THE LAZARD FUNDS, INC.
30 Rockefeller Plaza
New York, New York 10112
(800) 823-6300
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 1997
The Lazard Funds, Inc. (the "Fund") is a no-load, open-end management
investment company known as a mutual fund. This Statement of Additional
Information, which is not a prospectus, supplements and should be read in
conjunction with the current Prospectus of the Fund, dated November 1, 1997, as
it may be revised from time to time, relating to the following twelve portfolios
(individually, a "Portfolio" and collectively, the "Portfolios"):
Lazard Equity Portfolio Lazard International Small Cap Portfolio
Lazard Mid Cap Portfolio Lazard Emerging Markets Portfolio
Lazard Small Cap Portfolio Lazard Bond Portfolio
Lazard Bantam Value Portfolio Lazard High Yield Portfolio
Lazard Global Equity Portfolio Lazard International Fixed Income Portfolio
Lazard International Equity Lazard Strategic Yield Portfolio
Portfolio
Each Portfolio currently offers two classes of shares--Institutional
Shares and Open Shares. Institutional Shares and Open Shares are identical,
except as to minimum investment requirements and the services offered to and
expenses borne by each Class.
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.
To obtain a copy of the Fund's Prospectus, please write or call the
Fund at the address and telephone number given above.
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TABLE OF CONTENTS
Page
Investment Objectives and Management Policies.................... 3
Investment Restrictions.......................................... 18
Management....................................................... 21
Determination of Net Asset Value................................. 27
Portfolio Transactions........................................... 28
Purchase and Redemption of Shares................................ 31
Distribution and Servicing Plan.................................. 31
Dividends and Distributions...................................... 32
Taxation......................................................... 33
Performance Information.......................................... 36
Organization and Description of Capital Stock.................... 38
Counsel and Independent Auditors................................. 51
Additional Information........................................... 51
Appendix......................................................... 52
Financial Statements and Report of Independent Auditors.......... 57
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INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTIONS IN THE FUND'S PROSPECTUS ENTITLED "DESCRIPTION OF
THE PORTFOLIOS" AND "APPENDIX."
PORTFOLIO SECURITIES
DEPOSITARY RECEIPTS. (All Portfolios, except the Small Cap Portfolio)
These securities may be purchased through "sponsored" or "unsponsored"
facilities. A sponsored facility is established jointly by the issuer of the
underlying security and a depositary, whereas a depositary may establish an
unsponsored facility without participation by the issuer of the deposited
security. Holders of unsponsored depositary receipts generally bear all the
costs of such facilities and the depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through voting
rights to the holders of such receipts in respect of the deposited securities.
REPURCHASE AGREEMENTS. (All Portfolios) The Fund's custodian or
sub-custodian will have custody of, and will hold in a segregated account,
securities acquired by a Portfolio under a repurchase agreement. Repurchase
agreements are considered by the staff of the Securities and Exchange Commission
(the "Commission") to be loans by the Portfolio that enters into them. In an
attempt to reduce the risk of incurring a loss on a repurchase agreement, the
Portfolio will enter into repurchase agreements only with domestic banks with
total assets in excess of $1 billion, or primary government securities dealers
reporting to the Federal Reserve Bank of New York, with respect to securities of
the type in which the Portfolio may invest, and will require that additional
securities be deposited with it if the value of the securities purchased should
decrease below the resale price.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS. (All
Portfolios) These instruments include variable amount master demand notes, which
are obligations that permit a Portfolio to invest fluctuating amounts at varying
rates of interest pursuant to direct arrangements between the Portfolio, as
lender, and the borrower. These notes permit daily changes in the amounts
borrowed. Because these obligations are direct lending arrangements between the
lender and borrower, it is not contemplated that such instruments generally will
be traded, and there generally is no established secondary market for these
obligations, although they are redeemable at face value, plus accrued interest,
at any time. Accordingly, where these obligations are not secured by letters of
credit or other credit support arrangements, the Portfolio's right to redeem is
dependent on the ability of the borrower to pay principal and interest on
demand. Such obligations frequently are not rated by credit rating agencies, and
the Portfolio may invest in them only if at the time of an investment the
borrower meets the criteria set forth in the Prospectus for other commercial
paper issuers.
CONVERTIBLE SECURITIES. (All Portfolios) Although to a lesser extent
than with fixed-income securities, the market value of convertible securities
tends to decline as interest rates increase and, conversely, tends to increase
as interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stock. A unique feature of convertible
securities is that as the market price of the underlying common stock declines,
convertible securities tend to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the
prices of the convertible securities tend to rise as a reflection of the value
of the underlying common stock. While no securities investments are without
risk, investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.
Convertible securities are investments that provide for a stable
stream of income with generally higher yields than common stocks. There can be
no assurance of current income because the issuers of the convertible securities
may default on their obligations. A convertible security, in addition to
providing fixed income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because securities prices fluctuate. Convertible
securities, however, generally offer lower interest or dividend yields than
non-convertible securities of similar quality because of the potential for
capital appreciation.
PARTICIPATION INTERESTS. (All Portfolios) Each Portfolio may invest in
corporate obligations denominated in U.S. or (except with respect to the Equity
Portfolio and Small Cap Portfolio) foreign currencies that are originated,
negotiated and structured by a syndicate of lenders ("Co-Lenders") consisting of
commercial banks, thrift institutions, insurance companies, financial companies
or other financial institutions one or more of which administers the security on
behalf of the syndicate (the "Agent Bank"). Co-Lenders may sell such securities
to third parties called "Participants." Each Portfolio may invest in such
securities either by participating as a Co-Lender at origination or by acquiring
an interest in the security from a Co-Lender or a Participant (collectively,
"participation interests"). Co-Lenders and Participants interposed between the
Portfolio and the corporate borrower (the "Borrower"), together with Agent
Banks, are referred to herein as "Intermediate Participants." Each Portfolio
also may purchase a participation interest in a portion of the rights of an
Intermediate Participant, which would not establish any direct relationship
between the Fund, on behalf of the Portfolio, and the Borrower. In such cases,
the Portfolio would be required to rely on the Intermediate Participant that
sold the participation interest not only for the enforcement of the Portfolio's
rights against the Borrower, but also for the receipt and processing of payments
due to the Portfolio under the security. Because it may be necessary to assert
through an Intermediate Participant such rights as may exist against the
Borrower, if the Borrower fails to pay principal and interest when due, the
Portfolio may be subject to delays, expenses and risks that are greater than
those that would be involved if the Portfolio were to enforce its rights
directly against the Borrower. Moreover, under the terms of a participation
interest, the Portfolio may be regarded as a creditor of the Intermediate
Participant (rather than of the Borrower), so that the Portfolio also may be
subject to the risk that the Intermediate Participant may become insolvent.
Similar risks may arise with respect to the Agent Bank if, for example, assets
held by the Agent Bank for the benefit of the Portfolio were determined by the
appropriate regulatory authority or court to be subject to the claims of the
Agent Bank's creditors. In such case, the Portfolio might incur certain costs
and delays in realizing payment in connection with the participation interest or
suffer a loss of principal and/or interest. Further, in the event of the
bankruptcy or insolvency of the Borrower, the obligation of the Borrower to
repay the loan may be subject to certain defenses that can be asserted by such
Borrower as a result of improper conduct by the Agent Bank or Intermediate
Participant.
VARIABLE AND FLOATING RATE SECURITIES. (All Portfolios) Variable and
floating rate securities provide for a periodic adjustment in the interest rate
paid on the obligations. The terms of such obligations must provide that
interest rates are adjusted periodically based upon an interest rate adjustment
index as provided in the respective obligations. The adjustment intervals may be
regular, and range from daily up to annually, or may be event based, such as
based on a change in the prime rate.
Each Portfolio may invest in floating rate debt instruments
("floaters"). The interest rate on a floater is a variable rate which is tied to
another interest rate, such as a money- market index or Treasury bill rate. The
interest rate on a floater resets periodically, typically every six months.
Because of the interest rate reset feature, floaters provide the Portfolio with
a certain degree of protection against rises in interest rates, although the
Portfolio will participate in any declines in interest rates as well.
Each Portfolio also may invest in inverse floating rate debt
instruments ("inverse floaters"). The interest rate on an inverse floater resets
in the opposite direction from the market rate of interest to which the inverse
floater is indexed. An inverse floating rate security may exhibit greater price
volatility than a fixed rate obligation of similar credit quality.
ILLIQUID SECURITIES. (All Portfolios) Each Portfolio may invest up to
10% (15% in the case of the Mid Cap Portfolio and High Yield Portfolio) of the
value of its net assets in illiquid securities, provided such investments are
consistent with the Portfolio's investment objective. 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) repurchase agreements providing for settlement in more than
seven days after notice, and (iii) certain privately negotiated, non-exchange
traded options and securities used to cover such options written by the
Portfolio. When purchasing securities that have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and are not readily
marketable, a Portfolio will endeavor, to the extent practicable, to obtain the
right to registration at the expense of the issuer. Generally, there will be a
lapse of time between the Portfolio's decision to sell any such security and the
registration of the security permitting sale. During any such period, the price
of the securities will be subject to market fluctuations. However, where a
substantial market of qualified institutional buyers has developed for certain
unregistered securities purchased by the Portfolio pursuant to Rule 144A under
the Securities Act, the Portfolio intends to treat such securities as liquid
securities in accordance with procedures approved by the Fund's Board. Because
it is not possible to predict with assurance how the market for specific
restricted securities sold pursuant to Rule 144A will develop, the Fund's Board
has directed the Investment Manager to monitor carefully each Portfolio's
investments in such securities with particular regard to trading activity,
availability of reliable price information and other relevant information. To
the extent that, for a period of time, qualified institutional buyers cease
purchasing restricted securities pursuant to Rule 144A, a Portfolio's investing
in such securities may have the effect of increasing the level of illiquidity in
its investment portfolio during such period.
