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CONSULTING GROUP
CAPITAL MARKETS FUNDS
SMITH BARNEY
------------
A Member of TravelersGroup[LOGO]
<PAGE>
TRAK(R)
----------------------------------
Personalized Investment Advisory Service
TRAK Personalized Investment Advisory Service ("TRAK") is a securities
advisory service offered by the Consulting Group (the "Consulting Group") of
Mutual Management Corp. ("MMC") designed to assist a client in devising and
implementing a reasoned, systematic, long-term investment strategy tailored to
the client's financial circumstances. TRAK links the Consulting Group's
experience in evaluating an investor's investment objectives and risk
tolerances, the abilities of investment advisers to meet those objectives and
risk tolerances and the historic performance of various asset classes, with
the convenience and cost effectiveness of a broad array of investment
portfolios. TRAK consists of the following elements for programs other than
certain qualified employee benefit plans:
THE REQUEST
The core of TRAK is the Consulting Group's evaluation of the client's
financial goals and risk tolerances based on the Request, a confidential
client questionnaire that the client completes with the assistance of his or
her Financial Consultant. In reviewing and processing a client's Request, the
Consulting Group considers the client's specific investment goals--a secure
retirement, the education of children, the preservation and growth of an
inheritance or savings or the accumulation of capital for the formation of a
business--in terms of the client's time horizon for achievement of those
goals, immediate and projected financial means and needs and overall
tolerances for investment risk.
THE RECOMMENDATION
Based on its evaluation of the client's financial goals and circumstances,
the Consulting Group prepares and issues a Recommendation. In the
Recommendation, the Consulting Group provides advice as to an appropriate mix
of investment types designed to balance the client's financial goals against
his or her means and risk tolerances as part of a long term investment
strategy. Numerous financial studies, including a study in the Financial
Analysis Journal, a major publication forum for investment research, have
concluded that the single most important component determining the performance
of an investment portfolio is how that portfolio is allocated among different
types of investments. The Recommendation draws on Smith Barney's experience in
analyzing macroeconomic events worldwide and designing asset allocation
strategies as well as the Consulting Group's experience in monitoring and
evaluating the performance of various market segments over substantial periods
of time and correlating that information with the client's financial
characteristics. The Recommendation provides specific advice about
implementing investment decisions through Consulting Group Capital Markets
Funds (the "Trust"), a series of investment portfolios (the "Portfolios") that
covers a spectrum of investments from a money market fund that limits its
investment to U.S. Government securities and repurchase agreements exclusively
for those securities, to an emerging markets fund that offers the potential
for significant returns to the client that can commit a portion of his or her
portfolio to more volatile markets*. The Recommendation specifies a
combination of investments in the Portfolios considered suitable for the
client. The Recommendation employs an asset allocation theory based on a
framework discussed in "Portfolio Selection," a paper published in the Journal
of Finance that earned its author a Nobel Prize. The Financial Consultant
assists the client in evaluating the advice contained in the Recommendation,
offers interpretations in light of personal knowledge of the client's
circumstances and implements the client's investment decisions, but has no
investment discretion over the client's accounts. All decisions on investing
among the Portfolios remain with the client. The client has the option of
accepting the Recommendation or selecting an alternative combination of
investments in the Portfolios.
- --------
* Smith Barney, through the Consulting Group, also offers TRAK in connection
with investments in mutual funds offered by a variety of no-load fund
families, including Smith Barney funds in load-waived Class A shares, which
cover a spectrum of investments. For more information about investing in
TRAK with funds from select no-load fund families, you should contact your
Smith Barney Financial Consultant. The fees and other compensation received
by Smith Barney in connection with TRAK with funds from select no-load fund
families may be different from the fees and other compensation received by
Smith Barney in connection with TRAK with the Consulting Group Capital
Markets Funds.
i
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THE INVESTMENTS
The Portfolios offer a convenient and economical means through which to
implement the Recommendation. The Trust consists of the following Portfolios,
which are described in greater detail in the Prospectus that accompanies this
description:
<TABLE>
<S> <C>
(1) Government Money Investments (8) Large Capitalization Growth Investments
(2) Intermediate Fixed Income (9) Small Capitalization Value Equity Investments
Investments (10) Small Capitalization Growth Investments
(3) Long-Term Bond Investments (11) International Equity Investments
(4) Municipal Bond Investments (12) International Fixed Income Investments
(5) Mortgage Backed Investments (13) Emerging Markets Equity Investments
(6) Balanced Investments (14) High Yield Investments
(7) Large Capitalization Value Equity
Investments
</TABLE>
The Trust offers investors the opportunity to invest in Portfolios that are
advised by investment firms ("Advisors") identified, retained, supervised and
compensated by the Consulting Group in its capacity as Manager to the Trust.
Shares of the Portfolios may be purchased, redeemed or exchanged daily at the
net asset value next determined without imposition of any sales or redemption
charge. As described below, participation in TRAK is subject to payment of a
quarterly fee at the maximum annual rate of 1.50% of TRAK assets held in an
account at Smith Barney (an "Account"). Financial Consultants are compensated
based on client participation in TRAK but do not receive compensation or
incentives based on which of the Portfolios are selected for investment.
THE REVIEW
TRAK is a continuing investment advisory service. Once a TRAK program is
active, the client receives a periodic Review highlighting all TRAK activity
for the preceding period. The Review is a monitoring report containing an
analysis and evaluation of the client's TRAK assets to ascertain whether the
client's objectives for the TRAK assets are being met and recommending, when
appropriate, changes in the allocation of assets among the Portfolios.
Information presented within the Review includes a market commentary, a record
of the client's asset performance and rates of return as compared to several
appropriate market indices (illustrated in a manner that includes any fees for
participation in TRAK actually incurred during the period), the client's actual
portfolio showing the breakdown of investments made in each Portfolio, year-to-
date and cumulative realized gains and losses in and income received from each
Portfolio, all purchase, sale and exchange activity and dividends and interest
received and/or reinvested. The information in the Review is especially useful
for tax preparation purposes.
FINANCIAL CONSULTANT SUPPORT
Integral to TRAK is the personal and confidential relationship between the
client and his or her Financial Consultant. With a Financial Consultant a
client at all times has available a registered investment professional backed
by the full resources of the Consulting Group to discuss his or her financial
circumstances and strategy. The Financial Consultant serves the client by
assisting the client in identifying his or her financial characteristics,
completing and transmitting the Request, reviewing with the client the
Recommendation and Reviews, responding to identified changes in the client's
financial circumstances and implementing investment decisions. When financial
circumstances change, the Financial Consultant can be consulted and a new
evaluation commissioned at no additional charge.
ABOUT THE CONSULTING GROUP
TRAK and the Trust build on the experience of the Consulting Group, in
providing coordinated personalized investment advice and investment advisor
selection services. The predecessor of the Consulting Group was established in
1973 with the primary objective of matching the investment needs of
(continued)
ii
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PROSPECTUS
CONSULTING GROUP CAPITAL MARKETS FUNDS
222 Delaware Avenue . Wilmington, Delaware 19801 . (212) 816-8725
Consulting Group Capital Markets Funds (the "Trust") is an open-end,
management investment company providing a convenient means of investing in
separate investment portfolios (the "Portfolios") professionally managed by
the Consulting Group (the "Manager" or the "Consulting Group") of Mutual
Management Corp. ("MMC") (formerly Smith Barney Mutual Funds Management Inc.).
Each of the Portfolios benefits from discretionary advisory services from an
investment adviser (the "Advisor" or "Advisors") identified, retained,
supervised and compensated by the Manager. The Trust is a series company that
currently consists of the following Portfolios to which this Prospectus
relates:
<TABLE>
<S> <C>
.Government Money Investments .Large Capitalization Value Equity Investments
.Intermediate Fixed Income Investments .Large Capitalization Growth Investments
.Long-Term Bond Investments .Small Capitalization Value Equity Investments
.Municipal Bond Investments .Small Capitalization Growth Investments
.Mortgage Backed Investments .International Equity Investments
.Balanced Investments .International Fixed Income Investments
.Emerging Markets Equity Investments
.High Yield Investments
</TABLE>
Each of the Portfolios is a diversified Portfolio of the Trust, except
International Fixed Income Investments, which is a non-diversified Portfolio.
Shares of Government Money Investments are not guaranteed or insured by the
U.S. government and, although Government Money Investments attempts to
maintain a constant net asset value of $1.00 per share, there can be no
assurance that it will be able to do so at all times.
Shares of the Portfolios are offered to participants in advisory programs
sponsored by Smith Barney Inc. ("Smith Barney"), including the TRAK (R)
Personalized Investment Advisory Service ("TRAK"), which directly provides to
investors asset allocation recommendations with respect to the Portfolios
based on an evaluation of an investor's investment objectives and risk
tolerances (collectively, "Smith Barney Advisory Services"). The Portfolios
may also be offered to participants in other investment advisory services
offered by qualified investment advisers not affiliated with Smith Barney
(each an "Advisory Service" and collectively with Smith Barney Advisory
Services the "Advisory Services"). Participation in an Advisory Service is
subject to payment of a separate investment advisory fee at rates that may be
subject to negotiation based on levels of services as agreed upon with
clients. Currently the maximum annual rate for assets invested in the
Portfolios under a Smith Barney Advisory Service is 1.50%. The operating
expenses of the Portfolios, when combined with any investment advisory fees
separately paid, may involve greater fees and expenses than other investment
companies whose shares are purchased without the benefit of an Advisory
Service.
This Prospectus sets forth concisely certain information about the Trust,
including expenses, that prospective investors will find helpful in making an
investment decision. Investors are encouraged to read this Prospectus
carefully and retain it for future reference.
High Yield Investments may invest up to 100% of its net assets in non-
investment grade securities, commonly referred to as "junk bonds." Junk bonds
are high risk and considered speculative with regard to payment of interest
and return of principal. Purchasers should carefully consider the risks
associated with an investment in this Portfolio prior to investing.
Additional information about the Trust is contained in a Statement of
Additional Information which is available upon request and without charge by
calling or writing the Trust at the telephone number or address listed above
or by contacting any Smith Barney Financial Consultant. The Statement of
Additional Information, which has been filed with the Securities and Exchange
Commission, bears the same date as this Prospectus and is incorporated by
reference into this Prospectus in its entirety.
SHARES OF THE PORTFOLIOS ARE NOT INSURED BY THE FDIC; ARE NOT A
DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, ANY
BANK; AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
July 1, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Summary............................. 2
Advisory Service Fees; Portfolio
Expenses........................... 5
Financial Highlights................ 7
Objectives and Policies of the Port-
folios............................. 14
Management of the Trust............. 32
Purchase of Shares.................. 39
Redemption of Shares................ 41
Net Asset Value..................... 42
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Exchange Privilege.................. 43
Dividends, Distributions and Taxes.. 43
Custodian and Transfer Agent........ 45
Performance of the Portfolios....... 45
Additional Information.............. 46
Appendix A.......................... A-1
Appendix B.......................... B-1
</TABLE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus.
The Trust. The Trust is a management investment company providing a
convenient means of investing in separate Portfolios professionally managed by
the Manager. The assets of each of the Portfolios are managed on a
discretionary basis by one or more separate Advisors. See "Management of the
Trust." The Trust is a series company currently consisting of the following 14
Portfolios:
. Government Money Investments, whose Advisor is Standish, Ayer & Wood,
Inc. ("Standish, Ayer").
. Intermediate Fixed Income Investments, whose Advisor is Standish, Ayer.
. Long-Term Bond Investments, whose Advisor is National Asset Management
Corp. ("National Asset Mgmt.").
. Municipal Bond Investments, whose Advisor is Smith Affiliated Capital
Corp. ("Smith Affiliated").
. Mortgage Backed Investments, whose Advisor is Atlantic Portfolio
Analytics & Management, Inc. ("Atlantic Analytics").
. International Fixed Income Investments, whose Advisor is Julius Baer
Investment Management Inc. ("Julius Baer").
. Balanced Investments, whose Advisor is Palley-Needelman Asset Management,
Inc. ("Palley-Needelman").
. Large Capitalization Value Equity Investments, whose Advisors are The
Boston Company Asset Management, Inc. ("TBCAM") and Parametric Portfolio
Associates ("Parametric").
. Small Capitalization Value Equity Investments, whose Advisors are NFJ
Investment Group ("NFJ"), David L. Babson & Co., Inc. ("Babson") and
Mellon Capital Management Corporation ("Mellon").
. Large Capitalization Growth Investments, whose Advisors are Provident
Investment Counsel Inc. ("Provident") and Barclays Global Fund Advisors
("BGI").
. Small Capitalization Growth Investments, whose Advisors are Berger
Associates, Inc. ("Berger Associates"), Wall Street Associates ("WSA")
Montgomery Asset Management, LLC ("Montgomery"), Westpeak Investment
Advisors, L.P. ("Westpeak") and Mellon.
. International Equity Investments, whose Advisors are Oechsle
International Advisers, L.P. ("Oechsle") and State Street Global Advisors
("State Street").
. Emerging Markets Equity Investments, whose Advisor is AIB Govett Asset
Management Limited ("Govett").
. High Yield Investments, whose Advisor is Alliance Capital Management L.P.
("Alliance Capital").
Management. The Consulting Group, a division of MMC, acts as the Portfolios'
Manager. Each of the Portfolios benefits from discretionary advisory services
made available by one or more Advisors identified, retained, supervised and
compensated by the Manager. MMC serves as the Portfolios' administrator and
generally manages all aspects of the Trust's administration and operation. See
"Management of the Trust."
2
<PAGE>
Advisory Services, Purchase and Redemption of Shares. Shares of the
Portfolios are offered to or for the benefit of participants in Advisory
Services. TRAK is one such investment advisory service pursuant to which 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 objectives and risk tolerances. Shares of the Portfolios
are offered for purchase and redemption at their respective net asset values
next determined, without imposition of any initial or contingent deferred sales
charge except that the Consulting Group is paid directly by the client a
quarterly fee at the maximum annual rate of 1.50% of assets held in a TRAK
account for its services. Investors purchasing Portfolio shares based on the
recommendations 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. See "Purchase of
Shares" and "Redemption of Shares."
Risk Factors and Special Considerations. No assurance can be given that the
Portfolios will achieve their investment objectives. Investing in an investment
company that invests in securities of companies and governments of foreign
countries, particularly developing countries, involves risks that go beyond the
usual risks inherent in an investment company limiting its holdings to domestic
investments. In particular, because Emerging Markets Equity Investments will
invest in emerging markets countries, an investment in such Portfolio should be
considered more speculative than an investment in a mutual fund that invests in
securities of U.S. companies and investment in this Portfolio involves certain
risks and considerations not associated with an investment in a mutual fund
that invests in securities of countries with better developed and more stable
markets. In addition, this Portfolio is authorized to borrow for investment
purposes which will have the effect of magnifying gains and losses on the
Portfolio's investments. A substantial portion of assets of certain of the
Portfolios may be held in securities denominated in one or more foreign
currencies, which will result in the Portfolio's bearing the risk that those
currencies may lose value in relation to the U.S. dollar. Certain Portfolios
may also be subject to certain risks of using investment techniques and
strategies such as entering into forward currency contracts and repurchase
agreements and trading futures contracts and options on futures contracts. In
addition, High Yield Investments and Mortgage Backed Investments may invest in
high yield, high risk securities that are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal, and
Mortgage Backed Investments, Intermediate Fixed Income Investments and Long-
Term Bond Investments may invest in government stripped mortgage related
securities and zero coupon securities, which, due to changes in interest rates,
may be more speculative and subject to greater fluctuations in value than
securities that pay interest currently. See "Objectives and Policies of the
Portfolios--Certain Securities, Investment Techniques and Risk Factors."
