STATEMENT OF ADDITIONAL INFORMATION
CONSULTING GROUP CAPITAL MARKETS FUNDS
December 29, 1997
As Amended February 2, 1998
222 Delaware Avenue ~ Wilmington, Delaware 19801 ~
(212) 816-TRAK
This Statement of Additional Information supplements the
information contained in the current Prospectus (the "Prospectus") of
Consulting Group Capital Markets Funds (the "Trust"), dated December
29, 1997, and should be read in conjunction with the Prospectus. The
Prospectus may be obtained by contacting any Financial Consultant of
Smith Barney Inc. ("Smith Barney"), or by writing or calling the Trust
at the address or telephone number listed above. This Statement of
Additional Information, although not in itself a prospectus, is
incorporated by reference into the Prospectus in its entirety.
CONTENTS
Objectives and Policies of the
Portfolios
1
Management of the Trust
18
Purchase of Shares
25
Redemption of Shares
26
Net Asset Value
26
Determination of Performance (See in
the Prospectus "Performance of the
Portfolios")
28
Taxes (See in the Prospectus
"Dividends, Distributions and
Taxes")
31
Custodian and Transfer Agent
34
For ease of reference, the section headings used in this Statement of
Additional Information are identical to those used in the Prospectus
except where noted. Capitalized terms used but not defined in this
Statement of Additional Information have the meanings accorded to them
in the Prospectus.
OBJECTIVES AND POLICIES OF THE PORTFOLIOS
The Prospectus discusses the investment objectives of the
investment portfolios (the "Portfolios") comprising the Trust and the
policies to be employed to achieve those objectives. Supplemental
information is set out below concerning the types of securities and
other instruments in which the Portfolios may invest, the investment
policies and strategies that the Portfolios may utilize and certain
risks attendant to those investments, policies and strategies.
Ratings as Investment Criteria
In general, the ratings of Moody's Investors Service, Inc.
("Moody's") and Standard & Poor's Ratings Group ("S&P") represent the
opinions of those agencies as to the quality of debt obligations that
they rate. It should be emphasized, however, that these ratings are
relative and subjective, are not absolute standards of quality and do
not evaluate the market risk of securities. These ratings will be used
by the Portfolios as initial criteria for the selection of portfolio
securities, but the Portfolios also will rely upon the independent
advice of their respective investment advisors (collectively, the
"Advisors") to evaluate potential investments. Among the factors that
will be considered are the long term ability of the issuer to pay
principal and interest and general economic trends. The Appendix to
this Statement of Additional Information contains further information
concerning the ratings of Moody's and S&P and their significance.
Subsequent to its purchase by a Portfolio, an issue of debt
obligations may cease to be rated or its rating may be reduced below
the minimum required for purchase by the Portfolio. Neither event will
require the sale of the debt obligation by the Portfolio, but the
Portfolio's Advisor will consider the event in its determination of
whether the Portfolio should continue to hold the obligation. In
addition, to the extent that the ratings change as a result of changes
in rating organizations or their rating systems or owing to a corporate
restructuring of Moody's or S&P, the Portfolio will attempt to use
comparable ratings as standards for its investments in accordance with
its investment objectives and policies.
U.S. Government Securities
Securities issued or guaranteed by the U.S. government or one of
its agencies, authorities or instrumentalities ("U.S. Government
Securities") in which the Portfolios may invest include debt
obligations of varying maturities issued by the U.S. Treasury or issued
or guaranteed by an agency or instrumentality of the U.S. government,
including the Federal Housing Administration, Federal Financing Bank,
Farmers Home Administration, Export-Import Bank of the U.S., Small
Business Administration, Government National Mortgage Association
("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National
Mortgage Association ("FNMA"), Maritime Administration, Tennessee
Valley Authority, District of Columbia Armory Board, Student Loan
Marketing Association, Resolution Trust Corporation and various
institutions that previously were or currently are part of the Farm
Credit System (which has been undergoing reorganization since 1987).
Direct obligations of the U.S. Treasury include a variety of securities
that differ in their interest rates, maturities and dates of issuance.
Because the U.S. government is not obligated by law to provide support
to an instrumentality that it sponsors, a Portfolio will invest in
obligations issued by an instrumentality of the U.S. government only if
the Advisor determines that the instrumentality's credit risk does not
make its securities unsuitable for investment by the Portfolio.
Emerging Markets Countries
AIB Govett Asset Management Limited ("Govett") believes the
performance of emerging markets mutual funds is largely determined by
country allocation. Empirical studies suggest that between 70% and 90%
of emerging market fund investment performance is explained by country
allocation. Govett is firmly committed to the notion that
diversification is essential to coping with an array of volatile
markets and it follows a rigorous country allocation scheme which
prevents excessive exposure to any single country. Once this "top-down"
country allocation is complete, Govett follows a fundamentally-grounded
security selection process.
Emerging Markets Equity Investments may invest in the securities
of companies domiciled in, and in markets of, so-called "emerging
markets countries." These investments may be subject to potentially
higher risks than investments in developed countries. These risks
include:
(1) Unfavorable and unstable political and economic conditions.
The economies of countries in which the Portfolio may invest may differ
favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, the rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. Some of the countries in which the Portfolio may invest have
experienced over the past decade, and may continue to experience,
significant economic problems. The areas of concern may include: budget
deficits; high, and in some cases unmanageable, interest payments on
foreign debt; lack of investment in plant and machinery; hyper-
inflation due to rapid expansion of the local money supply; and
political instability, which may result in the failure to adopt
economic adjustment policies.
(2) The small size and volatility of the markets and the low
volume of trading in such markets. The securities and debt markets of
some of the countries in which the Portfolio may invest are
substantially smaller and less liquid than the major securities and
debt markets in the United States and as a result, in periods of rising
market prices, the Portfolio may be unable to participate in price
increases fully to the extent that it is unable to acquire desired
securities positions quickly; the Portfolio's inability to dispose
fully and promptly of positions in declining markets may conversely
cause its net asset value to decline as the value of unsold positions
is marked to lower prices. A high proportion of the shares of many
companies traded in emerging market countries may be held by a small
number of persons, which may restrict the number of shares available
for investment by the Portfolio.
(3) The existence of national policies which may restrict the
Portfolio's investment opportunities. Foreign investment in some
countries in which the Portfolio may invest is restricted or controlled
to varying degrees. Although the Portfolio's Advisor, in its asset
allocation procedure, will seek to identify countries that exhibit
certain improved credentials, these restrictions or controls may at
times limit or preclude foreign investment in certain issuers and
increase the costs and expenses of the Portfolio.
(4) Governmental regulation of the relevant securities markets.
The governments of some emerging markets countries have exercised and
continue to exercise substantial influence over many aspects of the
private sector, including, for example, imposing wage and price
controls to control inflation. In some cases, the government owns or
controls many companies, including some of the largest in the country.
Governments of some countries have in the past participated, and may
continue in the future to participate, directly in the securities
markets of their countries, which participation may affect the
availability, prices and liquidity of securities traded in those
markets. Similar government actions in the future could have an effect
on economic conditions in such countries, and in turn affect private
sector companies, market conditions, prices and yields of securities
held by the Portfolio. The extent of government supervision and
regulations of securities exchanges, underwriters, brokers, dealers and
issuers in emerging markets countries, however, may be less than in
other countries.
(5) The lack of adequate financial and other reporting standards
and the absence of information regarding issuers in emerging markets
countries. Accounting, auditing, financial and other reporting
standards in countries in which the Portfolio may invest may differ, in
some cases significantly, from standards in other countries, including
the United States. In particular, the assets and profits appearing on
the financial statements of an issuer in certain emerging markets
countries may not reflect its financial position or results of
operations in the manner in which such information would have been
reflected in financial statements prepared in accordance with U.S.
generally accepted accounting principles. In addition, companies in
certain emerging markets countries must restate certain assets and
liabilities on their financial statements to reflect the effect of
inflation on those assets. As a result, financial statements and
reported earnings may differ from those of companies in other
countries, such as the United States. Although a principal objective of
the securities laws of the countries in which the Portfolio may invest
is to promote full and fair disclosure of all material corporate
information, substantially less information may be publicly available
about the issuers of securities in the markets of those countries than
is regularly published by issuers in other countries, and disclosure of
certain material information may not be made. Moreover, even when
public information about such companies and governments is available,
it may be less reliable than information concerning the U.S. government
and U.S. companies. In addition, the extent of government supervision
and regulation of securities exchanges, underwriters, brokers, dealers
and issuers may be less in countries in which the Portfolio may invest
than in other countries.
(6) Differences in the value of the U.S. dollar and the
currencies of other countries. To the extent the Portfolio invests in
securities denominated in the currencies of countries other than the
United States, a change in the value of any of those currencies
relative to the dollar will result in a corresponding change in the
dollar value of the Portfolio's investments denominated in the
currency. In addition, although some of the Portfolio's income may be
received in the currency of a country other than the United States, the
Portfolio will measure distributions, including those made in
connection with the redemption of shares, from its income in U.S.
dollars. Therefore, if the value of a particular currency falls
relative to the U.S. dollar between accrual of the income and the
making of a distribution, the amount of the currency to be converted
into U.S. dollars by the Portfolio to pay the distribution will
increase and the Portfolio could be required to liquidate portfolio
investments to make the distribution.
Exchange Rate-Related U.S. Government Securities
Each Portfolio, except Government Money Investments, may invest
up to 5% of its net assets in U.S. Government Securities for which the
principal repayment at maturity, while paid in U.S. dollars, is
determined by reference to the exchange rate between the U.S. dollar
and the currency of one or more foreign countries ("Exchange Rate-
Related Securities"). The interest payable on these securities is
denominated in U.S. dollars and is not subject to foreign currency risk
and, in most cases, is paid at rates higher than most other U.S.
