerships, except that a Portfolio may purchase and sell securities
of companies which deal in real estate or interests therein and the
International Small Cap Portfolio, Emerging Markets Portfolio, Global
Equity Portfolio, Bantam Value Portfolio and Emerging World Funds
Portfolio also may purchase and sell securities that are secured by
real estate; provided, however, that this clause (a) is not a
fundamental policy of the Equity Portfolio; (b) purchase or sell
commodities or commodity contracts (except that the International Small
Cap Portfolio, Emerging Markets Portfolio, Global Equity Portfolio,
Bantam Value Portfolio and Emerging World Funds Portfolio may purchase
and sell, swaps, options, forward contracts, futures contracts,
including those relating to indices, and options on futures contracts
or indices, the International Equity Portfolio, International
Fixed-Income Portfolio and Strategic Yield Portfolio may purchase or
sell foreign currency forward exchange contracts, the International
Fixed-Income Portfolio and Bond Portfolio may enter into futures
contracts and options on futures contracts, the International
Fixed-Income Portfolio may enter into futures contracts on foreign
- 15 -
<PAGE>
currencies and the International Fixed-Income Portfolio and Strategic
Yield Portfolio may purchase and write put and call options on foreign
currencies); and (c) invest in interests in or leases relating to oil,
gas, or other mineral exploration or development programs; provided,
however, that this clause (c) is not a fundamental policy of the Equity
Portfolio, Global Equity Portfolio, Bantam Value Portfolio and Emerging
World Funds Portfolio;
(iii) purchase securities on margin (except for short-term credits
necessary for the clearance of transactions) or make short sales of
securities, provided, however, that this prohibition on short sales is
not a fundamental policy of the Global Equity Portfolio, Bantam Value
Portfolio and Emerging World Funds Portfolio;
(iv) underwrite securities of other issuers, except to the extent that
the purchase of municipal obligations or other permitted investments
directly from the issuer thereof or from an underwriter for an issuer
and the later disposition of such securities in accordance with any
Portfolio's investment program may be deemed to be an underwriting; or
(v) make investments for the purpose of exercising control or
management; provided, however, that this restriction is not a
fundamental policy of the International Small Cap Portfolio, Emerging
Markets Portfolio, Global Equity Portfolio, Bantam Value Portfolio and
Emerging World Funds Portfolio.
In addition to the restrictions noted above applicable to all the
Portfolios, the Equity Portfolio has adopted the following fundamental
investment policies:
The Equity Portfolio may not:
(i) purchase restricted securities, which are securities that must be
registered under the Securities Act before they may be offered or sold
to the public, except that the Equity Portfolio may invest up to 5% of
the value of its total assets, taken at cost, in such securities;
(ii) invest more than 5% of the current value of its total assets in
the securities of any one issuer, other than obligations of the United
States Government, its agencies or instrumentalities or securities
which are backed by the full faith and credit of the United States; or
(iii) purchase securities of an issuer if, as a result, as to 75% of
the Portfolio's total assets, the Portfolio would own more than 10% of
the voting securities of such issuer.
- 16 -
<PAGE>
Whenever any investment policy or restriction states a minimum or maximum
percentage of a Portfolio's assets which may be invested in any security or
other asset, it is intended that such minimum or maximum percentage limitation
be determined immediately after and as a result of the Portfolio's acquisition
of such security or other asset. Accordingly, any later increase or decrease in
percentage beyond the specified limitations resulting from a change in values or
net assets will not be considered a violation.
In connection with the qualification or registration for sale under the
securities laws of certain states of the shares of the International Equity
Portfolio, International Fixed-Income Portfolio, Bond Portfolio and Small Cap
Portfolio, the Fund has agreed that, in addition to the foregoing investment
restrictions applicable to these Portfolios, none of them may (i) purchase any
security of any issuer if as a result the Portfolio would own more than 10% of
the outstanding voting securities of that issuer; (ii) invest in warrants; (iii)
invest more than 10% of its total assets in puts, calls, straddles, spreads or
any combination thereof; (iv) purchase or retain securities of any issuer if the
Directors or officers of the Fund or the Investment Manager who own beneficially
more than 1/2 of 1% of the securities of an issuer together own beneficially
more than 5% of such issuer. The investment restrictions set forth in (i), (iii)
and (iv) of the preceding sentence are additionally applicable to the Strategic
Yield Portfolio and the investment restrictions set forth in (i) and (iv) of the
preceding sentence are additionally applicable to the Equity Portfolio. The
investment restrictions set forth in this paragraph are not designated
fundamental policies of these Portfolios within the meaning of the Investment
Company Act and may be changed by the Board of Directors of the Fund without the
approval of the shareholders of the affected Portfolio or Portfolios.
- 17 -
<PAGE>
MANAGEMENT
The Directors and officers of the Fund and their principal occupations
during the past five years are set forth below. Unless otherwise specified, the
address of each of the following persons is 30 Rockefeller Plaza, New York, New
York 10020.
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH REGISTRANT PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ------------------------ ----------------------------------------
<S> <C> <C>
Norman Eig* (57) Chairman of the Board Managing Director (formerly General Partner),
Lazard Freres
Herbert W. Gullquist* (59) President, Director Managing Director (formerly General Partner),
Lazard Freres
John J. Burke (68) Director Vice Chairman, Director, Montana Power Company;
50 Burning Tree Lane
Butte, MT 59701
Kenneth S. Davidson (52) Director Managing Partner, Davidson Weil Associates;
Davidson Weil Associates Blackthorn Fund N.V., Director; Ottertail
767 Fifth Avenue, 43rd Floor Valley Railroad, Director.
New York, NY 10153
Carl Frischling* (60) Director Senior Partner, Kramer, Levin, Naftalis, Nessen,
170 East 83rd Street Kamin & Frankel; from 1992 to 1994, Senior
New York, NY 10028 Partner, Reid & Priest; from 1979 to 1992, Senior
Partner, Spengler Carlson Grubar Brodsky & Frischling.
Lester Z. Lieberman (66) Director Private Investor, Member of the Board of
25 Vreeland Road Directors of Dowel Associates, Chairman of the
Florham Park, NJ 07932 Boards of Trustees of Newark Beth Israel
Medical Center and Irvington General Hospital,
member of the New Jersey State Investment
Council, prior to 1994 was Member of the Boards
of Directors of United Jersey Bank, N.A. and
Clarkson University.
Richard Reiss, Jr. (53) Director Managing Partner, Cumberland Associates, an
1114 Avenue of the Americas investment manager to December 1996, Georgica
New York, NY 10036 Advisors LLC, an investment manager.
John Rutledge (48) Director President, Rutledge & Company, an economics and
One Greenwich Office Park investment advisory firm, Chairman, Claremont
51 Weaver Street Economics Institute
Greenwich, CT 06831
William Katz (43) Director President and Chief Operating Officer of BBDO,
1285 Avenue of the Americas an advertising agency; from May 1994 to February
New York, NY 10019 1996, General Manager of BBDO; prior thereto
Executive Vice President and Senior Account
Director of BBDO.
William G. Butterly, III (36) Vice President, Vice President, Legal Affairs of the Investment
30 Rockefeller Plaza Secretary Manager, prior to May 1993, attorney with
New York, NY 10020 Shearman & Sterling
Gus Coutsouros (34) Treasurer Certified Public Accountant, Vice President and
30 Rockefeller Plaza Assistant Controller of the Investment Manager,
New York, NY 10020 prior to June 1992, Manager, National
Securities and Research Corp., prior to June
1991, Senior Accountant, Price Waterhouse.
</TABLE>
- --------
* An "interested person" of the Fund as defined in the Investment Company Act
and a member of the Executive Committee of the Fund, which meets with the
officers of the Fund in accordance with the Fund's procedures for the valuation
of illiquid securities and for other appropriate purposes.
- 18 -
<PAGE>
For so long as the Fund's plan described under "Distribution and Servicing
Plan" remains in effect, the Directors who are not "interested persons" of the
Fund, as defined in the Investment Company Act, will be selected and nominated
by the Directors who are not "interested persons" of the Fund.
Compensation received from the Fund during 1996 by the Directors who are
not employees or affiliated persons of the Investment Manager is set forth in
the following table.
Compensation Table
TOTAL
COMPENSATION
AGGREGATE FROM FUND
COMPENSATION FROM AND FUND COMPLEX
NAME OF PERSON THE FUND PAID TO DIRECTORS
- -------------- ---------------- -----------------
John J. Burke $31,452 $31,452
Lester Z. Lieberman $27,829 $27,829
Richard Reiss, Jr. $27,000 $27,000
John Rutledge $27,000 $27,000
Kenneth S. Davidson $27,000 $27,000
Carl Frischling $13,791 $13,791
William Katz* $24,000 $24,000
- ----------
* Estimated for 1997.
The Fund does not compensate officers or Directors who are employees or
affiliated persons of the Investment Manager. As of December 31, 1996, the
officers and Directors of the Fund, as a group, owned less than 1% of the shares
of each Portfolio, except the Bantam Value Portfolio. As of that date, the
officers and Directors of the Fund, as a group, owned 1.14% of the shares of the
Bantam Value Portfolio
INVESTMENT MANAGER AND INVESTMENT MANAGEMENT AGREEMENTS
Lazard Asset Management, 30 Rockefeller Plaza, New York, New York 10020,
has entered into an investment management agreement with the Fund on
- 19 -
<PAGE>
behalf of each of the Portfolios. The investment management agreements entered
into by Lazard Asset Management are collectively referred to herein as the
"Management Agreements" and, where appropriate, individually as the "Management
Agreement." Pursuant to each Management Agreement, Lazard Asset Management
regularly provides each Portfolio with investment research, advice and
supervision and furnishes continuously an investment program for each Portfolio
consistent with its investment objectives and policies, including the purchase,
retention and disposition of securities.
Lazard Asset Management is a division of Lazard Freres, a New York limited
liability company, which is registered as an investment adviser with the
Commission and is a member of the New York, American and Midwest Stock
Exchanges. Lazard Freres provides its clients with a wide variety of investment
banking and related services, including investment management. It is a major
underwriter of corporate securities, conducts a broad range of trading and
brokerage activities in corporate and governmental bonds and stocks and acts as
a financial adviser to municipal authorities and utilities and as an underwriter
and trader in municipal securities. Lazard Asset Management provides investment
management services to client discretionary accounts with assets as of December
31, 1996 totaling approximately $38.1 billion. Its clients are both individuals
and institutions, some of whose accounts have investment policies similar to
those of several of the Portfolios. As of April 30, 1997, Lazard Asset
Management held voting and dispositive power with respect to a sufficient number
of shares of each Portfolio held by client accounts as to be considered a
controlling person of such Portfolio.
Subject to policies established by the Fund's Board of Directors, which has
overall responsibility for the business and affairs of each Portfolio, the
Investment Manager manages the operations of the Portfolios. In addition to
providing advisory services, the Investment Manager furnishes the Portfolios
with office space and certain facilities and personnel required for conducting
the business of the Portfolios and pays the compensation of the Fund's officers,
directors and employees affiliated with the Investment Manager or its
affiliates.
As compensation for its services, each of the Portfolios has agreed to pay
the Investment Manager an investment management fee at the annual rates set
forth below as a percentage of the average daily value of the net assets of the
applicable Class of the relevant Portfolio: Equity Portfolio, .75%;
International Equity Portfolio, .75%; International Fixed-Income Portfolio,
.75%; Bond Portfolio, .50%; Strategic Yield Portfolio, .75%; Small Cap
Portfolio, .75%; International Small Cap Portfolio, .75%; Emerging Markets
Portfolio, 1.00%; Global Equity Portfolio, .75%; Bantam Value Portfolio, .75%;
and Emerging World Funds Portfolio, .75%. The management fees are accrued daily
and paid monthly.