Investors through TRAK should be aware that while the Consulting Group
receives a fee as investment adviser from each participant, the Consulting
Group also receives a fee from each Portfolio for its service as the Trust's
Manager with responsibility for identifying, retaining, supervising and
compensating each Portfolio's Advisor. The portion of such fee that is retained
by the Manager varies based on the Portfolio involved. Consequently, the
Consulting Group, when making asset allocation recommendations for TRAK
participants, may be presented with a conflict of interest as to the specific
Portfolios recommended for investment. The Consulting Group, however, is
subject to and intends to comply fully with standards of fiduciary duty that
require that it act solely in the best interest of the participants when making
investment recommendations. Investors also should be aware that the Manager may
be subject to a conflict of interest when making decisions regarding the
retention and compensation of particular Advisors. However, the Manager's
decisions, including the identity of an Advisor and the specific amount of the
Manager's compensation to be paid to the Advisor, are subject to review and
approval by a majority of the Board of Trustees and separately by a majority of
the Trustees who are not affiliated with the Manager or any of its affiliates.
See "Management of the Trust--Investment Manager" and "Purchase of Shares--
General--TRAK."
The Portfolios are intended as vehicles for the implementation of long-term
asset allocation strategies rendered through Advisory Services that are based
on an evaluation of an investor's investment objectives
3
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and risk tolerances. Because these asset allocation strategies are designed to
spread investment risk across the various segments of the securities markets
through investment in a number of Portfolios, each individual Portfolio
generally intends to be substantially fully invested in accordance with its
investment objectives and policies during most market conditions. Although an
Advisor of a Portfolio may, upon the concurrence of the Manager, take a
temporary defensive position during adverse market conditions, it can be
expected that a defensive posture will be adopted less frequently than it would
be by other mutual funds. This policy may impede an Advisor's ability to
protect a Portfolio's capital during declines in the particular segment of the
market to which the Portfolio's assets are committed. Consequently, no single
Portfolio should be considered a complete investment program and an investment
among the Portfolios should be regarded as a long-term commitment that should
be held through several market cycles. In addition, although the Consulting
Group intends to recommend adjustments in the allocation of assets among the
Portfolios based on, among other things, anticipated market trends, there can
be no assurance that these recommendations can be developed, transmitted and
acted upon in a manner sufficiently timely to avoid market shifts, which can be
sudden and substantial. Participants in TRAK should recognize that it is a
nondiscretionary investment advisory service and that all investment decisions
rest with the participant alone. Therefore, such participants are urged
strongly to adhere to the Consulting Group's asset allocation recommendations
and to act promptly upon any recommended reallocation of assets among the
Portfolios. Investors intending to purchase Portfolio shares through other
Advisory Services should evaluate carefully whether the service is ongoing and
continuous, as well as their investment advisers' ability to anticipate and
respond to market trends. See "Objectives and Policies of the Portfolios--
Certain Securities, Investment Techniques and Risk Factors--Temporary
Investments."
Dividends and Distributions. Each Portfolio intends to distribute annually to
its shareholders substantially all of its net investment income and its net
realized long- and short-term capital gains. Dividends from the net investment
income of Government Money Investments are declared daily and paid monthly.
Dividends from the net investment income of Intermediate Fixed Income
Investments, Long-Term Bond Investments, Mortgage Backed Investments, Municipal
Bond Investments, International Fixed Income Investments, High Yield
Investments and Balanced Investments are declared and paid monthly. Dividends
from the net investment income of the remaining Portfolios are declared and
paid annually. Distributions of any net realized long-term and short-term
capital gains earned by a Portfolio will be made annually. See "Dividends,
Distributions and Taxes."
Taxation. Each of the Portfolios has qualified and intends to continue to
qualify as a regulated investment company for U.S. federal income tax purposes.
As such, the Trust anticipates that no Portfolio will be subject to U.S.
federal income tax on income and gains that are distributed to shareholders. It
is expected that certain capital gains and certain dividends and interest
earned by International Equity Investments and Emerging Markets Equity
Investments will be subject to foreign withholding taxes. These taxes may be
deductible or creditable in whole or in part by shareholders of the Portfolio
for U.S. federal income tax purposes. Although any foreign withholding taxes
paid by International Fixed Income Investments are not expected to be
creditable by its shareholders for U.S. federal income tax purposes, the
Portfolio will be managed in a manner so as to minimize, to the extent
practicable, the payment of any foreign withholding taxes. See "Dividends,
Distributions and Taxes."
Custodian and Transfer Agent. PNC Bank, National Association ("PNC") and The
Chase Manhattan Bank ("Chase") serve as the custodians of the Trust's assets
and may employ sub-custodians outside the United States approved by the
Trustees of the Trust in accordance with regulations of the Securities and
Exchange Commission (the "SEC"). PNC provides services for Portfolios
predominately comprised of domestic securities, whereas Chase provides services
for international Portfolios. First Data Investor Services Group, Inc. (the
"Transfer Agent"), a subsidiary of First Data Corporation, serves as the
transfer agent for the Portfolios' shares. See "Custodian and Transfer Agent."
4
<PAGE>
ADVISORY SERVICE FEES; PORTFOLIO EXPENSES
The following table lists the costs and expenses, including fees for TRAK
(but not those for other Advisory Services paid separately), that an investor
will incur either directly or indirectly as a shareholder of each Portfolio
based on the Portfolio's operating expenses for the most recent fiscal year.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES+
------------------------------------------
MAXIMUM MANAGEMENT
SHAREHOLDER ANNUAL FEES (NET DISTRIBUTION TOTAL
TRANSACTION TRAK OF FEE (RULE 12B-1) OTHER OPERATING
EXPENSES FEE* WAIVERS) EXPENSES EXPENSES EXPENSES
----------- ------- ---------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Government Money
Investments............ None 1.50% 0.20% None 0.40% 0.60%
Intermediate Fixed
Income Investments..... None 1.50 0.60 None 0.13 0.73
Long-Term Bond
Investments............ None 1.50 0.60 None 0.18 0.78
Municipal Bond
Investments............ None 1.50 0.37 None 0.43 0.80
Mortgage Backed
Investments............ None 1.50 0.57 None 0.23 0.80
Balanced Investments.... None 1.50 0.78 None 0.22 1.00
Large Capitalization
Value Equity
Investments............ None 1.50 0.70 None 0.08 0.78
Large Capitalization
Growth Investments..... None 1.50 0.62 None 0.07 0.69
Small Capitalization
Value Equity
Investments**.......... None 1.50 0.82 None 0.18 1.00
Small Capitalization
Growth Investments++... None 1.50 0.73 None 0.20 0.93
International Equity
Investments**.......... None 1.50 0.59 None 0.43 1.02
International Fixed
Income Investments..... None 1.50 0.50 None 0.49 0.99
Emerging Markets
Equity Investments..... None 1.50 0.90 None 0.70 1.60
High Yield Investments.. None 1.50 0.70 None 0.50 1.20
</TABLE>
- --------
+ As a percentage of average net assets.
++ The management fee has been restated to reflect a management fee increase
for the fiscal year ending August 31, 1998.
+++ The management fee and the total operating expenses for High Yield
Investments are estimated since there were no outstanding shares during the
most recent fiscal year.
* As a percentage of the value of Portfolio shares held on the last calendar
day of the previous quarter per annum.
** The management fees have been restated to reflect management fee increases
which were approved by shareholders effective April 1, 1998.
Management Fees; Expenses. Each Portfolio pays the Manager a fee for its
services that is computed daily and paid monthly at an annual rate ranging from
0.15% to 0.90% of the value of the average daily net assets of the Portfolio.
The fees of each Advisor are paid by the Manager. Each Portfolio pays MMC a fee
for administration services that is computed daily and paid monthly at an
annual rate of 0.20% of the value of the Portfolio's average daily net assets.
The Manager and MMC (the "Agents") may voluntarily waive a portion or all of
their respective fees otherwise payable to them and the "Total Operating
Expenses" without fee waivers would have been 0.64%, 0.83%, 0.93% and 1.02% for
Government Money Investments, Municipal Bond Investments, Mortgage Backed
Investments and Balanced Investments, respectively.
5
<PAGE>
Based on the Portfolio expenses set forth above, including an Advisory
Service fee of 1.50%, a shareholder would pay the following expenses on a
$1,000 investment assuming (i) a 5% annual return and (ii) redemption at the
end of each period.
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Government Money Investments......... $21 $ 66 $113 $243
Intermediate Fixed Income
Investments......................... 23 70 119 256
Long-Term Bond Investments........... 23 71 122 262
Municipal Bond Investments........... 23 72 123 264
Mortgage Backed Investments.......... 23 72 123 264
Balanced Investments................. 25 78 133 284
Large Capitalization Value Equity
Investments......................... 23 71 122 262
Large Capitalization Growth
Investments......................... 22 69 117 252
Small Capitalization Value Equity
Investments......................... 25 78 133 284
Small Capitalization Growth
Investments......................... 24 76 130 277
International Equity Investments..... 25 79 134 286
International Fixed Income
Investments......................... 25 78 133 283
Emerging Markets Equity Investments.. 31 96 163 341
High Yield Investments............... 27 84 143 303
</TABLE>
The purpose of this example is to assist an investor in understanding various
costs and expenses that an investor in a Portfolio will bear directly or
indirectly. This example should not be considered to be a representation of the
past or future expenses; actual expenses may be greater or less than those
shown. Moreover, although the table assumes a 5% annual return, a Portfolio's
actual performance will vary and may result in an actual return greater or less
than 5%.
6
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FINANCIAL HIGHLIGHTS
The following information includes unaudited information for the six month
period ended February 28, 1998 and for the three years ended August 31, 1997
has been audited by KPMG Peat Marwick LLP, independent auditors, whose report
thereon appears in the Trust's Annual Report dated August 31, 1997. The
following information for each of the fiscal years or periods in the three-
year period ended August 31, 1994 has been audited by other independent
auditors. This information should be read in conjunction with the financial
statements and related notes that also appear in the Trust's Annual Report
dated August 31, 1997, which is available upon request and incorporated by
reference into the Statement of Additional Information.
GOVERNMENT MONEY INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------
1998(1) 1997 1996 1995 1994 1993 1992*
-------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, Begin-
ning of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------
Net investment in-
come#................. 0.02 0.05 0.05 0.05 0.03 0.03 0.03
Dividends from net in-
vestment income....... (0.02) (0.05) (0.05) (0.05) (0.03) (0.03) (0.03)
-------- -------- -------- -------- -------- -------- -------
NET ASSET VALUE, End of
Year................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== =======
Total Return++.......... 2.50%++++ 4.98% 5.02% 5.24% 3.10% 2.76% 2.72%
======== ======== ======== ======== ======== ======== =======
NET ASSETS, End of Year
(in 000's)............. $459,378 $388,713 $278,162 $241,590 $184,656 $84,034 $30,353
Ratios to Average Net
Assets:
Expenses+.............. 0.60%** 0.60% 0.60% 0.60% 0.55% 0.50% 0.49%**
Net investment income.. 5.01** 4.91% 4.93% 5.14% 3.16% 2.71% 3.37%**
- --------
(1) For the six months ended February 28, 1998 (unaudited).
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized expense ratios before fees waived and/or expenses reimbursed by
the Agents, for the years ended August 31, 1997, 1996, 1995, 1994, and 1993
and the period ended August 31, 1992 were 0.64%, 0.72%, 0.74%, 0.84%, 1.39%
and 2.48%, respectively.
++ Total return represents aggregate total return for the period indicated.
# Net investment income before fees waived and/or expenses reimbursed for the
years ended August 31, 1997, 1996, 1995, 1994 and 1993 and the period ended
August 31, 1992 were $0.04, $0.04, $0.00, $0.00, $0.01 and $0.02,
respectively.
++++ Total return is not annualized, as it may not be representative of the
total return for the year.
INTERMEDIATE FIXED INCOME INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------
1998(1) 1997 1996 1995 1994 1993 1992*
-------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, Begin-
ning of Year........... $ 8.06 $ 7.92 $ 8.10 $ 7.92 $ 8.58 $ 8.25 $ 8.00
-------- -------- -------- -------- -------- -------- -------
Income (loss) from oper-
ations:
Net investment
income#............... 0.24 0.50 0.50 0.50 0.47 0.51 0.34
Net realized and
unrealized
gain/(loss)........... 0.09 0.14 (0.17) 0.16 (0.56) 0.33 0.25
-------- -------- -------- -------- -------- -------- -------
Total Income (Loss) From
Operations............. 0.33 0.64 0.33 0.66 (0.09) 0.84 0.59
-------- -------- -------- -------- -------- -------- -------
Less Distributions From:
Net investment income.. (0.26) (0.50) (0.51) (0.48) (0.50) (0.48) (0.34)
Net realized gains..... -- -- -- -- (0.06) (0.03) --
Capital................ -- -- -- -- (0.01) -- --
-------- -------- -------- -------- -------- -------- -------
Total Distributions..... (0.26) (0.50) (0.51) (0.48) (0.57) (0.51) (0.34)
======== ======== ======== ======== ======== ======== =======
NET ASSET VALUE, End of
Year................... $ 8.13 $ 8.06 $ 7.92 $ 8.10 $ 7.92 $ 8.58 $ 8.25
======== ======== ======== ======== ======== ======== =======
Total Return++.......... 4.14%++++ 8.23% 4.08% 8.70% (1.13)% 10.59% 7.53%
======== ======== ======== ======== ======== ======== =======
NET ASSETS, End of Year
(in 000's)............. $479,182 $384,094 $296,053 $246,323 $223,548 $140,580 $58,545
Ratios to Average Net
Assets:
Expenses+.............. 0.71%** 0.73% 0.73% 0.80% 0.80 % 0.80% 0.79%**
Net investment income.. 5.96** 6.19% 5.78% 6.40% 5.77 % 5.94% 6.00%**
Portfolio turnover
rate................... 22% 118% 98% 98% 86 % 92% 169%
</TABLE>
- --------
(1) For the six months ended February 28, 1998 (unaudited).
++ Total return is not annualized, as it may not be representative of the
total return for the year.
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized operating expense ratios before fees waived for the year ended
August 31, 1993 and the period ended August 31, 1992 were 0.88% and 1.30%,
respectively.
++++ Total return represents aggregate total return for the period indicated.
# Net investment income before fees waived by the Agents, for the year ended
August 31, 1993 and the period ended August 31, 1992 was $0.50 and $0.31,
respectively.
7
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
LONG-TERM BOND INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------
1998(1) 1997 1996 1995 1994 1993 1992*
-------- -------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, Begin-
ning of Year........... $ 8.26 $ 7.87 $ 8.23 $ 7.86 $ 8.70 $ 8.26 $ 8.00
-------- -------- -------- -------- ------- ------- -------
Income (Loss) From Oper-
ations:
Net investment income#. 0.26 0.53 0.51 0.45 0.38 0.47 0.31
Net realized and
unrealized
gain/(loss)........... 0.42 0.46 (0.41) 0.36 (0.75) 0.42 0.26
-------- -------- -------- -------- ------- ------- -------
Total Income (Loss) from
Operations............. 0.68 0.99 0.10 0.81 (0.37) 0.89 0.57
Less Distributions From:
Net investment income.. (0.26) (0.59) (0.46) (0.44) (0.41) (0.45) (0.31)
Net realized gains..... -- -- -- -- (0.06) -- --
Capital................ -- (0.01) -- -- (0.00)@ -- --
-------- -------- -------- -------- ------- ------- -------
Total Distributions..... (0.26) (0.60) (0.46) (0.44) (0.47) (0.45) (0.31)
-------- -------- -------- -------- ------- ------- -------
NET ASSET VALUE, End of
Year................... $ 8.68 $ 8.26 $ 7.87 $ 8.23 $ 7.86 $ 8.70 $ 8.26
======== ======== ======== ======== ======= ======= =======
Total Return++.......... 8.43%++++ 12.93% 1.11% 10.71% (3.93)% 11.08% 7.37%
======== ======== ======== ======== ======= ======= =======
NET ASSETS, End of Year
(in 000's)............. $165,458 $183,051 $155,910 $137,545 $94,628 $64,734 $34,986
Ratios to Average Net
Assets:
Expenses+.............. 0.80%** 0.78% 0.80% 0.80% 0.80 % 0.80% 0.79%**
Net investment income.. 6.03** 6.54% 6.18% 5.80% 5.34 % 5.40% 5.69%**
Portfolio turnover rate. 26% 34% 125% 62% 43 % 35% 4%
</TABLE>
- --------
(1) For the six months ended February 28, 1998 (unaudited).