MUNICIPAL OBLIGATIONS. (Bond Portfolio, High Yield Portfolio and
Strategic Yield Portfolio) Municipal obligations are debt obligations issued by
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities, or
multistate agencies or authorities. Municipal obligations bear fixed, floating
or variable rates of interest. Certain municipal obligations are subject to
redemption at a date earlier than their stated maturity pursuant to call
options, which may be separated from the related municipal obligations and
purchased and sold separately. Each of these Portfolios also may acquire call
options on specific municipal obligations. The Portfolio generally would
purchase these call options to protect the Portfolio from the issuer of the
related municipal obligation redeeming, or other holder of the call option from
calling away, the municipal obligation before maturity.
Municipal obligations generally include debt obligations issued to
obtain funds for various public purposes as well as certain industrial
development bonds issued by or on behalf of public authorities. Municipal
obligations are classified as general obligation bonds, revenue bonds and notes.
General obligation bonds are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from the revenue derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source, but not from the general taxing power. Industrial
development bonds, in most cases, are revenue bonds and generally do not carry
the pledge of the credit of the issuing municipality, but generally are
guaranteed by the corporate entity on whose behalf they are issued. Notes are
short-term instruments which are obligations of the issuing municipalities or
agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. Municipal obligations include municipal
lease/purchase agreements which are similar to installment purchase contracts
for property or equipment issued by municipalities.
While, in general, municipal obligations are tax exempt securities
having relatively low yields as compared to taxable, non-municipal obligations
of similar quality, certain municipal obligations are taxable obligations,
offering yields comparable to, and in some cases greater than, the yields
available on other permissible Portfolio investments. Dividends received by
shareholders on Portfolio shares which are attributable to interest income
received by the Portfolio from municipal obligations generally will be subject
to federal income tax. Each of these Portfolios will invest in municipal
obligations, the ratings of which correspond with the ratings of other
permissible Portfolio investments. Each of these Portfolios currently intends to
invest no more than 25% of its assets in municipal obligations. However, this
percentage may be varied from time to time without shareholder approval.
MORTGAGE-RELATED SECURITIES. (Bond Portfolio, High Yield Portfolio,
International Fixed Income Portfolio and Strategic Yield Portfolio and, to a
limited extent, the Equity Portfolio, Mid Cap Portfolio, Small Cap Portfolio,
Bantam Value Portfolio and Global Equity Portfolio) Mortgage-related securities
are a form of Derivative collateralized by pools of commercial or residential
mortgages. Pools of mortgage loans are assembled as securities for sale to
investors by various governmental, government-related and private organizations.
These securities may include complex instruments such as collateralized mortgage
obligations and stripped mortgage-backed securities, mortgage pass-through
securities, interests in REMICs or other kinds of mortgage-backed securities,
including those with fixed, floating and variable interest rates, those with
interest rates that change based on multiples of changes in a specified index of
interest rates and those with interest rates that change inversely to changes in
interest rates.
GOVERNMENT-AGENCY SECURITIES--Mortgage-related securities issued by the
Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development.
GOVERNMENT-RELATED SECURITIES--Mortgage-related securities issued by the Federal
National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of FNMA and are not backed by or entitled to the full faith and
credit of the United States Government. FNMA is a government-sponsored
organization owned entirely by private stockholders.
Mortgage-related securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "PCs"). FHLMC is a corporate instrumentality of the
United States Government created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks.
PRIVATE ENTITY SECURITIES--These mortgage-related securities are issued by
commercial banks, savings and loan institutions, mortgage bankers, private
mortgage insurance companies and other non-governmental issuers. Timely payment
of principal and interest on mortgage-related securities backed by pools created
by non-governmental issuers often is supported partially by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance. The insurance and guarantees are issued by government entities,
private insurers and the mortgage poolers. There can be no assurance that the
private insurers or mortgage poolers can meet their obligations under the
policies, so that if the issuers default on their obligations the holders of the
security could sustain a loss. No insurance or guarantee covers the Portfolio or
the price of the Portfolio's shares. Mortgage-related securities issued by
non-governmental issuers generally offer a higher rate of interest than
government-agency and government-related securities because there are no direct
or indirect government guarantees of payment.
COMMERCIAL MORTGAGE-BACKED SECURITIES--These mortgage-related securities reflect
an interest in, and are secured by, mortgage loans on commercial real property.
The market for commercial mortgage-backed securities developed more recently and
in terms of total outstanding principal amount of issues is relatively small
compared to the market for residential single-family mortgage-backed securities.
Many of the risks of investing in commercial mortgage-backed securities reflect
the risks of investing in the real estate securing the underlying mortgage
loans. These risks reflect the effects of local and other economic conditions on
real estate markets, the ability of tenants to make loan payments, and the
ability of a property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility than other
types of mortgage- or asset-backed securities.
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 (such
collateral 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.
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 accrued on all classes of the CMOs on a
monthly, quarterly or semiannual basis. The principal of and interest on the
Mortgage Assets may be 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.
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 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.
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
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. CMO Residuals, whether or not
registered under the Securities Act, may be subject to certain restrictions of
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.
REAL ESTATE INVESTMENT TRUSTS--Each of these Portfolios may invest an unlimited
amount of its assets in Real Estate Investment Trusts ("REITs"), although each
of the Mid Cap Portfolio, Bantam Value Portfolio, Equity Portfolio, Global
Equity Portfolio and Small Cap Portfolio currently intends to limit its
investments in REITs to no more than 5% of its assets. Each Portfolio intends to
invest in listed equity REITs, which own properties, listed mortgage REITs,
which make short-term construction and development mortgage loans or which
invest in long- term mortgages or mortgage pools, and listed hybrid REITs, which
combine characteristics of both equity and mortgage REITs. Accordingly, 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 therefore are
subject to the risk of financing single or a limited number of projects. REITs
also are 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 of 1940, as
amended (the "1940 Act").
OTHER MORTGAGE-RELATED SECURITIES--Other mortgage-related securities include
securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property. Other mortgage-related securities may be equity or debt
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, homebuilders, mortgage banks, commercial banks, investment
banks, partnerships, trusts and special purpose entities of the foregoing.
ASSET-BACKED SECURITIES. (Bond Portfolio, High Yield Portfolio,
International Fixed Income Portfolio and Strategic Yield Portfolio). Each of
these Portfolios 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 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.
MANAGEMENT POLICIES
LENDING PORTFOLIO SECURITIES. (All Portfolios) In connection with its
securities lending transactions, a Portfolio may return to the borrower or a
third party which is unaffiliated with the Portfolio, and which is acting as a
"placing broker," a part of the interest earned from the investment of
collateral received for securities loaned.
The Commission currently requires that the following conditions must
be met whenever portfolio securities are loaned: (1) the Portfolio must receive
at least 100% cash collateral from the borrower; (2) the borrower must increase
such collateral whenever the market value of the securities rises above the
level of such collateral; (3) the Portfolio must be able to terminate the loan
at any time; (4) the Portfolio must receive reasonable interest on the loan, as
well as any dividends, interest or other distributions payable on the loaned
securities, and any increase in market value; (5) the Portfolio may pay only
reasonable custodian fees in connection with the loan; and (6) while voting
rights on the loaned securities may pass to the borrower, the Fund's Board must
terminate the loan and regain the right to vote the securities if a material
event adversely affecting the investment occurs.
DERIVATIVES. (All Portfolios) Each Portfolio may invest in Derivatives
(as defined in the Prospectus), to the extent described in the Prospectus, for a
variety of reasons, including to hedge certain market risks, to provide a
substitute for purchasing or selling particular securities or to increase
potential income gain. Derivatives may provide a cheaper, quicker or more
specifically focused way for the Portfolio to invest than "traditional"
securities would.
Derivatives may be purchased on established exchanges or through
privately negotiated transactions referred to as over-the-counter Derivatives.
Exchange-traded Derivatives generally are guaranteed by the clearing agency
which is the issuer or counterparty to such Derivatives. This guarantee usually
is supported by a daily payment system (i.e., variation margin requirements)
operated by the clearing agency in order to reduce overall credit risk. As a
result, unless the clearing agency defaults, there is relatively little
counterparty credit risk associated with Derivatives purchased on an exchange.
By contrast, no clearing agency guarantees over-the-counter Derivatives.
Therefore, each party to an over-the-counter Derivative bears the risk that the
counterparty will default. Accordingly, the Investment Manager will consider the
creditworthiness of counterparties to over-the-counter Derivatives in the same
manner as it would review the credit quality of a security to be purchased by
the Portfolio. Over- the-counter Derivatives are less liquid than
exchange-traded Derivatives since the other party to the transaction may be the
only investor with sufficient understanding of the Derivative to be interested
in bidding for it.
FUTURES TRANSACTIONS--IN GENERAL. (All Portfolios, except the Equity Portfolio,
Small Cap Portfolio, Bantam Value Portfolio, International Equity Portfolio and
Strategic Yield Portfolio) Each of these Portfolios may enter into futures
contracts in U.S. domestic markets, such as the Chicago Board of Trade and the
International Monetary Market of the Chicago Mercantile Exchange, or, if
permitted as described in the Prospectus, on exchanges located outside the
United States, such as the London International Financial Futures Exchange and
the Sydney Futures Exchange Limited. Foreign markets may offer advantages such
as trading opportunities or arbitrage possibilities not available in the United
States. Foreign markets, however, may have greater risk potential than domestic
markets. For example, some foreign exchanges are principal markets so that no
common clearing facility exists and an investor may look only to the broker for
performance of the contract. In addition, any profits a Portfolio might realize
in trading could be eliminated by adverse changes in the exchange rate, or the
Portfolio could incur losses as a result of those changes. Transactions on
foreign exchanges may include both commodities which are traded on domestic
exchanges and those which are not. Unlike trading on domestic commodity
exchanges, trading on foreign commodity exchanges is not regulated by the
Commodity Futures Trading Commission.