- 20 -
<PAGE>
The Investment Manager has undertaken to bear, excluding 12b-1 fees for the
Retail Shares (i) with respect to each of the International Fixed-Income
Portfolio, Global Equity Portfolio, Bantam Value Portfolio and Emerging World
Funds Portfolio, total operating expenses in excess of 1.05%, and (ii) with
respect to the Bond Portfolio, total operating expenses in excess of .80%, of
such Portfolio's average net assets, in each case until the earlier of December
31, 1997 (or such time as the respective Portfolio reaches total net assets of
$100 million). Pursuant to the terms of the Management Agreements and these
arrangements, for the fiscal year ended December 31, 1996, the Investment
Manager received management fees equal to $1,829,111 for the Equity Portfolio,
$11,746,379 for the International Equity Portfolio, $6,243,613 for the Small Cap
Portfolio, $908,760 for the Strategic Yield Portfolio, $361,469 for the
International Fixed Income Portfolio, $269,026 for the Bond Portfolio, $870,310
for the International Small Cap Portfolio, $896,107 for the Emerging Markets
Portfolio, and $10,891 for the Batan Value Portfolio. For the fiscal year ended
December 31, 1996, the Investment Manager received no management fees for the
Global Equity Portfolio. For the fiscal year ended December 31, 1995, the
Investment Manager received management fees equal to $982,130 for the Equity
Portfolio, $7,895,766 for the International Equity Portfolio, $4,066,987 for the
Small Cap Portfolio, $525,597 for the Strategic Yield Portfolio, $232,537 for
the International Fixed-Income Portfolio, $286,080 for the Bond Portfolio,
$736,353 for the International Small Cap Portfolio and $93,501 for the Emerging
Markets Portfolio. For the fiscal year ended December 31, 1995, the Investment
Manager received no management fees for the Bantam Value Portfolio, Global
Equity Portfolio and Emerging World Funds Portfolio. For the fiscal year ended
December 31, 1994, the Investment Manager received management fees equal to
$504,424 for the Equity Portfolio, $5,782,629 for the International Equity
Portfolio, $2,974,688 for the Small Cap Portfolio, $330,620 for the Strategic
Yield Portfolio, $62,918 for the International Fixed-Income Portfolio, $13,790
for the Bond Portfolio and $335,900 for the International Small Cap Portfolio.
For the fiscal year ended December 31, 1994, the Investment Manager received no
management fee for the Emerging Markets Portfolio.
Each Management Agreement provides that the relevant Portfolio pays all of
its expenses that are not specifically assumed by the Investment Manager.
(Expenses attributable to each Portfolio will be charged against the assets of
that Portfolio, other expenses of the Fund will be allocated among the
Portfolios in a manner which may, but need not, be proportionate in relation to
the net assets of each Portfolio.) Expenses payable by each of the Portfolios
include, but are not limited to, clerical salaries; brokerage and other expenses
of executing portfolio transactions; legal, auditing or accounting expenses;
trade association dues; taxes or governmental fees; the fees and expenses of any
person providing administrative services to the Fund; the fees and expenses of
the custodian and transfer agent of the Fund; the cost of preparing share
certificates or any other expenses, including clerical expenses of issue,
redemption or repurchase of shares of the Portfolio; the expenses and fees for
registering and qualifying securities for sale; the fees of Directors of the
Fund who are not employees or affiliated persons of the Investment Manager or
its affiliates; travel expenses of all Directors, officers and employees;
insurance premiums; and the cost of preparing and distributing reports and
notices to shareholders. In addition, the Retail Shares of each Portfolio are
subject to an annual distribution and servicing fee. See "Distribution and
Servicing Plan." The organizational expenses of the Fund are being amortized and
allocated among the International Equity Portfolio, International Fixed-Income
Portfolio, Bond Portfolio, Strategic Yield Portfolio and Small Cap Portfolio.
- 21 -
<PAGE>
Each Management Agreement other than with respect to the International
Small Cap Portfolio, Emerging Markets Portfolio, Global Equity Portfolio, Bantam
Value Portfolio and Emerging World Funds Portfolio was approved on September 11,
1991 (and amended and restated on October 19, 1993) by the Fund's Board of
Directors, including a majority of the Directors of the Fund who are not parties
to such Management Agreement or interested persons (as defined in the Investment
Company Act) of any such party (the "Disinterested Directors"), and by a
majority of the outstanding voting securities of the respective Portfolio at the
Fund's Initial Meeting of Stockholders held on December 16, 1992. Each of the
Management Agreements for the International Small Cap Portfolio and Emerging
Markets Portfolio was approved by the Fund's Board of Directors, including a
majority of the Disinterested Directors, at the meeting of the Board held on
July 20, 1993 and the sole shareholder of each such Portfolio on August 25,
1993. The Management Agreements for the Global Equity Portfolio, Bantam Value
Portfolio and Emerging World Funds Portfolio were approved by the Fund's Board
of Directors on October 16, 1995. Each Management Agreement was renewed by
approval of the Fund's Board of Directors including a majority of the Directors
who are not interested persons, on October 22, 1996. Each such Management
Agreement will continue in effect, provided that such continuance is approved
annually by a vote of a majority of the respective Portfolio's outstanding
voting securities or by the Fund's Board of Directors and, in either case, by a
majority of the Disinterested Directors.
Each Management Agreement is terminable without penalty by the Fund on 60
days' written notice when authorized either by majority vote of the outstanding
voting securities of the particular Portfolio or by a vote of a majority of the
Fund's Directors, or by the Investment Manager on 60 days' written notice, and
will automatically terminate in the event of its assignment. Each Management
Agreement provides that in the absence of willful misfeasance, bad faith or
gross negligence on the part of the Investment Manager, or of reckless disregard
of its obligations thereunder, the Investment Manager shall not be liable for
any action or failure to act in accordance with its duties thereunder.
ADMINISTRATION
Effective May 1, 1995, the Fund engaged State Street Bank and Trust Company
("State Street") to provide certain administrative services to the Portfolios.
Each Portfolio will bear the cost of such administrative expenses at the annual
rate of $45,000 plus .02% of the average daily net assets of the applicable
Class of such Portfolios up to $1 billion and .01% in excess of $1 billion.
- 22 -
<PAGE>
DISTRIBUTOR
Lazard Freres serves as the distributor of shares of each of the Fund's
Portfolios and conducts a continuous offering pursuant to a "best efforts"
arrangement requiring it to take and pay for only such securities as may be sold
to the public. As the distributor, it accepts purchase and redemption orders for
shares of the Portfolios. In addition, the distribution agreement obligates
Lazard Freres to pay certain expenses in connection with the offering of the
shares of the Portfolios. After the prospectuses and periodic reports have been
prepared, set in type and mailed to shareholders, Lazard Freres will pay for the
printing and distribution of copies thereof used in connection with the offering
to prospective investors. Lazard Freres will also pay for other supplementary
sales literature and advertising costs.
DETERMINATION OF NET ASSET VALUE
Net asset value per share for the applicable Class of each Portfolio is
determined by the Fund on each day the New York Stock Exchange is open for
trading. The New York Stock Exchange is normally closed on the following
national holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Net asset value
per share is of each Class determined by dividing the value of the total assets
of the Portfolio represented by such Class, less all liabilities, by the total
number of Portfolio shares of such class outstanding.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the New York Stock
Exchange is open). In addition, European or Far Eastern securities trading
generally or in a particular country or countries may not take place on all
business days in New York. Furthermore, trading takes place in Japanese markets
on certain Saturdays and in various foreign markets on days which are not
business days in New York and on which the net asset value of each Class of a
Portfolio is not calculated. Each Class of each Portfolio calculates net asset
value per share, and therefore effects sales, redemptions and repurchases of its
shares, as of the close of regular trading on the New York Stock Exchange once
on each day on which the New York Stock Exchange is open. Such calculation may
not take place
- 23 -
<PAGE>
contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation. If events materially affecting
the value of such securities occur between the time when their price is
determined and the time when the Portfolio's net asset value is calculated, such
securities will be valued at fair value as determined in good faith by the Board
of Directors.
PORTFOLIO TRANSACTIONS
Subject to the supervision of the Board of Directors, the Investment
Manager is primarily responsible for the investment decisions and the placing of
portfolio transactions for each Portfolio. In placing orders, it is the policy
of the Investment Manager to obtain the most favorable net results, taking into
account such factors as price, size of order, difficulty of execution and skill
required of the executing broker. While the Investment Manager will generally
seek reasonably competitive spreads or commissions, the Portfolios will not
necessarily be paying the lowest spread or commission available.
Purchases and sales of portfolio securities on a securities exchange for
the Portfolios are effected by the Investment Manager through brokers who charge
a negotiated commission for their services based on the quality and quantity of
execution services provided by the broker in the light of generally prevailing
rates. Orders may be directed to any broker including, to the extent and in the
manner permitted by applicable law, Lazard Freres. In the over-the-counter
market, securities are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price that includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount.
Subject to the above considerations, Lazard Freres may act as a main broker
for the Portfolios. For Lazard Freres to effect any portfolio transactions for
the Portfolios, the commissions, fees or other remuneration received by Lazard
Freres must be reasonable and fair compared to the commissions, fees or other
remuneration paid to other brokers in connection with comparable transactions
involving similar securities being purchased or sold on a securities exchange
during a comparable period of time. This standard allows Lazard Freres to
receive no more than the remuneration that would be expected to be received by
an unaffiliated broker in a commensurate arm's-length transaction. Furthermore,
the Board of Directors of the Fund, including a majority of the Disinterested
Directors, have adopted procedures that are reasonably designed to provide that
any commissions, fees or other remuneration paid to Lazard Freres are consistent
with the foregoing standard. Brokerage transactions with Lazard Freres are also
subject to such fiduciary standards as may be imposed upon Lazard Freres by
applicable law.
For the fiscal year ended December 31, 1996, the total brokerage
commissions paid by the Equity Portfolio, International Equity Portfolio, Small
Cap Portfolio, International Samll Cap Portfolio, Emerging Markets Portfolio,
Global Equity Portfolio and Bantam Value Portfolio were $483,954, $2,707,977,
$1,522,251, $580,942, $621,547, $29,963 and $206,307, respectively. Of those
amounts $0, $0, $4,465, $0, $0, $1,104, and $12,195, respectively, were paid to
Lazard Freres. For the fiscal year ended December 31, 1996, Lazard Freres
received 0%, 0%, 0.29%, 0%, 0%, 3.69%, and 5.91%, respectively, of the total
brokerage commissions paid by those Portfolios and the total transactions
effected through Lazard Freres represented 0%, 0%, 0.31%, 0%, 0%, 9.28% and
3.49%, respectively, of the total dollar amount of transactions on which
brokerage commissions were paid by those Portfolios. For the fiscal year ended
December 31, 1996, no brokerage commissions were paid by the International
Fixed-Income Portfolio, Bond Portfolio or Strategic Yield Portfolio.
For the fiscal year ended December 31, 1995, the total brokerage
commissions paid by the Equity Portfolio, International Equity Portfolio, Small
Cap Portfolio, International Small Cap Portfolio and Emerging Markets Portfolio
were $331,180, $2,303,409, $1,507,582, $976,314, and $280,844, respectively. Of
those amounts, $0, $0, $3,324, $0 and $0, respectively, were paid to Lazard
Freres. For the fiscal year ended December 31, 1995, Lazard Freres received 0%,
0%, 0%, 0.2% and 0%, respectively, of the total brokerage commissions paid by of
those Portfolios and the total transactions effected through Lazard Freres
represented 0%, 0%, .19%, 0% and 0%, respectively, of the total dollar amount of
transactions on which brokerage were paid by those Portfolios. For the fiscal
year ended December 31, 1995, no brokerage commissions were paid by the
International Fixed-Income Portfolio, Bond Portfolio or Strategic Yield
Portfolio.
- 24 -
<PAGE>
For the fiscal year ended December 31, 1994, the total brokerage
commissions paid by the Equity Portfolio, International Equity Portfolio, Small
Cap Portfolio, International Small Cap Portfolio, and Emerging Markets Portfolio
were $160,325, $4,374,956, $997,227, $563,176, and $80,889, respectively. Of
those amounts, $1,655, $0, $14,125, $0, and $0, respectively, were paid to
Lazard Freres. For the fiscal year ended December 31, 1994. Lazard Freres
received 1.0%, 0%, 1.4%, 0%, and 0%, respectively. Of the total brokerage
commissions paid by those Portfolios and the total transactions effected through
Lazard Freres represented 0.6%, 0%, 0.4%, 0%, and 0% respectively, of the total
dollar amount of transactions on which brokerage transactions were paid by those
Portfolios. For the fiscal year ended December 31, 1994, no brokerage
commissions were paid by the International Fixed-Income Portfolio, Bond
Portfolio or Strategic Yield Portfolio.
Purchase and sale orders for securities held by a Portfolio may be combined
with those for other Portfolios in the interest of the most favorable net
results for all. When the Investment Manager determines that a particular
security should be bought for or sold by more than one Portfolio, the Investment
Manager undertakes to allocate those transactions between the participants
equitably.