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized expense ratios before fees waived and/or expenses reimbursed by
the Agents, for the years ended August 31, 1995, 1994 and 1993 and the
period ended August 31, 1992 were 0.93%, 0.95%, 1.09% and 1.91%,
respectively.
++ Total return represents aggregate total return for the period indicated.
# Net investment income before fees waived and/or expense reimbursed by the
Agents, for the years ended August 31, 1995, 1994 and 1993 and the period
ended August 31, 1992 were $0.44, $0.37, $0.45 and $0.25, respectively.
@ Amount represents less than $/0/./0//1/ per portfolio share.
++++ Total return is not annualized, as it may not be representative of the
total return for the year.
MUNICIPAL BOND INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------
1998(1) 1997 1996 1995 1994 1993 1992*
------- -------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, Begin-
ning of Year........... $ 8.62 $ 8.26 $ 8.27 $ 8.06 $ 8.85 $ 8.25 $ 8.00
------- -------- -------- -------- ------- ------- -------
Income (Loss) From Oper-
ations:
Net investment income#. 0.18 0.38 0.38 0.40 0.40 0.41 0.30
Net realized and
unrealized
gain/(loss)........... 0.23 0.34 -- 0.21 (0.71) 0.62 0.25
------- -------- -------- -------- ------- ------- -------
Total Income (Loss) From
Operations............. 0.41 0.72 0.38 0.61 (0.31) 1.03 0.55
Less Distributions From:
Net investment income.. (0.19) (0.36) (0.39) (0.40) (0.40) (0.41) (0.30)
Net realized gains..... -- -- -- (0.00) (0.05) (0.02) --
Capital................ -- -- -- -- (0.03) -- --
------- -------- -------- -------- ------- ------- -------
Total Distributions..... (0.19) (0.36) (0.39) (0.40) (0.48) (0.43) (0.30)
------- -------- -------- -------- ------- ------- -------
NET ASSET VALUE, End of
Year................... $ 8.84 $ 8.62 $ 8.26 $ 8.27 $ 8.06 $ 8.85 $ 8.25
======= ======== ======== ======== ======= ======= =======
Total Return++.......... 4.82%++++ 8.88% 4.62% 7.86% (3.78)% 12.94% 7.06%
======= ======== ======== ======== ======= ======= =======
NET ASSETS, End of Year
(in 000's)............. $66,444 $ 52,024 $ 46,485 $ 45,356 $56,625 $47,811 $21,795
Ratios to Average Net
Assets:
Expenses+.............. 0.80%** 0.80% 0.80% 0.80% 0.80 % 0.80% 0.79%**
Net investment income.. 4.29** 4.50% 4.59% 4.99% 4.59 % 4.76% 4.71%**
Portfolio turnover rate. 9% 31% 29% 49% 132 % 15% 76%
</TABLE>
- --------
(1) For the six months ended February 28, 1998 (unaudited).
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized expense ratios before fees waived and/or expenses reimbursed by
the Agents, for the years ended August 31, 1997, 1996 1995, 1994 and 1993
and the period ended August 31, 1992 were 0.83%, 1.02%, 1.04%, .93%, 1.02%
and 1.66%, respectively.
++ Total return represents aggregate total return for the period indicated.
# Net investment income before fees waived and/or expenses reimbursed by the
Agents, for the years ended August 31, 1997, 1996, 1995, 1994 and 1993 and
the period ended August 31, 1992 were $0.38 $0.36, $0.38, $0.39, $0.39 and
$0.24, respectively.
@ Amount represents less than $0.01 per portfolio share.
++++ Total return is not annualized, as it may not be representative of the
total return for the year.
8
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
MORTGAGE BACKED INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------
1998(1) 1997 1996 1995 1994 1993 1992*
-------- -------- -------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, Begin-
ning of Year........... $ 7.96 $ 7.74 $ 7.91 $ 7.69 $ 8.21 $ 8.19 $ 8.00
-------- -------- -------- ------- -------- ------- -------
Income From Operations:
Net investment income#. 0.23 0.48 0.48 0.51 0.41 0.53 0.40
Net realized and
unrealized
gain/(loss)........... 0.14 0.25 (0.14) 0.22 (0.41) 0.00@ 0.19
-------- -------- -------- ------- -------- ------- -------
Total Income From Opera-
tions.................. 0.37 0.73 0.34 0.73 0.00 0.53 0.59
Less Distributions From:
Net investment income.. (0.24) (0.51) (0.48) (0.49) (0.41) (0.42) (0.40)
Net realized gains..... -- -- -- -- (0.01) (0.04) --
Capital................ -- -- (0.03) (0.02) (0.10) (0.05) --
-------- -------- -------- ------- -------- ------- -------
Total Distributions..... (0.24) (0.51) (0.51) (0.51) (0.52) (0.51) (0.40)
-------- -------- -------- ------- -------- ------- -------
NET ASSET VALUE, End of
Year................... $ 8.09 $ 7.96 $ 7.74 $ 7.91 $ 7.69 $ 8.21 $ 8.19
======== ======== ======== ======= ======== ======= =======
Total Return++.......... 4.70 %++++ 9.69 % 4.37 % 9.96 % (0.20)% 6.68 % 7.56 %
======== ======== ======== ======= ======== ======= =======
NET ASSETS, End of Year
(in 000's)............. $153,828 $136,586 $120,945 104,789 $120,427 $94,421 $35,694
Ratios to Average Net
Assets:
Expenses+.............. 0.80 %** 0.80 % 0.80 % 0.80 % 0.80 % 0.80 % 0.79 %**
Net investment income.. 5.81 %** 6.08 % 6.09 % 6.85 % 6.38 % 6.53 % 6.55 %**
Portfolio turnover rate. 114 % 94 % 23 % 30 % 53 % 93 % 35 %
</TABLE>
- --------
(1) For the six months ended February 28, 1998 (unaudited).
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized expense ratios before fees waived and/or expenses reimbursed by
the Agents, for the years ended August 31, 1997, 1996, 1995, 1994 and 1993
and the period ended August 31, 1992 were 0.93%, 0.94%, 1.09%, 1.06%, 1.13%
and 1.66%, respectively.
++ Total return represents aggregate total return for the period indicated.
# Net investment income before fees waived and/or expenses reimbursed by the
Agents, for the years ended August 31, 1997, 1996, 1995, 1994 and 1993 and
the period ended August 31, 1992 were $0.47, $0.47, $0.49, $0.39, $0.49 and
$0.35, respectively.
@ Amount represents less than $0.01 per Portfolio share.
++++ Total return is not annualized, as it may not be representative of the
total return for the year.
BALANCED INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------------
1998(1) 1997 1996 1995 1994 1993*
------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, Begin-
ning of Year........... $ 12.01 $ 10.00 $ 9.37 $ 8.63 $ 8.41 $ 8.00
------- ------- ------- ------- ------- ------
Income From Operations:
Net investment income#. 0.14 0.27 0.29 0.26 0.21 0.09
Net realized and
unrealized gain....... 0.87 2.27 0.95 0.81 0.16 0.42
------- ------- ------- ------- ------- ------
Total Income From Opera-
tions.................. 1.01 2.54 1.24 1.07 0.37 0.51
Less Distributions From:
Net investment income.. (0.12) (0.27) (0.28) (0.29) (0.15) (0.10)
Net realized gains..... (0.57) (0.26) (0.33) (0.04) -- --
Capital................ -- -- -- -- -- (0.00)@
------- ------- ------- ------- ------- ------
Total Distributions..... 0.69 (0.53) (0.61) (0.33) (0.15) (0.10)
------- ------- ------- ------- ------- ------
NET ASSET VALUE, End of
Year................... $ 12.33 $ 12.01 $ 10.00 $ 9.37 $ 8.63 $ 8.41
======= ======= ======= ======= ======= ======
Total Return++.......... 8.61 %++++ 26.05 % 13.60 % 12.76 % 4.62 % 6.35 %
======= ======= ======= ======= ======= ======
NET ASSETS, End of Year
(in 000's)............. $82,356 $89,789 $50,281 $30,268 $14,940 $5,258
Ratios to Average Net
Assets:
Expenses+.............. 0.96 %** 1.00 % 1.00 % 1.00 % 1.00 % 1.00 %**
Net investment income.. 2.11 %** 2.49 % 2.85 % 3.28 % 2.66 % 2.67 %**
Portfolio turnover rate. 55 % 67 % 47 % 47 % 43 % 10 %
Average commissions per
share paid on equity
transactions##......... $ 0.06 $ 0.06 -- -- --
</TABLE>
- --------
(1) For the six months ended February 28, 1998 (unaudited).
* The Portfolio commenced operations on February 16, 1993.
** Annualized.
+ Annualized expense ratios before fees waived and/or expenses reimbursed by
the Agents, for the year ended August 31, 1997, 1996, 1995, and 1994 and
the period ended August 31, 1993 were 1.02%, 1.26%, 1.75%, 2.01%, 5.55%,
respectively.
++ Total return represents aggregate total return for the period indicated.
# Net investment income/(loss) before fees waived and/or expenses reimbursed
by the Agents, for the years ended August 31, 1997, 1996, 1995 and 1994 and
the period ended August 31, 1993 were $0.27, $0.26, $0.20, $0.13 and
$(0.06), respectively.
@ Amount represents less than $0.01 per Portfolio share.
## As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++++ Total return is not annualized, as it may not be representative of the
total return for the year.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
LARGE CAPITALIZATION VALUE EQUITY
INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------------------------------------------------------------
1998(1) 1997 1996 1995++ 1994 1993 1992*
------- ---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
Beginning of Year...... $14.91 $ 11.55 $ 10.42 $ 9.39 $ 9.35 $ 8.77 $ 8.00
------ ---------- ---------- ---------- -------- -------- --------
Income From Operations:
Net investment income#. 0.09 0.23 0.26 0.27 0.17 0.25 0.09
Net realized and
unrealized gain....... 1.87 4.09 1.25 1.16 0.02 0.54 0.68
------ ---------- ---------- ---------- -------- -------- --------
Total Income From
Operations............. 1.96 4.32 1.51 1.43 0.19 0.79 0.77
Less Distributions From:
Net investment income.. (0.11) (0.34) (0.24) (0.24) (0.15) (0.14) --
Net realized gains..... (2.76) (0.62) (0.14) (0.16) 0.00@ (0.07) --
------ ---------- ---------- ---------- -------- -------- --------
Total Distributions..... (2.87) (0.96) (0.38) (0.40) (0.15) (0.21) --
------ ---------- ---------- ---------- -------- -------- --------
NET ASSET VALUE, End of
Year................... $14.00 $ 14.91 $ 11.55 $ 10.42 $ 9.39 $ 9.35 $ 8.77
====== ========== ========== ========== ======== ======== ========
Total Return+........... 14.04 %++++ 38.98 % 14.75 % 16.14 % 2.09 % 9.25 % 9.63 %
====== ========== ========== ========== ======== ======== ========
NET ASSETS, End of Year
(in 000's)............. $1,930 $1,934,747 $1,512,451 $1,070,037 $832,138 $562,507 $197,695
Ratios to Average Net
Assets:
Expenses+++............ 0.79 %** 0.78 % 0.80 % 0.83 % 0.88 % 0.95 % 1.24 %**
Net investment income.. 1.31 %** 1.70 % 2.31 % 2.93 % 2.57 % 2.88 % 3.24 %**
Portfolio turnover rate. 29 % 70 % 24 % 21 % 108 % 47 % 12 %
Average commissions per
share paid on equity
transactions##......... $ 0.05 $ 0.05 $ 0.06 -- -- -- --
</TABLE>
- --------
(1) For the six months ended February 28, 1998 (unaudited).
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Total return represents aggregate total return for the period indicated.
++ Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since the use of the undistributed net investment income method does not
accord with results of operations.
+++ Annualized operating expense ratios before fee waivers by the Agents, for
the years ended August 31, 1995 and 1994 were 0.93% and 0.92%,
respectively.
@ Amount represents less than $0.01 per portfolio share.
# Net investment income before fee waived by the Agents, for the years ended
August 31, 1995 and 1994 were $0.26 and $0.17, respectively.
## As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++++ Total return is not annualized, as it may not be representative of the
total return for the year.
LARGE CAPITALIZATION GROWTH INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------------------------------------------------------------
1998(1) 1997 1996 1995 1994 1993+++ 1992*
------- ---------- ---------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, Begin-
ning of Year........... $17.27 $ 13.10 $ 12.13 $ 10.00 $ 9.76 $ 8.88 $ 8.00
------ ---------- ---------- -------- -------- -------- -------
Income From Operations:
Net investment income#. 0.04 0.07 0.07 0.09 0.03 0.00 @ 0.01
Net realized and
unrealized gain....... 2.82 4.72 1.46 2.13 0.21 0.89 0.87
------ ---------- ---------- -------- -------- -------- -------
Total Income From Opera-
tions.................. 2.86 4.79 1.53 2.22 0.24 0.89 0.88
Less Distributions From:
Net investment income.. (0.08) (0.08) (0.06) (0.08) -- (0.01) --
Net realized gains..... (1.24) (0.54) (0.50) (0.01) -- -- --
Capital................ -- -- -- -- -- (0.00)@ --
------ ---------- ---------- -------- -------- -------- -------
Total Distributions..... (1.32) (0.62) (0.56) (0.09) -- (0.01) --
------ ---------- ---------- -------- -------- -------- -------
NET ASSET VALUE, End of
Year .................. $18.81 $ 17.27 $ 13.10 $ 12.13 $ 10.00 $ 9.76 $ 8.88
====== ========== ========== ======== ======== ======== =======
Total Return++.......... 17.22 %++++ 37.47 % 12.89 % 22.30 % 2.46 % 10.00 % 11.00 %
====== ========== ========== ======== ======== ======== =======
NET ASSETS, End of Year
(in 000's) ............ $1,930 $1,844,817 $1,205,417 $782,394 $457,588 $238,256 $85,401
Ratios to Average Net
Assets:
Expenses+.............. 0.62 %** 0.69 % 0.83 % 0.88 % 0.98 % 1.12 % 1.24 %**
Net investment
income/(loss)......... 0.39 %** 0.50 % 0.63 % 0.98 % 0.39 % (0.04)% 0.31 %**
Portfolio turnover rate. 24 % 65 % 40 % 38 % 104 % 47 % 19 %
Average commissions per
share paid on equity
transactions##......... $ 0.04 $ 0.06 -- -- -- --
</TABLE>
- --------
(1) For the six months ended February 28, 1998 (unaudited).
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized operating expense ratios before fees waived by the Agents, for
the years ended August 31, 1995 and 1994 and period ended August 31, 1992
were 0.98%, 1.02% and 1.42%, respectively.
++ Total return represents aggregate total return for the period indicated.
+++ Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the
period since the use of the undistributed net investment income method
does not accord with results of operations.
# Net investment income before fees waived by the Agents, for the years ended
August 31, 1995 and 1994 and for the period ended August 31, 1992 were
$0.09, $0.03 and $0.00, respectively.
@ Amount represents less than $0.01 per portfolio share.