Government Securities in recognition of the foreign currency risk
component of Exchange Rate-Related Securities.
Exchange Rate-Related Securities are issued in a variety of
forms, depending on the structure of the principal repayment formula.
The principal repayment formula may be structured so that the security
holder will benefit if a particular foreign currency to which the
security is linked is stable or appreciates against the U.S. dollar. In
the alternative, the principal repayment formula may be structured so
that the securityholder benefits if the U.S. dollar is stable or
appreciates against the linked foreign currency. Finally, the principal
repayment formula can be a function of more than one currency and,
therefore, be designed as a combination of those forms.
Investments in Exchange Rate-Related Securities entail special
risks. There is the possibility of significant changes in rates of
exchange between the U.S. dollar and any foreign currency to which an
Exchange Rate-Related Security is linked. If currency exchange rates do
not move in the direction or to the extent anticipated by the Advisor
at the time of purchase of the security, the amount of principal repaid
at maturity might be significantly below the par value of the security,
which might not be offset by the interest earned by the Portfolios over
the term of the security. The rate of exchange between the U.S. dollar
and other currencies is determined by the forces of supply and demand
in the foreign exchange markets. These forces are affected by the
international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. The
imposition or modification of foreign exchange controls by the U.S. or
foreign governments or intervention by central banks could also affect
exchange rates. Finally, there is no assurance that sufficient trading
interest to create a liquid secondary market will exist for a
particular Exchange Rate-Related Security due to conditions in the debt
and foreign currency markets. Illiquidity in the forward foreign
exchange market and the high volatility of the foreign exchange market
may from time to time combine to make it difficult to sell an Exchange
Rate-Related Security prior to maturity without incurring a significant
price loss.
Mortgage Backed Securities
The average maturity of pass-through pools of mortgage backed
securities varies with the maturities of the underlying mortgage
instruments. In addition, a pool's stated maturity may be shortened by
unscheduled payments on the underlying mortgages. Factors affecting
mortgage prepayments include the level of interest rates, general
economic and social conditions, the location of the mortgaged property
and age of the mortgage. Because prepayment rates of individual pools
vary widely, it is not possible to accurately predict the average life
of a particular pool. Common practice is to assume that prepayments
will result in an average life ranging from two to ten years for pools
of fixed rate 30-year mortgages. Pools of mortgages with other
maturities of different characteristics will have varying average life
assumptions.
Mortgage backed securities may be classified as private,
governmental or government related, depending on the issuer or
guarantor. Private mortgage backed securities represent pass-through
pools consisting principally of conventional residential mortgage loans
created by non-governmental issuers, such as commercial banks, savings
and loan associations and private mortgage insurance companies.
Governmental mortgage backed securities are backed by the full faith
and credit of the United States. GNMA, the principal U.S. guarantor of
such securities, is a wholly owned U.S. Governmental Corporation within
the Department of Housing and Urban Development. Government related
mortgage backed securities are not backed by the full faith and credit
of the United States. Issuers of these securities include FNMA and
FHLMC. FNMA is a government sponsored corporation owned entirely by
private stockholders that is subject to general regulation by the
Secretary of Housing and Urban Development. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and
interest by FNMA. FHLMC is a corporate instrumentality of the United
States, the stock of which is owned by the Federal Home Loan Banks.
Participation certificates representing interests in mortgages from
FHLMC's national portfolio are guaranteed as to the timely payment of
interest and ultimate collection of principal by FHLMC.
The Trust expects that private and governmental entities may
create mortgage loan pools offering pass-through investments in
addition to those described above. The mortgages underlying these
securities may be alternative mortgage instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose
terms to maturity may be shorter than previously customary. As new
types of mortgage backed securities are developed and offered to
investors, the Trust, consistent with the Portfolio's investment
objectives and policies, will consider making investments in those new
types of securities on behalf of that Portfolio.
The Portfolio also may invest in pass-through securities backed
by adjustable rate mortgages that have been introduced by GNMA, FNMA
and FHLMC. These securities bear interest at a rate that is adjusted
monthly, quarterly or annually. The prepayment experience of the
mortgages underlying these securities may vary from that for fixed rate
mortgages. The Portfolio will only purchase mortgage related securities
issued by persons that are governmental agencies or instrumentalities
or fall outside, or are excluded from, the definition of investment
company under the Investment Company Act of 1940, as amended (the "1940
Act").
Forward Currency Contracts
Forward currency contracts (i) are traded in an interbank market
conducted directly between currency traders (typically commercial banks
or other financial institutions) and their customers, (ii) generally
have no deposit requirements and (iii) are typically consummated
without payment of any commissions. Certain Portfolios, however, may
enter into forward currency contracts containing either or both deposit
requirements and commissions.
The cost to a Portfolio of engaging in forward currency
transactions varies with factors such as the currency involved, the
length of the contract period and market conditions then prevailing.
Because transactions in currency exchange contracts are usually
conducted on a principal basis, no fees or commissions are involved.
Hedging transactions may be made from any foreign currency into U.S.
dollars or into other appropriate currencies. As noted in the
Prospectus, if a Portfolio enters into a position hedging transaction,
cash or liquid high grade debt securities will be placed in a
segregated account with the Portfolio's custodian in an amount equal to
the value of the Portfolio's total assets committed to the consummation
of the forward currency contract. If the value of the securities placed
in the segregated account declines, additional cash or securities will
be placed in the account so that the value of the account will equal
the amount of the Portfolio's commitment with respect to the contract.
At or before the maturity of a forward currency contract, a
Portfolio may either sell a portfolio security and make delivery of the
currency, or retain the security and offset its contractual obligation
to deliver the currency by purchasing a second contract pursuant to
which the Portfolio will obtain, on the same maturity date, the same
amount of the currency that it is obligated to deliver. If the
Portfolio retains the portfolio security and engages in an offsetting
transaction, the Portfolio, at the time of execution of the offsetting
transaction, will incur a gain or a loss to the extent that movement
has occurred in forward currency contract prices. Should forward prices
decline during the period between the Portfolio's entering into a
forward currency contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency,
the Portfolio will realize a gain to the extent the price of the
currency it has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should forward prices increase, the Portfolio will
suffer a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The use of forward currency contracts does not eliminate
fluctuations in the underlying prices of the securities, but it does
establish a rate of exchange that can be achieved in the future. In
addition, although forward currency contracts limit the risk of loss
owing to a decline in the value of the hedged currency, at the same
time, they limit any potential gain that might result should the value
of the currency increase. If a devaluation is generally anticipated,
the Portfolio may not be able to contract to sell currency at a price
above the devaluation level it anticipates. The successful use of
forward currency contracts as a hedging technique draws upon special
skills and experience with respect to these instruments and usually
depends on the ability of the Portfolio's Advisor to forecast interest
rate and currency exchange rate movements correctly. Should interest or
exchange rates move in an unexpected manner, the Portfolio may not
achieve the anticipated benefits of forward currency contracts or may
realize losses and thus be in a worse position than if those strategies
had not been used. Many forward currency contracts are subject to no
daily price fluctuation limits so that adverse market movements could
continue with respect to those contracts to an unlimited extent over a
period of time.
Futures Contracts and Related Options
Futures contracts and options thereon may be undertaken for
hedging and other risk management purposes in an effort to reduce the
impact of several kinds of anticipated price fluctuation risks on the
securities held by a Portfolio. For example, futures contracts for the
sale of foreign currency might be entered into to protect against
declines in the value of currencies in which portfolio securities are
denominated; and put options on interest rate futures might be
purchased to protect against declines in the market values of debt
securities occasioned by higher interest rates. If these transactions
are successful, the futures or options positions taken by the Portfolio
will rise in value by an amount which approximately offsets the decline
in value of the portion of the securities held by a Portfolio that is
being hedged.
On other occasions, a Portfolio may enter into contracts to
purchase the underlying instrument. For example, futures contracts for
the purchase of debt securities might be entered into to protect
against an anticipated increase in the price of debt securities to be
purchased in the future resulting from decreased interest rates.
A Portfolio will incur brokerage costs whether or not its hedging
is successful and will be required to post and maintain "margin" as a
good-faith deposit against performance of its obligations under futures
contracts and under options written by the Portfolio. Futures and
options positions are marked to the market daily and the Portfolio may
be required to make subsequent "variation" margin payments depending
upon whether its positions increase or decrease in value. In this
context margin payments involve no borrowing on the part of the
Portfolio.
Options on Securities
The Portfolios may purchase put and call options on securities
owned by the Portfolio and on securities which the Portfolio may
acquire in the future. The exercise price of the options may be below,
equal to or above the market values of the underlying securities at the
times the options are written.
An option position may be closed out only where there exists a
secondary market for an option of the same series on a recognized
securities exchange or in the over-the-counter market. In light of
this fact and current trading conditions, the Portfolios expect to
purchase not only call or put options issued by the Clearing
Corporation, but also options in the domestic and foreign over-the-
counter markets. When a Portfolio has purchased an option and engages
in a closing sale transaction, whether the Portfolio realizes a profit
or loss will depend upon whether the amount received in the closing
sale transaction is more or less than the premium that the Portfolio
initially paid for the original option plus the related transaction
costs.
Although a Portfolio generally will purchase only those options
for which its Advisor believes there is an active secondary market so
as to facilitate closing transactions, there is no assurance that
sufficient trading interest to create a liquid secondary market on a
securities exchange will exist for any particular option or at any
particular time, and for some options no such secondary market may
exist. A liquid secondary market in an option may cease to exist for a
variety of reasons. In the past, for example, higher than anticipated
trading activity or order flow or other unforeseen events have at times
rendered inadequate certain of the facilities of the Clearing
Corporation and securities exchanges and resulted in the institution of
special procedures, such as trading rotations, restrictions on certain
types of orders or trading halts or suspensions in one or more options.