RESEARCH AND STATISTICAL INFORMATION
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the practice of the Investment Manager to place
orders with brokers and dealers who supply market quotations to the Fund's
custodian for valuation purposes, or who supply research, market and statistical
information to the Investment Manager. Although research, market and statistical
information is useful to the Investment Manager, it is its opinion that such
information is only supplementary to the Investment Manager's own research
efforts, since the information must still be analyzed, weighed and reviewed by
the Investment Manager's staff. Information so received will be in addition to,
and not in lieu of, the services required to be performed by the Investment
Manager under the Management Agreements with the Fund on behalf of the
Portfolios. This information may be useful to the Investment Manager in
providing services to clients other than the Portfolios, and not all of this
information is used by the Investment Manager in connection with the Portfolios.
The total dollar amount of transactions pursuant to which brokerage was directed
in consideration of research services provided during the year ending December
31, 1996 was $433,508,500 and the related commissions were $867,017. In
addition, when it can be done consistently with the above stated policy, the
Investment Manager may place orders with brokers and dealers (i) who refer
persons to the Investment Manager for the purpose of purchasing shares of the
Portfolios or (ii) who provide services to the Fund at no fee or for a reduced
fee.
- 25 -
<PAGE>
REDEMPTION OF SHARES
Payment of the redemption price for shares redeemed may be made either in
cash or in portfolio securities (selected in the discretion of the Board of
Directors of the Fund and taken at their value used in determining the net asset
value per share of the applicable Class of each Portfolio as described in the
Prospectus under "Determination of Net Asset Value"), or partly in cash and
partly in portfolio securities; however, payments will be made wholly in cash
unless the Board of Directors believes that economic conditions exist which
would make such a practice detrimental to the best interests of the relevant
Portfolio. If payment for shares redeemed is made wholly or partly in portfolio
securities, brokerage costs may be incurred by the investor in converting the
securities to cash. A Portfolio will not distribute in kind portfolio securities
that are not readily marketable. The Fund has filed a formal election with the
Commission pursuant to which the Fund will only effect a redemption in portfolio
securities where the particular stockholder of record is redeeming more than
$250,000 or 1% of a Portfolio's total net assets, whichever is less, during any
90-day period. In the opinion of the Investment Manager, however, the amount of
a redemption request would have to be significantly greater than $250,000 or 1%
of total net assets before a redemption wholly or partly in portfolio securities
was made.
DISTRIBUTION AND SERVICING PLAN
(Open Shares Only)
Rule 12b-1 (the "Rule") adopted by the Commission under the Investment
Company Act provides, among other things, that an investment company may bear
expenses of distributing its shares only pursuant to a plan adopted in
accordance with the Rule. The Fund's Board of Directors has adopted such a plan
(the "Distribution and Servicing Plan") with respect to each Portfolio's Open
Shares, pursuant to which each Portfolio pays the Distributor for advertising,
marketing and distributing the Portfolio's Open Shares, and for the provision of
certain services to the holders of Open Shares. Under the Distribution and
Servicing Plan, the Distributor may make payments to certain third parties in
respect to these services. The Fund's Board of Directors believes that there is
a reasonable likelihood that the Distribution and Servicing Plan will benefit
each Portfolio and the holders of Open Shares.
A quarterly report of the amounts expended under the Distribution and
Servicing Plan, and the purposes for which such expenditures were incurred, must
be made to the Directors for their review. In addition, the Distribution and
Servicing Plan provides that it may not be amended to increase materially the
costs which holders of Open Shares may bear pursuant to the Distribution and
Servicing Plan without the approval of the holders of Open Shares and that other
material amendments of the Distribution and Servicing Plan must be approved by
the Board of Directors and by the Directors who are not "interested persons" (as
defined in the Investment Company Act) of the Fund and have no direct or
indirect financial interest in the operation of the Distribution and Servicing
Plan or in any agreements entered into in connection with the Distribution and
Servicing Plan, by vote cast in person at a meeting called for the purpose of
considering such amendments. The Distribution and Servicing Plan is subject to
annual approval by such vote of the Directors cast in person at a meeting called
for the purpose of voting on the Distribution and Servicing Plan. The
Distribution and Servicing Plan was so approved by the Directors at a meeting
held on July 22, 1996. As to each Portfolio, the Distribution and Servicing Plan
may be terminated at any time by a vote of a majority of the Directors who are
not "interested persons" and have no direct or indirect financial interest in
the operation of the Distribution and Servicing Plan or in any agreements
entered into in connection with the Distribution and Servicing Plan or by vote
of the holders of a majority of such Portfolio's Open Shares.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to declare as a dividend on the outstanding shares of each
of the International Fixed-Income Portfolio, the Bond Portfolio and the
Strategic Yield Portfolio substantially all of each Portfolio's net investment
income at the close of each business day to shareholders of record at 4:00 p.m.
(New York time). Purchased shares of the International Fixed-Income Portfolio,
the Bond Portfolio and the Strategic Yield Portfolio will begin earning
dividends on the business day following the day the purchase order is accepted
and settled and redeemed shares of any of these Portfolios will earn a dividend
on the day the redemption order is executed. Net investment income for a
Saturday, Sunday or holiday will be included in the dividend declared on the
previous business day. Dividends declared on the shares of the International
Fixed-Income Portfolio, Bond Portfolio and Strategic Yield Portfolio will be
paid five business days prior to the end of each month. Shareholders who redeem
all their shares of any of these Portfolios prior to a dividend payment date
will receive, in addition to the redemption proceeds, any dividends that are
declared but unpaid. Shareholders of any of these Portfolios who redeem only a
portion of their shares will be entitled to all dividends that are declared but
unpaid on the redeemed shares on the next dividend payment date.
Dividends from net investment income on the Equity Portfolio will be
declared and paid quarterly. Dividends from net investment income on the
International Equity Portfolio, Small Cap Portfolio, International Small Cap
Portfolio, Emerging Markets Portfolio, Global Equity Portfolio, Bantam Value
Portfolio and Emerging World Funds Portfolio generally will be declared and paid
at least annually and may be declared and paid twice annually.
Investment income for a Portfolio includes, among other things, interest
income, accretion of market and original issue discount and amortization of
premium and, in the case of the Equity Portfolio, International Equity
Portfolio, Small Cap Portfolio, International Small Cap Portfolio, Emerging
Markets Portfolio, Global Equity Portfolio, Bantam Value Portfolio and Emerging
World Funds Portfolio would also include dividends.
Dividends paid by each Class will be calculated at the same time and in the
same manner and will be of the same amount, except that certain expenses will be
borne exclusively by one Class and not by the other, such as fees payable under
the Distribution and Servicing Plan. Open Shares will receive lower per share
dividends than Institutional Shares because of the higher expenses borne by Open
Shares. See "Fee Table" in the Fund's Prospectus.
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<PAGE>
With respect to all of the Portfolios, net realized capital gains from each
of the Portfolios, if any, will be distributed at least annually and may be
declared and paid twice annually. Dividends and distributions on shares of a
Portfolio will be invested in additional shares of the same Portfolio at net
asset value and credited to the shareholder's account on the payment date or, at
the shareholder's election, paid in cash. Dividend checks and Statements of
Account will be mailed approximately two business days after the payment date.
Each Portfolio forwards to the Fund's custodian the monies for dividends to be
paid in cash on the payment date
TAXATION
The Prospectus describes generally the tax treatment of distributions by
the Fund. This section of the Statement of Additional Information includes
additional information concerning federal taxes.
It is intended that each Portfolio will declare and distribute dividends in
the amounts and at the times necessary to avoid the application of the 4%
federal excise tax imposed on certain undistributed income of regulated
investment companies. Each Portfolio will be required to pay the 4% excise tax
to the extent it does not distribute to its shareholders during any calendar
year at least 98% of its ordinary income for the calendar year plus 98% of its
capital gain net income for the twelve months ended October 31, or December 31
if elected by the Portfolio, of such year. Certain distributions of a Portfolio
which are paid in January of a given year but are declared in the prior October,
November or December to shareholders of record as of a specified date during
such a month may be treated as having been distributed in December and will be
taxable to shareholders as if received in December.
Except as described below with respect to straddles, gains or losses on
sales of securities by a Portfolio will be long-term capital gains or losses if
the securities have been held by the Portfolio for more than one year and other
gains or losses on sales of securities will be short-term capital gains or
losses.
Certain listed options, futures contracts and forward foreign currency
contracts are considered "section 1256 contracts" for U.S. federal income tax
purposes. In general, gain or loss realized by a Portfolio on section 1256
contracts will be considered 60% long-term and 40% short-term capital gain or
loss. Also, section 1256 contracts held by a Portfolio at the end of each
taxable year will be "marked to market," that is, treated for federal income tax
purposes as though sold for fair market value on the last business day of such
taxable year. A Portfolio can elect to exempt its section 1256 contracts which
are part of a "mixed straddle" (as described below) from the application of
section 1256.
With respect to over-the-counter put and call options, gain or loss
realized by a Portfolio upon the lapse or sale of such options held by the
Portfolio will be either long-term or short-term capital gain or loss depending
upon the Portfolio's holding period with respect to such option. However, gain
or loss realized upon the lapse or closing out of such options that are written
by a Portfolio will be treated as short-term capital gain or loss. In general,
if a Portfolio exercises an option, or an option that the Portfolio has written
is exercised, gain or loss on the option will not be separately recognized but
the premium received or paid will be included in the calculation of gain or loss
upon disposition of the property underlying the option.
- 27 -
<PAGE>
Any security, option, futures contract, forward foreign currency contract,
forward commitment, or other position entered into or held by a Portfolio which
acts as a hedge with respect to any other position held by the Portfolio may
constitute a "straddle" for federal income tax purposes. A straddle of at least
one, but not all, the positions of which are section 1256 contracts will
constitute a "mixed straddle." In general, straddles are subject to certain
rules that may affect the character and timing of a Portfolio's gains and losses
with respect to straddle positions by requiring, among other things, that loss
realized on disposition of one position of a straddle not be recognized until
the other position in such straddle is disposed of; that the Portfolio's holding
period in straddle positions be suspended while the straddle exists (possibly
resulting in gain being treated as short-term capital gain rather than long-term
capital gain); and that losses recognized with respect to certain straddle
positions, which would otherwise constitute short-term capital losses, be
treated as long-term capital losses. Different elections are available to the
Portfolios which may mitigate the effects of the straddle rules, particularly
with respect to mixed straddles.
Under section 988 of the Code, foreign currency gain or loss realized with
respect to foreign currency denominated debt instruments and other foreign
currency denominated positions held or entered into by a Portfolio, except for
futures contracts or options that are marked to market under Code section 1256,
will be ordinary income or loss. In addition, foreign currency gain or loss
realized with respect to certain foreign currency "hedging" transactions will be
treated as ordinary income or loss, regardless of whether they would otherwise
be marked to market, under Code section 1256.
Income received by a Portfolio from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the effective rate of
foreign tax in advance since the amount of each Portfolio's assets to be
invested in various countries is not known.
If more than 50% of the value of a Portfolio's total assets at the close of
its taxable year consists of the stock or securities of foreign corporations,
the Portfolio may elect to "pass through" to its shareholders the amount of
foreign income taxes paid by the Portfolio. Pursuant to such election,
shareholders would be required: (i) to include in gross income, even though not
actually received, their respective pro rata shares of the foreign taxes paid by
the Portfolio; (ii) treat their income from the Portfolio as being from foreign
sources to the extent that the Portfolio's income is from foreign sources; and
(iii) either to deduct their pro rata share of foreign taxes in computing their
taxable income, or to use it as a foreign tax credit against federal income (but
not both). No deduction for foreign taxes could be claimed by a shareholder who
does not itemize deductions.
It is anticipated that the International Equity Portfolio, International
Fixed-Income Portfolio, International Small Cap Portfolio, Emerging Markets
Portfolio, Global Equity Portfolio, Bantam Value Portfolio and Emerging World
Funds Portfolio will be operated so as to meet the requirements of the Code to
"pass through" to shareholders of the Portfolios credits for foreign taxes paid,
although there can be no assurance that these requirements will be met. Each
shareholder will be notified within 45 days after the close of each taxable year
of the Portfolio whether the foreign taxes paid by the Portfolio will "pass
through" for that year, and, if so, the amount of each shareholder's pro rata
share of (i) the foreign taxes paid, and (ii) the Portfolio's gross income from
foreign sources. Of course, shareholders who are not liable for federal income
- 28 -
<PAGE>
taxes, such as retirement plans qualified under section 401 of the Code, will
not be affected by any such "pass through" of foreign tax credits.