## As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++++ Total return is not annualized, as it may not be representative of the
total return for the year.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
SMALL CAPITALIZATION VALUE EQUITY
INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------------
1998(/1/) 1997 1996 1995 1994 1993 1992*
--------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
Beginning of Year...... $ 14.45 $ 11.11 $ 10.01 $ 9.03 $ 9.94 $ 8.68 $ 8.00
-------- -------- -------- -------- -------- -------- -------
Income (Loss) from
Operations:
Net income#............ 0.06 0.19 0.16 0.15 0.08 0.06 0.03
Net realized and
unrealized
gain/(loss)........... 1.90 4.22 1.08 0.95 (0.40) 1.31 0.65
-------- -------- -------- -------- -------- -------- -------
Total Income (Loss) From
Operations............. 1.96 4.41 1.24 1.10 (0.32) 1.37 0.68
Less Distributions From:
Net investment income.. (0.13) (0.19) (0.14) (0.12) (0.07) (0.03) --
Net realized gains..... (1.72) (0.88) -- (0.00)@ (0.52) (0.08) --
-------- -------- -------- -------- -------- -------- -------
Total Distributions..... (1.85) (1.07) (0.14) (0.12) (0.59) (0.11) --
-------- -------- -------- -------- -------- -------- -------
NET ASSET VALUE, End of
Year................... $ 14.56 $ 14.45 $ 11.11 $ 10.01 $ 9.03 $ 9.94 $ 8.68
======== ======== ======== ======== ======== ======== =======
Total Return++.......... 14.23 %++++ 42.40 % 12.48 % 12.50 % (3.30)% 15.74 % 8.50%
======== ======== ======== ======== ======== ======== =======
NET ASSETS, End of Year
(in 000's)............. $920,740 $622,372 $478,884 $340,306 $342,388 $183,051 $93,458
Ratios to Average Net
Assets
Expenses............... 0.87 %** 0.90 % 0.95 % 1.11 % 1.06 % 1.11 % 1.24%**
Net investment income.. 1.42 %** 1.62 % 1.52 % 1.54 % 1.12 % 0.82 % 0.99%**
Portfolio turnover rate. 16 % 53 % 39 % 115 % 65 % 70 % 20%
Average commissions per
share paid on equity
transactions##......... $ 0.04 $ 0.04 $ 0.04 -- -- -- --
</TABLE>
- --------
(1) For the six months ended February 28, 1998 (unaudited).
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized operating expense ratios before fees waived by the Agents, for
the year ended August 31, 1995 and for the period ended August 31, 1992
were 1.13% and 1.40%, respectively.
++ Total return represents aggregate total return for the period indicated.
# Net investment income before fees waived by the Agents, for the year ended
August 31, 1995 and for the period ended August 31, 1992 were $0.15 and
$0.02, respectively.
@ Amount represents $0.01 per portfolio share.
## As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++++ Total return is not annualized, so it may not be representative of the
total return for the year.
SMALL CAPITALIZATION GROWTH INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------
1998(/1/) 1997 1996 1995+++ 1994+++ 1993+++ 1992*
--------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
Beginning of Year...... $18.29 $ 17.79 $ 17.19 $ 12.50 $ 11.21 $ 7.99 $ 8.00
------ -------- -------- -------- -------- ------- -------
Income (Loss) From
Operations:
Net investment loss#... (0.03) (0.06) (0.08) (0.05) (0.09) (0.07) (0.01)
Net realized and
unrealized gain....... 1.07 2.87 3.36 4.81 1.56 3.29 --
------ -------- -------- -------- -------- ------- -------
Total Income (Loss) From
Operations............. 1.04 2.81 3.28 4.76 1.47 3.22 (0.01)
Less Distributions From:
Net realized capital
gains................. (1.16) (2.31) (2.68) (0.07) (0.14) -- --
Capital................ -- -- -- -- (0.04) -- --
------ -------- -------- -------- -------- ------- -------
Total Distributions..... (1.16) (2.31) (2.68) (0.07) (0.18) -- --
------ -------- -------- -------- -------- ------- -------
NET ASSET VALUE, End of
Year................... $18.17 $ 18.29 $ 17.79 $ 17.19 $ 12.50 $ 11.21 $ 7.99
====== ======== ======== ======== ======== ======= =======
Total Return++.......... 6.08 %++++ 17.53 % 21.33 % 38.25 % 13.18 % 40.30 % (0.13)%
====== ======== ======== ======== ======== ======= =======
NET ASSETS, End of Year
(in 000's)............. $1,151 $777,321 $494,323 $315,033 $180,175 $75,498 $22,145
Ratios to Average Net
Assets:
Expenses+.............. 1.00 %** 0.90 % 1.00 % 1.14 % 1.20 % 1.25 % 1.24 %**
Net investment loss.... (0.40)%** (0.39)% (0.49)% (0.35)% (0.78)% (0.72)% (0.25)%**
Portfolio turnover rate. 38 % 81 % 83 % 174 % 94 % 97 % 35 %
Average commissions per
share paid on equity
transactions##......... $ 0.03 $ 0.03 $ 0.08 -- -- -- --
</TABLE>
- --------
(1) For the six months ended February 28, 1998 (unaudited).
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized operating expense ratios before fees waived and/or expenses
reimbursed by the Agents, for the years ended August 31, 1995 and 1994 and
the period ended August 31, 1992 were 1.16%, 1.49% and 2.61%,
respectively.
++ Total return represents aggregate total return for the period indicated.
+++ Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the
period since the use of the undistributed net investment income method
does not accord with results of operations.
# Net investment loss before fees waived and/or expenses reimbursed by the
Agents, for the years ended August 31, 1995, and 1994 and the period ended
August 31, 1992 were $0.05, $0.09 and $0.05, respectively.
## As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++++ Total return is not annualized, so it may not be representative of the
total return for the year.
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
INTERNATIONAL EQUITY INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------------------------------------
1998(/1/) 1997 1996 1995 1994+++ 1993 1992*
--------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
Beginning of Year...... $10.63 $ 10.49 $ 10.50 $ 10.86 $ 9.57 $ 7.76 $ 8.00
------ ---------- -------- -------- -------- -------- --------
Income (Loss) From
Operations:
Net investment income#. 0.03 0.09 -- 0.05 0.02 0.05 0.03
Net realized and
unrealized
gain/(loss)........... 0.73 0.87 0.44 (0.09) 1.54 1.79 (0.27)
------ ---------- -------- -------- -------- -------- --------
Total Income (Loss) From
Operations............. 0.76 0.96 0.44 (0.04) 1.56 1.84 (0.24)
------ ---------- -------- -------- -------- -------- --------
Less Distributions From:
Net investment income.. (0.18) (0.12) (0.17) -- (0.03) (0.03) --
Net realized gains..... (0.11) (0.70) (0.28) (0.32) (0.24) -- --
------ ---------- -------- -------- -------- -------- --------
Total Distributions..... (0.29) (0.82) (0.45) (0.32) (0.27) (0.03) --
------ ---------- -------- -------- -------- -------- --------
NET ASSET VALUE, End of
Year (in 000's)........ $11.10 $ 10.63 $ 10.49 $ 10.50 $ 10.86 $ 9.57 $ 7.76
====== ========== ======== ======== ======== ======== ========
Total Return++.......... 7.51 %++++ 9.53 % 4.23 % (0.18)% 16.74 % 23.73 % (3.00)%
====== ========== ======== ======== ======== ======== ========
NET ASSETS, End of Year
(in 000's)............. $1,385 $1,136,444 $843,730 $663,130 $594,965 $270,302 $115,779
Ratios to Average Net
Assets:
Expenses+.............. 0.90 %** 0.97 % 1.00 % 1.19 % 1.19 % 1.32 % 1.50 %**
Net investment income.. 0.36 %** 0.70 % (0.12)% 0.43 % 0.23 % 0.61 % 1.08 %**
Portfolio turnover rate. 33 % 32 % 50 % 28 % 33 % 46 % 10 %
Average commissions per
share paid on equity
transactions##......... $ 0.02 $ 0.02 $ 0.02 -- -- -- --
</TABLE>
- --------
(1) For the six months ended February 28, 1998 (unaudited).
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized expense ratio before fees waived by the Agents, for the period
ended August 31, 1992 was 1.52%.
++ Total return represents aggregate total return for the period indicated.
+++ Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since use of the undistributed net investment income method does not accord
with results of operations.
# Net investment income before fees waived by the Agents, for the period
ended August 31, 1992 was $0.03.
## As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++++ Total return is not annualized, as it may not be representative of the
total return for the year.
INTERNATIONAL FIXED INCOME INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------------
1998(/1/) 1997 1996 1995 1994 1993 1992*
--------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
Beginning of Year...... $ 8.21 $ 9.11 $ 9.01 $ 8.17 $ 8.86 $ 8.71 $ 8.00
-------- -------- -------- -------- -------- -------- -------
Income From Operations:
Net investment income#. 0.25 0.51 0.55 0.56 0.40 0.51 0.39
Net realized and
unrealized
gain/(loss)........... 0.18 (0.62) 0.49 0.84 (0.32) 0.20 0.69
-------- -------- -------- -------- -------- -------- -------
Total Income/(Loss) From
Operations............. 0.43 (0.11) 1.04 1.40 0.08 0.71 1.08
Less Distributions From:
Net investment income.. (0.24) (0.55) (0.94) (0.56) (0.65) (0.55) (0.37)
Net realized gains..... (0.23) (0.24) -- -- (0.12) (0.01) --
Capital................ -- -- -- (0.00)@ -- --
-------- -------- -------- -------- -------- -------- -------
Total Distributions..... (0.47) (0.79) (0.94) (0.56) (0.77) (0.56) (0.37)
-------- -------- -------- -------- -------- -------- -------
NET ASSET VALUE, End of
Year................... $ 8.17 $ 8.21 $ 9.11 $ 9.01 $ 8.17 $ 8.86 $ 8.71
======== ======== ======== ======== ======== ======== =======
Total Return++.......... 5.33 % (1.52)% 12.05 % 17.66 % 1.00 % 8.67 % 13.93 %
======== ======== ======== ======== ======== ======== =======
NET ASSETS, End of Year
(in 000's)............. $139,360 $125,610 $129,410 $105,884 $116,929 $100,362 $39,182
Ratios to Average Net
Assets:
Expenses+.............. 0.96 %** 0.99 % 1.02 % 0.95 % 0.95 % 0.95 % 0.95 %**
Net investment income.. 5.58 %** 5.87 % 6.34 % 6.50 % 5.54 % 6.03 % 6.34 %**
Portfolio turnover rate. 127 % 251 % 211 % 307 % 358 % 251 % 106 %
</TABLE>
- --------
(1) For the six months ended February 28, 1998 (unaudited).
* The Portfolio commenced operations on November 18, 1991.
** Annualized.
+ Annualized expense ratios before fees waived and/or expenses reimbursed by
the Agents, for the years ended August 31, 1995, 1994 and 1993 and the
period ended August 31, 1992 were 1.18%, 1.08%, 1.22% and 1.87%,
respectively.
++ Total return represents aggregate total return for the period indicated.
# Net investment income before fees waived and/or expenses reimbursed by the
Agents, for the years ended August 31, 1995, 1994 and 1993 and the period
ended August 31, 1992 were $0.54, $0.39, $0.49 and $0.33, respectively.
@ Amount represents less than $0.01 per Portfolio share.
++++ Total return is not annualized, as it may not be representative of the
total return for the year.
12
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
EMERGING MARKETS EQUITY INVESTMENTS
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------------------------------
1998(1) 1997 1996 1995+++ 1994*
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, Begin-
ning of Year........... $ 9.31 $ 8.50 $ 7.85 $ 9.49 $ 8.00
Income (Loss) From Oper-
ations:
Net investment
income/(loss)#....... -- 0.04 0.03 0.01 (0.02)
Net realized and
unrealized gain
(loss)............... (1.46) 0.79 0.62 (1.45) 1.51
-------- -------- ------- ------- -------
Total Income (Loss) From
Operations............. (1.46) 0.83 0.65 (1.44) 1.49
-------- -------- ------- ------- -------
Less Distributions From:
Net investment income. (0.10) (0.01)
Net realized gains.... (0.46) (0.01) -- (0.20) --
-------- -------- ------- ------- -------
Total Distributions..... (0.56) (0.02) -- (0.20) --
-------- -------- ------- ------- -------
NET ASSET VALUE, End of
Year................... $ 7.29 $ 9.31 $ 8.50 $ 7.85 $ 9.49
======== ======== ======= ======= =======
Total Return++.......... (15.73)%++++ 9.88 % 8.28% (15.13)% 18.63 %
======== ======== ======= ======= =======
NET ASSETS, End of Year
(in 000's)............. $240,405 $226,280 $97,489 $59,333 $36,365
Ratios to average net
assets:
Expenses+............. 1.55 %** 1.60 % 1.84% 1.75 % 1.72 %**
Net investment
income/(loss)........ 0.20 %** 0.39 % 0.26% 0.15 % (0.42)%**
Portfolio turnover rate. 63 % 105 % 106% 89 % 16 %
Average commissions per
share paid on equity
transactions##......... $ 0.00@@ $ 0.00@@ $ 0.00@@ -- --
</TABLE>
- --------
(1) For the six months ended February 28, 1998 (unaudited).
* The Portfolio commenced operations on April 21, 1994.
** Annualized.
+ Annualized expense ratios before fees waived by the Agents for the years
ended August 31, 1996 and 1995 and for the period ended August 31, 1994
were 1.97%, 1.96% and 2.56%, respectively.
++ Total return represents aggregate total return for the period indicated.
+++ Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the
period since use of the undistributed net investment income method does
not accord with the results of operations.
# Net investment income (loss) per share before fees waived by the Agents
for the years ended August 31, 1996 and 1995 and for the period ended
August 31, 1994 was $0.02, ($0.01) and ($0.04), respectively.
## As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
@@ Amount represents less than $0.01 per share.
++++ Total return is not annualized, as it may not be representative of the
total return for the year.
13
<PAGE>
OBJECTIVES AND POLICIES OF THE PORTFOLIOS
Set forth below is a description of the investment objectives and policies of
each Portfolio. There can be no assurance that any Portfolio will achieve its
investment objectives. Further information about the investment policies of
each Portfolio, including a list of those restrictions on its investment
activities that cannot be changed without shareholder approval, appears in the
Statement of Additional Information.
GOVERNMENT MONEY INVESTMENTS
Government Money Investments seeks, as its investment objective, to provide
maximum current income to the extent consistent with the maintenance of
liquidity and the preservation of capital by investing exclusively in short-
term securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities ("U.S. Government Securities") and repurchase agreements with
respect to those securities. The Portfolio may purchase securities on a when-
issued or delayed-delivery basis and may lend its portfolio securities. See
"Certain Securities, Investment Techniques and Risk Factors." The Portfolio
will invest only in securities that are purchased with and payable in U.S.
dollars and that have remaining maturities of 397 days or less at the time of
purchase. The Portfolio maintains a dollar-weighted average portfolio maturity
of 90 days or less. All securities purchased by the Portfolio, including
repurchase agreements, will present minimal credit risks in the opinion of the
Advisor acting under the supervision of the Trustees. The Portfolio follows
these policies in order to maintain a constant net asset value of $1.00 per
share, although there can be no assurance it can do so on a continuing basis.
The Portfolio is not insured or guaranteed by the U.S. Government. The yield
attained by the Portfolio may not be as high as that of other funds that invest
in lower quality or longer term securities.
INTERMEDIATE FIXED INCOME INVESTMENTS
Intermediate Fixed Income Investments seeks, as its investment objectives,
current income and reasonable stability of principal. The Portfolio seeks to
achieve its objectives through investment in high quality fixed income
securities. The average maturity of the securities held by the Portfolio may be
shortened, but not below three years, in order to preserve capital if the
Advisor anticipates a rise in interest rates. Conversely, the average maturity
may be lengthened, but not beyond ten years, to maximize returns if interest
rates are expected to decline.
The Portfolio invests in U.S. Government Securities, corporate bonds,
debentures, non-convertible fixed income preferred stocks, mortgage related
securities including collateralized mortgage obligations ("CMOs") and
government stripped mortgage related securities, asset-backed securities
("ABS"), Eurodollar certificates of deposit, Eurodollar bonds and Yankee bonds.
The securities held by the Portfolio are actively managed. The Portfolio limits
its investments to investment grade securities, which are securities rated
within the four highest categories established by Moody's Investors Service,
Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P"), and unrated
securities determined by the Advisor to be of comparable quality. See the
Appendix to the Statement of Additional Information for a description of
Moody's and S&P ratings and "Certain Securities, Investment Techniques and Risk
Factors--Medium and Lower Rated and Unrated Securities" for a description of
certain risks associated with securities in the fourth highest rating category.