Engaging in these transactions involves risk of loss to the Portfolio
which could adversely affect the value of the Portfolio's net assets. Although
each of these Portfolios intends to purchase or sell futures contracts only if
there is an active market for such contracts, no assurance can be given that a
liquid market will exist for any particular contract at any particular time.
Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contract prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the Portfolio
to substantial losses.
Successful use of futures by a Portfolio also is subject to the
Investment Manager's ability to predict correctly movements in the direction of
the relevant market, and, to the extent the transaction is entered into for
hedging purposes, to ascertain the appropriate correlation between the
transaction being hedged and the price movements of the futures contract. For
example, if a Portfolio uses futures to hedge against the possibility of a
decline in the market value of securities held in its portfolio and the prices
of such securities instead increase, the Portfolio will lose part or all of the
benefit of the increased value of securities which it has hedged because it will
have offsetting losses in its futures positions. Furthermore, if in such
circumstances the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. The Portfolio may have
to sell such securities at a time when it may be disadvantageous to do so.
Pursuant to regulations and/or published positions of the Commission,
a Portfolio may be required to segregate permissible liquid assets in connection
with its commodities transactions in an amount generally equal to the value of
the underlying commodity. The segregation of such assets will have the effect of
limiting the Portfolio's ability otherwise to invest those assets.
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 such 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.
SPECIFIC FUTURES TRANSACTIONS. Each of these Portfolios, except the Bond
Portfolio, High Yield Portfolio and International Fixed Income Portfolio, may
purchase and sell stock index futures contracts. A stock index future obligates
the Portfolio to pay or receive an amount of cash equal to a fixed dollar amount
specified in the futures contract multiplied by the difference between the
settlement price of the contract on the contract's last trading day and the
value of the index based on the stock prices of the securities that comprise it
at the opening of trading in such securities on the next business day.
The Bond Portfolio, High Yield Portfolio, International Fixed Income
Portfolio, Emerging Markets Portfolio, Global Equity Portfolio and International
Small Cap Portfolio may purchase and sell interest rate futures contracts. An
interest rate future obligates the Portfolio to purchase or sell an amount of a
specific debt security at a future date at a specific price.
Each of these Portfolios, except the Bond Portfolio, may purchase and
sell currency futures. A currency future obligates the Portfolio to purchase or
sell an amount of a specific currency at a future date at a specific price.
OPTIONS--IN GENERAL. (All Portfolios, except the Small Cap Portfolio and
International Equity Portfolio) Each of these Portfolios may purchase and write
(i.e., sell) call or put options with respect to specific securities. A call
option gives the purchaser of the option the right to buy, and obligates the
writer to sell, the underlying security or securities at the exercise price at
any time during the option period, or at a specific date. Conversely, a put
option gives the purchaser of the option the right to sell, and obligates the
writer to buy, the underlying security or securities at the exercise price at
any time during the option period, or at a specified date.
A covered call option written by a Portfolio is a call option with
respect to which the Portfolio owns the underlying security or otherwise covers
the transaction by segregating cash or other securities. A put option written by
a Portfolio is covered when, among other things, cash or liquid securities
having a value equal to or greater than the exercise price of the option are
placed in a segregated account with the Fund's custodian to fulfill the
obligation undertaken. The principal reason for writing covered call and put
options is to realize, through the receipt of premiums, a greater return than
would be realized on the underlying securities alone. A Portfolio receives a
premium from writing covered call or put options which it retains whether or not
the option is exercised.
There is no assurance that sufficient trading interest to create a
liquid secondary market on a securities exchange will exist for any particular
option or at any particular time, and for some options no such secondary market
may exist. A liquid secondary market in an option may cease to exist for a
variety of reasons. In the past, for example, higher than anticipated trading
activity or order flow, or other unforeseen events, at times have rendered
certain of the clearing facilities inadequate and resulted in the institution of
special procedures, such as trading rotations, restrictions on certain types of
orders or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. If, as a
covered call option writer, a Portfolio is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise or it otherwise covers its position.
SPECIFIC OPTIONS TRANSACTIONS. Each of these Portfolios may purchase and sell
call and put options in respect of specific securities (or groups or "baskets"
of specific securities) or indices listed on national securities exchanges or
traded in the over-the-counter market. An option on an index is similar to an
option in respect of specific securities, except that settlement does not occur
by delivery of the securities comprising the index. Instead, the option holder
receives an amount of cash if the closing level of the 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. Thus, the effectiveness of
purchasing or writing index options will depend upon price movements in the
level of the index rather than the price of a particular security.
Except as described below, each of the Equity Portfolio, International
Small Cap Portfolio, Emerging Markets Portfolio, Global Equity Portfolio and
Bantam Value 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 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 Nasdaq National Market
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 permissible liquid assets in a segregated account with the Fund's
custodian, it will not be subject to the requirements described in this
paragraph.
Each of these Portfolios, except the Equity Portfolio, Small Cap
Portfolio, Bantam Value Portfolio and Bond Portfolio, may purchase and sell call
and put options on foreign currency. These options convey the right to buy or
sell the underlying currency at a price which is expected to be lower or higher
than the spot price of the currency at the time the option is exercised or
expires.
Each of these Portfolios may purchase cash-settled options on interest
rate swaps, interest rate swaps interest rate swaps denominated in foreign
currency (except in the case of the Equity Portfolio), and (except in the case
of the Bond Portfolio and International Fixed Income Portfolio) equity index
swaps in pursuit of its investment objective. Interest rate swaps involve the
exchange by a Portfolio with another party of their respective commitments to
pay or receive interest (for example, an exchange of floating-rate payments for
fixed-rate payments) denominated in U.S. dollars or foreign currency. Equity
index swaps involve the exchange by the Portfolio with another party of cash
flows based upon the performance of an index or a portion of an index of
securities which usually includes dividends. A cash-settled option on a swap
gives the purchaser the right, but not the obligation, in return for the premium
paid, to receive an amount of cash equal to the value of the underlying swap as
of the exercise date. These options typically are purchased in privately
negotiated transactions from financial institutions, including securities
brokerage firms.
Successful use by a Portfolio of options will be subject to the
Investment Manager's ability to predict correctly movements in the prices of
individual stocks, the stock market generally, foreign currencies or interest
rates. To the extent the Investment Manager's predictions are incorrect, the
Portfolio may incur losses.
FUTURE DEVELOPMENTS. The relevant Portfolios may take advantage of
opportunities in the area of options and futures contracts and options on
futures contracts and any other Derivatives which are not presently contemplated
for use by the Portfolio or which are not currently available but which may be
developed, to the extent such opportunities are both consistent with the
Portfolio's investment objective and legally permissible for the Portfolio.
Before entering into such transactions or making any such investment, the
Portfolio will provide appropriate disclosure in the Prospectus or Statement of
Additional Information.
LEVERAGE. (Equity Portfolio, Mid Cap Portfolio, Bantam Value
Portfolio, Global Equity Portfolio, International Small Cap Portfolio, Emerging
Markets Portfolio and High Yield Portfolio) For borrowings for investment
purposes, the 1940 Act requires the Portfolio to maintain continuous asset
coverage (that is, total assets including borrowings, less liabilities exclusive
of borrowings) of 300% of the amount borrowed. If the required coverage should
decline as a result of market fluctuations or other reasons, the Portfolio may
be required to sell some of its portfolio securities within three days to reduce
the amount of its borrowings and restore the 300% asset coverage, even though it
may be disadvantageous from an investment standpoint to sell securities at that
time. The Portfolio also may be required to maintain minimum average balances in
connection with such borrowing or pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate. To the extent the Portfolio enters into
a reverse repurchase agreement, the Portfolio will maintain in a segregated
custodial account permissible liquid assets at least equal to the aggregate
amount of its reverse repurchase obligations, plus accrued interest, in certain
cases, in accordance with releases promulgated by the Commission. The Commission
views reverse repurchase transactions as collateralized borrowings by the
Portfolio.
SHORT-SELLING. (Mid Cap Portfolio and High Yield Portfolio) Until the
Portfolio closes its short position or replaces the borrowed security, it will:
(a) maintain a segregated account, containing permissible liquid assets, at such
a level that the amount deposited in the account plus the amount deposited with
the broker as collateral always equals the current value of the security sold
short; or (b) otherwise cover its short position.
FORWARD COMMITMENTS. (All Portfolios) Securities purchased on a
forward commitment or when-issued basis are subject to changes in value
(generally changing in the same way, i.e., appreciating when interest rates
decline and depreciating when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Securities purchased on a forward
commitment or when-issued basis may expose a Portfolio to risks because they may
experience such fluctuations prior to their actual delivery. Purchasing
securities on a when-issued basis can involve the additional risk that the yield
available in the market when the delivery takes place actually may be higher
than that obtained in the transaction itself. Purchasing securities on a forward
commitment or when-issued basis when the Portfolio is fully or almost fully
invested may result in greater potential fluctuation in the value of the
Portfolio's net assets and its net asset value per share.