There can be no assurance that similar events, or events that may
otherwise interfere with the timely execution of customers' orders,
will not recur. In such event, it might not be possible to effect
closing transactions in particular options.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may
be held or exercised within certain time periods, by an investor or
group of investors acting in concert (regardless of whether the options
are written on the same or different securities exchanges or are held,
written or exercised in one or more accounts or through one or more
brokers). It is possible that the Portfolios and other clients of
their respective Advisors and certain of their affiliates may be
considered to be such a group. A securities exchange may order the
liquidation of positions found to be in violation of these limits and
it may impose certain other sanctions.
Stock Index Options
The Portfolios may purchase and write put and call options on
domestic and foreign stock indexes for the purpose of hedging their
portfolios. A stock index fluctuates with changes in the market values
of the stocks included in the index. Stock index options may be based
on a broad market index such as the New York Stock Exchange Composite
Index or a narrower market index such as the Standard & Poor's Daily
Price Index of 500 Common Stocks ("S&P 500"). Indexes also may be
based on an industry or market segment.
Options on stock indexes are generally similar to options on
stock except that the delivery requirements are different. Instead of
giving the right to take or make delivery of stock at a specified
price, an option on a stock index gives the holder the right to receive
a cash "exercise settlement amount" equal to (a) the amount, if any, by
which the fixed exercise price of the option exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (b) a fixed
"index multiplier." Receipt of this cash amount will depend upon the
closing level of the stock index upon which the option is based being
greater than, in the case of a call, or less than, in the case of a
put, the exercise price of the option. The amount of cash received
will be equal to such difference between the closing price of the index
and the exercise price of the option, expressed in dollars, times a
specified multiple. The writer of the option is obligated, in return
for the premium received, to make delivery of this amount. The writer
may offset its position in stock index options prior to expiration by
entering into a closing transaction on an exchange, or it may let the
option expire unexercised.
The effectiveness of purchasing stock index options as a hedging
technique will depend upon the extent to which price movements in the
portion of a securities portfolio being hedged correlate with price
movements of the stock index selected. Because the value of an index
option depends upon movements in the level of the index rather than the
price of a particular stock, whether the Portfolio will realize a gain
or loss from the purchase or writing of options on an index depends
upon movements in the level of stock prices in the stock market
generally or, in the case of certain indexes, in an industry or market
segment, rather than movements in the price of a particular stock.
Accordingly, successful use by the Portfolio of options on stock
indexes will be subject to its Advisor's ability to predict correctly
movements in the direction of the stock market generally or of a
particular industry. This requires different skills and techniques
than predicting changes in the price of individual stocks.
A Portfolio will engage in stock index options transactions only
when determined by its Advisor to be consistent with the Portfolio's
efforts to control risk. There can be no assurance that such judgment
will be accurate or that the use of these portfolio strategies will be
successful.
Lending Portfolio Securities
Each Portfolio other than Municipal Bond Investments may lend
portfolio securities to brokers, dealers and other financial
organizations. These loans, if and when made, may not exceed 30% of the
value of a Portfolio's total assets. A Portfolio will not lend
securities to Smith Barney, the Trust's distributor, unless the
Portfolio has applied for and received specific authority to do so from
the Securities and Exchange Commission (the "SEC"). A Portfolio's loans
of securities will be collateralized by cash, letters of credit or U.S.
Government Securities. The cash or instruments collateralizing a
Portfolio's loans of securities will be maintained at all times in a
segregated account with the Portfolio's custodian or with a designated
sub-custodian in an amount at least equal to the current market value
of the loaned securities. From time to time, a Portfolio may pay a part
of the interest earned from the investment of collateral received for
securities loaned to the borrower and/or a third party that is
unaffiliated with the Portfolio and is acting as a "finder." A
Portfolio will comply with the following conditions whenever it loans
securities: (i) the Portfolio must receive at least 100% cash
collateral or equivalent securities from the borrower; (ii) the
borrower must increase the collateral whenever the market value of the
securities loaned rises above the level of the collateral; (iii) the
Portfolio must be able to terminate the loan at any time; (iv) the
Portfolio must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities and
any increase in market value; (v) the Portfolio may pay only reasonable
custodian fees in connection with the loan; and (vi) voting rights on
the loaned securities may pass to the borrower except that, if a
material event adversely affecting the investment in the loaned
securities occurs, the Trust's Board of Trustees must terminate the
loan and regain the right to vote the securities.
When-Issued and Delayed-Delivery Securities
When a Portfolio engages in when-issued or delayed-delivery
securities transactions, it relies on the other party to consummate the
trade. Failure of the seller to do so may result in the Portfolio's
incurring a loss or missing an opportunity to obtain a price considered
to be advantageous.
Rule 144A Securities
A Portfolio may purchase securities that are not registered under
the Securities Act of 1933, as amended (the "1933 Act"), but that can
be sold to "qualified institutional buyers" in accordance with Rule
144A under the 1933 Act ("Rule 144A Securities"). Particular Rule 144A
Securities will be considered illiquid and therefore subject to the
Portfolio's 10% limitation on the purchase of illiquid securities,
unless the Trust's Board of Trustees determines on an ongoing basis
that an adequate trading market exists for the Rule 144A Securities.
This investment practice could have the effect of increasing the level
of illiquidity in a Portfolio to the extent that qualified
institutional buyers become uninterested for a time in purchasing Rule
144A Securities. The Board of Trustees has instructed the Portfolios'
Advisors to determine and monitor on a daily basis the liquidity of
Rule 144A Securities, although the Board of Trustees will retain
responsibility for any determination regarding liquidity.
American Depository Receipt
A Portfolio may purchase American Depository Receipts ("ADRs"),
which are dollar denominated receipts issued generally by domestic
banks and represent the deposit with the bank of a security of a
foreign issuer. ADRs are publicly traded on exchanges or over-the-
counter in the United States.
Investment Restrictions
The investment restrictions numbered 1 through 7 below have been
adopted by the Trust as fundamental policies of the Portfolios. Under
the 1940 Act, a fundamental policy may not be changed without the vote
of a majority of the outstanding voting securities of a Portfolio,
which is defined in the 1940 Act as the lesser of (i) 67% or more of
the shares present at a Portfolio meeting, if the holders of more than
50% of the outstanding shares of the Portfolio are present or
represented by proxy, or (ii) more than 50% of the outstanding shares
of the Portfolio. Investment restrictions 8 through 14 may be changed
by a vote of a majority of the Board of Trustees at any time.
Under the investment restrictions adopted by the Portfolios:
1. Portfolio, other than International Fixed Income Investments,
will not deviate from the definition of a "diversified company" as
defined in the 1940 Act and rules thereunder.
2. Portfolio, except Municipal Bond Investments, will not invest
more than 25% of its total assets in securities, the issuers of which
conduct their principal business activities in the same industry. For
purposes of this limitation, U.S. government securities and securities
of state or municipal governments and their political subdivisions are
not considered to be issued by members of any industry.
3. Portfolio will not borrow money, except that (a) the Portfolio
may borrow from banks for temporary or emergency (not leveraging)
purposes, including the meeting of redemption requests which might
otherwise require the untimely disposition of securities, in an amount
not exceeding 33 1/3% of the value of the Portfolio's total assets
(including the amount borrowed) valued at the lesser of cost or market,
less liabilities (not including the amount borrowed) valued at the time
the borrowing is made and (b) a Portfolio may, to the extent consistent
with its investment policies, enter into reverse repurchase agreements,
forward roll transactions and similar investment strategies and
techniques.
4. Portfolio will not make loans. This restriction does not apply
to: (a) the purchase of debt obligations in which a Portfolio may
invest consistent with its investment objectives and policies
(including participation interests in such obligations); (b) repurchase
agreements; and (c) loans of its portfolio securities.
5. A Portfolio will not purchase any securities on margin (except
for such short-term credits as are necessary for the clearance of
purchases and sales of Portfolio securities). For purposes of this
restriction, the deposit or payment by a Portfolio of underlying
securities and other assets in escrow and collateral agreements with
respect to initial or maintenance margin in connection with futures
contracts and related options and options on securities, indexes or
similar items is not considered to be the purchase of a security on
margin.
6. A Portfolio will not purchase or sell real estate, real estate
mortgages, commodities or commodity contracts, but this restriction
shall not prevent a Portfolio from (a) investing in and selling
securities of issuers engaged in the real estate business and
securities which are secured by real estate or interests therein; (b)
holding or selling real estate received in connection with securities
it holds; (c) trading in futures contracts and options on futures
contracts or (d) investing in or purchasing real estate investment
trust securities.
7. A Portfolio will not engage in the business of underwriting
securities issued by other persons, except to the extent that a
Portfolio may technically be deemed to be an underwriter under the
Securities Act of 1933, as amended, in disposing of Portfolio
securities.
8. Portfolio will not invest in oil, gas or other mineral leases
or exploration or development programs.
9. Each Portfolio will not make short sales of securities, unless
it owns or has the right to obtain securities equivalent in kind and
amount to the securities sold short and provided that transactions in
futures contracts and options are not deemed to constitute selling
securities short.
10. A Portfolio will not make investments for the purpose of
exercising control of management.
11. Portfolio will not purchase any security if as a result
(unless the security is acquired pursuant to a plan of reorganization
or an offer of exchange) the Portfolio would own any securities of a
registered open-end investment company or more than 3% of the total
outstanding voting stock of any registered closed-end investment
company or more than 5% of the value of the Portfolio's total assets
would be invested in securities of any one or more registered closed-
end investment companies.