The Portfolio also may attempt to hedge against unfavorable changes in interest
rates by entering into interest rate futures contracts and purchasing and
writing put and call options thereon. The Portfolio will not invest more than
25% of its assets in privately issued mortgage related securities. The
Portfolio also may engage in repurchase agreements, purchase temporary
investments, purchase securities on a when-issued basis and lend its portfolio
securities. See "Certain Securities, Investment Techniques and Risk Factors."
LONG-TERM BOND INVESTMENTS
Long-Term Bond Investments seeks, as its investment objective, total return
consisting of current income and appreciation of capital through investments in
fixed income securities without regard to remaining maturity. The average
maturity of the Portfolio's holdings may be shortened in order to preserve
capital if
14
<PAGE>
the Advisor anticipates a rise in interest rates, but, under normal
circumstances, at least 65% of the value of the Portfolio's net assets is
invested in bonds or debentures so that the average maturity of the portfolio
is at least 10 years. Conversely, the maturity may be lengthened to maximize
returns if interest rates are expected to decline.
The Portfolio invests in U.S. Government Securities, corporate bonds,
debentures, non-convertible fixed income preferred stocks, mortgage related
securities including CMOs and government stripped mortgage related securities
and other ABSs, Eurodollar certificates of deposit and Eurodollar bonds. The
Portfolio may invest up to 15% of its assets in "Yankee Bonds" or dollar-
denominated bonds sold in the United States by non-U.S. issuers. The securities
held by the Portfolio are actively managed. The Portfolio limits its
investments to securities that are considered to be "investment grade," that is
securities that are rated at least Bbb by Moody's or BBB by S&P and unrated
securities determined to be of comparable quality by the Advisor. The Portfolio
will not invest more than 25% of its assets in privately issued mortgage
related securities. The Portfolio may engage in repurchase agreements, purchase
temporary investments, purchase securities on a when-issued basis and lend its
portfolio securities. The Portfolio may attempt to hedge against unfavorable
changes in interest rates by entering into interest rate futures contracts and
purchasing and writing put and call options thereon. See "Certain Securities,
Investment Techniques and Risk Factors."
MUNICIPAL BOND INVESTMENTS
Municipal Bond Investments seeks, as its investment objective, a high level
of interest income that is excluded from federal income taxation to the extent
consistent with prudent investment management and the preservation of capital.
The Portfolio seeks to achieve its objective through investment in a
diversified portfolio of general obligation, revenue and private activity bonds
and notes that are issued by or on behalf of states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, or multi-state agencies
or authorities, the interest on which, in the opinion of counsel to the issuer
of the instrument, is excluded from gross income for federal income tax
purposes ("Municipal Obligations").
Portfolio composition generally covers a full range of maturities with broad
geographic and issuer diversification. The Portfolio may invest in private
activity bonds collateralized by letters of credit issued by banks having
stockholders' equity in excess of $100 million as of the date of their most
recent published statement of financial condition. The Portfolio may also
invest in variable rate Municipal Obligations, most of which permit the holder
thereof to receive the principal amount on demand upon seven days' notice. The
Portfolio limits its investments to Municipal Obligations that are rated at
least A, MIG-2 or Prime 2 by Moody's or A, SP-2 or A-2 by S&P and unrated
securities determined to be of comparable quality by the Advisor.
It is a fundamental policy of the Portfolio that under normal circumstances
at least 80% of its assets will be invested in Municipal Obligations and at
least 65% of its assets will be invested in bonds. The Portfolio will not
invest more than 25% of its total assets in Municipal Obligations whose issuers
are located in the same state or more than 25% of its total assets in Municipal
Obligations that are secured by revenues from entities in any one of the
following categories: hospitals and health facilities; ports and airports; or
colleges and universities. The Portfolio will also not invest more than 25% of
its assets in private activity bonds of similar projects. The Portfolio may,
however, invest more than 25% of its total assets in Municipal Obligations of
one or more of the following types: turnpikes and toll roads; public housing
authorities, general obligations of states and localities; state and local
housing finance authorities; municipal utilities systems; bonds that are
secured or backed by the U.S. Treasury or other U.S. government guaranteed
securities; and pollution control bonds.
The Portfolio may invest without limit in private activity bonds, although it
does not currently expect to invest more than 20% of its total assets in
private activity bonds. Dividends attributable to interest income on certain
types of private activity bonds issued after August 7, 1986 to finance
nongovernmental activities
15
<PAGE>
are a specific tax preference item for purposes of the federal individual and
corporate alternative minimum taxes. Dividends derived from interest income on
all Municipal Obligations are a component of the "current earnings" adjustment
item for purposes of the federal corporate alternative minimum tax.
When the Portfolio is maintaining a temporary defensive position, it may
invest in short-term investments, some of which may not be tax exempt.
Securities eligible for short-term investment by the Portfolio are tax exempt
notes of municipal issuers having, at the time of purchase, a rating within the
three highest grades of Moody's or S&P or, if not rated, having an issue of
outstanding Municipal Obligations rated within the three highest grades by
Moody's or S&P, and taxable short-term instruments having quality
characteristics comparable to those for Municipal Obligations. The Portfolio
may invest in temporary investments for defensive reasons in anticipation of a
market decline. At no time will more than 20% of the Portfolio's total assets
be invested in temporary investments unless the Portfolio has adopted a
defensive investment policy. The Portfolio will purchase tax exempt temporary
investments pending the investment of the proceeds from the sale of the
securities held by the Portfolio or from the purchase of the Portfolio's shares
by investors or in order to have highly liquid securities available to meet
anticipated redemptions. To the extent that the Portfolio holds temporary
investments, it may not achieve its investment objective. The Portfolio may
purchase securities on a when-issued basis. See "Certain Securities, Investment
Techniques and Risk Factors."
MORTGAGE BACKED INVESTMENTS
The primary investment objective of Mortgage Backed Investments is high
current income and its secondary objective is capital appreciation, each to the
extent consistent with the protection of capital. The Portfolio seeks to
achieve these objectives by investing, under normal circumstances, at least 65%
of its assets in mortgage related securities.
The mortgage related securities in which the Portfolio invests represent
pools of mortgage loans assembled for sale to investors by various governmental
agencies, such as the Government National Mortgage Association ("GNMA") and
government related organizations, such as the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC")
as well as by private issuers, such as commercial banks, savings and loan
institutions, mortgage bankers and private mortgage insurance companies. The
Portfolio may also invest in government stripped mortgage related securities
and CMOs collateralized by mortgage loans or mortgage pass-through
certificates. Under current market conditions, the Portfolio's holdings of
mortgage related securities may be expected to consist primarily of securities
issued by GNMA, FNMA and FHLMC. However, the composition of the Portfolio's
assets will vary from time to time based upon a determination by the Advisor of
how best to achieve the Portfolio's investment objectives taking into account
such factors as the liquidity, yield and creditworthiness of various mortgage
related securities. Mortgage related securities held by the Portfolio will
generally be rated no lower than A by Moody's or S&P or, if not rated, will be
of equivalent investment quality as determined by the Advisor. Although up to
20% of the Portfolio's assets may be invested in securities rated as low as B
by Moody's or S&P (or, if unrated, judged by the Advisor to be of comparable
quality), a program of investments in securities rated below A will only be
made upon the concurrence of the Manager. In order to enhance current income,
the Portfolio may enter into forward roll transactions with respect to mortgage
related securities issued by GNMA, FNMA and FHLMC. The Portfolio may invest in
government stripped mortgage related securities issued and guaranteed by GNMA,
FNMA or FHLMC. The Portfolio will not invest more than 25% of its assets in
privately issued mortgage related securities. The Portfolio may engage in
repurchase agreements, purchase temporary investments, purchase securities on a
when-issued basis and lend its portfolio securities. The Portfolio may attempt
to hedge against unfavorable changes in interest rates by entering into
interest rate futures contracts and purchasing and writing put and call options
thereon. See "Certain Securities, Investment Techniques and Risk Factors."
HIGH YIELD INVESTMENTS
High Yield Investments seeks as its investment objective a high level of
current income by investing primarily in below investment grade debt
securities. Debt securities of less than investment grade, commonly referred to
as junk bonds, are considered "high risk" securities.
16
<PAGE>
The Portfolio invests under normal market conditions at least 65% of its
assets in a diversified portfolio of fixed-income securities rated below
investment grade by two or more nationally recognized statistical rating
organizations ("NRSROs") (i.e. rated lower than Baa by Moody's or lower than
BBB or lower by S&P) or unrated but deemed by the Advisor to be equivalent to
such lower-rated securities. The remainder of the Portfolio's assets may be
invested in investment grade fixed-income securities (i.e. securities rated at
least Baa by Moody's or BBB by S&P, or if unrated, deemed by the advisor to be
of comparable quality). The average duration of the Portfolio will vary within
a two to six year time frame depending on the Advisor's view of the potential
for total return offered by a particular strategy. The Portfolio may also
engage in hedging strategies involving equity options. See "Certain Securities
and Investment Techniques and Risk Factors--Purchasing Put and Call Options or
Securities."
An amount up to 10% of the Portfolio's assets may be invested in common stock
or other equity or equity-related securities, including convertible securities,
preferred stock, warrants and rights.
In addition, a portion of the Portfolio's assets are also expected to be
invested in foreign securities and the Portfolio may buy and sell foreign
currencies principally for the purpose of preserving the value of foreign
securities or in anticipation of purchasing foreign securities. See "Certain
Securities, Investment Techniques and Risk Factors--Foreign Securities."
Investments in high yield securities, while generally providing greater
potential opportunity for capital appreciation and higher yields than
investments in higher rated securities, also entail greater risk, including the
possibility of default or bankruptcy of the issuer of such securities. Risk of
default or bankruptcy may be greater in periods of economic uncertainty or
recession, as the issuers of high yield securities may be less able to
withstand general economic downturns. The Advisor seeks to reduce risk through
diversification, credit analysis and attention to developments and trends in
both the economy and financial markets. The value of all fixed-income
securities, including those held by the Portfolio, can be expected to change
inversely with interest rates. See "Certain Securities, Investment Techniques
and Risk Factors--High Yield Securities."
The Portfolio has reserved the right if approved by the Board of Trustees, to
convert in the future to a "master/feeder" fund that would invest all of its
assets in a master/feeder fund having substantially the same investment
objective, policies and restrictions. At least 30 days written notice of any
such action would be given to all shareholders if, and when, such a proposal,
is approved.
BALANCED INVESTMENTS
The investment objective of Balanced Investments is total return through a
combination of current income and capital appreciation. The Portfolio seeks to
achieve its objective through investment in common stocks and in fixed income
senior securities rated within the four highest categories established by
Moody's or S&P and unrated securities determined to be of comparable quality by
the Portfolio's Advisor. See the Appendix to the Statement of Additional
Information for a description of Moody's and S&P ratings and "Certain
Securities, Investment Techniques and Risk Factors--Medium and Lower Rated and
Unrated Securities" in this Prospectus for a description of certain risks
associated with securities in the fourth highest rating category. It is the
Portfolio's policy not to purchase a security if as a result of the purchase
less than 25% of the Portfolio's total assets would be invested in fixed-income
senior securities, including short- and long-term debt securities, preferred
stocks and convertible debt securities and convertible preferred stocks to the
extent their value is attributable to their fixed income characteristics.
Subject to this policy, the Portfolio's assets will be invested in each type of
security in such proportions as are deemed appropriate by the Advisor under
prevailing economic and market conditions.
Shares of Balanced Investments are intended for purchase by investors that
participate in the TRAK Advisory Service through employee benefit plans, the
sponsors of which have elected to make available less than the full range of
Portfolios offered by the Trust. Consequently, the Consulting Group does not
intend to advise the purchase of these shares to other participants as part of
a recommended asset allocation strategy.
Balanced Investments may purchase American Depositary 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.
17
<PAGE>
LARGE CAPITALIZATION VALUE EQUITY INVESTMENTS
Large Capitalization Value Equity Investments is advised by TBCAM and
Parametric which manage approximately twenty percent (20%) and eighty percent
(80%), respectively, of the Portfolio's assets although it is expected that the
percentage allocation will vary from time to time. Changes of the above
allocation between the Advisors that are less than 10% will be made by the
Manager. The Trust's Board of Trustees, upon the advice of the Manager, will
make changes in the above allocation between the Advisors which are greater
than 10%.
TBCAM seeks total return consisting of capital appreciation and dividend
income by investing primarily in a diversified portfolio of highly liquid
common stocks that, in its opinion, have above average price appreciation
potential at the time of purchase. With respect to the remainder of the
Portfolio, Parametric seeks to track the performance of the Russell 1000 Value
Index. In general, these securities are characterized as having above average
dividend yields and below average price earnings ratios relative to the stock
market in general, as measured by the Standard & Poor's 500 Composite Stock
Price Index (the "S&P 500"). Other factors, such as earnings and dividend
growth prospects as well as industry outlook and market share, also are
considered. Under normal conditions, at least 80% of the Portfolio's assets
will be invested in common stocks and at least 65% of the Portfolio's assets
will be invested in common stocks that, at the time of investment, will be
expected to pay regular dividends. No less than 65% of the Portfolio's assets
will be invested in common stocks of issuers with total market capitalization
of $1 billion or greater at the time of purchase. The Portfolio may purchase
temporary investments, lend its portfolio securities and purchase stock index
futures contracts and purchase and write options thereon. See "Certain
Securities, Investment Techniques and Risk Factors."
LARGE CAPITALIZATION GROWTH INVESTMENTS
Large Capitalization Growth Investments is advised by Provident and BGI which
manage approximately twenty percent (20%) and eighty percent (80%),
respectively, of the Portfolio's assets although it is expected that the
percentage allocation will vary from time to time. Changes of the above
allocation between the Advisors that are less than 10% will be made by the
Manager. The Trust's Board of Trustees, upon the advice of the Manager, will
make changes in the above allocation between the Advisors which are greater
than 10%.
Provident seeks substantial capital appreciation by investing primarily in a
diversified portfolio of common stocks that, in its opinion, are characterized
by a growth of earnings at a rate faster than that of the S&P 500. With respect
to the remainder of the Portfolio, BGI seeks to track the performance of the
Russell 1000 Growth Index. Dividend income is an incidental consideration in
the selection of investments. The securities held by the Portfolio can be
expected to experience greater volatility than those of Large Capitalization
Value Equity Investments. In selecting securities for the Portfolio, Provident
evaluates factors believed to be favorable to long-term capital appreciation
including specific financial characteristics of the issuer such as historical
earnings growth, sales growth, profitability and return on equity. Provident
also analyzes the issuer's position within its industry as well as the quality
and experience of the issuer's management. Under normal conditions, at least
80% of the Portfolio's assets will be invested in common stocks and at least
65% of the Portfolio's assets will be invested in common stocks of issuers with
total market capitalization of $1 billion or greater at the time of purchase.
The Portfolio may purchase temporary investments, lend its portfolio securities
and purchase stock index futures contracts and purchase and write options
thereon. See "Certain Securities, Investment Techniques and Risk Factors."
SMALL CAPITALIZATION VALUE EQUITY INVESTMENTS
Small Capitalization Value Equity Investments is advised by NFJ, Babson and
Mellon which each manage approximately thirty five percent (35%), fifteen
percent (15%) and fifty percent (50%), respectively of the Portfolio's assets
although it is expected that the percentage allocation will vary from time to
time. Changes of the above allocation between the Advisors that are less than
10% will be made by the Manager. The Trust's Board of Trustees, upon the advice
of the Manager, will make changes in the above allocation between the Advisors
which are greater than 10%.