Any gain or loss realized upon a sale or redemption of shares of a
Portfolio by a shareholder who is not a dealer in securities is treated as
long-term capital gain or loss if the shares have been held for more than one
year and otherwise as short-term capital gain or loss; however, any loss
realized by a shareholder upon the sale or redemption of shares of a Portfolio
held for six months or less is treated as long-term capital loss to the extent
of any long-term capital gain distribution received by the shareholder.
Any loss realized on a sale or exchange of shares of a Portfolio will be
disallowed to the extent shares of such Portfolio are reacquired within the
61-day period beginning 30 days before and ending 30 days after the shares are
disposed of.
If a Portfolio invests in an entity that is classified as a "passive
foreign investment company" ("PFIC") for federal income tax purposes, the
operation of certain provisions of the Code applying to PFICs could result in
the imposition of certain federal income taxes on the Portfolio. In addition,
gain realized from the sale or other disposition of PFIC securities may be
treated as ordinary income under Section 1291 of the Code.
SHAREHOLDER SERVICES
A special service is available to banks, brokers, investment advisers,
trust companies and others who have a number of accounts in any Portfolio. In
addition to the copy of the regular Statement of Account furnished to the
registered holder after each transaction, a monthly summary of accounts can be
provided. The monthly summary will show for each account the account number, the
month-end share balance and the dividends and distributions paid during the
month. All costs of this service will be borne by the Portfolio. For information
on the special monthly summary of accounts, contact the Fund.
ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK
The Fund was incorporated in Maryland on May 17, 1991 as a series
investment company. The authorized capital stock of the Fund consists of
1,550,000,000 shares of common stock, $.001 par value. The Fund's Board of
Directors has authorized the issuance of the following eleven portfolios: Equity
Portfolio; International Equity Portfolio; International Fixed-Income Portfolio;
Bond Portfolio; Strategic Yield Portfolio; Small Cap Portfolio; International
Small Cap Portfolio; Emerging Markets Portfolio; Global Equity Portfolio; Bantam
Value Portfolio; and Emerging World Funds Portfolio. Shares of each Portfolio
are classified into two classes of shares--Open Shares and Institutional Shares.
The Board of Directors may, in the future, designate and authorize additional
portfolios or the issuance of additional classes of capital stock.
On January 1, 1992, the Fund, on behalf of the Equity Portfolio, acquired
the assets and liabilities of Lazard Equity Fund, formerly a portfolio of
Scudder Fund, an open-end, diversified management investment company.
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<PAGE>
Lazard Freres has agreed to indemnify Scudder Fund and its directors from
any and all claims arising out of the transfer of assets to the maximum extent
that Scudder Fund would be so permitted by the Maryland General Corporation Law,
subject to the limitations of the Investment Company Act. In addition, the Fund
has agreed to indemnify Scudder Fund and its directors and officers from claims
arising out of acts or omissions occurring prior to the transfer to the same
extent that such individuals could have been indemnified by Scudder Fund. If,
however, the Fund (or the Equity Portfolio) ceases to exist, Lazard Freres has
agreed, in lieu of the Fund, to indemnify the directors and officers of Scudder
Fund as set forth in the next preceding sentence.
Following for each Portfolio is the name, address and percentage of
ownership of each person who owns of record or is known by the Fund as of April
1, 1997 to own of record or beneficially 5% or more of the Institutional Shares
of that Portfolio: Equity Portfolio: Lazard Asset Management, 30 Rockefeller
Plaza, New York, NY 10020, 28.52%, Seagrams Retirement Savings, 231 South La
Salle Street, Chicago, IL, 60697 6.90%; International Equity Portfolio: Lazard
Asset Management, 30 Rockefeller Plaza, New York, NY 10020, 59.95%;
International Fixed-Income Portfolio: Lazard Asset Management, 30 Rockefeller
Plaza, New York, NY 10020, 59.95%; Graphic Communications International Union
Supplemental Retirement & Disability Fund, 1900 L Street NW, Washington, DC
20036-5002, 5.30%; Bond Portfolio: Lazard Freres Asset Management, 30
Rockefeller Plaza, New York, NY 10020, 37.84%; Sachem Trust National Association
, 23 Boston Street, Gulford, CT. 06737, 6.38%, Strategic Yield Portfolio: Lazard
Asset Management, 30 Rockefeller Plaza, New York, NY 10020, 44.37%; Small Cap
Portfolio: Lazard Asset Management, 30 Rockefeller Plaza, New York, NY 10020,
59.70%; International Small Cap Portfolio: Lazard Asset Management, 30
Rockefeller Plaza, New York, NY 10020, 66.89%; Emerging Markets Portfolio:
Lazard Asset Management, 30 Rockefeller Plaza, New York, NY 10020, 62.06%;
Presbyterian Church USA, 200 East 12th Street, Jefferson, IN 47130, 10.80%;
Bantam Value Portfolio, Lazard Asset Management, 30 Rockefeller Plaza, New York,
New York 10020, 53.40% and Lazard Global Equity Portfolio, Lazard Asset
Management, 30 Rockefeller Plaza, New York, NY 10020, 8.65%; Mt. Sinai Hospital
Fund of Toronto, 331-600 University Ave., Toronto Ontario Canada, 45.16%, John
D. Udible, 225 Water St. Suite 840, Jacksonville, FL 32202, 11.61%, Bitterroot
Enterprises Inc., PO Box 7048, Wilmington DE 19803, 7.30%.
Following for each portfolio is the name, address and percentage of
ownership of each person who owns of record or is known by the Fund as of April
1, 1997 to own of record or beneficially 5% or more of the Retail Shares of that
Portfolio: Equity Portfolio Lazard Asset Management, 30 Rockefeller Plaza, New
York, NY 10040, 86.57%, International Equity Portfolio, Lazard Asset Management,
30 Rockefeller Plaza, New York, NY 10020 72.08% Richard K. Boshey, 1030 Don
Alvarado Dr., Arcandia, CA, 9.80%, R. Peter Zimmerman, 1244 Denbing Ln, Randor,
PA 19087 7.41%, Lazard International Fixed Income Portfolio, Lazard Asset
Management, 39.28%, Wendel & Co., The Bank of New York, Wall Street Station, New
York, NY 10268, 27.64%; Bond Portfolio, Lazard Asset Management, 30 Rockefeller
Plaza, New York, NY 10020, 100%, Strategic Yield Portfolio, Lazard Asset
Management, 30 Rockefeller Plaza, New York, NY 10020, 72.22%, Small Cap
Portfolio, Lazard Asset Management, 30 Rockefeller Plaza, New York NY, 10020,
34.99%, Richard P. Gardener, 3516 Tangley St, Houston TX 77005, 16.46%, Suntrust
Bank TTEE FBO J. Beatty Jr., Atlanta GA, 30348 10.33%, Shawnee Mission Medical
Center, 14249 W. 123 St., Olathe, KS 66062, 7.34%, Sean M. Robbins, Vienna Va,
22181, 6.85%, International Small Cap Portfolio, Lazard Asset Management, 30
Rockefeller Plaza, New York, NY 10020, 27.64% Marsha Von Mueffling Crawford, 770
Park Ave., New York, NY 38.34%, Crestar Bank FBO William F. Massex, Jr.,
Richmond, VA 23260, 28.28%, Emerging Market Portfolio, Jeane M. Swalm, 414
Nichols Rd., Kansas City, MO 64112, 17.89%, Charbourne Family Partnership, 4375
McCoy Drive, Pensacola FL, 12.07% Philip B. Abbey, PO Box 12641, Roanoke, VA
24032, 9.41%, Lazard Asset Management, 30 Rockefeller Plaza, New York, NY 10020,
34.35%, Bantam Value Portfolio, Lazard Asset Management, 30 Rockefeller Plaza,
New York, NY 10020, 88.10%, Global Equity Portfolio, Lazard Asset Management, 30
Rockefeller Plaza, New York, NY 10020, 87.35%
A shareholder who beneficially owns, directly or indirectly, more than 25%
of a portfolio's voting securities may be deemed a "control person" (as defined
in the Investment Company Act) of the Portfolios.
Certain of the stockholders of the Portfolios are investment management
clients of the Investment Manager that have entered into agreements with the
Investment Manager pursuant to which the Investment Manager has investment
discretion and voting power over any assets held in the clients' accounts,
including any shares of the Portfolios. Accordingly, for purposes of the list
above, the Fund considered the Investment Manager to be a beneficial owner of
any shares of the Portfolios held in management accounts on behalf of its
investment management clients.
Generally, all shares of the Fund have equal voting rights and will be
voted in the aggregate, and not by class, except where voting by class is
required by law or where the matter involved affects only one class. As used in
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<PAGE>
the Prospectus and in this Statement of Additional Information, the vote of a
majority of the Fund's outstanding voting securities means the vote of the
lesser of (i) 67% of the Fund's shares represented at a meeting if the holders
of more than 50% of the outstanding shares are present in person or by proxy, or
(ii) more than 50% of the Fund's outstanding shares and the vote of a majority
of a Portfolio's outstanding voting securities means the vote of the lesser of
(i) 67% of the shares of the Portfolio represented at a meeting if the holders
of more than 50% of the outstanding shares of the Portfolio are present in
person or by proxy, or (ii) more than 50% of the outstanding shares of the
Portfolio. Shareholders are entitled to one vote for each full share held, and
fractional votes for fractional shares held.
Each share of the applicable Class of a Portfolio of the Fund is entitled
to such dividends and distributions out of the income earned on the assets
belonging to that Portfolio as are declared in the discretion of the Fund's
Board of Directors. In the event of the liquidation or dissolution of the Fund,
shares of each Class of a Portfolio are entitled to receive the assets
attributable to the applicable Class of that Portfolio that are available for
distribution based upon the relative net assets of the applicable Class.
Shareholders are not entitled to any preemptive rights. All shares, when
issued, will be fully paid and non-assessable by the Fund.
OTHER
The Registration Statement, including the Prospectus, the Statement of
Additional Information and the exhibits filed therewith, may be examined at the
office of the Commission in Washington, D.C. Statements contained in the
Prospectus or the Statement of Additional Information as to the contents of any
contract or other document referred to herein or in the Prospectus are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
CUSTODIAN
As the Fund's custodian, State Street Bank, among other things, maintains a
custody account or accounts in the name of each Portfolio; receives and delivers
all assets for each Portfolio upon purchase and upon sale or maturity; collects
and receives all income and other payments and distributions on account of the
assets of each Portfolio and disburses the Portfolio's assets in payment of its
expenses. The custodian does not determine the investment policies of any
Portfolio or decide which securities any Portfolio will buy or sell.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Legal matters in connection with the issuance of the shares of the Fund
offered hereby will be passed upon by Stroock & Stroock & Lavan LLP, 180 Maiden
Lane, New York, New York 10038-4982.
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<PAGE>
ABA Seymour Schneidman Financial Services Group, a division of Anchin,
Block & Anchin LLP, has been selected as the independent accountants for the
Fund.
YIELD AND TOTAL RETURN QUOTATIONS
From time to time, the Fund may advertise "yield," "actual distribution
rate" and "total return" quotations for one or more of the Portfolios. A
Portfolio's "yield" for any 30-day period is computed by dividing the net
investment income per share earned during such period by the maximum public
offering price per share on the last day of the period, and then annualizing
such 30-day yield in accordance with a formula prescribed by the Commission
which provides for compounding on a semi-annual basis. A Portfolio's "actual
distribution rate" is computed in the same manner as yield except that actual
income dividends declared per share during the period in question is substituted
for net investment income per share. Advertisements of a Portfolio's "total
return" disclose a Portfolio's average annual compounded total return for its
most recently completed one-, five- and ten-year periods (or the period since
the Portfolio's inception). A Portfolio's total return for each such period is
computed by finding, through the use of a formula prescribed by the Commission,
the average annual compounded rate of return over the period that would equate
an assumed initial amount invested to the value of such investment at the end of
the period. For purposes of computing total return, income dividends and capital
gains distributions paid on shares of a Portfolio are assumed to have been
reinvested when received.