12. Portfolio will not purchase any security if as a result the
Portfolio would then have more than 5% of its total assets invested in
securities of companies (including predecessors) that have been in
continuous operation for fewer than three years.
13. Portfolio will not purchase or retain securities of any
company if, to the knowledge of the Trust, any of the Trust's officers
or Trustees, or any officer or director of the Consulting Group (the
"Manager" or the "Consulting Group") or the Advisor(s) individually
owns more than 1/2 of 1% of the outstanding securities of the company
and together they own beneficially more than 5% of the securities.
14. Portfolio will not invest in excess of 5% of the value of
its net assets in warrants, valued at the lower of cost or market
value. Included within this amount, but not to exceed 2% of the value
of the Portfolio's net assets, may be warrants that are not listed on
the New York or American Stock Exchanges. Warrants acquired by the
Portfolio in units or attached to securities may be deemed to be
without value.
The Trust may make commitments more restrictive than the restrictions
listed above so as to permit the sale of shares of a Portfolio in
certain states. Should the Trust determine that a commitment is no
longer in the best interests of the Portfolio and its shareholders, the
Trust will revoke the commitment by terminating the sale of shares of
the Portfolio in the state involved. The percentage limitations
contained in the restrictions listed above apply at the time of
purchase of securities.
Portfolio Transactions
Decisions to buy and sell securities for a Portfolio are made by
the Advisor(s), subject to the overall review of the Manager and the
Board of Trustees. Although investment decisions for the Portfolios are
made independently from those of the other accounts managed by an
Advisor, investments of the type that the Portfolios may make also may
be made by those other accounts. When a Portfolio and one or more other
accounts managed by an Advisor are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities
for sales will be allocated in a manner believed by the Advisor to be
equitable to each. In some cases, this procedure may adversely affect
the price paid or received by a Portfolio or the size of the position
obtained or disposed of by a Portfolio.
Transactions on U.S. stock exchanges and some foreign stock
exchanges involve the payment of negotiated brokerage commissions. On
exchanges on which commissions are negotiated, the cost of transactions
may vary among different brokers. On most foreign exchanges,
commissions are generally fixed. No stated commission is generally
applicable to securities traded in U.S. over-the-counter markets, but
the underwriters include an underwriting commission or concession and
the prices at which securities are purchased from and sold to dealers
include a dealer's mark-up or mark-down. U.S. Government Securities
generally are purchased from underwriters or dealers, although certain
newly issued U.S. Government Securities may be purchased directly from
the U.S. Treasury or from the issuing agency or instrumentality.
In selecting brokers or dealers to execute securities
transactions on behalf of a Portfolio, its Advisor seeks the best
overall terms available. In assessing the best overall terms available
for any transaction, the Advisor will consider the factors it deems
relevant, including the breadth of the market in the security, the
price of the security, the financial condition and execution capability
of the broker or dealer and the reasonableness of the commission, if
any, for the specific transaction and on a continuing basis. In
addition, each Advisory Agreement between the Trust and the Advisor
authorizes the Advisor, in selecting brokers or dealers to execute a
particular transaction, and in evaluating the best overall terms
available, to consider the brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of
1934) provided to the Portfolio and/or other accounts over which the
Advisor or its affiliates exercise investment discretion. The fees
under the Management Agreement and the Advisory Agreements,
respectively, are not reduced by reason of a Portfolio's Advisor
receiving brokerage and research services. The Board of Trustees of the
Trust will periodically review the commissions paid by a Portfolio to
determine if the commissions paid over representative periods of time
were reasonable in relation to the benefits inuring to the Portfolio.
Over-the-counter purchases and sales by a Portfolio are transacted
directly with principal market makers except in those cases in which
better prices and executions may be obtained elsewhere.
To the extent consistent with applicable provisions of the 1940
Act and the rules and exemptions adopted by the SEC under the 1940 Act,
the Board of Trustees has determined that transactions for a Portfolio
may be executed through Smith Barney and other affiliated broker-
dealers if, in the judgment of the Advisor, the use of an affiliated
broker-dealer is likely to result in price and execution at least as
favorable as those of other qualified broker-dealers, and if, in the
transaction, the affiliated broker-dealer charges the Portfolio a fair
and reasonable rate.
The Portfolios will not purchase any security, including U.S.
Government Securities or Municipal Obligations, during the existence of
any underwriting or selling group relating thereto of which Smith
Barney is a member, except to the extent permitted by the SEC.
The Portfolios may use Smith Barney and other affiliated broker-
dealers as a commodities broker in connection with entering into
futures contracts and options on futures contracts if, in the judgment
of the Advisor, the use of an affiliated broker-dealer is likely to
result in price and execution at least as favorable as those of other
qualified broker-dealers, and if, in the transaction, the affiliated
broker-dealer charges the Portfolio a fair and reasonable rate. Smith
Barney has agreed to charge the Portfolios commodity commissions at
rates comparable to those charged by Smith Barney to its most favored
clients for comparable trades in comparable accounts.
BROKERAGE COMMISSIONS PAID TO SMITH BARNEY
The following table sets forth certain information regarding each
Portfolio's payment
of brokerage commissions for the fiscal year ended August 31, 1997:
Portfolio
Total
Brokerage
Commissions
Commissions
paid to
Smith
Barney
% of Total
Brokerage
Commissions
paid to
Smith
Barney
% of Total
Transactio
ns
involving
Commission
s Paid to
Smith
Barney
Balanced Investments
$102,303
$16,253
15.89%
10.28%
Large Capitalization
Value Investments
1,952,663
$132,015
4.47%
5.01%
Large Capitalization
Growth Investments
1,401,805
4,770
0.34%
0
Small Capitalization
Value Investments
761,002
27,534
3.62%
1.76%
Small Capitalization
Growth Investments
732,557
17,568
2.40%
0.46%
International Equity
Investments
1,890,342
0
0
0
Emerging Markets
Investments
1,973,521
0
0
0
Government Money Investments, Intermediate Fixed Income
Investments, Long-Term Bond Income Investments, Municipal Bond
Investments, Mortgage Backed Investments and International Fixed Income
Investments did not pay brokerage commissions during the year ended
August 31, 1997.
The following table sets forth certain information regarding each
Portfolio's payment of brokerage commissions for the fiscal year ended
August 31, 1996:
Portfolio
Total
Brokerage
Commissions
Commissions
paid to
Smith
Barney
% of Total
Brokerage
Commissions
paid to
Smith
Barney
% of Total
Transactio
ns
involving
Commission
Paid to
Smith
Barney
Balanced Investments
$
48,129
$ 8,430
17.51%
18.1%
Large Capitalization
Value Investments
1,320,797
52,448
3.97
4.5
Large Capitalization
Growth Investments
997,456
0
0
0
Small Capitalization
Value Investments
587,395
38,857
6.62
5.14
Small Capitalization
Growth Investments
515,880
4,098
0.79
0.38
Emerging Markets
Equity Investments
819,616
0
0
0
International Equity
Investments
2,471,727
0
0
0
Government Money Investments, Intermediate Fixed Income Investments,
Long-Term Bond Income Investments, Municipal Bond Investments, Mortgage
Backed Investments and International Fixed Income Investments did not
pay brokerage commissions during the year ended August 31, 1996.
The following table sets forth certain information regarding each
Portfolio's payment of brokerage commissions for the fiscal year ended
August 31, 1995:
Portfolio
Total
Brokerage
Commissions
Commissions
paid to
Smith
Barney
% of Total
Brokerage
Commissions
paid to
Smith
Barney
% of Total
Transactio
ns
involving
Commission
s Paid to
Smith
Barney
Balanced Investments
$36,073
N/A
N/A
N/A
Large Capitalization
Value Investments
819,528
$35,134
4.39%
0.25%
Large Capitalization
Growth Investments
743,269
2,448
0.33
0.02
Small Capitalization
Value Investments
1,272,329
23,322
1.83
0.12
Small Capitalization
Growth Investments
519,901
7,587
1.46
N/A
Emerging Markets
Equity Investments
391,066
N/A
N/A
N/A
International Equity
Investments
330,680
N/A
N/A
N/A
Government Money Investments, Intermediate Fixed Income Investments,
Long-Term Bond Income Investments, Municipal Bond Investments, Mortgage
Backed Investments and International Fixed Income Investments did not
pay brokerage commissions during the year ended August 31, 1995.
Portfolio Turnover
Government Money Investments may attempt to increase yields by
trading to take advantage of short-term market variations, which
results in high portfolio turnover. Because purchases and sales of
money market instruments are usually effected as principal
transactions, this policy does not result in high brokerage commissions
to the Portfolio. The other Portfolios do not intend to seek profits
through short-term trading. Nevertheless, the Portfolios will not
consider portfolio turnover rate a limiting factor in making investment
decisions.
A Portfolio's turnover rate is calculated by dividing the lesser
of purchases or sales of its portfolio securities for the year by the
monthly average value of the portfolio securities. Securities or
options with remaining maturities of one year or less on the date of
acquisition are excluded from the calculation. Under certain market
conditions, a Portfolio authorized to engage in transactions in options
may experience increased portfolio turnover as a result of its
investment strategies. For instance, the exercise of a substantial
number of options written by a Portfolio (due to appreciation of the
underlying security in the case of call options or depreciation of the
underlying security in the case of put options) could result in a
turnover rate in excess of 100%. A portfolio turnover rate of 100%
would occur if all of a Portfolio's securities that are included in the
computation of turnover were replaced once during a period of one year.