The Portfolio seeks above average capital appreciation. With respect to the
portion of the Portfolio allocated to it, Mellon seeks to track the performance
of the Russell 2000 Value Index. With respect to the
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remainder of the Portfolio, NFJ will invest primarily in a diversified
portfolio of common stocks that, in NFJ's opinion, are undervalued or
"neglected" in the marketplace at the time of purchase. In general, these
securities are characterized as having below average price earnings ratios and
a small number of shares outstanding relative to the stock market in general
and enjoy below average industry analyst coverage. Other factors, such as
earnings and dividend growth prospects as well as industry outlook and market
share, also are considered. Current dividend income is only an incidental
consideration in the selection of investments. With respect to the portion of
the assets allocated to it, Babson employs a strong valuation discipline that
strives for companies that are not widely followed by the investment community.
Babson's research staff seeks superior, but neglected companies, possessing
significant market share, sustainable competitive advantage in their primary
business, solid finances and improving margins. The target companies are
thought to possess above average growth potential that is underestimated by the
market, providing attractive valuation. Under normal conditions, at least 80%
of the Portfolio's assets will be invested in common stocks, at least 65% of
the Portfolio's assets in the common stocks of "Value" companies with total
market capitalization at the time of purchase that are below the maximum market
capitalization permitted for a stock in the Russell 2000 Value Index. As of
June 30, 1997, the market capitalization permitted for a stock in the Russell
2000 Value Index was $1.6 billion. In addition, at least one third of the
Portfolio's assets will be invested in common stocks of companies with total
market capitalization of $550 million or less at the time of purchase. The
Portfolio may purchase temporary investments, lend its portfolio securities and
purchase stock index futures contracts and purchase and write options thereon.
See "Certain Securities, Investment Techniques and Risk Factors."
SMALL CAPITALIZATION GROWTH INVESTMENTS
Small Capitalization Growth Investments seeks as its investment objective
maximum capital appreciation. The Portfolio is advised by Mellon, Berger
Associates, WSA, Montgomery and Westpeak which manage approximately 50 percent
(50%), 20 percent (20%), 10 percent (10%), 10 percent (10%) and 10 percent
(10%), respectively, of the Portfolio's assets. Changes of the above allocation
between the Advisors that are less than 10% will be made by the Manager. The
Trust's Board of Trustees, upon the advice of the Manager, will make changes in
the above allocation between the Advisors which are greater than 10%.
With respect to the portion of the Portfolio allocated to it, Mellon seeks to
track the performance of the Russell 2000 Growth Index. With respect to the
portion of the Portfolio allocated to Berger Associates, WSA, Montgomery and
Westpeak (collectively the "Active Advisors") each will attempt to achieve the
Portfolio's objective by investing at least 65% of the Portfolio's assets in
the common stocks of "emerging growth" companies with total market
capitalization at the time of purchase that are below the maximum market
capitalization permitted for a stock in the Russell 2000 Growth Index. As of
June 30, 1997, the market capitalization permitted for a stock in the Russell
2000 Growth Index was $2.1 billion. In addition, at least one third of the
Portfolio's assets allocated to the Active Advisors will be invested in common
stocks of companies with a total market capitalization of $550 million or less
at the time of purchase. Dividend income is not a consideration in the
selection of investments. Companies in which the Active Advisors are likely to
invest may have limited product lines, markets or financial resources and may
lack management depth. The securities of these companies may be subject to more
abrupt or erratic market movements than securities of larger, more established
companies or the market averages in general. The Portfolio may purchase
temporary investments, lend its portfolio securities and purchase stock index
futures contracts and purchase and write options thereon.
INTERNATIONAL EQUITY INVESTMENTS
International Equity Investments is advised by State Street and Oechsle with
each managing approximately sixty percent (60%) and forty percent (40%),
respectively, of the Portfolio's assets although it is expected that the
percentage allocation will vary from time to time. Changes of the above
allocation between the Advisors that are less than 10% will be made by the
Manager. The Trust's Board of Trustees, upon the advice of the Manager, will
make changes in the above allocation between the Advisors which are greater
than 10%.
The investment objective of the Portfolio is capital appreciation. The
Portfolio ordinarily invests at least 80% of its assets in equity securities of
companies domiciled outside the United States. For purposes of the
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Portfolio's investment policies, equity securities consist of common and
preferred stock and securities such as bonds, rights and warrants that are
convertible into common stock.
Under normal market conditions, at least 65% of the Portfolio's assets will
be invested in securities of issuers domiciled in at least three foreign
countries. Investments may be made in companies in developed as well as
developing countries. Investing in the equity markets of developing countries
involves exposure to economies that are generally less diverse and mature, and
to political systems that can be expected to have less stability, than those of
developed countries. With respect to that portion of the Portfolio allocated to
it, State Street seeks to track the performance of the Morgan Stanley Capital
International Europe, Australia and Far East ("EAFE") Index. With respect to
the remainder of the Portfolio, Oechsle attempts to limit exposure to
investments in developing countries where both liquidity and sovereign risks
are high. Although there is no established definition, a developing country is
generally considered to be a country that is in the initial stages of its
industrialization cycle with per capita gross national product of less than
$5,000. Historical experience indicates that the markets of developing
countries have been more volatile than the markets of developed countries,
although securities traded in the former markets have provided higher rates of
return to investors. For a discussion of the risks associated with investing in
foreign securities, see "Certain Securities, Investment Techniques and Risk
Factors--Foreign Securities."
The Portfolio intends to invest in non-U.S. companies whose securities are
traded on exchanges located in the countries in which the issuers are
principally based. The Portfolio may invest in securities of foreign issuers in
the form of ADRs. European Depositary Receipts ("EDRs"), which are sometimes
referred to as Continental Depositary Receipts ("CDRs"), may also be purchased
by the Portfolio. EDRs and CDRs are generally issued by foreign banks and
evidence ownership of either foreign or domestic securities. The Portfolio may
attempt to hedge against unfavorable changes in currency exchange rates by
engaging in forward currency transactions, purchasing and writing put and call
options on foreign currencies and trading currency futures contracts and
options thereon. The Portfolio may purchase temporary investments, lend its
portfolio securities and purchase stock index futures contracts and purchase
and write options thereon. See "Certain Securities, Investment Techniques and
Risk Factors."
INTERNATIONAL FIXED INCOME INVESTMENTS
International Fixed Income Investments is advised by Julius Baer. The
Portfolio seeks as its investment objective, to maximize current income
consistent with protection of principal by investing primarily in a managed
portfolio of non-U.S. dollar debt securities issued by foreign governments and
supranational entities. Under normal market conditions, at least 65% of the
Portfolio's assets will be invested in fixed income securities of issuers
domiciled in at least three foreign countries. The Portfolio will not invest
more than 25% of its assets in the securities of governments in any one
country. The Portfolio limits its purchases of debt securities to those that
are rated within the four highest categories established by S&P or Moody's or,
if unrated, are deemed by Julius Baer to be of comparable quality. See the
Appendix to the Statement of Additional Information for a description of
Moody's and S&P's ratings and "Certain Securities, Investment Techniques and
Risk Factors--Medium and Lower Rated and Unrated Securities" for a description
of certain risks associated with securities in the fourth highest rating
category. The Portfolio may attempt to hedge against unfavorable changes in
currency exchange rates by engaging in forward currency transactions and
trading currency futures contracts and options thereon. The Portfolio may
purchase temporary investments, purchase securities on a when-issued basis and
lend its portfolio securities.
The Portfolio is classified as a "non-diversified" investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"), which means
that it is not limited by the 1940 Act in the proportion of its assets that it
may invest in the securities of a single issuer. The Portfolio, as a non-
diversified investment company, may invest in a smaller number of individual
issuers than a diversified investment company. Thus, an investment in the
Portfolio may, due to changes in the financial condition or in the market's
assessment of those issuers present greater risk to an investor than an
investment in a diversified investment company. However, the Portfolio intends
to conduct its operations so as to qualify as a "regulated investment company"
for purposes of the Internal Revenue Code of 1986, as amended (the "Code"),
which will relieve the Portfolio of any liability for federal income tax to the
extent that its earnings are distributed
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to shareholders. In order to so qualify, among other things, the Portfolio must
ensure that, at the close of each quarter of the taxable year, (i) not more
than 25% of the market value of the Portfolio's total assets is invested in the
securities (other than U.S. Government Securities) of a single issuer or of two
or more issuers that the Portfolio controls and that are engaged in the same,
similar or related trades or businesses and (ii) at least 50% of the market
value of the Portfolio's total assets is represented by (a) cash and cash
items, (b) U.S. Government Securities and (c) other securities limited in
respect of any one issuer to an amount not greater in value than 5% of the
market value of the Portfolio's total assets and to not more than 10% of the
outstanding voting securities of the issuer.
EMERGING MARKETS EQUITY INVESTMENTS
Emerging Markets Equity Investments is advised by Govett. The Portfolio seeks
to achieve long-term capital appreciation through investment primarily in a
diversified portfolio of equity securities of issuers in countries having
"emerging markets." For this purpose, a country with an emerging market is
generally one in which the per capita income is in the low to middle ranges, as
determined by the International Bank for Reconstruction and Development (World
Bank). The Portfolio currently expects to invest in the following emerging
markets countries: Argentina, Austria, Brazil, Chile, China, Colombia, Croatia,
Czech Republic, Egypt, Greece, Hong Kong (as a "gateway" into China), Hungary,
India, Indonesia, Israel, South Korea, Jordan, Lebanon, Malaysia, Mexico,
Pakistan, Peru, Philippines, Poland, Portugal, Russia, Singapore, South Africa,
Sri Lanka, Taiwan, Thailand, Turkey, Venezuela and Zimbabwe. The Portfolio may
from time to time discontinue investments in any of the above-mentioned
countries and/or begin investing in other countries with emerging markets.
The Portfolio anticipates normally investing at least 65% of its total assets
in securities of issuers located in at least three different countries, other
than the United States. At least 65% of the Portfolio's total assets typically
will be invested in equity securities such as common stocks, preferred stocks
and warrants. Most of the equity securities in which the Portfolio will invest
will be listed on recognized foreign securities exchanges, although the
Portfolio may also invest in over-the-counter securities. Under normal market
conditions, not more than 5% of the Portfolio's net assets will be invested in
the securities of any one issuer (excluding the United States Government and
its agencies and instrumentalities) and not more than 25% of the Portfolio's
total assets will be invested in issuers in the same industry.
In choosing the issuers in whose securities the Portfolio will invest, the
Portfolio's Advisor first analyzes the economic factors and background of each
emerging markets country and estimates the rate of Gross Domestic Product
growth, the rate of inflation and currency exchange rates for the following six
months. Anticipated returns for each country are then determined based on
prospective price earnings ratios relative to bond yields and other relevant
historical interest rate measures, and asset allocation decisions are made
among the different emerging markets countries. Within each market chosen for
investment, the Portfolio's Advisor will then choose the issuers offering the
best relative value, based on relative price earnings ratios, dividend yields,
dividend and interest cover and balance sheets.
The Portfolio may enter into forward currency contracts, use options and
options on futures contracts to hedge against movements in currency exchange
rates, purchase temporary investments and enter into reverse repurchase
agreements. The Portfolio, which is designed for investors who do not require
regular current income and who can accept a high degree of risk in their
investment, may be viewed as speculative in nature. Investing in the securities
of issuers in emerging markets countries involves certain risks and special
considerations not inherent in investments in securities of U.S. companies. See
"Certain Securities, Investment Techniques and Risk Factors."
CERTAIN SECURITIES, INVESTMENT TECHNIQUES AND RISK FACTORS
TEMPORARY INVESTMENTS. For temporary defensive purposes during periods when
the Advisor of a Portfolio, other than Government Money Investments, believes,
in consultation with the Manager, that pursuing the Portfolio's basic
investment strategy may be inconsistent with the best interests of its
shareholders, the Portfolio may invest its assets in the following money market
instruments: U.S. Government Securities (including those purchased in the form
of custodial receipts), repurchase agreements, certificates of
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deposit and bankers' acceptances issued by U.S. banks or savings and loan
associations having assets of at least $500 million as of the end of their most
recent fiscal year and high quality commercial paper. Each of these Portfolio's
U.S. dollar-denominated temporary investments are managed by MMC. See
"Management of the Trust--Administrator." In addition, for the same purposes
the Advisors of Emerging Markets Equity Investments, International Fixed Income
Investments and International Equity Investments may invest in obligations
issued or guaranteed by foreign governments or by any of their political
subdivisions, authorities, agencies or instrumentalities that are rated at
least AA by S&P or Aa by Moody's or, if unrated, are determined by the Advisor
to be of equivalent quality. Emerging Markets Equity Investments may also
invest in obligations issued by foreign banks, but will limit its investments
in such obligations to U.S. dollar-denominated obligations of foreign banks
which at the time of investment: (i) have assets with a value of more than $10
billion; (ii) are among the 75 largest foreign banks in the world, based on
amount of assets; (iii) have branches in the United States; and (iv) are of
comparable quality to obligations issued by United States banks in which the
Portfolio may invest, in the opinion of the Portfolio's Advisor. See "Foreign
Securities" below. Each Portfolio also may hold a portion of its assets in
money market instruments or cash in amounts designed to pay expenses, to meet
anticipated redemptions or pending investment in accordance with its objectives
and policies. Any temporary investments may be purchased on a when-issued
basis. A Portfolio's investment in any other short-term debt instruments would
be subject to the Portfolio's investment objectives and policies, and to
approval by the Trust's Board of Trustees.
The Portfolios are intended as vehicles for the implementation of long-term
asset allocation strategies rendered through investment advisory programs that
are based on an evaluation of an investor's investment objectives and risk
tolerances. Because these asset allocation strategies are designed to spread
investment risk across the various segments of the securities markets through
investment in a number of Portfolios, each individual Portfolio generally
intends to be substantially fully invested in accordance with its investment
objectives and policies during most market conditions. Although the Advisor of
a Portfolio may, upon the concurrence of the Manager, take a temporary
defensive position during adverse market conditions, it can be expected that a
defensive posture will be adopted less frequently than it would be by other
mutual funds. This policy may impede an Advisor's ability to protect a
Portfolio's capital during declines in the particular segment of the market to
which the Portfolio's assets are committed. Consequently, no single Portfolio
should be considered a complete investment program and an investment among the
Portfolios should be regarded as a long-term commitment that should be held
through several market cycles. In addition, although the Consulting Group
intends to recommend adjustments in the allocation of assets among the
Portfolios based on, among other things, anticipated market trends, there can
be no assurance that these recommendations can be developed, transmitted and
acted upon in a manner sufficiently timely to avoid market shifts, which can be
sudden and substantial. Participants in TRAK should recognize that it is a
nondiscretionary investment advisory service and that all investment decisions
rest with the participant alone. Therefore, such participants are urged
strongly to adhere to the Consulting Group's asset allocation recommendations
and to act promptly upon any recommended reallocation of assets among the
Portfolios. Investors intending to purchase Portfolio shares through other
Advisory Services should evaluate carefully whether the service is ongoing and
continuous, as well as their investment advisers' ability to anticipate and
respond to market trends.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Each of the
Portfolios may engage in repurchase agreement transactions. Under the terms of
a typical repurchase agreement, a Portfolio would acquire an underlying debt
obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Portfolio to
resell, the obligation at an agreed-upon price and time, thereby determining
the yield during the Portfolio's holding period. This arrangement results in a
fixed rate of return that is not subject to market fluctuations during the
Portfolio's holding period. A Portfolio may enter into repurchase agreements
with respect to U.S. Government Securities with member banks of the Federal
Reserve System and certain non-bank dealers approved by the Board of Trustees.
Under each repurchase agreement, the selling institution is required to
maintain the value of the securities subject to the repurchase agreement at not
less than their repurchase price. The Portfolio's Advisor, acting under the
supervision of the Board of Trustees, reviews on an ongoing basis the value of
the collateral and the
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creditworthiness of those non-bank dealers with whom the Portfolio enters into
repurchase agreements. A Portfolio will not invest in a repurchase agreement
maturing in more than seven days if the investment, together with illiquid
securities held by the Portfolio, exceeds 10% of the Portfolio's total assets.