INVESTMENT CONSIDERATIONS AND RISKS
LOWER RATED SECURITIES. (Bond Portfolio, High Yield Portfolio,
International Fixed Income Portfolio and Strategic Yield Portfolio). Each of
these Portfolios is permitted to invest in securities rated Ba by Moody's
Investors Service, Inc. ("Moody's") or BB by Standard & Poor's Ratings Group
("S&P" and together with Moody's, the "Rating Agencies"), and as low as the
lowest rating assigned by the Rating Agencies. Such securities, though higher
yielding, are characterized by risk. See "Description of the
Portfolios-Investment Considerations and Risks-Lower Rated Securities" in the
Prospectus for a discussion of certain risks and the "Appendix" for a general
description of the Rating Agencies' ratings. Although ratings may be useful in
evaluating the safety of interest and principal payments, they do not evaluate
the market value risk of these securities. The Portfolio will rely on the
Investment Manager's judgment, analysis and experience in evaluating the
creditworthiness of an issuer.
Investors should be aware that the market values of many of these
securities tend to be more sensitive to economic conditions than are higher
rated securities. These securities generally are considered by the Rating
Agencies to be, on balance, predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligation and generally will involve more credit risk than securities in the
higher rating categories.
Companies that issue certain of these securities often are highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with the higher rated securities.
For example, during an economic downturn or a sustained period of rising
interest rates, highly leveraged issuers of these securities may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be affected adversely by
specific corporate developments, forecasts, or the unavailability of additional
financing. The risk of loss because of default by the issuer is significantly
greater for the holders of these securities because such securities generally
are unsecured and often are subordinated to other creditors of the issuer.
Because there is no established retail secondary market for many of
these securities, the Portfolio anticipates that such securities could be sold
only to a limited number of dealers or institutional investors. To the extent a
secondary trading market for these securities does exist, it generally is not as
liquid as the secondary market for higher rated securities. The lack of a liquid
secondary market may have an adverse impact on market price and yield and the
Portfolio's ability to dispose of particular issues when necessary to meet the
Portfolio's liquidity needs or in response to a specific economic event such as
a deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities also may make it more difficult for the
Portfolio to obtain accurate market quotations for purposes of valuing its
portfolio and calculating its net asset value. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of these securities. In such cases, judgment may play a
greater role in valuation because less reliable, objective data may be
available.
These securities may be particularly susceptible to economic
downturns. It is likely that an economic recession could disrupt severely the
market for such securities and may have an adverse impact on the value of such
securities. In addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon and increase the incidence of default for
such securities.
The Portfolio may acquire these securities during an initial offering.
Such securities may involve special risks because they are new issues. The
Portfolio has no arrangement with any persons concerning the acquisition of such
securities, and the Investment Manager will review carefully the credit and
other characteristics pertinent to such new issues.
The credit risk factors pertaining to lower rated securities also
apply to lower rated zero coupon securities and pay-in-kind bonds, in which each
of these Portfolios may invest. Pay-in-kind bonds pay interest through the
issuance of additional securities. Zero coupon securities and pay-in-kind bonds
carry an additional risk in that, unlike bonds which pay interest throughout the
period to maturity, the Portfolio will realize no cash until the cash payment
date unless a portion of such securities are sold and, if the issuer defaults,
the Portfolio may obtain no return at all on its investment.
INVESTMENT RESTRICTIONS
The following investment restrictions, except as otherwise noted, are
fundamental policies, which cannot be changed, as to a Portfolio, without
approval by the holders of a majority (as defined in the 1940 Act) of such
Portfolio's outstanding voting shares. However, the amendment of these
restrictions to add an additional Portfolio, which amendment does not
substantively affect the restrictions with respect to an existing Portfolio,
will not require approval as described in the preceding sentence. None of the
Portfolios 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 in the
Prospectus, (B) each of the Mid Cap Portfolio, International
Small Cap Portfolio, High Yield Portfolio, Emerging Markets
Portfolio, Global Equity Portfolio and Bantam Value
Portfolio also may borrow money to the extent permitted
under the 1940 Act and, as a non-fundamental policy, may
pledge, hypothecate, mortgage or otherwise encumber its
assets to secure permitted borrowings; provided, however,
that the Portfolio will not make new investments to the
extent borrowings exceed 5% of its total assets, except for
borrowings covered within the interpretations of Section
18(f) of the 1940 Act, and (C) the Equity Portfolio may
additionally utilize leverage as described in the
Prospectus. 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 33-1/3% (10% in the case of the
Equity Portfolio, Small Cap Portfolio, International Equity
Portfolio, Bond Portfolio, International Fixed Income
Portfolio and Strategic Yield Portfolio) of a Portfolio's
total assets and except that each Portfolio may purchase
debt obligations in accordance with its investment
objectives and policies;
(iii) invest in illiquid securities as defined in
"Investment Objectives and Management Policies--Illiquid
Securities" if immediately after such investment more than
10% (15% in the case of the Mid Cap Portfolio and High Yield
Portfolio) 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 Mid Cap
Portfolio, High Yield Portfolio, Global Equity Portfolio and
Bantam Value Portfolio);
(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 Mid Cap
Portfolio, International Small Cap Portfolio, Emerging
Markets Portfolio, Global Equity Portfolio, Bantam Value
Portfolio or High Yield Portfolio, and provided, further,
that (A) the Mid Cap Portfolio, International Small Cap
Portfolio, Emerging Markets Portfolio, Global Equity
Portfolio, Bantam Value Portfolio and High Yield Portfolio,
may purchase securities of other investment companies to the
extent permitted under the 1940 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;
(v) 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 the 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;
(vi) (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 Mid Cap Portfolio, International
Small Cap Portfolio, Emerging Markets Portfolio, Global
Equity Portfolio, Bantam Value Portfolio and High Yield
Portfolio also may purchase and sell securities that are
secured by real estate; (B) purchase or sell commodities or
commodity contracts (except that the Mid Cap Portfolio,
International Small Cap Portfolio, Emerging Markets
Portfolio, Global Equity Portfolio, Bantam Value Portfolio
and High Yield Portfolio may purchase and sell swaps,
options, forward contracts, futures contracts, including
those relating to indices, and options on futures contracts
or indices, the Mid Cap Portfolio, International Equity
Portfolio, International Fixed Income Portfolio, Strategic
Yield Portfolio and High 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 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, Mid
Cap Portfolio, Global Equity Portfolio, Bantam Value
Portfolio and High Yield Portfolio;
(vii) purchase securities on margin (except for short-term
credits necessary for the clearance of transactions) or,
except for the Mid Cap Portfolio and High Yield Portfolio,
make short sales of securities, provided, however, that this
prohibition on short sales is not a fundamental policy of
the Global Equity Portfolio and Bantam Value Portfolio;
(viii) 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 the Portfolio's
investment program may be deemed to be an underwriting; or
(ix) 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 and Bantam Value Portfolio. This restriction has
not been adopted by the Mid Cap Portfolio or High Yield
Portfolio.
In addition to the restrictions noted above, the Equity
Portfolio has adopted the following restrictions as fundamental policies. The
Equity Portfolio may not:
(i) purchase restricted securities, which are securities
that must be registered under the Securities Act of 1933, as
amended, 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.
* * *
If a percentage restriction is adhered to at the time of
investment, a later change in percentage resulting from a change in values or
assets will not constitute a violation of such restriction.
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 10112.
Name, Address and Age Position with Fund Principal Occupation During
Past 5 Years
Norman Eig* (57) Chairman of the Managing Director (formerly
Board General Partner), Lazard
Freres.
Herbert W. Gullquist* (59) President, Managing Director (formerly
Director General Partner), Lazard
Freres.
John J. Burke (68) Direector Vice Chairman, Director,
50 Burning Tree Lanr Montana Power Company.
Butte, MT 59701
Kenneth S. Davidson (52) Director Managing Partner, Davidson
Davidson Weil Weil Associates; Director,
Associates Blackthorn Fund N.V. and
767 Fifth Avenue, Ottertail Valley Railroad.
43rd Floor
New York, NY 10153
Carl Frischling* (60) Director Senior Partner, Kramer,
170 East 83rd Street Levin, Naftalis & Frankel;
New York, NY 10028 from 1992 to 1994, Senior
Partner, Reid & Priest; from
1979 to 1992, Senior Partner,
Spengler Carlson Grubar
Brodsky & Frischling.
Lester Z. Lieberman (66) Director Private Investor; Director of
25 Vreeland Road Dowel Associates; Chairman
Florham Park, NJ 07932 of the Board of Trustees of
Newark Beth Israel Medical
Center and Irvington General
Hospital; Member of the New
Jersey State Investment
Council; prior to 1994,
Director of United Jersey
Bank, N.A. and Clarkson
University.
Richard Reiss, Jr. (53) Director Managing Partner, Cumberland
1114 Avenue of the Associates, an investment
Americas manager.
New York, NY 10036
John Rutledge (48) Director President, Rutledge &
One Greenwich Company, an economics and
Office Park investment advisory firm;
51 Weaver Street Chairman, Claremont
Greenwich, CT Economics Institute.
06831
William Katz (43) Director President and Chief Operating
1285 Avenue of the Officer of BBDO, an
Americas advertising agency; from May
New York, NY 10019 1994 to February 1996,
General Manager of BBDO;
prior thereto, Executive Vice
President and Senior Account
Director of BBDO.
William G. Butterly, Vice President, Vice President, Legal Affairs
III (36) Secretary of the Investment Manager;
prior to May 1993, attorney
with Shearman & Sterling.
Gus Coutsouros (34) Treasurer Certified Public Accountant,
Vice President and Assistant
Controller of the Investment
Manager; prior to June 1992,
Manager, National Securities
and Research Corp.