The Portfolios' portfolio turnover rates were as follows:
Portfolio
Year Ended
August 31,
1997
Year Ended
August 31,
1996
Government Money Investments
N/A
N/A
Intermediate Fixed Income
Investments
98%
98%
Long-Term Bond Investments
34
125
Municipal Bond Investments
31
29
Mortgage Backed Investments
94
23
Balanced Investments
67
47
Large Capitalization Value Equity
Investments
70
24
Large Capitalization Growth
Investments
65
40
Small Capitalization Value Equity
Investments
53
39
Small Capitalization Growth
Investments
81
83
International Equity Investments
32
50
International Fixed Income
Investments
251
211
Emerging Markets Equity
Investments
105
106
Certain practices that may be employed by a Portfolio could
result in high portfolio turnover. For example, portfolio securities
may be sold in anticipation of a rise in interest rates (market
decline) or purchased in anticipation of a decline in interest rates
(market rise) and later sold. In addition, a security may be sold and
another of comparable quality purchased at approximately the same time
to take advantage of what an Advisor believes to be a temporary
disparity in the normal yield relationship between the two securities.
These yield disparities may occur for reasons not directly related to
the investment quality of particular issues or the general movement of
interest rates, such as changes in the overall demand for, or supply
of, various types of securities. Portfolio turnover rates may vary
greatly from year to year as well as within a particular year and may
be affected by cash requirements for redemptions of a Portfolio's
shares as well as by requirements that enable the Portfolio to receive
favorable tax treatment.
MANAGEMENT OF THE TRUST
Trustees and Officers of the Trust
The Trustees and executive officers of the Trust, together with
information as to their principal business occupations, are set forth
below. The executive officers of the Trust are employees of
organizations that provide services to the Portfolios. Each Trustee who
is an "interested person" of the Trust, as defined in the 1940 Act, is
indicated by an asterisk. As of the date of this Statement of
Additional Information and the Prospectus, the Trustees and officers of
the Trust as a group did not own any of the outstanding shares of the
Portfolios.
*Walter E. Auch, Trustee (Age 76). Consultant to companies in the
financial services industry; Director of Pimco Advisers L.P.; Brinson
Partners; Nicholas-Applegate (each a registered investment adviser);
Legend Properties, a real estate management company; Banyan Realty
Trust; Banyan Land Fund II; Geotek Communications Inc., an
international wireless communications company. His address is 6001 N.
62nd Place, Paradise Valley, Arizona 85253.
Martin Brody, Trustee (Age 76). Private Investor; His address is
c/o HMK Associates, 30 Columbia Turnpike, Florham Park, N.J. 07932.
Armon E. Kamesar, Trustee (Age 70). Chairman of the Board of TEC,
an international organization of Chief Executive Officers; Trustee,
U.S. Bankruptcy Court. His address is 7328 Country Club Drive, La
Jolla, CA 92037.
Stephen E. Kaufman, Trustee (Age 64). Attorney. His address is
277 Park Avenue, New York, New York 10172.
*Heath B. McLendon, Trustee and Chairman (Age 64). Managing
Director of Smith Barney and Chairman of the Board of Smith Barney
Strategy Advisers Inc. and Director and President of Smith Barney
Mutual Funds Management Inc. ("SBMFM") and Travelers Investment
Adviser, Inc. ("TIA"); prior to July 1993, Senior Executive Vice
President of Shearson Lehman Brothers Inc.; Vice Chairman of Shearson
Asset Management,; and a Director of PanAgora Asset Management, Inc.
and PanAgora Asset Management Limited. Mr. McLendon serves on the Board
of 41 Smith Barney Mutual Funds. His address is 388 Greenwich Street,
New York, New York 10013.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 40).
Managing Director of Smith Barney; Director and Senior Vice President
of Smith Barney Mutual Funds Management Inc. ("SBMFM") and TIA. Mr.
Daidone serves as Treasurer of 41 Smith Barney Mutual Funds. His
address is 388 Greenwich Street, New York, New York 10013.
Frank L. Campanale, Investment Officer (Age 45). President and
Chief Executive Officer of Smith Barney's Consulting Group. Prior to
1996, National Sales Director for Consulting Group. His address is 222
Delaware Avenue, Wilmington, Delaware, 19801.
LeRoy T. Pease, CFA, Investment Officer (Age 39). Vice President
of Smith Barney Consulting Group. Prior to 1996, Chief Investment
Officer of EMT Group and Manager for Investment Strategy for Bell
Atlantic, Philadelphia, Pennsylvania. His address is 222 Delaware
Avenue, Wilmington, Delaware, 19801.
Christina T. Sydor, Secretary (Age 46) Managing Director of Smith
Barney; General Counsel and Secretary of SBMFM and TIA. Ms. Sydor
serves as Secretary of 41 Smith Barney Mutual Funds. Her address is
388 Greenwich Street, New York New York 10013.
Irving David, Controller (Age 37) Director of Smith Barney and
Controller of other investment companies associated with Smith Barney.
Prior to March, 1994, Assistant Treasurer of First Investment
Management Company. His address is 388 Greenwich Street, New York New
York 10013.
Thomas M. Reynolds, Controller (Age 37) Director of Smith Barney
and Controller of the Fund and other investment companies associated
with Smith Barney. His address is 388 Greenwich Street, New York New
York 10013.
As of December 5, 1997, the Trustees and officers as a group
owned less than 1% of the outstanding common stock of the Trust. As of
December 5, 1997, the following shareholders own of record or
beneficially 5% or more of shares of a Portfolio of the Trust :
Balanced Investments
SB Corp. Trust
Custodian
Synthes (USA)
Attn: Lisa Snyder
201 North Walnut Street
9th Floor
Wilmington, DE 19801
owned 889,217.396 (13.27%) shares
SBC Trust Company
TST Inc.
Attn. Jody Tourant
20232 E. 220th Street
Long Beach, CA 98010-1644
owned 615,067.484 (9.177%) shares
SBC Trust Company TTEE
Marketing Specialist Sales Co.
Attn. Lisa Snyder
201 North Walnut Street
9th Floor
Wilmington, DE 19801
owned 529,862.251 (7.91%) shares
SBC Trust Company TTEE
EBCO Manufacturing Company
401 (k) Profit Sharing Plan
Attn. Lisa Snyder
201 North Walnut Street
9th Floor
Wilmington, DE 19801
owned 398,427.229 (5.95%) shares
International Fixed Income Investments
Boatmens Trust Company
FAD Maritz Inc. Retirement Plan
Acct. #011007037375/Julius Baer
Attn. Mutual Funds
PO Box 14737
St. Louis, MO 63178-4737
owned 984,159.177 (5.95%) shares
Remuneration
No director, officer or employee of Smith Barney, the Manager,
SBMFM, or any of their affiliates will receive any compensation from
the Trust for serving as an officer or Trustee of the Trust. The Trust
pays each Trustee who is not a director, officer or employee of Smith
Barney, the Manager, any advisor, SBMFM or any of their affiliates a
fee of $22,000 per annum plus $1,000 per meeting attended. The Trust
reimburses the Trustees for travel and out-of-pocket expenses to attend
meetings of the Board. For the fiscal year ended August 31, 1997, such
fees and expenses totaled $160,141.
For the fiscal year ended August 31, 1997, the Trustees of the
Trust were paid the following compensation:
Total
Pension or Total Number
Retirement Benefits Compensation of Funds
Aggregate Accrued as Expense From Served in
Name Compensation of the Trust Fund Complex Complex
Heath B. McLendon* None None None 41
Walter Auch $ 25,400 None $ 35,814 2
Martin Brody 26,300 None 120,314 19
Armon E. Kamesar 26,400 None 37,414 2
Stephen E. Kaufman 26,400 None 84,214 13
* Designates "interested trustee".
Manager; Advisors; Administrator
The Manager serves as investment manager to the Trust pursuant to
an investment management agreement ("Management Agreement"). Each
Advisor serves as investment advisor to a Portfolio pursuant to
separate written agreements with each Portfolio ("Advisory
Agreements"), SBMFM serves as administrator to each Portfolio pursuant
to a written agreement ("Administration Agreement"). The Management
Agreement was most recently approved by the Board of Trustees,
including a majority of the Trustees who are not "interested persons"
of the Trust, the Manager, or the Advisors, on June 5, 1997 and by the
shareholders of the Trust on June 1, 1993. The Administration Agreement
was most recently approved by The Trust's Board of Trustees, including
a majority of the disinterested Trustees, on June 5, 1997. Certain of
the services provided and the fees paid by the Trust under the
Management Agreement, the Advisory Agreements and the Administration
Agreement are described in the Prospectus. In addition to the services
described in the Prospectus, as administrator, SBMFM furnishes the
Trust with statistical and research data, clerical help, accounting,
data processing, bookkeeping, internal auditing and legal services and
certain other services required by the Trust, prepares reports to the
Trust's shareholders and prepares tax returns, reports to and filings
with the SEC and state blue sky authorities.
For the fiscal year ended August 31, 1997 the Portfolios accrued
investment management and administration fees as follows:
Portfolio
Management
Fee
Administration Fee
Government Money Investments
$490,756
$654,342
Intermediate Fixed Income
Investments
1,325,387
662,693
Long-Term Bond Investments
672,437
336,219
Municipal Bond Investments
190,705
95,353
Mortgage Backed Investments
642,610
257,044
Balanced Investments
400,541
133,514
Large Capitalization Value Equity
Investments
8,514,670
3,452,366
Large Capitalization Growth
Investments
6,413,997
3,126,348
Small Capitalization Value Equity
Investments
2,721,377
1,039,277
Small Capitalization Growth
Investments
3,060,297
1,217,818
International Equity Investments
5,372,446
1,986,030
International Fixed Income
Investments
641,164
256,466
Emerging Markets Equity
Investments
1,690,749
375,723
Of the fees incurred by the following Portfolios, management,
administration and custody fees, in the aggregate, were waived as
follows: Government Money Investments - $124,703; Municipal Bond
Investments - $12,330; Mortgage Backed Investments - $172,962; and
Balanced Investments - $15,022.