The yield for the 30-day period ended December 31, 1996 and the actual
distribution rate for such period for the Institutional Shares of each Portfolio
indicated below was as follows:
Name of Portfolio 30-Day Yield Distribution Rate
- ----------------- ------------ -----------------
Bond 5.3% .04%
International Fixed-Income 5.2% .07%
Strategic Yield 7.3% .07%
The average annual total return of Institutional Shares for the indicated
Portfolio and periods ended December 31, 1996 was as follows:
Name of Portfolio 1-Year 5-Year 10-Year
- ----------------- ------ ------ -------
Equity 19.9% 16.5% 13.8%(4)
International Equity 15.6% 9.9% 10.3%(5)
International Fixed-Income 5.5% 9.1% 9.7%(6)
Bond 4.4% 5.9% 6.5%(7)
Strategic Yield 13.7% 9.1%(1) N/A
Small Cap 23.9% 20.0% 20.4%(8)
International Small Cap 15.6% 6.7%(2) N/A
Emerging Markets 23.6% 5.7%(3) N/A
_________________
(1) For the period October 1, 1991 through December 31, 1996.
(2) For the period December 1, 1993 through December 31, 1996.
(3) For the period July 15, 1994 through December 31, 1996.
(4) For the period June 1, 1987 through December 31, 1996.
(5) For the period October 29, 1991 through December 31, 1996.
(6) For the period November 8, 1991 through December 31, 1996.
(7) For the period November 12, 1991 through December 31, 1996.
(8) For the period October 30, 1991 through December 31, 1996.
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<PAGE>
The total return of Institutional Shares for the indicated Portfolio for
the period from inception of the Portfolio through December 31, 1996 was as
follows:
Name of Portfolio Total Return from Inception
- ----------------- ---------------------------
Equity 243.3%(1)
International Equity 65.6%(2)
International Fixed-Income 61.0%(3)
Bond 38.5%(4)
Strategic Yield 57.8%(5)
Small Cap 160.7%(6)
International Small Cap 22.2%(7)
Emerging Markets 14.7%(8)
Global Equity 15.8%(9)
Bantam Value 33.3%(10)
_________________
(1) For the period June 1, 1987 (commencement of operations) through December
31, 1996.
(2) For the period October 29, 1991 (commencement of operations) through
December 31, 1996.
(3) For the period November 8, 1991 (commencement of operations) through
December 31, 1996.
(4) For the period November 12, 1991 (commencement of operations) through
December 31, 1996.
(5) For the period October 1, 1991 (commencement of operations) through
December 31, 1996.
(6) For the period October 30, 1991 (commencement of operations) through
December 31, 1996.
(7) For the period December 1, 1993 (commencement of operations) through
December 31, 1996.
(8) Fo r the period July 15, 1994 (commencement of operations) through December
31, 1996.
(9) For the period January 3, 1996 (commencement of operations) through
December 31, 1996.
(10) For the period March 1, 1996 (commencement of operations) through December
31, 1996.
A Portfolio's yield, actual distribution rate and total return are not
fixed and will fluctuate in response to prevailing market conditions or as a
function of the type and quality of the securities held by such Portfolio, its
average portfolio maturity and its expenses. Yield, actual distribution rate and
total return information is useful in reviewing a Portfolio's performance and
such information may provide a basis for comparison with other investments but
such information may not provide a basis for comparison with certificates of
deposit, which pay a fixed rate of return, or money market funds, which seek a
stable net asset value. Investment return and principal value of an investment
in a Portfolio will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their original cost.
Performance of each Class will be calculated separately and will take into
account any applicable distribution and service fees. As a result, at any given
time, the performance of Retail Shares should be expect to be lower than that of
Institutional Shares.
No performance data is provided for the Emerging World Funds Portfolio
which had not commenced operations as of the date performance information was
calculated or for the Retail Shares of any Portfolio which had not been offered
as of the date hereof.
From time to time, the Fund may compare a Portfolio's performance against
one or more broad-based indices or data from Lipper Analytical Services, Inc.,
Money Magazine, Morningstar, Inc. and other industry publications. In addition,
the Fund may compare a Portfolio's performance against inflation with the
performance of other instruments against inflation, such as short-term Treasury
Bills (which are direct obligations of the U.S. Government) and FDIC-insured
bank money market accounts.
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APPENDIX A
DESCRIPTION OF OBLIGATIONS
ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES OR INSTRUMENTALITIES
FEDERAL FARM CREDIT SYSTEM NOTES AND BONDS--are bonds issued by a
cooperatively owned nationwide system of banks and associations supervised by
the Farm Credit Administration, an independent agency of the U.S. Government.
These bonds are not guaranteed by the U.S. Government.
MARITIME ADMINISTRATION BONDS--are bonds issued and provided by the
Department of Transportation of the U.S. Government and are guaranteed by the
U.S. Government.
FHA DEBENTURES--are debentures issued by the Federal Housing Administration
of the U.S. Government and are guaranteed by the U.S. Government.
GNMA CERTIFICATES--are mortgage-backed securities which represent a partial
ownership interest in a pool of mortgage loans issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration.
FHLMC BONDS--are bonds issued and guaranteed by the Federal Home Loan
Mortgage Corporation.
FNMA BONDS--are bonds issued and guaranteed by the Federal National
Mortgage Association.
FEDERAL HOME LOAN BANK NOTES AND BONDS--are notes and bonds issued by the
Federal Home Loan Bank System and are not guaranteed by the U.S. Government.
STUDENT LOAN MARKETING ASSOCIATION ("SALLIE MAE") NOTES AND
BONDS--are notes and bonds issued by the Student Loan Marketing
Association.
Although this list includes a description of the primary types of U.S.
Government agency or instrumentality obligations in which the Portfolios intend
to invest, each Portfolio may invest in obligations of U.S. Government agencies
or instrumentalities other than those listed above.
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APPENDIX B
FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS AND FOREIGN CURRENCIES
FUTURES CONTRACTS
Each of the International Fixed-Income Portfolio, Bond Portfolio,
International Small Cap Portfolio, Emerging Markets Portfolio, Global Equity
Portfolio, Bantam Value Portfolio and Emerging World Funds Portfolio may enter
into contracts for the purchase or sale for future delivery of fixed-income
securities or contracts based on financial indices including any index of U.S.
Government Securities or corporate debt securities. In addition, the
International Fixed-Income Portfolio, International Small Cap Portfolio,
Emerging Markets Portfolio, Global Equity Portfolio and Emerging World Funds
Portfolio may enter into contracts for the purchase or sale for future delivery
of foreign currencies. U.S. futures contracts have been designed by exchanges
which have been designated "contracts markets" by the Commodity Futures Trading
Commission ("CFTC"), and must be executed through a futures commission merchant,
or brokerage firm, which is a member of the relevant contract market. Futures
contracts trade on a number of exchange markets, and, through their clearing
corporations, the exchanges guarantee performance of the contracts as between
the clearing members of the exchange. Each of the International Fixed-Income
Portfolio, Bond Portfolio, International Small Cap Portfolio, Emerging Markets
Portfolio, Global Equity Portfolio, Bantam Value Portfolio and Emerging World
Funds Portfolio may enter into futures contracts which are based on debt
securities that are backed by the full faith and credit of the U.S. Government,
such as long-term U.S. Treasury Bonds, Treasury Notes, Government National
Mortgage Association modified pass-through mortgage-backed securities and
three-month U.S. Treasury Bills. The International Fixed-Income Portfolio, Bond
Portfolio, International Small Cap Portfolio, Emerging Markets Portfolio, Global
Equity Portfolio, Bantam Value Portfolio and Emerging World Funds Portfolio may
also enter into futures contracts which are based on bonds issued by entities
other than the U.S. government.
At the same time a futures contract is purchased or sold, the Portfolio
must allocate cash or securities as a deposit payment ("initial deposit"). It is
expected that the initial deposit would be approximately 1-1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" would be required if there has been a decline in
the contract's value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some cases, securities called for by a futures contract may not
have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
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on which the contracts are traded, the International Fixed-Income Portfolio and
the Bond Portfolio will incur brokerage fees when they purchase or sell futures
contracts.
The purpose of the acquisition or sale of a futures contract in the case of
a Portfolio, which holds or intends to acquire fixed-income securities, is to
attempt to protect the Portfolio from fluctuations in interest or foreign
exchange rates without actually buying or selling fixed-income securities or
foreign currency. For example, if interest rates were expected to increase, the
Portfolio might enter into futures contracts for the sale of debt securities.
Such a sale would have much the same effect as selling an equivalent value of
the debt securities owned by the Portfolio. If interest rates did increase, the
value of the debt securities in the Portfolio would decline, but the value of
the futures contracts to the Portfolio would increase at approximately the same
rate, thereby keeping the net asset value of the Portfolio from declining as
much as it otherwise would have. The Portfolio could accomplish similar results
by selling debt securities and investing in bonds with short maturities when
interest rates are expected to increase; however, since the futures market is
more liquid than the cash market, the use of futures contracts as an investment
technique allows the Portfolio to maintain a defensive position without having
to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, the Portfolio could
take advantage of the anticipated rise in the value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Portfolio could then buy debt securities
on the cash market. To the extent a Portfolio enters into futures contracts for
this purpose, the assets in the segregated asset account maintained to cover the
Portfolio's obligations with respect to such futures contracts will consist of
cash, U.S. Government Securities, cash equivalents or high quality liquid debt
securities from its portfolio in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value of
the initial and variation margin payments made by the Portfolio with respect to
such futures contracts.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Investment Manager may
still not result in a successful transaction.
In addition, futures contracts entail risks. Although the Fund believes
that use of such contracts will benefit the Portfolio, if the Investment
Manager's investment judgment about the general direction of interest rates is
incorrect, the overall performance of the Portfolio would be poorer than if it
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had not entered into any such contracts. For example, if the Portfolio has
hedged against the possibility of an increase in interest rates which would
adversely affect the price of debt securities held in its portfolio and interest
rates decrease instead, the Portfolio will lose part or all of the benefit of
the increased value of its debt securities which it has hedged because it will
have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell debt
securities from its portfolio to meet daily variation margin requirements. Such
sales of bonds may be, but will not necessarily be, at increased prices which
reflect the rising market. The Portfolio may have to sell securities at a time
when it may be disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS
Each of the International Fixed-Income Portfolio, Bond Portfolio,
International Small Cap Portfolio, Emerging Markets Portfolio, Global Equity
Portfolio, Bantam Value Portfolio and Emerging World Funds Portfolio may
purchase and write options on futures contracts for hedging purposes. The
purchase of a call option on a futures contract is similar in some respects to
the purchase of a call option on an individual security. Depending on the
pricing of the option compared to either the price of the futures contract upon
which it is based or the price of the underlying debt securities, it may or may
not be less risky than ownership of the futures contract or underlying debt
securities. As with the purchase of futures contracts, when the Portfolio is not
fully invested it may purchase a call option on a futures contract to hedge
against a market advance due to declining interest rates.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, the Portfolio will retain
the full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Portfolio's investment portfolio holdings.
The writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Portfolio intends to
purchase. If a put or call option that a Portfolio has written is exercised, the
Portfolio will incur a loss which will be reduced by the amount of the premium
it receives. Depending on the degree of correlation between changes in the value
of its portfolio securities and changes in the value of its futures positions, a
Portfolio's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of its portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, one of the Portfolios may purchase a put option on a futures contract
to hedge the Portfolio's investment portfolio against the risk of rising
interest rates.
The amount of risk the Portfolio assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
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option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
OPTIONS ON FOREIGN CURRENCIES
Each of the International Fixed-Income Portfolio, Strategic Yield
Portfolio, International Small Cap Portfolio, Emerging Markets Portfolio, Global
Equity Portfolio and Emerging World Funds Portfolio may purchase and write
options on foreign currencies in a manner similar to that in which futures
contracts on foreign currencies, or forward contracts, will be utilized. For
example, a decline in the dollar value of a foreign currency in which portfolio
securities are denominated will reduce the dollar value of such securities, even
if their value in the foreign currency remains constant. In order to protect
against such diminutions in the value of portfolio securities, these Portfolios
may purchase put options on the foreign currency. If the value of the currency
does decline, the Portfolio will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Portfolio may purchase call options thereon. The
purchase of such options could offset, at least partially, the adverse effects
of such movements in exchange rates. As in the case of other types of options,
however, the benefit to the Portfolio deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in the
direction or to the extent anticipated the Portfolio could sustain losses on
transactions in foreign currency options which would require it to forego a
portion or all of the benefits of advantageous changes in such rates.