- -----------
* An "interested person" of the Fund as defined in the 1940 Act.
The Fund has adopted a Distribution and Servicing Plan with respect to
shares of the Portfolios. So long as the Plan remains in effect, the Directors
who are not "interested persons" of the Fund, as defined in the 1940 Act, will
be selected and nominated by the Directors who are not "interested persons" of
the Fund.
The Fund pays its Directors its allocable share of the aggregate of a
fixed fee of $20,000 per annum and a per meeting fee of $1,000 for the Fund and
Lazard Retirement Series, Inc., and reimburses them for their expenses. The
aggregate amount of compensation paid to each Director by the Fund for the year
ended December 31, 1996, was as follows:
Total Compensation from
Aggregate Compensation the Fund and
Name of Director From the Fund Lazard Retirement Series, inc.*
Norman Eig N/A N/A
Herbert W. Gullquist N/A N/A
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**
- -----------------------
* Lazard Retirement Series, Inc. was not operational in 1996.
** Estimated for 1997.
The Fund does not compensate officers or Directors who are employees
or affiliated persons of the Investment Manager. As of July 1, 1997, the
officers and Directors of the Fund, as a group, owned less than 1% of the shares
of each Portfolio.
INVESTMENT MANAGER AND INVESTMENT MANAGEMENT AGREEMENTS
Lazard Asset Management, 30 Rockefeller Plaza, New York, New York
10112, has entered into an investment management agreement with the Fund on
behalf of each Portfolio (the "Management Agreements"). 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 utilities. 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 July 1, 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.
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
elected officers or directors of the Fund. Under each Management Agreement, 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.
As compensation for its services, each of the Portfolios has agreed to
pay the Investment Manager an investment management fee, accrued daily and
payable monthly, at the annual rates set forth below as a percentage of the
average daily value of the net assets of the relevant Portfolio:
Investment Management
Name of Portfolio Fee Payable
Equity Portfolio .75%
Mid Cap Portfolio .75%
Small Cap Portfolio .75%
Bantam Value Portfolio .75%
Global Equity Portfolio .75%
International Equity Portfolio .75%
International Small Cap Portfolio .75%
Emerging Markets Portfolio 1.00%
Bond Portfolio .50%
High Yield Portfolio .75%
International Fixed Income Portfolio .75%
Strategic Yield Portfolio .75%
The Investment Manager has undertaken to bear, excluding 12b-1 fees
for the Open Shares, (i) with respect to each of the International Fixed Income
Portfolio, Global Equity Portfolio and Bantam Value 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, the fees paid by each
Portfolio (other than the Mid Cap Portfolio and High Yield Portfolio which had
not commenced operations) to the Investment Manager for the fiscal years ended
December 31, 1994, 1995 and 1996, were as follows:
<TABLE>
<CAPTION>
Fee Paid For Fee Paid For Fee Paid For
Fiscal Year Fiscal Year Fiscal Year
Name of Portfolio Ended Ended Ended
- ----------------- December 31, 1994 December 31, 1995 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Equity Portfolio $ 504,424 $ 982,130 $ 1,829,111
Small Cap Portfolio $ 2,974,688 $4,066,987 $ 6,243,613
Bantam Value Portfolio N/A -0- $ 10,891
Global Equity Portfolio N/A -0- -0-
International Equity Portfolio $ 5,782,629 $ 7,895,766 $ 11,746,379
International Small Cap Portfolio $ 335,900 $ 736,353 $ 870,310
Emerging Markets Portfolio -0- $ 93,501 $ 896,107
Bond Portfolio $ 13,790 $ 286,080 $ 269,026
International Fixed Income Portfolio $ 62,918 $ 232,537 $ 361,469
Strategic Yield Portfolio $ 330,620 $ 525,597 $ 908,760
</TABLE>
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; 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 Open 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.
Each Management Agreement is subject to annual approval by (i) the
Fund's Board or (ii) vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the relevant Portfolio, provided that in either
event the continuance also is approved by a majority of the Directors who are
not "interested persons" (as defined in the 1940 Act) of the Fund or the
Investment Manager, by vote cast in person at a meeting called for the purpose
of voting on such approval. The Management Agreement was approved by
shareholders of the Equity Portfolio, Small Cap Portfolio, International Equity
Portfolio, International Fixed Income Portfolio, Bond Portfolio and Strategic
Yield Portfolio on December 16, 1992 and initially by the Board on September 11,
1991 (and amended and restated on October 19, 1993); by the sole shareholder for
the International Small Cap Portfolio and Emerging Markets Portfolio on August
25, 1993 and initially by the Board on July 20, 1993; by the sole shareholder
for the Bantam Value Portfolio and Global Equity Portfolio and initially by the
Board on October 16, 1995; and by the sole shareholder for the Mid Cap Portfolio
and High Yield Portfolio and by the Board on July 29, 1997. The Management
Agreement for each Portfolio, other than the Mid Cap Portfolio and High Yield
Portfolio was last approved by the Fund's Board, including a majority of the
Directors who are not "interested persons" of any party to the Management
Agreement, at a meeting held on October 22, 1996. Each Management Agreement is
terminable without penalty, on 60 days' notice, by the Fund's Board or by vote
of the holders of a majority of the shares of such Portfolio, or, upon not less
than 60 days' notice, by the Investment Manager. Each Management Agreement
provides for automatic termination in the event of its assignment (as defined in
the 1940 Act). 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.
ADMINISTRATOR AND CUSTODIAN
The Fund has engaged State Street Bank and Trust Company ("State
Street"), 225 Franklin Street, Boston, Massachusetts 02110, 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
value of the average daily net assets of each Class of the Portfolio up to $1
billion and .01% of the value of such assets over $1 billion.
State Street also acts as the Fund's custodian. As the Fund's
custodian, State Street, 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.
DISTRIBUTOR
Lazard Freres serves as the distributor of each Portfolio's shares and
conducts a continuous offering pursuant to a "best efforts" arrangement. As the
distributor, it accepts purchase and redemption orders for Portfolio shares. In
addition, the distribution agreement obligates Lazard Freres to pay certain
expenses in connection with the offering of Portfolio shares. After the
prospectus and periodic reports have been prepared, set in type and mailed to
shareholders, Lazard Freres also will pay for the printing and distribution of
copies thereof used in connection with the offering to prospective investors.
DETERMINATION OF NET ASSET VALUE
Net asset value per share for each Class of each Portfolio is
determined by State Street for the Fund on each day the New York Stock Exchange
is open for trading. The New York Stock Exchange is ordinarily closed on the
following national holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Net asset value per share is 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.
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 stock 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 a Portfolio for which the primary market is the
Nasdaq 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 also may 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 Bantam Value Portfolio, International Small Cap Portfolio and
Small Cap 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 Bantam Value Portfolio,
International Small Cap Portfolio or Small Cap 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.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets ordinarily is 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 a Portfolio is not
calculated. 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
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 may be valued at fair value as determined in good faith by the Board
of Directors.
PORTFOLIO TRANSACTIONS
GENERAL
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 selecting brokers or dealers to
execute portfolio transactions on behalf of a Portfolio, the Investment Manager
seeks the best overall terms available, 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
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.
To the extent consistent with applicable provisions of the 1940 Act
and the rules adopted by the Commission thereunder, the Fund's Board has
determined that securities transactions for a Portfolio may be executed through
Lazard Freres if, in the judgment of the Investment Manager, the use of Lazard
Freres is likely to result in price and execution at least as favorable as those
of other qualified brokers or dealers, and if, in the transaction, Lazard Freres
charges the Portfolio a rate consistent with that charged to comparable
unaffiliated customers in similar transactions.
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 best
overall terms available, the Investment Manager may select brokers or 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 such research, market and statistical information may be
useful to the Investment Manager, it 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 Agreement with the Fund
on behalf of the Portfolios. Such information may be useful to the Investment
Manager in providing services to both the Portfolios and clients other than the
Portfolios, and, conversely, supplemental information obtained by the placement
of business of other clients may be useful to the Investment Manager in carrying
out its obligations to the Portfolios. The total dollar amount of transactions
pursuant to which brokerage was directed in consideration of research services
provided during the year ended 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.
BROKERAGE COMMISSIONS
In connection with its portfolio securities transactions for the
fiscal years ended December 31, 1994, 1995 and 1996, each Portfolio indicated
below paid brokerage commissions as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
Percentage
Amount of Percentage of Total
Brokerage of Total Brokerage
Brokerage Commissions Brokerage Transactions
Name of Portfolio Commissions Paid to Commissions Effected
Paid Lazard Paid to Through
Freres Lazard Lazard
Freres Freres
<S> <C> <C> <C> <C>
Equity Portfolio $ 160,325 $ 1,655 1.0% 0.6%
Small Cap Portfolio $ 997,227 $ 14,125 1.4% 0.4%
International Equity Portfolio $4,374,956 -0- -0- -0-
International Small Cap Portfolio $ 563,176 -0- -0- -0-
Emerging Markets Portfolio $ 80,889 -0- -0- -0-
YEAR ENDED DECEMBER 31, 1995
Percentage
Amount of Percentage of Total
Brokerage of Total Brokerage
Brokerage Commissions Brokerage Transactions
NAME OF PORTFOLIO Commissions Paid TO Commissions Effected
Paid Lazard Paid to Through
Freres Lazard Lazard
Freres Freres
<S> <C> <C> <C> <C>
Equity Portfolio $ 331,180 -0- -0- -0-
Small Cap Portfolio $ 1,507,582 $ 3,324 0.2% 0.19%
International Equity Portfolio $ 2,303,409 -0- -0- -0-
International Small Cap Portfolio $ 976,314 -0- -0- -0-
Emerging Markets Portfolio $ 280,844 -0- -0- -0-
Portfolio
YEAR ENDED DECEMBER 31, 1996
Percentage
Amount of Percentage of Total
Brokerage of Total Brokerage
Brokerage Commissions Brokerage Transactions
NAME OF PORTFOLIO Commissions Paid to Commissions Effected
Paid Lazard Paid to Through
Freres Lazard Lazard
Freres Freres
<S> <C> <C> <C> <C>
Equity Portfolio $ 483,954 -0- -0- -0-
Small Cap Portfolio $1,522,251 $ 4,465 0.29% 0.31%
Bantam Value Portfolio $ 206,307 $ 12,195 5.91% 3.49%
Global Equity Portfolio $ 29,963 $ 1,104 3.69% 9.28%
International Equity Portfolio $2,707,977 -0- -0- -0-
International Small Cap Portfolio $ 580,942 -0- -0- -0-
Emerging Markets Portfolio $ 621,547 -0- -0- -0-
</TABLE>
PURCHASE AND REDEMPTION OF SHARES
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTIONS IN THE PROSPECTUS ENTITLED "PURCHASE OF SHARES"
AND "REDEMPTION OF SHARES."