Effective March 21, 1994, the Manager has agreed to waive a
portion of the fees otherwise payable to it by each of Large
Capitalization Value Equity Investments and Large Capitalization Growth
Investments so that the Manager would retain, as its annual management
fee, no more than 0.30% of each such Portfolio's average daily net
assets. Absent such waivers, the Manager would retain, as its annual
management fee, between 0.40% and 0.45% of the assets of Large
Capitalization Value Equity Investments and Large Capitalization Growth
Investments managed by Parametric Portfolio Associates, Inc. and
PanAgora, respectively.
For the year ended August 31, 1996, the Portfolios
accrued investment management and administration fees as
follows:
Portfolio
Management Fee
Administration Fee
Government Money Investments
$381,354
$508,472
Intermediate Fixed Income
Investments
1,102,332
551,166
Long-Term Bond Investments
604,542
302,271
Municipal Bond Investments
195,025
97,512
Mortgage Backed Investments
570,243
228,097
Balanced Investments
243,698
81,199
Large Capitalization Value Equity
Investments
6,468,340
2,660,110
Large Capitalization Growth
Investments
5,143,03
1
2,085,238
Small Capitalization Value Equity
Investments
2,188,471
823,189
Small Capitalization Growth
Investments
2,217,550
828,378
International Equity Investments
4,205,662
1,509,451
International Fixed Income
Investments
605,151
242,060
Emerging Markets Equity Investments
697,117
154,915
For the year ended August 31, 1995, the Portfolios
accrued investment management and administration fees as
follows:
Portfolio
Management Fee
Administration Fee
Government Money Investments
$332,386
$443,181
Intermediate Fixed Income
Investments
881,208
440,604
Long-Term Bond Investments
525,476
262,738
Municipal Bond Investments
189,270
94,635
Mortgage Backed Investments
526,392
210,557
Balanced Investments
114,764
38,254
Large Capitalization Value Equity
Investments
5,293,946
1,764,649
Large Capitalization Growth
Investments
3,720,760
1,240,253
Small Capitalization Value Equity
Investments
1,754,756
584,919
Small Capitalization Growth
Investments
1,405,674
468,558
International Equity Investments
4,163,115
1,189,461
International Fixed Income
Investments
536,934
214,773
Emerging Markets Equity Investments
445,779
99,062
SBMFM was incorporated on March 12, 1968 under the laws of
Delaware and is a registered investment adviser. SBMFM renders
investment advice to investment companies that had aggregate assets
under management as of November 30, 1997 in excess of $85 billion. The
Consulting Group, a division of SBMFM, has extensive experience in
providing investment advisor selection services. The Consulting Group,
through its predecessors, was established in 1973 with the primary
objective of matching the investment needs of institutional and
individual clients with appropriate and qualified money management
organizations throughout the nation. In 1989, the Consulting Services
Division was restructured and its research and investment advisory
evaluation services functions were segregated and named the Consulting
Group. The Consulting Group's analysts, in the aggregate, have many
years of experience performing asset manager searches for institutional
and individual clients. These analysts rely on the Manager's
comprehensive database of money management firms, through which the
Manager tracks the historic and ongoing performance of over 800 of the
more than 16,000 registered investment advisors, and over 300 on-sight
evaluation visits annually to advisors. As of November 28, 1997, the
Consulting Group provided services with respect to over $135 billion in
client assets representing more than 322,000 separate accounts under a
variety of programs designed for individual and institutional
investors.
The Manager and the Advisors each pays the salaries of all
officers and employees who are employed by it and the Trust, and the
Manager maintains office facilities for the Trust. The Manager and the
Advisors bear all expenses in connection with the performance of their
respective services under the Management Agreement, the Advisory
Agreements, and the Administration Agreement.
As noted in the Prospectus, subject to the supervision and
direction of the Manager and, ultimately, the Board of Trustees, each
Advisor manages the securities held by the Portfolio it serves in
accordance with the Portfolio's stated investment objectives and
policies, makes investment decisions for the Portfolio and places
orders to purchase and sell securities on behalf of the Portfolio.
The Manager has agreed that if in any fiscal year the aggregate
expenses of the Portfolios (including fees payable pursuant to the
Management Agreement, but excluding interest, taxes, brokerage fees
and, if permitted by the relevant state securities commissions,
extraordinary expenses) exceed the expense limitation of any state
having jurisdiction over the Portfolios, the Manager will reduce its
fees by the amount of the excess expenses. A fee reduction, if any,
will be reconciled monthly. As of the date of this Statement of
Additional Information, the most restrictive state expense limitation
applicable to the Portfolios is 2.5% of the first $30 million of each
Portfolio's average daily net assets, 2% of the next $70 million of
each Portfolio's average daily net assets and 1.5% of each Portfolio's
remaining average daily net assets. No such fee reduction was required
for the years ended August 31, 1997 and 1996.
Counsel and Auditors
Willkie Farr & Gallagher serves as counsel to the Trust. Stroock
& Stroock & Lavan LLP serves as counsel to the Trustees who are not
interested persons of the Trust.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154,
currently serve as the independent auditors of the Trust and rendered
an opinion on the Trust's most recent financial statements and
financial highlights.
Organization of the Trust
The Trust has been organized as an unincorporated business trust
under the laws of The Commonwealth of Massachusetts pursuant to a
Master Trust Agreement dated April 12, 1991, as amended from time to
time (the "Trust Agreement").
In the interest of economy and convenience, certificates
representing shares in the Trust are not physically issued. PNC Bank,
N.A., the Trust's custodian, maintains a record of each shareholder's
ownership of Trust shares. Shares do not have cumulative voting rights,
which means that holders of more than 50% of the shares voting for the
election of Trustees can elect all Trustees. Shares are transferable,
but have no preemptive, conversion or subscription rights. Shareholders
generally vote on a Trust-wide basis, except with respect to
continuation of the Advisory Agreements, in which case shareholders
vote by Portfolio.
Massachusetts law provides that shareholders could, under certain
circumstances, be held personally liable for the obligations of the
Trust. The Trust Agreement disclaims shareholder liability for acts or
obligations of the Trust, however, and requires that notice of the
disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Trust or a Trustee. The Trust Agreement
provides for indemnification from the Trust's property for all losses
and expenses of any shareholder held personally liable for the
obligations of the Trust. Thus, the risk of a shareholder's incurring
financial loss on account of shareholder liability is limited to
circumstances in which the Trust would be unable to meet its
obligations, a possibility that the Trust's management believes is
remote. Upon payment of any liability incurred by the Trust, the
shareholder paying the liability will be entitled to reimbursement from
the general assets of the Trust. The Trustees intend to conduct the
operations of the Trust in a manner so as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of the Trust.
PURCHASE OF SHARE
Purchases of shares of a Portfolio through an Advisory Service
must be made through a brokerage account maintained with Smith Barney.
Payment for Portfolio shares must be made by check directly to Smith
Barney or to a broker that clears securities transactions through Smith
Barney. No brokerage account or inactivity fee is charged in
connection with a brokerage account through which an investor purchases
shares of a Portfolio.
Shares of the Portfolios are available exclusively to
participants in Advisory Services and are generally designed to relieve
investors of the burden of devising an asset allocation strategy to
meet their individual needs as well as selecting individual investments
within each asset category among the myriad choices available. Advisory
Services generally provide investment advice in connection with
investments among the Portfolios by identifying the investor's risk
tolerances and investment objectives through evaluation of an
investment questionnaire; identifying and recommending in writing an
appropriate allocation of assets among the Portfolios that conform to
those tolerances and objectives in a written recommendation; and
providing on a periodic basis, a written monitoring report to the
investor containing an analysis and evaluation of an investor's account
and recommending any appropriate changes in the allocation of assets
among the Portfolios. Usually under an Advisory Service, all
investment decisions ultimately rest with the investor and investment
discretion is not given to the investment adviser.
The TRAK - Personalized Investment Advisory Service ("TRAK")
sponsored by Smith Barney is one such advisory service. Under the TRAK
program the Consulting Group in its capacity as investment adviser to
participants in TRAK generally directly provides to investors asset
allocation recommendations and related services with respect to the
Portfolios based on an evaluation of an investor's investment objective
and risk tolerances. Shares of the Portfolios are offered for purchase
and redemption at their respective net asset value next determined,
without imposition of any initial or contingent deferred sales charge
except that the Consulting Group is paid directly by the investors
purchasing Portfolio shares based on the recommendation of investment
advisors other than the Consulting Group, or who contract with the
Consulting Group for services other than those described above, pay, in
lieu of TRAK charges, different fees for different levels of services
as agreed upon with their investment advisers.
REDEMPTION OF SHARES
Detailed information on how to redeem shares of a Portfolio is
included in the Prospectus. The right of redemption of shares of a
Portfolio may be suspended or the date of payment postponed (i) for any
periods during which the New York Stock Exchange, Inc. (the "NYSE") is
closed (other than for customary weekend and holiday closings), (ii)
when trading in the markets the Portfolio normally utilizes is
restricted, or an emergency, as defined by the rules and regulations of
the SEC, exists making disposal of the Portfolio's investments or
determination of its net asset value not reasonably practicable or
(iii) for such other periods as the SEC by order may permit for the
protection of the Portfolio's shareholders.