The International Fixed-Income Portfolio, Strategic Yield Portfolio,
International Small Cap Portfolio, Emerging Markets Portfolio, Global Equity
Portfolio and Emerging World Funds Portfolio may write options on foreign
currencies for the same types of hedging purposes. For example, where one of
these Portfolios anticipates a decline in the dollar value of foreign currency
denominated securities due to adverse fluctuations in exchange rates it could,
instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities will be offset by
the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Portfolio could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Portfolio to
hedge such increased cost up to the amount of the premium. As in the case of
other types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the Portfolio would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of options on foreign currencies, these Portfolios also may be
required to forego all or a portion of the benefits which might otherwise have
been obtained from favorable movements in exchange rates.
The International Fixed-Income Portfolio, Strategic Yield Portfolio,
International Small Cap Portfolio, Emerging Markets Portfolio, Global Equity
Portfolio and Emerging World Funds Portfolio may write covered call options on
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foreign currencies. A call option written on a foreign currency is "covered" if
the Portfolio owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in a segregated
account by the Fund's Custodian) upon conversion or exchange of other foreign
currency held in its portfolio. A call option is also "covered" if the Portfolio
has a call on the same foreign currency and in the same principal amount as the
call written where the exercise price of the call held (a) is equal to or less
than the exercise price of the call written or (b) is greater than the exercise
price of the call written if the difference is maintained by the Portfolio in
cash, U.S. Government Securities and other high quality liquid debt securities
in a segregated account with the Fund's Custodian.
The International Fixed-Income Portfolio, Strategic Yield Portfolio,
International Small Cap Portfolio, Emerging Markets Portfolio, Global Equity
Portfolio and Emerging World Funds Portfolio also may write call options on
foreign currencies that are not covered for cross-hedging purposes. A call
option on a foreign currency is for cross-hedging purposes if it is not covered,
but is designed to provide a hedge against a decline in the U.S. dollar value of
a security which the Portfolio owns or has the right to acquire and which is
denominated in the currency underlying the option due to an adverse change in
the exchange rate. In such circumstances, the Portfolio collateralizes the
option by maintaining in a segregated account with the Fund's Custodian, cash,
U.S. Government Securities or other high quality liquid debt securities in an
amount not less than the value of the underlying foreign currency in U.S.
dollars marked to market daily.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS
AND OPTIONS ON FOREIGN CURRENCIES
Unlike transactions in futures contracts, options on foreign currencies and
forward contracts are not traded on contract markets regulated by the CFTC or
(with the exception of certain foreign currency options) by the Securities and
Exchange Commission (the "Commission"). To the contrary, such instruments are
traded through financial institutions acting as market-makers, although foreign
currency options are also traded on certain national securities exchanges, such
as the Philadelphia Stock Exchange and the Chicago Board Options Exchange,
subject to regulation by the Commission. Similarly, options on currencies may be
traded over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the Commission, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation ("OCC"), thereby reducing the risk of counterparty default. Further,
a liquid secondary market in options traded on a national securities exchange
may be more readily available than in the over-the-counter market, potentially
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permitting the Portfolio to liquidate open positions at a profit prior to
exercise or expiration, or to limit losses in the event of adverse market
movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on exercise.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
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FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT AUDITORS
The Fund's Annual Report to Shareholders for the fiscal year ended December
31, 1996 for each Portfolio (other than the Emerging World Funds Portfolio which
had not commenced operations as of December 31, 1996) is a separate document
supplied with this statement of Additional Information, and the financial
statements, accompanying notes and report of independent auditors appearing
therein are incorporated by reference in this Statement of Additional
Information.
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PART C
OTHER INFORMATION
Item 24. Financial Statements
(a) Financial Statements
Included in Part A of the Registration Statement
Financial Highlights for each Portfolio (except the Emerging World
Funds Portfolio) for the applicable period from the Portfolio's
commencement of operations to December 31, 1996.
Included (by Reference) in Part B of the Registration Statement
Statement of Investments -- December 31, 1996.
Statement of Assets and Liabilities -- December 31, 1996.
Statement of Operations -- December 31, 1996.
Statement of Changes in Net Assets -- for each of the two years
(or such shorter period of time, if applicable) in the period
ended December 31, 1996.
Notes to Financial Statements -- December 31, 1996.
Report of Anchin, Block & Anchin, LLP, Independent Auditors,
dated January 28, 1997.
(b) Exhibits
1(a) Articles of Incorporation1
1(b) Articles of Amendment10
1(c) Articles Supplementary10
2 By-Laws1
3 Not applicable
5(A) Form of Investment Management Agreement between the Registrant and
Lazard Freres Asset Management with respect to the Lazard International
Equity Portfolio6
5(B) Form of Investment Management Agreement between the Registrant and
Lazard Freres Asset Management with respect to the Lazard International
Fixed-Income Portfolio6
5(C) Form of Investment Management Agreement between the Registrant and
Lazard Freres Asset Management with respect to the Lazard Bond
Portfolio6
5(D) Form of Investment Management Agreement between the Registrant and
Lazard Freres Asset Management with respect to the Lazard Strategic
Yield Portfolio6
5(E) Form of Investment Management Agreement between the Registrant and
Lazard Freres Asset Management with respect to the Lazard Small Cap
Portfolio6
5(F) Form of Administrative Services Agreement2
5(G) Form of Sub-Investment Management Agreement between Lazard Freres Asset
Management and Lazard International Investment Management Limited with
respect to the Lazard Global Fixed-Income Portfolio3
5(H) Form of Investment Management Agreement between the Registrant and
Lazard Freres Asset Management with respect to the Lazard Equity
Portfolio6
5(J) Form of Investment Management Agreement between the Registrant and
Lazard Freres Asset Management with respect to the Lazard Emerging
Markets Portfolio5
5(K) Form of Investment Management Agreement between the Registrant and
Lazard Freres Asset Management with respect to the Lazard International
Small Cap Portfolio5
5(L) Form of Administrative Services Sub-Contract between Lazard Freres
Asset Management and Scudder Investment Services, Inc.4
5(M) Form of Investment Management Agreement between the Registrant and
Lazard Freres Asset Management with respect to the Lazard Global Equity
Portfolio8
5(N) Form of Investment Management Agreement between the Registrant and
Lazard Freres Asset Management with respect to the Lazard Bantam Value
Portfolio8
5(O) Form of Investment Management Agreement between the Registrant and
Lazard Freres Asset Management with respect to the Lazard Emerging
World Funds Portfolio8
5(P) Form of Administration Agreement between the Registrant and State
Street Bank and Trust Company8
6 Distribution Agreement, as revised10
7 Not applicable
8 Form of Custodian Agreement2
9(A) Form of Transfer Agency and Service Agreement2
10(A) Opinion and Consent of Stroock & Stroock & Lavan9
10(B) Opinion and Consent of Venable, Baetjer and Howard, LLP9
11 Consent of Independent Auditors
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12 Not applicable
13 Investment Representation Letter5
14 Not applicable
15 Distribution and Servicing Plan10
16 Schedule for Computation of Total Return Performance Quotations7
17 Financial Data Schedule
18 Rule 18f-3 Plan10
(c) Other Exhibits:
Powers of Attorney of Messrs. Burke, Lieberman, Eig, Gullquist, Reiss
and Rutledge5
Power of Attorney of Mr. Davidson9
Power of Attorney of Mr. Frischling10
Power of Attorney of Mr. Katz
1. Incorporated by reference from Registrant's Registration Statement on Form
N-1A (file Nos. 33-40682 and 811-6312) filed with the Securities and Exchange
Commission on May 20, 1991.
2. Incorporated by reference from Registrant's Pre-Effective Amendment No. 1
filed with the Securities and Exchange Commission on July 23, 1991.
3. Incorporated by reference from Registrant's Pre-Effective Amendment No. 2
filed with the Securities and Exchange Commission on September 23, 1991.
4. Incorporated by reference from Registrant's Post-Effective Amendment No. 1
filed with the Securities and Exchange Commission on November 1, 1991.
5. Incorporated by reference from Registrant's Post-Effective Amendment No. 5
filed with the Securities and Exchange Commission on September 1, 1993.
6. Incorporated by reference from Registrant's Post Effective Amendment No. 6
filed with the Securities and Exchange Commission on March 31, 1994.
7. Incorporated by reference from Registrant's Post-Effective Amendment No. 1
filed with the Securities and Exchange Commission on March 3, 1992.
8. Incorporated by reference from Registrant's Post-Effective Amendment No. 8
filed with the Securities and Exchange Commission on October 13, 1995.
9. Incorporated by reference from Registrant's Post-Effective Amendment No. 9
filed with the Securities and Exchange Commission on December 27, 1995.
10. Incorporated by reference from Registrant's Post-Effective Amendment No. 10
filed with the Securities and Exchange Commission on August 15, 1996.
Item 25. Persons Controlled by or under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
As of April 1, 1997, the number of record holders of each
Portfolio were as follows:
INSTITUTIONAL OPEN
------------- ------
Lazard International Equity Portfolio 1,857 15
Lazard International Fixed-Income Portfolio 827 11
Lazard Bond Portfolio 433 6
Lazard Equity Portfolio 1,229 19
Lazard Strategic Yield Portfolio 916 19
Lazard Small Cap Portfolio 2,064 23
Lazard International Small Cap Portfolio 1,132 15
Lazard Emerging Markets Portfolio 1,147 51
Lazard Global Equity Portfolio 93 7
Lazard Bantam Value Portfolio 744 45
Lazard Emerging World Funds Portfolio 0 0
Item 27. Indemnification.
It is the Registrant's policy to indemnify its directors and officers,
employees and other agents to the maximum extent permitted by Section
2-418 of the General Corporation Law of the State of Maryland and as
set forth in Article EIGHTH of Registrant's Articles of Incorporation,
incorporated by reference to Exhibit 1 and Article VIII of the
Registrant's By-Laws, incorporated by reference to Exhibit 2. The
liability of Lazard Asset Management (the "Investment Manager") for any
loss suffered by the Lazard International Equity Portfolio, Lazard
International Fixed-Income Portfolio, Lazard Bond Portfolio, Lazard
Strategic Yield Portfolio, Lazard Small Cap Portfolio, Lazard Emerging
Markets Portfolio, Lazard International Small Cap Portfolio, Lazard
Global Equity Portfolio, Lazard Bantam Value Portfolio, and Lazard
Emerging World Funds Portfolio or their shareholders is set forth in
Section 9 of the Investment Management Agreement referenced by Exhibits
5(A), 5(B), 5(C), 5(D), 5(E), 5(J), 5(K), 5(M), 5(N), and 5(O). The
liability of the Investment Manager for any loss suffered by the Lazard
Equity Portfolio or its shareholders is set forth in Section 5 of the
Investment Management Agreement referenced by Exhibit 5(H). The
liability of Lazard Freres & Co. LLC, the Registrant's distributor, for
any loss suffered by the Registrant, each of its directors and officers
and each person, if any, who controls the Registrant is set forth in
Section 5(b) of the form of Distribution Agreement referenced by
Exhibit 6. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to
directors, officers and controlling persons of the Registrant pursuant
to the foregoing provisions, or otherwise, the Registrant has been
advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director,
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officer or the Registrant in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
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<TABLE>
<CAPTION>
Name and Address of Company with
Name of General Member which General Member is Connected Capacity
- ----------------------------------------------------------------------------------------
Item 28. Business and Other Connections of Investment Advisers.