TERMS OF PURCHASE AND REDEMPTION. The Fund has authorized one or more
brokers to accept on its behalf purchase and redemption orders. Such brokers are
authorized to designate other intermediaries to accept purchase and redemption
orders on the Fund's behalf. The Fund will be deemed to have received a purchase
or redemption order when an authorized broker or, if applicable, a broker's
authorized designee, accepts the order. Customer orders will be priced at the
Fund's net asset value next computed after such orders are accepted by an
authorized broker or the broker's authorized designee.
REDEMPTION COMMITMENT. The Fund has committed to pay in cash all
redemption requests by any shareholder of record, limited in amount during any
90-day period to the lesser of $250,000 or 1% of the value of a Portfolio's net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the Commission. In the case of requests for redemption in
excess of such amount, the Fund's Board reserves the rights to make payments in
whole or part in securities (which may include non-marketable securities) or
other assets of the Portfolio in case of an emergency or any time a cash
distribution would impair the liquidity of the Portfolio to the detriment of the
existing shareholders. In such event, the securities would be valued in the same
manner as the Portfolio's investments are valued. If the recipient sold such
securities, brokerage charges might be incurred.
SUSPENSION OF REDEMPTIONS. The right of redemption may be suspended or
the date of payment postponed (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closings), (b) when
trading in the markets the Portfolio ordinarily utilizes is restricted, or when
an emergency exists as determined by the Commission so that disposal of the
Portfolio's investments or determination of its net asset value is not
reasonably practicable, or (c) for such other periods as the Commission by order
may permit to protect the Portfolio's shareholders.
DISTRIBUTION AND SERVICING PLAN
(OPEN SHARES ONLY)
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTION IN THE PROSPECTUS ENTITLED "DISTRIBUTION AND
SERVICING PLAN."
Rule 12b-1 (the "Rule") adopted by the Commission under the 1940 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 has adopted such a plan (the "Distribution and Servicing
Plan") with respect to each Portfolio's Open Shares, pursuant to which the Fund
pays Lazard Freres for advertising, marketing and distributing Open Shares of
the Portfolios and for the provision of certain services to the holders of Open
Shares of the Portfolios. Lazard Freres may make payments to certain financial
institutions, securities dealers and other industry professionals (collectively,
"Service Agents") for providing these services. The Fund's Board determined, in
the exercise of its business judgment, that the Fund's Distribution and
Servicing Plan is reasonably likely to benefit each Portfolio and holders of
Open Shares.
A quarterly report of the amounts expended under the Distribution
Servicing Plan, and the purposes for which such expenditures were incurred, must
be made to the Board for its 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 of a Portfolio may bear for distribution pursuant to the
Distribution and Servicing Plan without such shareholders' approval and that
other material amendments of the Distribution and Servicing Plan must be
approved by the Board and by the Board members who are not "interested persons"
(as defined in the 1940 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 cast in person at a meeting called for the purpose of
voting on the Distribution and Servicing Plan. The Distribution and Servicing
Plan was last so approved on July 29, 1997. As to each Portfolio, the
Distribution and Servicing Plan may be terminated at any time by vote of a
majority of the Board members 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 FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTION IN THE PROSPECTUS ENTITLED "DIVIDENDS AND
DISTRIBUTIONS."
The Fund intends to declare as a dividend on the outstanding shares of
each of the Bond Portfolio, High Yield Portfolio, International Fixed Income
Portfolio and Strategic Yield Portfolio substantially all of the Portfolio's net
investment income at the close of each business day to shareholders of record at
4:00 p.m. (New York time). 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 Bond Portfolio, High Yield Portfolio,
International Fixed Income Portfolio and Strategic Yield Portfolio ordinarily
will be paid on the last business day 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 by 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 Mid Cap
Portfolio, International Equity Portfolio, Small Cap Portfolio, International
Small Cap Portfolio, Emerging Markets Portfolio, Global Equity Portfolio and
Bantam Value Portfolio generally will be declared and paid at least annually and
may be declared and paid twice annually.
Dividends for each Class of a Portfolio 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 "Annual Operating Expenses" in the Fund's
Prospectus.
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, Mid Cap
Portfolio, International Equity Portfolio, Small Cap Portfolio, International
Small Cap Portfolio, Emerging Markets Portfolio, Global Equity Portfolio and
Bantam Value Portfolio, also would include dividends.
With respect to all of the Portfolios, net realized capital gains, 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 FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTION IN THE PROSPECTUS ENTITLED "TAXATION."
Each Portfolio intends to qualify as a regulated investment company
under the Code and to continue to so qualify as long as such qualification is in
the best interests of its shareholders. As a regulated investment company, a
Portfolio will pay no Federal income tax on net investment income and net
realized securities gains to the extent that such income and gains are
distributed to shareholders in accordance with applicable provisions of the
Code. To qualify as a regulated investment company, the Portfolio must
distribute at least 90% of its net income (consisting of net investment income
and net short-term capital gain) to its shareholders and meet certain asset
diversification and other requirements. The term "regulated investment company"
does not imply the supervision of management of investment practices or policies
by any government agency.
Any dividend or distribution paid shortly after an investor's purchase
may have the effect of reducing the net asset value of the shares below the cost
of the investment. Such a dividend or distribution would be a return of
investment in an economic sense, although taxable as stated in the Prospectus.
In addition, the Code provides that if a shareholder holds shares of a Portfolio
for six months or less and has received a capital gain distribution with respect
to such shares, any loss incurred on the sale of such shares will be treated as
long-term capital loss to the extent of the capital gain distribution received.
Ordinarily, gains and losses realized from portfolio transactions will
be treated as capital gains and losses. However, all or a portion of the gain or
loss realized from the disposition of foreign currency, non-U.S. dollar
denominated debt instruments, and certain financial futures and options, may be
treated as ordinary income or loss under Section 988 of the Code. In addition,
all or a portion of the gain realized from the disposition of certain market
discount bonds will be treated as ordinary income under Section 1276 of the
Code. Finally, all or a portion of the gain realized from engaging in
"conversion transactions" may be treated as ordinary income under Section 1258
of the Code. "Conversion transactions" are defined to include certain forward,
futures, option and straddle transactions, transactions marketed or sold to
produce capital gains, or transactions described in Treasury regulations to be
issued in the future.
Under Section 1256 of the Code, gain or loss realized by a Portfolio
from certain financial futures and options transactions (other than those taxed
under Section 988 of the Code) will be treated as 60% long-term capital gain or
loss and 40% short-term capital gain or loss. Gain or loss will arise upon the
exercise or lapse of such futures and options as well as from closing
transactions. In addition, any such futures or options remaining unexercised at
the end of the Portfolio's taxable year will be treated as sold for their then
fair market value, resulting in additional gain or loss to the Portfolio
characterized in the manner described above.
Offsetting positions held by a Portfolio involving financial futures
and options may constitute "straddles." Straddles are defined to include
"offsetting positions" in actively traded personal property. The tax treatment
of straddles is governed by Sections 1092 and 1258 of the Code, which, in
certain circumstances, overrides or modifies the provisions of Sections 988 and
1256 of the Code. As such, all or a portion of any short- or long-term capital
gain from certain "straddle" transactions may be recharacterized as ordinary
income.
If a Portfolio were treated as entering into straddles by reason of
its future or options transactions, such straddles could be characterized as
"mixed straddles" if the futures or options transactions comprising such
straddles were governed by Section 1256 of the Code. The Portfolio may make one
or more elections with respect to "mixed straddles." Depending upon which
election is made, if any, the results to the Portfolio may differ. If no
election is made, to the extent the straddle rules apply to positions
established by the Portfolio, losses realized by the Portfolio will be deferred
to the extent of unrealized gain in any offsetting positions. Moreover, as a
result of the straddle and conversion transaction rules, short-term capital loss
on straddle positions may be recharacterized as long-term capital loss, and
long-term capital gain may be recharacterized as short-term capital gain or
ordinary income.
Recently enacted legislation added constructive sale provisions that
may apply if the Portfolio enters into short sales, or futures, forwards, or
offsetting notional principal contracts with respect to appreciated stock and
certain debt obligations that it holds. In such event, the Portfolio will be
taxed as if the appreciated property were sold at its fair market value on the
date the Portfolio entered into such short sale or contract. Such legislation
similarly may apply if the Portfolio has entered into a short sale, option,
futures or forward contract, or other position with respect to property, that
position has appreciated in value, and the Portfolio acquires that same or
substantially identical property. In such event, the Portfolio will be taxed as
if the appreciated position were sold at its fair market value on the date of
such acquisition. Transactions that are identified hedging or straddle
transactions under other provisions of the Code can be subject to the
constructive sale provisions.