Redemptions in Kind
If the Board of Trustees determines that it would be detrimental
to the best interests of a Portfolio's shareholders to make a
redemption payment wholly in cash, the Portfolio may pay, in accordance
with rules adopted by the SEC, any portion of a redemption in excess of
the lesser of $250,000 or 1% of the Portfolio's net assets by a
distribution in kind of readily marketable portfolio securities in lieu
of cash. Redemptions failing to meet this threshold must be made in
cash. Shareholders receiving distributions in kind of portfolio
securities may incur brokerage commissions when subsequently disposing
of those securities.
NET ASSET VALUE
As noted in the Prospectus, the Trust will not calculate the net
asset value of the Portfolios on certain holidays. On those days,
securities held by a Portfolio may nevertheless be actively traded and
the value of the Portfolio's shares could be significantly affected.
Certain of the Portfolios may invest in foreign securities. As a
result, the calculation of a Portfolio's net asset value may not take
place contemporaneously with the determination of the prices of certain
of the portfolio securities used in the calculation. A security that is
listed or traded on more than one exchange is valued for purposes of
calculating the Portfolio's net asset value at the quotation on the
exchange determined to be the primary market for the security.
In carrying out the Board's valuation policies, SBMFM, as
administrator, may consult with an independent pricing service (the
"Pricing Service") retained by the Trust. Debt securities of U.S.
issuers (other than U.S. Government Securities and short-term
investments) are valued by SBMFM after consultation with the Pricing
Service. When in the judgment of the Pricing Service quoted bid prices
for investments are readily available and are representative of the bid
side of the market, these investments are valued at the mean between
the quoted bid prices and asked prices. Investments for which no
readily obtainable market quotations are available, in the judgment of
the Pricing Service, are carried at fair value as determined by the
Pricing Service. The procedures of the Pricing Service are reviewed
periodically by the officers of the Trust under the general supervision
and responsibility of the Board of Trustees.
The valuation of the securities held by Government Money
Investments and U.S. dollar-denominated securities with less than 60
days to maturity held by the other Portfolios is based upon their
amortized cost, which does not take into account unrealized capital
gains or losses. Amortized cost valuation involves initially valuing an
instrument at its cost and, thereafter, assuming a constant
amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the
instrument. While this method provides certainty in valuation, it may
result in periods during which value, as determined by amortized cost,
is higher or lower than the price that the Portfolio would receive if
it sold the instrument.
Government Money Investments' use of the amortized cost method of
valuing its portfolio securities is permitted by a rule adopted by the
SEC. Under this rule, the Portfolio must maintain a dollar-weighted
average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 397 days or less, and invest
only in securities determined by the Advisor, under the supervision of
the Board of Trustees of the Trust, to be of high quality with minimal
credit risks.
Pursuant to the rule, the Board of Trustees also has established
procedures designed to stabilize, to the extent reasonably possible,
Government Money Investments' price per share as computed for the
purpose of sales and redemptions at $1.00. These procedures include
review of the Portfolio's holdings by the Board of Trustees, at such
intervals as it may deem appropriate, to determine whether the
Portfolio's net asset value calculated by using available market
quotations or market equivalents deviates from $1.00 per share based on
amortized cost.
The rule also provides that the extent of any deviation between
Government Money Investments' net asset value based on available market
quotations or market equivalents and the $1.00 per share net asset
value based on amortized cost must be examined by the Board of
Trustees. In the event that the Board of Trustees determines that a
deviation exists that may result in material dilution or other unfair
results to investors or existing shareholders, pursuant to the rule the
Board of Trustees must cause the Portfolio to take any corrective
action the Board of Trustees regards as necessary and appropriate,
including: selling portfolio instruments prior to maturity to realize
capital gains or losses or to shorten average portfolio maturity;
withholding dividends or paying distributions from capital or capital
gains; redeeming shares in kind; or establishing a net asset value per
share by using available market quotations.
DETERMINATION OF PERFORMANCE
From time to time, the Trust may quote a Portfolio's yield or
total return in advertisements or in reports and other communications
to shareholders.
Yield and Equivalent Taxable Yield
For a Portfolio other than Government Money Investments, the 30-
day yield figure described in the Prospectus is calculated according to
a formula prescribed by the SEC, expressed as follows:
YIELD = 2 [ (a-b + 1)(^6) -1]
cd
Where:
a = dividends and interest earned during the period.
b= expenses accrued for the period (net of reimbursement),
including a ratable portion of the maximum annual fee for participation
in TRAK.
c= the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d= the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a"
in the formula) on debt obligations that were purchased by the
Portfolio at a discount or premium, the formula generally calls for
amortization of the discount or premium; the amortization schedule will
be adjusted monthly to reflect changes in the market values of the debt
obligations.
A Portfolio's equivalent taxable 30-day yield is computed by
dividing that portion of the Portfolio's 30-day yield that is tax
exempt by one minus a stated income tax rate and adding the product to
any portion of the Portfolio's yield that is not tax exempt.
The yield for Government Money Investments is computed by: (a)
determining the net change, exclusive of capital changes, in the value
of a hypothetical pre-existing account in the Portfolio having a
balance of one share at the beginning of a seven day period for which
yield is to be quoted; (b) subtracting a hypothetical charge reflecting
deductions from shareholder accounts; (c) dividing the difference by
the value of the account at the beginning of the period to obtain the
base period return; and (d) annualizing the results (i.e., multiplying
the base period return by 365/7). The net change in the value of the
account reflects the value of additional shares purchased with
dividends declared on the original share and any such additional
shares, but does not include realized gains and losses or unrealized
appreciation and depreciation. In addition, the Portfolio may calculate
a compound effective annualized yield by adding one to the base period
return (calculated as described above), raising the sum to a power
equal to 365/7 and subtracting one.
Investors should recognize that in periods of declining interest
rates, a Portfolio's yield will tend to be somewhat higher than
prevailing market rates, and in periods of rising interest rates will
tend to be somewhat lower. In addition, when interest rates are
falling, the inflow of net new money to a Portfolio from the continuous
sale of its shares will likely be invested in instruments producing
lower yields than the balance of its portfolio of securities, thereby
reducing the current yield of the Portfolio. In periods of rising
interest rates the opposite can be expected to occur.
For the seven-day period ended August 31, 1997, the yield for the
Government Money Investments portfolio was 5.00% (the effective yield
was 5.12%) with an average dollar-weighted portfolio maturity of 84
days.
Average Annual Total Return
A Portfolio's average annual total return figures described in
the Prospectus are computed according to a formula prescribed by the
SEC, expressed as follows:
P(1+T)n = ERV
Where:
P= a hypothetical initial payment of $1,000
T= average annual total return, including the effect of the
maximum annual
fee for participation in TRAK.
n= number of years
ERV= Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of a 1-, 5- or 10-year period at the end of a 1-,
5- or 10-year period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions and the effect of the
maximum annual fee for participation in TRAK.
The ERV assumes complete redemption of the hypothetical
investment at the end of the measuring period. A Portfolio's net
investment income changes in response to fluctuations in interest rates
and the expenses of the Portfolio.
The Portfolios' average annual total returns without the effect
of the maximum annual fee for participation in TRAK and with the effect
of fee waivers were as follows:
Portfolio
From
September 1,
1996 through
August 31,
1997
From
September
1, 1992
through
August 31,
1997
From
Inception*
** through
August 31,
1997
Intermediate Fixed Income
Investments
8.23%
6.01%
6.50%
Long-Term Bond Investments
12.93
6.17
6.61
Municipal Bond Investments
8.88
5.95
6.37
Mortgage Backed Investments
9.69
6.03
6.52
Balanced Investments*
26.05
N/A
13.74
Large Capitalization Value Equity
Investments
38.98
15.62
15.17
Large Capitalization Growth
Investments
37.47
16.43
16.11
Small Capitalization Value Equity
Investments
42.40
15.06
14.48
Small Capitalization Growth
Investments
17.53
25.64
21.76
International Equity Investments
9.53
10.48
8.42
International Fixed Income
Investments
(1.52)
7.34
8.73
Emerging Markets Equity
Investments**
9.88
N/A
5.51
_________________
* Balanced Investments commenced operations on February 16, 1993.
** Aggregate from April 21, 1994 (commencement of operations of
Emerging Market Equity Investments) 1994 through August 31, 1994.
*** The remaining Portfolios commenced operations on November 18,
1991.
The Portfolios' average annual total returns with the effect of
the maximum annual fee for participation in TRAK and with the effect of
fee waivers were as follows:
Portfolio
From
September 1,
1996 through
August 31,
1997
From
September
1, 1992
through
August 31,
1997
From
Inception*
** through
August 31,
1997
Intermediate Fixed Income
Investments
6.63%
4.44%
4.92%
Long-Term Bond Investments
11.26
4.59
5.03
Municipal Bond Investments
7.26
4.38
4.74
Mortgage Backed Investments
8.06
4.46
4.94
Balanced Investments*
24.17
N/A
12.05
Large Capitalization Value Equity
Investments
36.92
13.90
13.45
Large Capitalization Growth
Investments
35.43
14.69
14.38
Small Capitalization Value Equity
Investments
40.24
13.35
12.78
Small Capitalization Growth
Investments
15.79
23.77
19.96
International Equity Investments
7.91
6.81
8.84
International Fixed Income
Investments
(2.97)
5.75
7.12
Emerging Markets Equity
Investments**
8.24
N/A
3.94
_________________
* Balanced Investments commenced operations on February 16, 1993.
** Aggregate from April 21, 1994 (commencement of operations of
Emerging Market Equity Investments) 1994 through August 31, 1994.
*** The remaining Portfolios commenced operations on November 18,
1991.
A Portfolio's net investment income changes in response to
fluctuations in interest rates and the expenses of the Portfolio.
Consequently, the given performance quotations should not be considered
as representative of the Portfolio's performance for any specified
period in the future.