See "Certain Investment Policies." In entering into a repurchase agreement, a
Portfolio bears a risk of loss in the event that the other party to the
transaction defaults on its obligations and the Portfolio is delayed or
prevented from exercising its rights to dispose of the underlying securities,
including the risk of a possible decline in the value of the underlying
securities during the period in which the Portfolio seeks to assert its rights
to them, the risk of incurring expenses associated with asserting those rights
and the risk of losing all or a part of the income from the agreement.
Emerging Markets Equity Investments may enter into reverse repurchase
agreements with the financial institutions with which it may enter into
repurchase agreements. Under a reverse repurchase agreement, the Portfolio
would sell securities to a financial institution and agree to repurchase them
at a mutually agreed upon date, price and rate of interest. During the period
between the sale and repurchase, the Portfolio would not be entitled to
principal and interest paid on the securities sold by the Portfolio. The
Portfolio, however, would seek to achieve gains derived from the difference
between the current sales price and the forward price for the future purchase
as well as the interest earned on the proceeds on the initial sale. Reverse
repurchase agreements will be viewed as borrowings by the Portfolio for the
purpose of calculating the Portfolio's indebtedness and will have the effect of
leveraging the Portfolio's assets.
BORROWING. Leverage increases investment risk as well as investment
opportunity. If the income and investment gains on securities purchased with
borrowed money exceed the interest paid on the borrowing, the net asset value
of the Portfolio's shares will rise faster than would otherwise be the case. On
the other hand, if the income and investment gains fail to cover the cost,
including interest, of the borrowings, or if there are losses, the net asset
value of the Portfolio's shares will decrease faster than otherwise would be
the case.
U.S. GOVERNMENT SECURITIES. Each Portfolio may invest in U.S. Government
Securities, which are obligations issued or guaranteed by the U.S. Government,
its agencies, authorities or instrumentalities. Some U.S. Government
Securities, such as U.S. Treasury bills, Treasury notes and Treasury bonds,
which differ only in their interest rates, maturities and times of issuance,
are supported by the full faith and credit of the United States. Others are
supported by: (i) the right of the issuer to borrow from the U.S. Treasury,
such as securities of the Federal Home Loan Banks; (ii) the discretionary
authority of the U.S. Government to purchase the agency's obligations, such as
securities of the FNMA; or (iii) only the credit of the issuer, such as
securities of the Student Loan Marketing Association. No assurance can be given
that the U.S. Government will provide financial support in the future to U.S.
Government agencies, authorities or instrumentalities that are not supported by
the full faith and credit of the United States.
Securities guaranteed as to principal and interest by the U.S. Government,
its agencies, authorities or instrumentalities include: (i) securities for
which the payment of principal and interest is backed by an irrevocable letter
of credit issued by the U.S. Government or any of its agencies, authorities or
instrumentalities; and (ii) participations in loans made to foreign governments
or other entities that are so guaranteed. The secondary market for certain of
these participations is limited and, therefore, may be regarded as illiquid.
U.S. Government Securities may include zero coupon securities that may be
purchased when yields are attractive and/or to enhance portfolio liquidity.
Zero coupon U.S. Government Securities are debt obligations that are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the security will accrue and compound over the
period until maturity or the particular interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
Zero coupon U.S. Government Securities do not require the periodic payment of
interest. These investments benefit the issuer by mitigating its need for cash
to meet debt service, but also require a higher rate of return to attract
investors who are willing to defer receipt of cash. These investments may
experience greater
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volatility in market value than U.S. Government Securities that make regular
payments of interest. A Portfolio accrues income on these investments for tax
and accounting purposes, which is distributable to shareholders and which,
because no cash is received at the time of accrual, may require the liquidation
of other portfolio securities to satisfy the Portfolio's distribution
obligations, in which case the Portfolio will forego the purchase of additional
income producing assets with these funds. Zero coupon U.S. Government
Securities include STRIPS and CUBES, which are issued by the U.S. Treasury as
component parts of U.S. Treasury bonds and represent scheduled interest and
principal payments on the bonds.
As part of its investments in U.S. Government Securities, a Portfolio, other
than Government Money Investments, may invest up to 5% of its net assets in
exchange rate-related U.S. Government Securities, which are described in the
Statement of Additional Information.
CUSTODIAL RECEIPTS. Each Portfolio other than Government Money Investments
may acquire custodial receipts or certificates, such as CATS, TIGRs and FICO
Strips, underwritten by securities dealers or banks that evidence ownership of
future interest payments, principal payments or both on certain notes or bonds
issued by the U.S. Government, its agencies, authorities or instrumentalities.
The underwriters of these certificates or receipts purchase a U.S. Government
Security and deposit the security in an irrevocable trust or custodial account
with a custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the U.S. Government Security. Custodial receipts evidencing specific
coupon or principal payments have the same general attributes as zero coupon
U.S. Government Securities, described above. Although typically under the terms
of a custodial receipt a Portfolio is authorized to assert its rights directly
against the issuer of the underlying obligation, the Portfolio may be required
to assert through the custodian bank such rights as may exist against the
underlying issuer. Thus, in the event the underlying issuer fails to pay
principal and/or interest when due, a Portfolio may be subject to delays,
expenses and risks that are greater than those that would have been involved if
the Portfolio had purchased a direct obligation of the issuer. In addition, in
the event that the trust or custodial account in which the underlying security
has been deposited is determined to be an association taxable as a corporation,
instead of a non-taxable entity, the yield on the underlying security would be
reduced in respect of any taxes paid.
LENDING PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, each Portfolio other than Municipal Bond Investments may lend
securities to brokers, dealers and other financial organizations. A Portfolio's
loans of securities will be collateralized at least 100% by cash, letters of
credit or U.S. Government Securities, which will be marked to market daily. 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. In lending securities to brokers,
dealers and other financial organizations, a Portfolio is subject to risks,
which, like those associated with other extensions of credit, include delays in
recovery and possible loss of rights in the collateral should the borrower fail
financially.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. To secure prices deemed
advantageous at a particular time, each Portfolio may purchase securities on a
when-issued or delayed-delivery basis, in which case delivery of the securities
occurs beyond the normal settlement period; payment for or delivery of the
securities would be made prior to the reciprocal delivery or payment by the
other party to the transaction. A Portfolio will enter into when-issued or
delayed-delivery transactions for the purpose of acquiring securities and not
for the purpose of leverage. When-issued securities purchased by the Portfolio
may include securities purchased on a "when, as and if issued" basis under
which the issuance of the securities depends on the occurrence of a subsequent
event, such as approval of a merger, corporate reorganization or debt
restructuring. The Portfolio will establish with its custodian, or with a
designated sub-custodian, a segregated account consisting of cash, debt
securities of any grade or equity securities, having a value equal to or
greater than the Fund's purchase commitments, provided such securities have
been determined by MMC to be liquid and unencumbered, and are marked to market
daily, pursuant to guidelines established by the trustees.
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Securities purchased on a when-issued or delayed-delivery basis may expose a
Portfolio to risk because the securities may experience fluctuations in value
prior to their actual delivery. The Portfolio does not accrue income with
respect to a when-issued or delayed-delivery security prior to its stated
delivery date. Purchasing securities on a when-issued or delayed-delivery basis
can involve the additional risk that the yield available in the market when the
delivery takes place may be higher than that obtained in the transaction
itself.
FIXED INCOME SECURITIES. The market value of fixed income obligations of the
Portfolios will be affected by general changes in interest rates which will
result in increases or decreases in the value of the obligations held by the
Portfolios. The market value of the obligations held by a Portfolio can be
expected to vary inversely to changes in prevailing interest rates. Investors
also 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, a Portfolio's yield will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to a Portfolio from the continuous sale of its shares will tend to be
invested in instruments producing lower yields than the balance of its
portfolio, thereby reducing the Portfolio's current yield. In periods of rising
interest rates, the opposite can be expected to occur. In addition, securities
in which a Portfolio may invest may not yield as high a level of current income
as might be achieved by investing in securities with less liquidity, less
creditworthiness or longer maturities.
Ratings made available by S&P and Moody's are relative and subjective and are
not absolute standards of quality. Although these ratings are initial criteria
for selection of portfolio investments, a Portfolio also will make its own
evaluation of these securities. Among the factors that will be considered are
the long-term ability of the issuers to pay principal and interest and general
economic trends.
MUNICIPAL OBLIGATIONS. The term "Municipal Obligations" generally is
understood to include debt obligations issued to obtain funds for various
public purposes, the interest on which is, in the opinion of bond counsel to
the issuer, excluded from gross income for federal income tax purposes. In
addition, if the proceeds from private activity bonds are used for the
construction, repair or improvement of privately operated industrial or
commercial facilities, the interest paid on such bonds may be excluded from
gross income for federal income tax purposes, although current federal tax laws
place substantial limitations on the size of these issues.
The two principal classifications of Municipal Obligations are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue bonds are payable from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source, but not from the
general taxing power. Sizable investments in these obligations could involve an
increased risk to the Portfolio should any of the related facilities experience
financial difficulties. Private activity bonds are in most cases revenue bonds
and do not generally carry the pledge of the credit of the issuing
municipality. There are, of course, variations in the security of Municipal
Obligations, both within a particular classification and between
classifications.
MORTGAGE RELATED SECURITIES. Intermediate Fixed Income Investments, Long-Term
Bond Investments and Mortgage Backed Investments may invest in mortgage related
securities without limit. There are several risks associated with mortgage
related securities generally. One is that the monthly cash inflow from the
underlying loans may not be sufficient to meet the monthly payment requirements
of the mortgage related security.
Prepayment of principal by mortgagors or mortgage foreclosures will shorten
the term of the underlying mortgage pool for a mortgage related security. Early
returns of principal will affect the average life of the mortgage related
securities remaining in a Portfolio. The occurrence of mortgage prepayments is
affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions. In periods of rising interest rates, the rate of
prepayment tends to decrease, thereby lengthening the average life of a pool of
mortgage related securities. Conversely, in
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periods of falling interest rates the rate of prepayment tends to increase,
thereby shortening the average life of a pool. Reinvestment of prepayments may
occur at higher or lower interest rates than the original investment, thus
affecting the yield of a Portfolio. Because prepayments of principal generally
occur when interest rates are declining, it is likely that a Portfolio will
have to reinvest the proceeds of prepayments at lower interest rates than those
at which the assets were previously invested. If this occurs, a Portfolio's
yield will correspondingly decline. Thus, mortgage related securities may have
less potential for capital appreciation in periods of falling interest rates
than other fixed income securities of comparable maturity, although these
securities may have a comparable risk of decline in market value in periods of
rising interest rates. To the extent that a Portfolio purchases mortgage
related securities at a premium, unscheduled prepayments, which are made at
par, will result in a loss equal to any unamortized premium.
CMOs are obligations fully collateralized by a portfolio of mortgages or
mortgage related securities. Payments of principal and interest on the
mortgages are passed through to the holders of the CMOs on the same schedule as
they are received, although certain classes of CMOs have priority over others
with respect to the receipt of prepayments on the mortgages. Therefore,
depending on the type of CMOs in which a Portfolio invests, the investment may
be subject to a greater or lesser risk of prepayment than other types of
mortgage related securities.
Mortgage related securities may not be readily marketable. To the extent any
of these securities are not readily marketable in the judgment of the Advisor,
the investment restriction limiting a Portfolio's investment in illiquid
instruments to not more than 10% of the value of its net assets will apply. See
"Certain Investment Policies."
GOVERNMENT STRIPPED MORTGAGE RELATED SECURITIES. Each of Intermediate Fixed
Income Investments, Long-Term Bond Investments and Mortgage Backed Investments
may invest up to 25% of its total assets in certain government stripped
mortgage related securities issued and guaranteed by GNMA, FNMA or FHLMC. These
securities represent beneficial ownership interests in either periodic
principal distributions ("principal-only") or interest distributions
("interest-only") on mortgage related certificates issued by GNMA, FNMA or
FHLMC, as the case may be. The certificates underlying the government stripped
mortgage related securities represent all or part of the beneficial interest in
pools of mortgage loans. A Portfolio will invest in government stripped
mortgage related securities in order to enhance yield or to benefit from
anticipated appreciation in value of the securities at times when its Advisor
believes that interest rates will remain stable or increase. In periods of
rising interest rates, the expected increase in the value of government
stripped mortgage related securities may offset all or a portion of any decline
in value of the securities held by a Portfolio.
Investing in government stripped mortgage related securities involves the
risks normally associated with investing in mortgage related securities issued
by government or government related entities. See "Mortgage Related Securities"
above. In addition, the yields on government stripped mortgage related
securities are extremely sensitive to the prepayment experience on the mortgage
loans underlying the certificates collateralizing the securities. If a decline
in the level of prevailing interest rates results in a rate of principal
prepayments higher than anticipated, distributions of principal will be
accelerated, thereby reducing the yield to maturity on interest-only government
stripped mortgage related securities and increasing the yield to maturity on
principal-only government stripped mortgage related securities. Sufficiently
high prepayment rates could result in a Portfolio not fully recovering its
initial investment in an interest-only government stripped mortgage related
security. Under current market conditions, the Portfolios expect that
investments in government stripped mortgage related securities will consist
primarily of interest-only securities. Government stripped mortgage related
securities are currently traded in an over-the-counter market maintained by
several large investment banking firms. There can be no assurance that the
Portfolios will be able to effect a trade of a government stripped mortgage
related security at a time when it wishes to do so. The Portfolios will acquire
government stripped mortgage related securities only if a secondary market for
the securities exists at the time of acquisition. Except for government
stripped mortgage related securities based on fixed rate FNMA and FHLMC
mortgage certificates that meet certain liquidity criteria established
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by the Board of Trustees, a Portfolio will treat government stripped mortgage
related securities as illiquid and will limit its investments in these
securities, together with other illiquid investments, to not more than 10% of
its net assets.
ASSET-BACKED SECURITIES. The Intermediate Fixed-Income Investments and Long-
Term Bond Investments may invest in ABSs. ABSs are well established and have
become increasingly prevalent in the fixed income market. ABSs may enhance a
Portfolio's performance; however, their use involves certain risks that may not
be found in other mutual fund investments. Both Advisors are only authorized to
invest in those ABSs that have received a AAA rating from both Moody's and S&P
and may invest only up to 5% of the Portfolio's new assets in this type of
security.
FORWARD ROLL TRANSACTIONS. In order to enhance current income, Mortgage
Backed Investments may enter into forward roll transactions with respect to
mortgage related securities issued by GNMA, FNMA and FHLMC. In a forward roll
transaction, a Portfolio sells a mortgage related security to a financial
institution, such as a bank or broker-dealer, and simultaneously agrees to
repurchase a similar security from the institution at a later date at an
agreed-upon price. The mortgage related securities that are repurchased will
bear the same interest rate as those sold, but generally will be collateralized
by different pools of mortgages with different prepayment histories than those
sold. During the period between the sale and repurchase, the Portfolio will not
be entitled to receive interest and principal payments on the securities sold.
Proceeds of the sale will be invested in short-term instruments, particularly
repurchase agreements, and the income from these investments, together with any
additional fee income received on the sale, is intended to generate income for
the Portfolio exceeding the yield on the securities sold. Forward roll
transactions involve the risk that the market value of the securities sold by
the Portfolio may decline below the repurchase price of those securities. At
the time the Portfolio enters into a forward roll transaction, it will place in
a segregated custodial account cash, U.S. Government Securities or high quality
debt obligations having a value equal to the repurchase price (including
accrued interest) and will subsequently monitor the account to insure that the
equivalent value is maintained. Forward roll transactions are considered to be
borrowings by the Portfolio.
HIGH YIELD SECURITIES. High Yield Investments and to a lesser extent
Intermediate Fixed Income Investments and Long-Term Bond Investments invest in
medium or lower rated securities and unrated securities of comparable quality,
sometimes referred to as "junk bonds."