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 each of the International Equity Portfolio,
International Fixed Income Portfolio, International Small Cap Portfolio,
Emerging Markets Portfolio, Global Equity Portfolio and Bantam Value Portfolio
will be operated so as to meet the requirements of the Code to "pass through" to
shareholders of the Portfolio 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 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.
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, other disposition or marking-to-market of PFIC
securities may be treated as ordinary income under Section 1291 or Section 1296
of the Code.
Investment by a Portfolio in securities issued at a discount or
providing for deferred interest or for payment of interest in the form of
additional obligations could, under special tax rules, affect the amount, timing
and character of distributions to shareholders by causing a Portfolio to
recognize income prior to the receipt of cash payments. For example, the
Portfolio could be required to recognize annually a portion of the discount (or
deemed discount) at which such securities were issued and to distribute an
amount equal to such income in order to maintain its qualification as a
regulated investment company. In such case, the Portfolio may have to dispose of
securities which it might otherwise have continued to hold in order to generate
cash to satisfy these distribution requirements.
PERFORMANCE INFORMATION
Current yield is computed pursuant to a formula which operates as
follows: The amount of the relevant Portfolio's expenses accrued for the 30-day
period (net of reimbursements) is subtracted from the amount of the dividends
and interest earned (computed in accordance with the regulatory requirements) by
such Portfolio during the period. That result is then divided by the product of:
(a) the average daily number of such Portfolio's shares outstanding during the
period that were entitled to receive dividends, and (b) the net asset value per
share on the last day of the period less any undistributed earned income per
share reasonably expected to be declared as a dividend shortly thereafter. The
quotient is then added to 1, and that sum is raised to the 6th power, after
which 1 is subtracted. The current yield is then arrived at by multiplying the
result by 2. 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.
The yield and the actual distribution rate for the 30-day period ended
June 30, 1997 for Open Shares and Institutional Shares of each Portfolio
indicated below was as follows:
NAME OF PORTFOLIO 30-Day Yield Distribution Rate
Institutional Institutional
Open Shares Shares Open Shares Shares
Bond 5.8% 6.1% 5.6% 5.9%
International Fixed Income 4.7% 5.0% 7.8% 8.0%
Strategic Yield 7.9% 8.4% 8.8% 9.3%
Average annual total return is calculated by determining the ending
redeemable value of an investment purchased with a hypothetical $1,000 payment
made at the beginning of the period (assuming the reinvestment of dividends and
distributions), dividing by the amount of the initial investment, taking the
"n"th root of the quotient (where "n" is the number of years in the period) and
subtracting 1 from the result.
The average annual total return of Institutional Shares for the
indicated Portfolio and periods ended June 30, 1997 (the date listed in the
footnote is the beginning of the period for the indicated Portfolio) was as
follows:
NAME OF PORTFOLIO 1-YEAR 5-YEAR 10-YEAR
Equity 27.01% 21.08% 14.35%(3)
International Equity 19.93% 11.46% 11.58%(4)
International Fixed Income 2.66% 8.20% 8.14%(5)
Bond 8.28% 6.20% 6.54%(6)
Strategic Yield 12.68% 11.02% 9.10%(7)
Small Cap 30.20% 22.67% 21.69%(8)
International Small Cap 13.80% 7.89%(1) N/A
Emerging Markets 26.82% 12.48%(2) N/A
- ---------------
(1) December 1, 1993.
(2) July 15, 1994.
(3) June 1, 1987.
(4) October 29, 1991.
(5) November 8, 1991.
(6) November 12, 1991.
(7) October 1, 1991.
(8) October 30, 1991.
Total return is calculated by subtracting the amount of the relevant
Portfolio's net asset value per share at the beginning of a stated period from
the net asset value per share at the end of the period (after giving effect to
the reinvestment of dividends and distributions during the period), and dividing
the result by the net asset value per share at the beginning of the period.
The total return of Open Shares and Institutional Shares for the
indicated Portfolio and period through June 30, 1997 (the date listed in the
footnote is the date operations commenced or, with respect to Open Shares, the
initial public offering date for the indicated Portfolio) was as follows:
NAME OF PORTFOLIO INSTITUTIONAL OPEN SHARES
SHARES
Equity 299.02%(1) 10.62%(11)
International Equity 86.11%(2) 14.87%(12)
International Fixed Income 55.80%(3) (2.17)%(13)
Bond 43.19%(4) 2.38%(14)
Strategic Yield 64.97%(5) 3.29%(12)
Small Cap 204.26%(6) 14.67%(15)
International Small Cap 31.24%(7) 3.74%(16)
Emerging Markets 41.65%(8) 20.79%(13)
Global Equity 32.15%(9) 15.72%(15)
Bantam Value 60.12%(10) 14.77%(12)
- -------------------
(1) June 1, 1987.
(2) October 29, 1991.
(3) November 8, 1991.
(4) November 12, 1991.
(5) October 1, 1991.
(6) October 30, 1991.
(7) December 1, 1993.
(8) July 15, 1994.
(9) January 3, 1996.
(10) March 1, 1996.
(11) February 5, 1997.
(12) January 23, 1997.
(13) January 8, 1997.
(14) March 5, 1997.
(15) January 30, 1997.
(16) February 13, 1997.
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 Open Shares should be expect to be lower than
that of Institutional Shares.
No performance data is provided for the Mid Cap Portfolio and High
Yield Portfolio which had not commenced operations as of the date performance
information was calculated.
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.
ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK
The Fund is a Maryland corporation organized on May 17, 1991 as an
open-end investment company. The authorized capital stock of the Fund consists
of one billion, five hundred and fifty million (1,550,000,000) shares of common
stock, $.001 par value per share. To date, the Fund's Board of Directors has
authorized the issuance of thirteen Portfolios. Shares of each Portfolio are
classified into two classes-Open Shares and Institutional Shares. The Board of
Directors may, in the future, create additional portfolios or classes of shares.
As of October 29, 1997, the following shareholders owned beneficially
or of record 5% or more of the indicated Portfolio's outstanding shares:
Percent of Total
Name and Address Institutional Shares
Outstanding
EQUITY PORTFOLIO
Seagrams Retirement Savings and Investment Trust 8.00%
c/o The Bank of New York
1 Wall Street, 12th Floor
New York, NY 10005-2501
Smith Barney Inc. 7.39%
388 Greenwich Street
New York, NY 10013
Lazard Freres & Co. LLC 6.00%
Employee Savings Plan--Equity Fund
30 Rockefeller Plaza
New York, NY 10112
SMALL CAP PORTFOLIO
Lazard Freres & Co. LLC 10.84%
Mercantile Safe Deposit & Trust Co.,
Custodian for Bakery &
Confectionery Intl
Pension Plan--Small Cap
30 Rockefeller Plaza
New York, NY 10112
BANTAM VALUE PORTFOLIO
Lazard Freres & Co. LLC 9.03%
United Food & Commercial
Workers Unions & Empl Pen Fund
1800 Phoenix Blvd Ste. 310
Atlanta, GA 30349
Lazard Freres & Co. LLC 6.99%
Graphic Communications Intl
Union Supplemental Retirement & Disability
Fund--Equity
30 Rockefeller Plaza
New York, NY 10112
GLOBAL EQUITY PORTFOLIO
Lazard Freres & Co. LLC 47.01%
Mount Sinai Hospital
Foundation of Toronto
331-500 University Avenue
Toronto, ON M5G 1X5
Lazard Freres & Co. LLC 12.17%
Maick (1997) Investment
Limited Partnership
225 Water Street Ste. 84C
Jacksonville, FL 32202
Lazard Freres & Co. LLC 7.66%
Bitterroot Enterprises Inc.
P.O. Box 7048
Wilmington, DE 19803
INTERNATIONAL EQUITY PORTFOLIO
Lazard Freres & Co. LLC 10.75%
Mercantile Safe Deposit & Trust Co.