A Portfolio's performance will vary from time to time depending
upon market conditions, the composition of its portfolio and its
operating expenses. Consequently, any given performance quotation
should not be considered representative of a Portfolio's performance
for any specified period in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in the Portfolio with certain bank deposits or other
investments that pay a fixed yield for a stated period of time.
Investors comparing a Portfolio's performance with that of other mutual
funds should give consideration to the quality and maturity of the
respective investment companies' portfolio securities.
Comparative performance information may be used from time to time
in advertising the Portfolios' shares, including data from Lipper
Analytical Services, Inc., Standard & Poor's 500 Composite Stock Price
Index, the Dow Jones Industrial Average and other industry
publications.
TAXES
Each Portfolio intends to continue to qualify in each year as a
"regulated investment company" under the Internal Revenue Code of 1986,
as amended (the "Code"). Provided that a Portfolio (i) is a regulated
investment company and (ii) distributes to its shareholders at least
90% of its taxable net investment income (including, for this purpose,
its net realized short-term capital gains) and 90% of its tax exempt
interest income (reduced by certain expenses), it will not be liable
for federal income taxes to the extent its taxable net investment
income and its net realized long-term and short-term capital gains, if
any, are distributed to its shareholders.
Interest on indebtedness incurred by a shareholder to purchase or
carry shares of Municipal Bond Investments will not be deductible for
federal income tax purposes. If a shareholder receives exempt-interest
dividends with respect to any share of Municipal Bond Investments and
if the share is held by the shareholder for six months or less, then
any loss on the sale or exchange of the share may, to the extent of the
exempt-interest dividends, be disallowed. In addition, the Code may
require a shareholder that receives exempt-interest dividends to treat
as taxable income a portion of certain otherwise non-taxable social
security and railroad retirement benefit payments. Furthermore, that
portion of any exempt-interest dividend paid by Municipal Bond
Investments that represents income derived from certain revenue or AMT-
Subject Bonds held by the Portfolio may not retain its tax exempt
status in the hands of a shareholder who is a "substantial user" of a
facility financed by such bonds, or a "related person" thereof.
Moreover, as noted in the Prospectus, some or all of Municipal Bond
Investments' exempt-interest dividends may be a specific preference
item, or a component of an adjustment item, for purposes of the federal
individual and corporate alternative minimum taxes. In addition, the
receipt of Municipal Bond Investments' dividends and distributions may
affect a foreign corporate shareholder's federal "branch profits" tax
liability and federal "excess net passive income" tax liability of a
shareholder of a Subchapter S corporation. Shareholders should consult
their own tax advisors as to whether they are (i) "substantial users"
with respect to a facility or "related" to such users within the
meaning of the Code or (ii) subject to a federal alternative minimum
tax, the federal "branch profits" tax, or the federal "excess net
passive income" tax.
As described above and in the Prospectus, each Portfolio other
than Government Money Investments, Municipal Bond Investments and
Balanced Investments may invest in certain types of warrants, foreign
currencies, forward contracts, options and futures contracts. These
Portfolios anticipate that these investment activities will not prevent
them from qualifying as regulated investment companies.
A Portfolio's transactions in foreign currencies, forward
contracts, options and futures contracts (including options and futures
contracts on foreign currencies) will be subject to special provisions
of the Code that, among other things, may affect the character of gains
and losses realized by the Portfolio (i.e., may affect whether gains or
losses are ordinary or capital), accelerate recognition of income to
the Portfolio and defer Portfolio losses. These rules could therefore
affect the character, amount and timing of distributions to
shareholders. These provisions also (i) will require a Portfolio to
mark-to-market certain types of the positions in its portfolio (i.e.,
treat them as if they were closed out), and (ii) may cause a Portfolio
to recognize income without receiving cash with which to pay dividends
or make distributions in amounts necessary to satisfy the distribution
requirements for avoiding income and excise taxes that are described
above and in the Prospectus. Each of the Portfolios will monitor its
transactions, will make the appropriate tax elections and will make the
appropriate entries in its books and records when it acquires any
foreign currency, forward contract, option, futures contract or hedged
investment in order to mitigate the effect of these rules and prevent
disqualification of the Portfolio as a regulated investment company.
As a general rule, a Portfolio's gain or loss on a sale or
exchange of an investment will be a long-term capital gain or loss if
the Portfolio has held the investment for more than one year and will
be a short-term capital gain or loss if it has held the investment for
one year or less. Furthermore, as a general rule, a shareholder's gain
or loss on a sale or redemption of Portfolio shares will be a long-term
capital gain or loss if the shareholder has held his or her Portfolio
shares for more than one year and will be a short-term capital gain or
loss if he or she has held his or her Portfolio shares for one year or
less. Gainson shares held for more than 18 months will be eligible for
the reduced 20% maximum capital gains tax rate.
The Portfolios other than Government Money Investments,
Intermediate Fixed Income Investments, Municipal Bond Investments and
Mortgage Backed Investments expect to realize a significant amount of
net long-term capital gains that will be distributed as described in
the Prospectus. Distributions of net realized long-term capital gains
("capital gain dividends") will be taxable to shareholders as long-term
capital gains, regardless of how long a shareholder has held Portfolio
shares, and will be designated as capital gain dividends in a written
notice mailed to the shareholders after the close of the Portfolio's
prior taxable year. If a shareholder receives a capital gain dividend
with respect to any share held for six months or less, then any loss
(to the extent not disallowed pursuant to the other six-month rule
described above with respect to Municipal Bond Investments) on the sale
or exchange of the share, to the extent of the capital gain dividend,
shall be treated as a long-term capital loss.
Each shareholder will receive after the close of the calendar
year an annual statement as to the federal income tax status of his or
her dividends and distributions for the prior calendar year. These
statements will also designate the amount of exempt-interest dividends
that is a specific preference item for purposes of the federal
individual and corporate alternative minimum taxes. Each shareholder
will also receive, if appropriate, various written notices after the
close of a Portfolio's prior taxable year as to the federal income tax
status of his or her Portfolio during the Portfolio's prior taxable
year. Shareholders should consult their tax advisors as to any state
and local taxes that may apply to these dividends and distributions.
The dollar amount of dividends paid by Municipal Bond Investments that
are excluded from federal income taxation and the dollar amount of
dividends paid by Municipal Bond Investments that are subject to
federal income taxation, including the portion, if any, of long-term
capital gains distributions eligible for the reduced 20% maximum
capital gains tax rate, if any, will vary for each shareholder
depending upon the size and duration of each shareholder's investment
in a Portfolio. To the extent that Municipal Bond Investments earns
taxable net investment income, it intends to designate as taxable
dividends the same percentage of each day's dividend as its taxable net
investment income bears to its total net investment income earned on
that day. Therefore, the percentage of each day's dividend designated
as taxable, if any, may vary from day to day.
If a Portfolio is the holder of record of any stock on the record
date for any dividends payable with respect to the stock, these
dividends shall be included in the Portfolio's gross income as of the
later of (i) the date the stock became ex-dividend with respect to the
dividends (i.e., the date on which a buyer of the stock would not be
entitled to receive the declared, but unpaid, dividends) or (ii) the
date the Portfolio acquired the stock. Accordingly, in order to satisfy
its income distribution requirements, a Portfolio may be required to
pay dividends based on anticipated earnings, and shareholders may
receive dividends in an earlier year than would otherwise be the case.
Investors considering buying shares of a Portfolio on or just
prior to the record date for a taxable dividend or capital gain
distribution should be aware that the amount of the forthcoming
dividend or distribution payment will be a taxable dividend or
distribution payment.
If a shareholder fails to furnish a correct taxpayer
identification number, fails to report fully dividend or interest
income, or fails to certify that he or she has provided a correct
taxpayer identification number and that he or she is not subject to
"backup withholding," then the shareholder may be subject to a 31%
"backup withholding" tax with respect to (i) taxable dividends and
distributions and (ii) the proceeds of any redemptions of Portfolio
shares. An individual's taxpayer identification number is his or her
social security number. The 31% "backup withholding" tax is not an
additional tax and may be credited against a taxpayer's regular federal
income tax liability.
The foregoing is only a summary of certain tax considerations
generally affecting a Portfolio and its shareholders, and is not
intended as a substitute for careful tax planning. Shareholders are
urged to consult their tax advisors with specific reference to their
own tax situations, including the effects of the Tax Relief Act of 1997
and their state and local tax liabilities.
CUSTODIAN AND TRANSFER AGENT
PNC Bank National Association ("PNC") and The Chase Manhattan
Bank ("Chase") serve as the custodians for the Trust. The assets of the
Trust are held under bank custodianship in accordance with the 1940
Act. Under their custody agreements with the Trust, PNC and Chase are
authorized to establish separate accounts for foreign securities owned
by the Portfolios to be held with foreign branches of U.S. banks as
well as certain foreign banks and securities depositories as sub-
custodians of assets owned by the Portfolios. For its custody services,
PNC and Chase receive monthly fees charged to a Portfolio based upon
the month-end, aggregate net asset value of the Portfolio plus certain
charges for securities transactions. PNC and Chase are also reimbursed
by the Portfolios for out-of-pocket expenses including the costs of any
foreign and domestic sub-custodians.
First Data Investors Services Group Inc., ("First Data"), a
subsidiary of First Data Corporation, serves as the Trust's transfer
agent. For its services as transfer agent, First Data receives fees
charged to a Portfolio at an annual rate based upon the number of
shareholder accounts maintained during the year. First Data is also
reimbursed by the Portfolios for out-of-pocket expenses.
FINANCIAL STATEMENTS
The Trust's Annual Report for the year ended August 31, 1997, was
previously sent to all shareholders and is incorporated into this
Statement of Additional Information by reference.
g:\funds\trak\1997\secdocs\sai1297.doc 33