The description of the Investment Manager under the Caption
"Management" in the Prospectus and in the Statement of Additional
Information constituting Parts A and B, respectively, of this
Registration Statement is incorporated by reference herein. Following
is a list of the General Members of Lazard Freres & Co. LLC, together
with their other business connections which are of substantial nature
during the previous two years:
Name and Address of Company with
Name of General Member which General Member is Connected Capacity
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Eileen D. Alexanderson None
William Araskog None
F. Harlan Batrus Mutual of America Capital Management Corp. Director
666 Fifth Avenue
New York, New York 10103
Ryan Labs, Inc. Director
350 Albany Street
New York, New York 10280
David G. Braunschvig None
Patrick J. Callahan, Jr. Berry Metal Co. Director
Route 68
Harmony, Pennsylvania 16307
BT Capital Corp. Director
280 Park Avenue
New York, New York 10017
Michigan Wheel Corp. Director
1501 Buchanan Avenue
Southwest Grand Rapids, Michigan 49507
Rotation Dynamics Corp. Director
15 Salt Creek Lane
Suite 316
Hinsdale, Illinois 60521
C-4
<PAGE>
Name and Address of Company with
Name of General Member which General Member is Connected Capacity
- ----------------------------------------------------------------------------------------
Somerset Technologies, Inc. Director
P.O. Box 791
New Brunswick, New Jersey 08903
GAR Holding Co. (Prior to 4/1/96) Director
600 Union Street
Ashland, Ohio 44805
Michel David-Weill BSN Gervais Danone (Prior to 8/1/96) Director
1260130 Rue Jules Gruesde
Levallois-Perret (Hauts de Seine)
France 92302
Credit Mobilier Industriel (Prior to 8/1/96) Chairman of the Board
(SOVAC)
19-21 Rue de la Bienfaisance
75008 Paris, France
The Dannon Company, Inc. Director
22-11 38th Avenue
Long Island City, New York 11101
Eurafrance President and Chairman of
12 Avenue Percier the Board
75008 Paris, France
Exor Group Director
19 Avenue Montaigne
75008 Paris, France
Euralux Director
8 Rue Ste-Zithe
2763 Luxembourg
Fiat S.p.A. (Prior to 8/1/96) Director
Corso Marconi 10
10125 Torino
Italy
Groupe Danone Director
7 Rue de Teheran
75008 Paris, France
ITT Industries, Inc. Director
320 Park Avenue
New York, New York 10022
La France S.A. Director
7 & 9 Boulevard Haussmann
75009 Paris, France
La France-Iard Director
7 & 9 Boulevard Haussmann
75009 Paris, France
La France-Vie Director
7 & 9 Boulevard Haussmann
75009 Paris, France
Lazard Brothers & Co., Limited Director
21 Moorfields
London EC2P-2HT
England
C-5
<PAGE>
Name and Address of Company with
Name of General Member which General Member is Connected Capacity
- ----------------------------------------------------------------------------------------
Pearson plc Director
Millbank Tower
London SWI P4QZ
Publicis S.A. Director
133 Champs-Ezlysees
75008 Paris, France
S.A. de la Rue Imperiale de Lyon Director
49, Rue de la Republique
Lyon (Rhone) 69002
France
John V. Doyle None
Charles R. Dreifus None
Thomas F. Dunn None
Norman Eig The Lazard Funds, Inc. Director, Chairman
30 Rockefeller Plaza
New York, New York 10020
Lazard Pension Management, Inc. Director
30 Rockefeller Plaza
New York, New York 10020
Richard P. Emerson None
Peter R. Ezersky None
Jonathan F. Foster None
Albert H. Garner None
James S. Gold Smart & Final Inc. Director
4700 South Boyle Avenue
Los Angeles, California 90058
Jeffrey A. Golman None
Steven J. Golub Mineral Technologies Inc. Director
405 Lexington Avenue
New York, New York 10174-1901
Herbert W. Gullquist The Lazard Funds, Inc. Director, President
30 Rockefeller Plaza
New York, New York 10020
Lazard Freres Asset Management (Canada), Inc. Director, President
30 Rockefeller Plaza
New York, New York 10020
C-6
<PAGE>
Name and Address of Company with
Name of General Member which General Member is Connected Capacity
- ----------------------------------------------------------------------------------------
Lazard Pension Management, Inc. Director, President
30 Rockefeller Plaza
New York, New York 10020
Thomas R. Haack None
J. Ira Harris Manpower Inc. Director
5301 North Ironwood Road
Milwaukee, Wisconsin 53201
Caremark International, Inc. (Prior to 9/20/96) Director
2215 Sanders Road
Northbrook, Illinois 60062
Brinker International Inc. Director
6820 LBJ Freeway
Dallas, Texas 75240
Melvin L. Heineman Lazard Freres & Co., Ltd. Director
21 Moorfields
London EC2P 2HT
England
Lazard Pension Management, Inc. (Prior to 1/1/97) Director
30 Rockefeller Plaza
New York, New York 10020
Kenneth M. Jacobs None
Jonathan H. Kagan Continental Cablevision, Inc. (Prior to 1/1/97) Director
Pilot House
54 Lewis Wharf
Boston, Massachusetts 02110
Firearms Training Systems, Inc. Director
7340 McGinnis Ferry Road
Suwanee, Georgia 30174
La Salle Re Ltd. Director
Cumberland House
One Victoria Street
P.O. HM 1502
Hamilton HM FX
Bermuda
La Salle Re Holdings Ltd. Director
Cumberland House
One Victoria Street
P.O. HM 1502
Hamilton HM FX
Bermuda
Patient Education Media, Inc. Director
1271 Avenue of the Americas
New York, New York 10020
Phar-Mor Inc. (Prior to 1/1/96) Director
20 Federal Plaza West
Youngstown, OH 44501
Tyco Toys, Inc. Director
6000 Midlantic Drive
Mount Laurel, New Jersey 08054
James L. Kempner Lazard Freres & Co. Capital Markets
30 Rockefeller Plaza
New York, NY 10020
William J. Kneisel Morgan Stanley & Co., Inc. (Prior to 12/95) Managing Director
1221 Avenue of the Americas
New York, NY 10020
Larry A. Kohn Goldman Sachs & Co. Vice President
85 Broad Street
New York, NY 10004
Sandra A. Lamb None
Edgar D. Legaspi None
Michael S. Liss Bear Stearns & Co. (Prior to 10/1/95) Senior Portfolio Manager
245 Park Avenue
New York, New York 10004
William R. Loomis, Jr. Engelhard Hanovia Inc. Director
280 Park Avenue
3rd Floor - West Wing
New York, New York 10017
C-7
<PAGE>
Name and Address of Company with
Name of General Member which General Member is Connected Capacity
- ----------------------------------------------------------------------------------------
Minorco S.A. Director
Boite Postal 185
L-2011 Luxembourg
Minorco (U.S.A.) Inc. Director
30 Rockefeller Plaza
Suite 4212
New York, NY 10112
Terra Industries, Inc. Director
600 4th Street
Sioux City, Iowa 51101
J. Robert Lovejoy Lazard Freres & Co. Capital Markets
30 Rockefeller Plaza
New York, NY 10020
Matthew J. Lustig None
Philippe L. Magistretti None
Damon Mezzacappa Corporate Property Investors Director
30 Rockefeller Plaza
New York, New York 10020
Robert P. Morgenthau Lazard Freres Asset Management (Canada), Inc. Director, Vice-President
30 Rockefeller Plaza
New York, New York 10020
Steven J. Niemczyk None
Hamish W. M. Norton None
Jonathan O'Herron Trigen Energy Corporation Director
1 Water Street
White Plains, New York 10601
James A. Paduano Donovan Data Systems, Inc. Director
666 Fifth Avenue
New York, New York 10019
Secure Products Inc. Director
47 Maple Street
Summit, NJ 07901
Louis Perlmutter None
Robert E. Poll, Jr. None
Lester Pollack Continental Cablevision, Inc. (Prior to 1/1/97) Director
Pilot House
54 Louis Wharf
Boston, Massachusetts 02210
Firearms Training Systems, Inc. Director
7340 McGinnis Ferry Road
Suwanee, Georgia 30174
Kaufman & Broad Home Corp. (Prior to 1/1/97) Director
11601 Wilshire Boulevard
Los Angeles, California 90025-1748
La Salle Re Ltd. Director
Cumberland House
One Vicotoria Street
P.O. HM FX
Bermuda
La Salle Re Holdings Ltd. Director
Cumberland House
One Victoria Street
P.O. HM FX
Bermuda
C-8
<PAGE>
Name and Address of Company with
Name of General Member which General Member is Connected Capacity
- ----------------------------------------------------------------------------------------
Loews Corporation (Prior to 1/1/96) Director
666 Fifth Avenue
New York, New York 10103
Parlex Corp. Director
145 Milk Street
Metuen, Massachusetts 01844
Polaroid Corp. Director
549 Technology Square
Cambridge, Massachusetts 02139
SD Holding (Bermuda) Ltd. Director
Hurst Holme
Trott Road
Hamilton, HMII
Bermuda
Sphere Drake Acquisitions (U.K.) Ltd. Director
52-24 Leadenhall Street
London EC3A 2BJ
England
Sphere Drake Holding Ltd. Director
52-24 Leadenhall Street
London EC3A 2BJ
England
Sphere Drake Ltd. Director
52-24 Leadenhall Street
London EC3A 2BJ
England
Sun America Inc. Director
11601 Wilshire Boulevard
Los Angeles, CA 90025
Tidewater Inc. Director
1440 Canal Street
Suite 2100
New Orleans, Louisianna 70112
Michael J. Price Avidia Systems, Inc. Director
10 Fairfield Blvd.
Wallingford, CT 06492
Steven L. Rattner Falcon Holding Group L.P. Director
10900 Wilshire Boulevard
Los Angeles, California 90024
John R. Reese Owosso Corp. Director
312 West Main Street
Owosso, Michigan 48867
Owosso Gan, Inc. Director
312 West Main Street
Owosso, Michigan 48867
John R. Reinsberg None
Louis G. Rice None
C-9
<PAGE>
Name and Address of Company with
Name of General Member which General Member is Connected Capacity
- ----------------------------------------------------------------------------------------
Luis E. Rinaldini None
Bruno M. Roger CAP Gemini Sogeti Director
6, bid Jean Pain a Grenoble (38005)
France
Carnaud Metal Box Packaging (Prior to 8/1/96) Director
153, Rue de Courcelles a Paris 17eme
France
Compagnie De Credit Director
121, boulevard Haussmann a Paris Seme
France
Compagnie De Saint-Gobain Director
Les Miroirs
18 avenue d'Alsace
Paris la Defense (92096)
France
Eurafrance Director
12, avenue Percier a Paris Seme
France
Financiere Et Industrielle Gaz Director
Et Eaux
3, rue Jacques Bingen a Paris 17eme
France
Fonds Partenaires Gestion (F.P.G.) Director
121, boulevard Haussmann a Paris Seme
France
Lazard, Burlkin, Kuna & Co. (Prior to 1/1/96) Director
Ulmenstrasse 37-39
60325 Frankfurt am Main
Federal Republic of Germany
Lazard & Co. GmbH Director
Ulmenstrasse 37-39
60325 Frankfurt am Main
Federal Republic of Germany
LVMH-Moet Hennessy Louis Vuitton Director
30, avenue Hoche a Paris 8eme
France
Marine-Wendel Director
189, rue Taitbout a Paris 9eme
France
Midial (Prior to 1/1/96) Director
192, avenue Charles de Gaulle
Neuille S/Sein (92200)
France
Pinault-Printemps-Redoute Director
61, rue Caumartin
75009 Paris
PSA Finance Holding (Prior to 1/1/96) Director
75, av. de la Grande Armee a Paris 16eme
France
C-10
<PAGE>
Name and Address of Company with
Name of General Member which General Member is Connected Capacity
- ----------------------------------------------------------------------------------------
Sidel Director
66, rue de Miromesnil
75008 Paris
Societe Centrale Puour L'Industrie Director
9, avenue Hoche a Paris 8eme
France
Societe Financiere Generale Director
Immobiliere (S.F.G.I.)