Custodian for Bakery & Confectionery Intl
30 Rockefeller Plaza
New York, NY 10112
INTERNATIONAL SMALL CAP PORTFOLIO
Lazard Freres & Co. LLC 6.96%
The George Washington University
Intl Small Cap
Attn: Lindfa McNeil
2121 I Street
707 Rice Hall
Lazard Freres & Co. LLC 6.67%
United Air Lines Inc. Pension & Welfare Plans
30 Rockefeller Plaza
New York, NY 10112
EMERGING MARKETS PORTFOLIO
Lazard Freres & Co. LLC 7.18%
Presbyterian Church (USA)
Foundation Foreign
260 East Twelfth Street
Jeffersonville, IN 47130
Lazard Freres & Co. LLC 6.05%
University of British Columbia
Faculty Pension Plan
Emerging Markets
4-6328 Memorial Road
Vancouver BC V6T 1Z2 Canada
Lazard Freres & Co. LLC 6.00%
United Air Lines Inc. Pension & Welfare Plans
30 Rockefeller Plaza
New York, NY 10112
BOND PORTFOLIO
Lazard Freres & Co. LLC 7.54%
Elaine Louise David-Weill
30 Rockefeller Plaza
New York, NY 10112-0194
Lazard Freres & Co. LLC 6.63%
Local 1922 Pension Fund
Attn: Laurie Greco Fund Mngr
1065 Old Country Road Ste 214
Westburty, NY 11590-5628
INTERNATIONAL FIXED INCOME PORTFOLIO
Lazard Freres & Co. LLC 28.26%
Graphic Communications Intl
Union Supplemental Retirement
Disability Fund--Fixed Income
30 Rockefeller Plaza
New York, NY 10112
M & I Trust Co., Custodian for 15.31%
Cuka Individual Acct Master Plan
1000 N. Water St., 14th Floor
Milwaukee, WI 53202
Charles Schwab & Co. Inc. 7.80%
Special Custody Account
For Benefit of Customers
101 Montgomery St.
San Francisco, CA 54104
STRATEGIC YIELD PORTFOLIO
Merrill Lynch for the Sole Benefit 12.88%
of its Customers
4800 Deere Lake Dr E
Jacksonville, FL 32246-6484
Lazard Freres & Co. LLC 12.07%
Mack Trusts Inc. Retirement
Trust - Strategic Yield
Attn: Mark Cherry
2100 Mack Blvd.
Allentown, PA 18103-5622
Northern Trust Co. 6.23%
F/B/O Cristel Denaan Trust
P.O. Box 92956
Chicago, IL 60675
Mac & Co 6.02%
F/B/O Cornell University
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA 15230
Name and Address Percent of Total
Open Shares Outstanding
EQUITY PORTFOLIO
Connecticut General Life Ins. Co. 57.40%
One Commercial Plaza
280 Trumbull Street
P.O. Box 2975
Hartford, CT 06104
SMALL CAP PORTFOLIO
Connecticut General Life Ins Co. 69.82%
One Commercial Plaza
280 Trumbull St.
P.O. Box 2975
Hartford, CT 06104
BANTAM VALUE PORTFOLIO
Charles Schwab & Co. Inc. 34.19%
Special Custoday Account
For Benefiet of Customers
Attn: Mutual FD 101 Montgomery
San Francisco, CA 94104
GLOBAL EQUITY PORTFOLIO
Lazard Freres & Co. LLC 44.81%
Gaetana Enders
555 Park Avenue
New York, NY 10021
Auckland & Trust Company 6.60%
P.O. Box 199
Auckland, New Zealand
Lazard Freres & Co. LLC 6.35%
Edward B. Meyercord, Jr.
46 Oxbon Drive
Summit, NJ 07901
Lazard Freres & Co. LLC 5.69%
First Trust Corp. A/C #185183
Custodian for the IRA of Abby Ellison
360 West 22nd Street, Apt. 10K
Lazard Freres & Co. LLC 5.47%
Christian D. De Gennaro
39 University Drive
Box 8825
Bethlehem, PA 18015
INTERNATIONAL EQUITY PORTFOLIO
Lazard Freres & Co. LLC 12.06%
Taurus Securities Limited
The Tropic Isle Building
Torotla Wickhams Cay
British Virgin Islands
Lazard Freres & Co. LLC 5.50%
Lazard Trust Company Channel
Islands Ltd T1319
30 Rockefeller Plaza
New York, NY 10112
INTERNATIONAL SMALL CAP PORTFOLIO
Marsha Von Mueffling Crawford 15.62%
770 Park Ave
New York, NY 10021
Crestar Bank, as Custodian 11.52%
F/B/O William E. Massey Jr.
P.O. Box 26246
Richmond, VA 23260
Wendel & Co 10.38%
The Bank of New York
Mutual Fund/Reorg. Dept.
P.O. Box 1066
Wall St. Station
New York, NY 10268
Lazard Freres & Co. LLC 8.64%
Jeremy N. Rubenstein and
Linda Tang Rubenstein,
Tenants by the Entirety
5805 Rockmere Drive
Bethesda, MD 20816
Lazard Freres & Co. LLC 5.20%
Lazard Trust Company Channel
Islands Ltd T1319
30 Rockefeller Plaza
New York, NY 10112
BOND PORTFOLIO
Lazard Freres & Co. LLC 23.87%
The Catholic Cemeteries of The
Archdiocese of Washington Inc.
13801 Georgia Avenue
Silver Spring, MD 20906
Lazard Freres & Co. LLC 22.01%
SUNY Univ Hospital
Brooklyn Anesthesia Research
PC Retirement Trust
30 Rockefeller Plaza
New York, NY 10112
Lazard Freres & Co. LLC 8.17%
Estate of Joseph Froelich
Sally Froelich Andrew Schoen
and Daryl Froelich Moss Exec
Attn: Mrs. Sally Froelich
6 Overlook Road
Lazard Freres & Co. LLC 7.07%
Peter W. Quesada
c/o Fork River Company
5 Milk Street
P.O. Box 7525
Portland, ME 64112
Lazard Freres & Co. LLC 5.78%
Horst D. Horst & Richard J. Horst JTWROS
188 East 64th Street
New York, NY 10021
INTERNATIONAL FIXED INCOME PORTFOLIO
Lazard Freres & Co. LLC 14.06%
Manfred Steinfeld
Shelby Williams Industries
11-111 Merchandise Mart
Chicago, IL 60554
Lazard Freres & Co. LLC 9.85%
NationsBank Na-Madeira School
Attn: Franklin B. Smith
8328 Georgetown Pike
McLean, VA 22102-1203
Lazard Freres & Co. LLC 6.72%
The Catholic Cemeteries of The
Archdiocese of Washington Inc.
13801 Georgia Avenue
Silver Spring, MD 20906
Lazard Freres & Co. LLC 6.61%
Patricia N. McEntee
91 Kensett Road
Manhasset, NY 11030
Lazard Freres & Co. LLC 5.55%
SUNY Univ. Hospital
Brooklyn Anesthesia Research
PC Retirement Trust
30 Rockefeller Plaza
New York, NY 10112
Lazard Freres & Co. LLC 5.33%
Peter Longo & Raffaela Longo TIC
6 Justin Court
Saddle River, NJ 07458-1409
DE&G Ltd 5.33%
2413 Nottingham St.
Houston, TX 77005
STRATEGIC YIELD PORTFOLIO
Lazard Freres & Co. LLC 6.67%
Shore View Nursing Home
c/o Clearview Octagon Corp.
30 Rockefeller Plaza
New York, NY 10112
A shareholder who beneficially owns, directly or indirectly, more than
25% of the Fund's voting securities may be deemed a "control person" (as defined
in the 1940 Act) of the Fund.
Certain of the shareholders 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 shares of the
Portfolios. For purposes of the list above, the Fund considers the Investment
Manager to be a beneficial owner of Portfolio shares held in management accounts
on behalf of its investment management clients.
Generally, all shares 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 the Prospectus
and in this Statement of Additional Information, the vote of a majority of the
outstanding voting securities means, with respect to the Fund or a Portfolio,
the vote of the lesser of (i) 67% of the shares represented at a meeting if the
holders of more than 50% of the outstanding shares of the Fund or Portfolio, as
the case may be, are present in person or by proxy, or (ii) more than 50% of the
outstanding shares of the Fund or Portfolio, as the case may be. 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 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 of a Portfolio, shares of each Class
of the Portfolio are entitled to receive the assets attributable to such 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.
COUNSEL AND INDEPENDENT AUDITORS
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.
ABA Seymour Schneidman Financial Services Group, a division of Anchin,
Block & Anchin LLP, has been selected as the independent auditors for the Fund.
ADDITIONAL INFORMATION
The Fund's 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 this Statement of Additional Information as to
the content 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.
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.
<PAGE>
APPENDIX
Description of certain ratings.
S&P
BOND RATINGS
AAA
Bonds rated AAA have the highest rating assigned to a debt obligation.
Capacity to pay interest and repay principal is extremely strong.
AA
Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A
Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB
Bonds rated BB have less near-term vulnerability to default than other
speculative grade bonds. However, they face major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payment.
B
Bonds rated B have a greater vulnerability to default but presently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
CCC
Bonds rated CCC have a current identifiable vulnerability to default,
and are dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayment of principal. In the event of
adverse business, financial or economic conditions to meet timely payments of
interest and repayment of principal. In the event of adverse business, financial
or economic conditions, they are not likely to have the capacity to pay interest
and repay principal.
CC
The rating CC is typically applied to bonds subordinated to senior
debt which is assigned an actual or implied CCC rating.
C
The rating C is typically applied to bonds subordinated to senior debt
which is assigned an actual or implied CCC- rating.
D
Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
S&P's letter ratings may be modified by the additional of a plus or a
minus sign, which is used to show relative standing within the major ratings
categories, except in the AAA (Prime Grade) category.
COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Issues assigned an A rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1
This designation indicates the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted within a plus sign (+)
designation.
A-2
Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
Moody's
BOND RATINGS
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities of fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa
Bond which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca
Bonds which are rated Ca present obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category and in
the categories below B. The modifier 1 indicates a rating for the security in
the higher end of a rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates a ranking in the lower end of a rating
category.
COMMERCIAL PAPER RATINGS
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity for
repayment of short-term promissory obligations, and ordinarily will be evidenced
by 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, and well established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers (or related supporting institutions) rated Prime-2 (P-2) have
a strong capacity for repayment of short-term promissory obligations. This
ordinarily 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 alternative liquidity is
maintained.
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT AUDITORS
The Fund's Annual Report to Shareholders for the fiscal year ended
December 31, 1996 and Semi-Annual Report to Shareholders for the six-month
period ended June 30, 1997 for each Portfolio (other than the Mid Cap Portfolio
and High Yield Portfolio which had not commenced operations) are separate
documents supplied with this Statement of Additional Information, and the
financial statements, accompanying notes and, with respect to the Annual Report,
report of independent auditors appearing therein are incorporated by reference
in this Statement of Additional Information.