23, rue de I'Arcasde a Paris 8eme
France
Sofina (Belgique) Director
Rue de Naples, 38-B-1050 Bruzelles
Sogeti S.A. (Prior to 8/1/96) Director
6, bld Jean Pain a Grenoble (38005)
France
Sovac (Prior to 8/1/96) Director
19-21, rue de la Bienfaisance aParis 8eme
France
Sovaclux S.A. Director
14 rue Aldringen - Luxembourg
Thomson S.A. Director
51 esplanade du General de Gaulle
La Defense 10-92800 Puteaux
France
Thomson CSF Director
51 Esplanade du General de Gaulle
La Defense 10-92800 Puteaux
France
U.A.P. Director
9, place Vendome
75001 Paris
Felix G. Rohatyn Crown Cork & Seal Co., Inc. Director
9300 Ashton Road
Philadelphia, PA 19136
General Instrument Corp. Director
181 West Madison Street
Chicago, Illinois 60602
Howmet Turbine Components Corp.(Prior to 1/1/96) Director
221 West Webster Avenue
Mouskegon, Michigan 49440
Pfizer Inc. Director
235 East 42nd Street
New York, New York 10017-5755
Michael S. Rome None
Gerald Rosenfeld Case Corporation Director
700 State Street
Racine, Wisconsin 53404
Steven H. Sands Isogen LLC Director
150 West Warrenville Rd.
Naperville, IL 60563-8460
National Imaging Associates, Inc. Director
10 Mountainview Road
Upper Saddle River, NJ 07458
Skila, Inc. Director
1200 MacArthur Blvd.
Mahwah, NJ 07430
C-11
<PAGE>
Name and Address of Company with
Name of General Member which General Member is Connected Capacity
- ----------------------------------------------------------------------------------------
Peter L. Smith Dixie Yarns Inc. Director
1100 Watkins Street
Chattanooga, Tennessee 37401
Arthur P. Solomon None
Michael B. Solomon Charming Shoppes Inc. Director
450 Winks Lane
Bensalem, Pennsylvania 19020
Edouard M. Stern Mainz Holdings Limited Director
P.O. Box 3161
Roadtown Tortola BVI
Penthievre Holdings B.V. Director
Jupiter Straat 158
2130 Ah Hoofddorp Netherlands
John S. Tamagni Western Holdings Inc. (Prior to 9/20/96) Director
1491 Tyrell Lane
Boise, Idaho 83706
David L. Tashjian None
J. Mikesell Thomas None
Donald A. Wagner None
Ali E. Wambold The Albert Fisher Group plc Director
Fisher House
61 Thames Street
Windsor, Berkshire SO4 IQW
England
Lazard Brothers & Co., Ltd. Director
21 Moorfields
London EC2P 2HT
England
Lazard Freres & Co., Ltd. Director
21 Moorfields
London EC2P 2HT
England
Lazard S.p.A. Director
Plazza Meda, 3
Milano, Italy 20121
Tomkins PLC Director
East Putney House
84 Upper Richmond Road
London SW15 2ST
England, UK
John B. Ward None
Michael A. Wildish None
Kendrick R. Wilson III American Buildings Company Director
State Docks Road
Eufaula, Alabama 36027
Bank United Director
3200 Southwest Freeway
Houston, Texas 77027
ITT Corp. Director
1330 Avenue of Americas
New York, NY 10019
Meigher Communications, Inc. Director
100 Avenue of Americas
New York, NY 10013
C-12
<PAGE>
Name and Address of Company with
Name of General Member which General Member is Connected Capacity
- ----------------------------------------------------------------------------------------
Alexander E. Zagoreos Drayton Korea Investment Trust Director
11 Devonshire Square
London EC2M 4YR
The Egypt Trust Director
30 Rockefeller Plaza
New York, NY 10020
Fleming Continental European Investment Trust Director
25 Copthall Avenue
London EC2R 7DR
Gartmore Emerging Pacific Investment Trust Director
Gartmore House
16-18 Monument Street
London EC3R 8AJ
Greek Progress Fund Director
Ergobank
5, Evripidou
40-44, Praxit, Elous
105-61 Athens
Greece
Latin American Investment Trust Director
Exchange House
Primrose Street
London EC2A 2NY
Merlin Green International Investment Trust Director
Knightsbridge House
197 Knightsbridge
London SW7 1RB
New Zealand Investment Trust Director
23 Cathedral Yard
Exeter
Devon EX1 1HB
Taiwan Opportunities Fund Director
c/o Martin-Currie
20 Castle Terrace
Edinburgh EHI 2ES
U.K.
World Trust Fund Director
Kredietrust
11 rue Aldringen
Luxembourg l-2960
</TABLE>
C-13
<PAGE>
Item 29. Principal Underwriters
(a) Lazard Freres & Co. LLC, through its division Lazard Asset Management,
currently serves as an investment adviser to the following investment
companies: Target Portfolio Trust; The Accessor Funds; Fortis Series
Fund, Inc.; the Managers Funds; DG International Equity Fund and The
Travelers Series Trust.
(b) Eileen D. Alexanderson, William R. Araskog, F. Harlan Batrus, David G.
Braunschvig, Patrick J. Callahan, Jr., Michel David-Weill, John V.
Doyle, Charles R. Dreifus, Thomas F. Dunn, Norman Eig, Richard P.
Emerson, Peter R. Ezersky, Jonathan F. Foster, Albert H. Garner, James
S. Gold, Jeffrey A. Golman, Steven J. Golub, Herbert W. Gullquist,
Thomas R. Haack, J. Ira Harris, Melvin L. Heineman, Kenneth M. Jacobs,
Jonathan H. Kagan, James L. Kempner, William J. Kneisel, Larry A. Kohn,
Sandra A. Lamb, Edgar D. Legaspi, Michael S. Liss, William E. Loomis,
Jr., J. Robert Lovejoy, Matthew J. Lustig, Philippe L. Magistretti,
Damon Mezzacappa, Robert P. Morgenthau, Steven J. Niemczyk, Hamish W.
M. Norton, Jonathan O'Herron, James A. Paduano, Louis Perlmutter,
Robert E. Poll, Jr., Lester Pollack, Michael J. Price, Steven L.
Rattner, John R. Reese, John R. Reinsberg, Louis G. Rice, Luis E.
Rinaldini, Bruno M. Roger, Felix G. Rohatyn, Michael S. Rome, Gerard
Rosenfeld, Stephen H. Sands, Peter L. Smith, Arthur P. Solomon, Michael
B. Solomon, Edouard M. Stern, John S. Tamagni, David L. Tashjian,
Joseph M. Thomas, Donald A. Wagner, Ali E. Wambold, John B. Ward,
Michael A. Wildish, Kendrick R. Wilson, III and Alexander E. Zagoreos
are the general members of Lazard Freres & Co. LLC. Mr. David-Weill is
the senior member of Lazard Freres & Co. LLC. The address of all such
members is 30 Rockefeller Plaza, New York, New York 10020.
(c) Not applicable.
Item 30. Location of Accounts and Records
The majority of the accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 and
the Rules thereunder are maintained as follows: Journals, ledgers,
securities records and other original records are maintained primarily
at the offices of the Registrant's Custodian, State Street Bank & Trust
Company. All other records so required to be maintained are maintained
at the offices of Lazard Freres & Co. LLC, 30 Rockefeller Plaza, New
York, New York 10020.
Item 31. Management Services.
Other than as set forth under the caption "Management" in the
Prospectus constituting Part A of this Registration Statement and the
Statement of Additional Information constituting Part B of this
Registration Statement, Registrant is not a party to any
management-related service contract.
Item 32. Undertakings.
Registrant hereby undertakes:
(1) to call a meeting of shareholders for the purpose of voting upon
the question of removal of a director or directors when requested in
writing to do so by the holders of at least 10% of the Registrant's
outstanding shares of common stock and in connection with such meeting
to comply with the provisions of Section 15(c) of the Investment
Company Act of 1940 relating to shareholder communications. (2) to
furnish each person to whom a prospectus is delivered with a copy of
its latest annual report to shareholders, upon request and without
charge, beginning with the annual report to shareholders for the fiscal
year ended December 31, 1996.
(2) to file a post-effective amendment, using financial statements
which need not be certified, within four to six months from the
effective date of Registrant's 1933 Act Registration Statement
pertaining to Registrant's Emerging World Funds Portfolio.
(3) to furnish each person to whom a prospectus is delivered with a
copy of the fund's latest Annual Report to Shareholders, upon request
and without charge.
C-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all of the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in The City of New York and State of New
York, on the 1st day of May, 1997.
THE LAZARD FUNDS, INC.
By: /s/ William G. Butterly, III
---------------------------------------
William G. Butterly, III
Vice President and Secretary
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 date indicated.
<TABLE>
<S> <C> <C> <C>
Signature Title Date
--------------------------------------- ------------------- --------------
1. Principal Executive Officer Chairman May 1, 1997
* /s/ William G. Butterly, III
----------------------------------
Norman Eig
2. Principal Financial & Accounting Officer: Treasurer May 1, 1997
/s/ Gus Coutsouros
------------------
Gus Coutsouros
3. All of the Directors:
*John J. Burke
*Kenneth S. Davidson
*Norman Eig
*Herbert W. Gullquist
*Lester Z. Lieberman
*Richard Reiss, Jr.
*John Rutledge
*Carl Frischling
*William Katz
*By: /s/ William G. Butterly, III May 1, 1997
-----------------------------
Attorney-in-fact, William G. Butterly, III
</TABLE>
C-15
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Sequential
Page Number
11 Consent of Independent Auditors
17 Financial Data Schedule
18c Power of Attorney
[Letterhead]
May 1, 1997
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 12 of The Lazard Funds,
Inc. Registration Statement on Form N-1A of our report dated January 28, 1997,
relating to the financial statements and selected per share data and ratios of
The Lazard Funds, Inc. which appears in such Statement of Additional
Information. We also consent to the incorporation by reference of our report in
the Prospectus constituting part of such Post-Effective Amendment No. 12 and to
the reference to us under the heading "Selected per Share Data and Ratios" in
the Prospectus.
We consent to the reference to our firm under the caption "Counsel and
Independent Accountants" in the registration statement (Form N-1A No. 33-40682)
of The Lazard Funds, Inc.
/s/Anchin, Block & Anchin LLP
-----------------------------
Anchin, Block & Anchin LLP
1375 Broadway
New York, NY 10018
May 1, 1997
Power of Attorney
For the purpose of Amending the Registration Statement of
The Lazard Funds, Inc.
The undersigned hereby constitutes and appoints William G. Butterly, III his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities (until revoked in writing) to sign any and all amendments to the
Registration Statement of The Lazard Funds, Inc. (including post-effective
amendments and amendments thereto), and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing ratifying and
confirming all that said attorney-in-fact and agent or his substitute may
lawfully do or cause to be done by virtue thereof.
/s/William Katz
---------------
William Katz
Director
Dated: April 30, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
</LEGEND>
<CIK> 0000874964
<NAME>THE LAZARD FUNDS, INC.
<SERIES>
<NUMBER> 1
<NAME> LAZARD INTERNATIONAL EQUITY PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 1,552,022,771
<INVESTMENTS-AT-VALUE> 1,807,918,308
<RECEIVABLES> 10,861,830
<ASSETS-OTHER> 618,427
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,819,398,565
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,225,397
<TOTAL-LIABILITIES> 3,225,397
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,551,277,018
<SHARES-COMMON-STOCK> 133,302,794
<SHARES-COMMON-PRIOR> 103,988,517
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (3,305,547)
<ACCUMULATED-NET-GAINS> 12,295,348
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 255,906,349
<NET-ASSETS> 1,816,173,168
<DIVIDEND-INCOME> 39,513,337
<INTEREST-INCOME> 4,811,713
<OTHER-INCOME> 0
<EXPENSES-NET> (14,169,340)
<NET-INVESTMENT-INCOME> 30,155,710
<REALIZED-GAINS-CURRENT> 77,886,214
<APPREC-INCREASE-CURRENT> 129,031,917
<NET-CHANGE-FROM-OPS> 237,073,841
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (24,135,758)
<DISTRIBUTIONS-OF-GAINS> (77,796,782)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,491,105
<NUMBER-OF-SHARES-REDEEMED> (1,279,291)
<SHARES-REINVESTED> 710,986
<NET-CHANGE-IN-ASSETS> 516,623,721
<ACCUMULATED-NII-PRIOR> 63,301
<ACCUMULATED-GAINS-PRIOR> 2,869,752
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11,746,379
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 14,181,013
<AVERAGE-NET-ASSETS> 1,566,183,893
<PER-SHARE-NAV-BEGIN> 12.50
<PER-SHARE-NII> 0.16
<PER-SHARE-GAIN-APPREC> 1.77
<PER-SHARE-DIVIDEND> (0.19)
<PER-SHARE-DISTRIBUTIONS> (0.62)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.61
<EXPENSE-RATIO> 0.91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
</LEGEND>
<CIK> 0000874964
<NAME> THE LAZARD FUNDS, INC.
<SERIES>
<NUMBER> 2
<NAME> LAZARD INTERNATIONAL FIXED INCOME PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 83,292,568
<INVESTMENTS-AT-VALUE> 85,855,906
<RECEIVABLES> 2,878,811
<ASSETS-OTHER> 1,807,625
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 90,542,342
<PAYABLE-FOR-SECURITIES> 1,442,799
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 669,705
<TOTAL-LIABILITIES> 2,112,504
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<APPREC-INCREASE-CURRENT> 3,026,512
<NET-CHANGE-FROM-OPS> 5,814,393
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (501,401)
<DISTRIBUTIONS-OF-GAINS> (1,351,185)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,685,157
<NUMBER-OF-SHARES-REDEEMED> (78,975)
<SHARES-REINVESTED> 140,707
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<ACCUMULATED-NII-PRIOR> 0
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<AVERAGE-NET-ASSETS> 21,674,708
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.22
<PER-SHARE-GAIN-APPREC> 3.11
<PER-SHARE-DIVIDEND> (0.22)
<PER-SHARE-DISTRIBUTIONS> (0.53)
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<PER-SHARE-NAV-END> 12.58
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