Generally, medium or lower rated securities and unrated securities of
comparable quality offer a higher current yield than is offered by higher rated
securities but also (i) will likely have some quality and protective
characteristics that, in the judgment of the rating organizations, are
outweighed by large uncertainties or major risk exposures to adverse conditions
and (ii) are predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligation. The market values of certain of these securities also tend to be
more sensitive to individual corporate developments and changes in economic
conditions than higher quality bonds. In addition, medium and lower rated
securities and comparable unrated securities generally present a higher degree
of credit risk. The risk of loss due to default by these issuers is
significantly greater because medium and lower rated securities and unrated
securities of comparable quality generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. In light of these
risks, the Board of Trustees has instructed the Advisors, in evaluating the
creditworthiness of an issue, whether rated or unrated, to take various factors
into consideration, which may include, as applicable, the issuer's financial
resources, its sensitivity to economic conditions and trends, the operating
history of and the community support for the facility financed by the issue,
the ability of the issuer's management and regulatory matters.
In addition, the market value of securities in lower rated categories is more
volatile than that of higher quality securities, and the markets in which
medium and lower rated or unrated securities are traded are more limited than
those in which higher rated securities are traded. The existence of limited
markets may make it more difficult for the Portfolios to obtain accurate market
quotations for purposes of valuing their
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respective portfolios and calculating their respective net asset values.
Moreover, the lack of a liquid trading market may restrict the availability of
securities for the Portfolios to purchase and may also have the effect of
limiting the ability of a Portfolio to sell securities at their fair value
either to meet redemption requests or to respond to changes in the economy or
the financial markets.
Lower rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Portfolio may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. Also, as the principal value of bonds moves
inversely with movements in interest rates, in the event of rising interest
rates the value of the securities held by a Portfolio may decline
proportionately more than a portfolio consisting of higher rated securities. If
a Portfolio experiences unexpected net redemptions, it may be forced to sell
its higher rated bonds, resulting in a decline in the overall credit quality of
the securities held by the Portfolio and increasing the exposure of the
Portfolio to the risks of lower rated securities. Investments in zero coupon
bonds may be more speculative and subject to greater fluctuations in value due
to changes in interest rates than bonds that pay interest currently.
Subsequent to its purchase by a Portfolio, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for
purchase by a Portfolio. Neither event will require sale of these securities by
the Portfolio, but the Advisor will consider the event in its determination of
whether the Portfolio should continue to hold the securities.
NON-PUBLICLY TRADED SECURITIES. Each Portfolio may invest in non-publicly
traded securities, which may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from these sales could be less than those originally paid
by the Portfolios. In addition, companies whose securities are not publicly
traded are not subject to the disclosure and other investor protection
requirements that may be applicable if their securities were publicly traded.
REAL ESTATE INVESTMENT TRUSTS. Each Portfolio may invest in real estate
investment trusts ("REITs"). REITs are entities which either own properties or
make construction or mortgage loans. Equity REITs own real estate directly and
the value of, and income earned by, the trust depends upon the income of the
underlying properties and the rental income they earn. Equity REITs may also
include operating or finance companies. Equity REITs can also realize capital
gains by selling properties that have appreciated in value. A mortgage REITs
can make construction, development or long-term mortgage loans, and are
sensitive to the credit quality of the borrower. Mortgage REITs derive their
income from interest payments. Hybrid REITs combine the characteristics of both
equity and mortgage REITs, generally by holding both ownership interests and
mortgage interests in real estate. The value of securities issued by REITs are
affected by tax and regulatory requirements and by perceptions of management
skill. They are also subject to heavy cash flow dependency, defaults by
borrowers or tenants, self-liquidation, the possibility of failing to qualify
for tax-free status under the Internal Revenue Code of 1986, as amended, and
failing to maintain exemption from the 1940 Act.
SUPRANATIONAL ENTITIES. International Fixed Income Investments, subject to
applicable diversification requirements of the Code, may invest up to 25% of
its total assets in debt securities issued by supranational organizations such
as the International Bank for Reconstruction and Development (commonly referred
to as the World Bank), which was chartered to finance development projects in
developing member countries; the European Community, which is a twelve-nation
organization engaged in cooperative economic activities; the European Coal and
Steel Community, which is an economic union of various European nations' steel
and coal industries; and the Asian Development Bank, which is an international
development bank established to lend funds, promote investment and provide
technical assistance to member nations in the Asian and Pacific regions. As
supranational entities do not possess taxing authority, they are dependent upon
their members' continued support in order to meet interest and principal
payments.
FOREIGN SECURITIES. Investing in securities issued by foreign companies and
governments involves considerations and potential risks not typically
associated with investing in obligations issued by the U.S.
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government and domestic corporations. Substantially less information may be
available about foreign companies, particularly emerging market country
companies, than about domestic companies and, even when public information
about such companies is available, it may be less reliable than information
concerning U.S. companies. Foreign companies generally are not subject to
uniform accounting, auditing and financial reporting standards and such
standards may differ, in some cases significantly, from standards in other
countries, including the United States. The values of foreign investments are
affected by changes in currency rates or exchange control regulations,
restrictions or prohibitions on the repatriation of foreign currencies,
application of foreign tax laws, including withholding taxes, changes in
governmental administration or economic or monetary policy (in the United
States or abroad) or changed circumstances in dealings between nations. Costs
are also incurred in connection with conversions between various currencies. In
addition, foreign brokerage commissions and custody fees are generally higher
than those charged in the United States, and foreign securities markets may be
less liquid, more volatile and less subject to governmental supervision than in
the United States. Investments in foreign countries could be affected by other
factors not present in the United States, including expropriation, confiscatory
taxation, lack of uniform accounting and auditing standards and potential
difficulties in enforcing contractual obligations and could be subject to
extended clearance and settlement periods.
INVESTING IN EMERGING MARKETS COUNTRIES. Investing in securities of issuers
in emerging markets countries involves exposure to economic structures that are
generally less diverse and mature than, and to political systems that can be
expected to have less stability than, those of developed countries. Other
characteristics of emerging markets countries that may affect investment in
their markets include certain national policies that may restrict investment by
foreigners and the absence of developed legal structures governing private and
foreign investments and private property. The typically small size of the
markets for securities issued by issuers located in emerging markets countries
and the possibility of a low or nonexistent volume of trading in those
securities may also result in a lack of liquidity and in price volatility of
those securities.
Included among the emerging markets in which Emerging Markets Equity
Investments may invest are the formerly communist countries of Eastern Europe
and the People's Republic of China (collectively, "Communist Countries"). Upon
the accession to power of Communist regimes approximately 40 to 70 years ago,
the governments of a number of Communist Countries expropriated a large amount
of property. The claims of many property owners against those governments were
never finally settled. There can be no assurance that the Portfolio's
investments in Communist Countries, if any, would not also be expropriated,
nationalized or otherwise confiscated, in which case the Portfolio could lose
its entire investment in the Communist Country involved. In addition, any
change in the leadership or policies of Communist Countries may halt the
expansion of or reverse the liberalization of foreign investment policies now
occurring.
CURRENCY EXCHANGE RATES. A Portfolio's share value may change significantly
when the currencies, other than the U.S. dollar, in which the Portfolio's
investments are denominated strengthen or weaken against the U.S. dollar.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries as seen from an international perspective. Currency
exchange rates can also be affected unpredictably by intervention by U.S. or
foreign governments or central banks or by currency controls or political
developments in the United States or abroad.
FORWARD CURRENCY CONTRACTS. Each Portfolio that may invest in foreign
currency-denominated securities may hold currencies to meet settlement
requirements for foreign securities and may engage in currency exchange
transactions in order to protect against uncertainty in the level of future
exchange rates between a particular foreign currency and the U.S. dollar or
between foreign currencies in which the Portfolio's securities are or may be
denominated. Forward currency contracts are agreements to exchange one currency
for another--for example, to exchange a certain amount of U.S. dollars for a
certain amount of French francs at a future date. The date (which may be any
agreed-upon fixed number of days in the future), the amount of currency to be
exchanged and the price at which the exchange will take place will be
negotiated
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with a currency trader and fixed for the term of the contract at the time that
the Portfolio enters into the contract. To assure that a Portfolio's forward
currency contracts are not used to achieve investment leverage, the Portfolio
will segregate cash or high grade securities with its custodian in an amount at
all times equal to or exceeding the Portfolio's commitment with respect to
these contracts.
In hedging specific portfolio positions, a Portfolio may enter into a forward
contract with respect to either the currency in which the positions are
denominated or another currency deemed appropriate by the Portfolio's Advisor.
The amount the Portfolio may invest in forward currency contracts is limited to
the amount of the Portfolio's aggregate investments in foreign currencies.
Risks associated with entering into forward currency contracts include the
possibility that the market for forward currency contracts may be limited with
respect to certain currencies and, upon a contract's maturity, the inability of
a Portfolio to negotiate with the dealer to enter into an offsetting
transaction. Forward currency contracts may be closed out only by the parties
entering into an offsetting contract. In addition, the correlation between
movements in the prices of those contracts and movements in the price of the
currency hedged or used for cover will not be perfect. There is no assurance
that an active forward currency contract market will always exist. These
factors will restrict a Portfolio's ability to hedge against the risk of
devaluation of currencies in which a Portfolio holds a substantial quantity of
securities and are unrelated to the qualitative rating that may be assigned to
any particular security. See the Statement of Additional Information for
further information concerning forward currency contracts.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES. Each Portfolio may purchase
put options on securities owned by the Portfolio and on securities which the
Portfolio may acquire in the future. The Portfolio may purchase only put
options that are traded on a regulated exchange. By buying a put, the Portfolio
limits its risk of loss from a decline in the market value of the security
until the put expires. Any appreciation in the value of the underlying
security, however, will be partially offset by the amount of the premium paid
for the put option and any related transaction costs. The Portfolio may
purchase call options on a security it intends to purchase in the future to
avoid the additional cost that would result from a substantial increase in the
market price of the security. Prior to their expiration, put and call options
may be sold in closing sale transactions (sales by the Portfolio, prior to the
exercise of options it has purchased, of options of the same series), and
profit or loss from the sale will depend on whether the amount received is more
or less than the premium paid for the option plus the related transaction
costs.
STOCK INDEX OPTIONS. Each Portfolio may purchase and write put and call
options on domestic and foreign stock indexes to hedge against risks of market-
wide price movements affecting that portion of its assets invested in the
country whose stocks are subject to the hedge. A stock index measures the
movement of a certain group of stocks by assigning relative values to the
common stocks included in the index. Examples of domestic stock indexes are the
Standard & Poor's 500 Stock Index and the New York Stock Exchange Composite
Index, and examples of foreign stock indexes are the Canadian Market Portfolio
Index (Montreal Stock Exchange), the Financial Times--Stock Exchange 100
(International Stock Exchange) and the Toronto Stock Exchange Composite 300
(Toronto Stock Exchange). Options on stock indexes are similar to options on
securities. Because no underlying security can be delivered, however, the
option represents the holder's right to obtain from the writer, in cash, a
fixed multiple of the amount by which the exercise price exceeds (in the case
of a put) or is less than (in the case of a call) the closing value of the
underlying index on the exercise date. Options on foreign stock indexes are
similar to options on domestic stock indexes. Like domestic stock index
options, foreign stock index options are subject to position and exercise
limits and other regulations imposed by the exchange on which they are traded.
Unlike domestic stock index options, foreign stock index options carry risks
associated with investing in foreign securities, as described above. The
advisability of using stock index options to hedge against the risk of market-
wide movements will depend on the extent of diversification of the Portfolio's
stock investments and the sensitivity of its stock investments to factors
influencing the underlying index. The effectiveness of purchasing or writing
stock index options as a hedging technique will depend upon the extent to which
price movements in the Portfolio's securities investments correlate with price
movements in the stock index selected. In addition, successful use by the
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Portfolio of options will be subject to the ability of the Portfolio's Advisor
to predict correctly movements in the direction of the underlying index.
When the Portfolio writes an option on a stock index, it will establish a
segregated account with the Portfolio's custodian, or with a foreign
subcustodian with which the Portfolio will deposit cash or cash equivalents or
a combination of both in an amount equal to the market value of the option, and
will maintain the account while the option is open.
FUTURES CONTRACTS AND RELATED OPTIONS. Each Portfolio other than Government
Money Investments, Balanced Investments and Municipal Bond Investments may
enter into futures contracts and purchase and write (sell) options on these
contracts, including but not limited to interest rate, securities index and
foreign currency futures contracts and put and call options on these futures
contracts. These contracts will be entered into only upon the concurrence of
the Manager that such contracts are necessary or appropriate in the management
of the Portfolio's assets. These contracts will be entered into on exchanges
designated by the Commodity Futures Trading Commission ("CFTC") or, consistent
with CFTC regulations, on foreign exchanges. These transactions may be entered
into for bona fide hedging and other permissible risk management purposes
including protecting against anticipated changes in the value of securities a
Portfolio intends to purchase.
A Portfolio will not enter into futures contracts and related options for
which the aggregate initial margin and premiums exceed 5% of the fair market
value of the Portfolio's assets after taking into account unrealized profits
and unrealized losses on any contracts it has entered into. All futures and
options on futures positions will be covered by owning the underlying security
or segregation of assets. With respect to long positions in a futures contract
or option (e.g., futures contracts to purchase the underlying instrument and
call options purchased or put options written on these futures contracts or
instruments), the underlying value of the futures contract at all times will
not exceed the sum of cash, short-term U.S. debt obligations or other high
quality obligations set aside for this purpose.
A Portfolio may lose the expected benefit of these futures or options
transactions and may incur losses if the prices of the underlying commodities
move in an unanticipated manner. In addition, changes in the value of the
Portfolio's futures and options positions may not prove to be perfectly or even
highly correlated with changes in the value of its portfolio securities.
Successful use of futures and related options is subject to an Advisor's
ability to predict correctly movements in the direction of the securities
markets generally, which ability may require different skills and techniques
than predicting changes in the prices of individual securities. Moreover,
futures and options contracts may only be closed out by entering into
offsetting transactions on the exchange where the position was entered into (or
a linked exchange), and as a result of daily price fluctuation limits there can
be no assurance that an offsetting transaction could be entered into at an
advantageous price at any particular time. Consequently, a Portfolio may
realize a loss on a futures contract or option that is not offset by an
increase in the value of its portfolio securities that are being hedged or a
Portfolio may not be able to close a futures or options position without
incurring a loss in the event of adverse price movements.
YEAR 2000. The investment management services provided to the Trust by the
Manager and the services provided to shareholders by Smith Barney, the Trust's
Distributor, depend on the smooth functioning of their computer systems. Many
computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were
encoded and calculated. That failure could have a negative impact on the
Trust's operations, including the handling of securities trades, pricing and
account services. The Manager and Smith Barney have advised the Trust that they
have been reviewing all of their computer systems and actively working on
necessary changes to their systems to prepare for the year 2000 and expect that
their systems will be compliant before that date. In addition, the Manager has
been advised by the Trust's custodian, transfer agent and accounting service
agent that they are also in the process of modifying their systems with the
same goal. There can, however, be no assurance that the Manager, Smith Barney
or any other service provider will be successful, or that interaction with
other non-complying computer systems will not impair Trust services at that
time.
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PORTFOLIO TURNOVER
Generally, a Portfolio, other than Small Capitalization Growth Investments
and International Equity Investments, will not trade in securities for short-
term profits but, when circumstances warrant, securities may be sold without
regard to the length of time held. The Portfolios specified in the previous
sentence may engage in active short-term trading to benefit from yield
disparities among different issues of securities, to seek short-term profits
during periods of fluctuating interest rates or for other reasons. Active
trading will increase a Portfolio's rate of turnover, certain transaction
expenses and the incidence of short-term capital gain taxable as ordinary
income. An annual turnover rate of 100% would occur when all the securities
held by the Portfolio are replaced one time during a period of one year.
Increased portfolio turnover may result in greater brokerage commissions paid
and in realization of net short-term capital gains which, when distributed, are
taxed to shareholders (other than retirement plans) at ordinary income tax
rates.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Trust and the
Portfolios rests with the Trust's Board of Trustees. The Trustees approve all
significant agreements between the Trust and the persons and companies that
furnish services to the Trust and the Portfolios, including agreements with the
Trust's distributor, custodian, transfer agent, the Manager, Advisors and
administrator. The Statement of Additional Information contains background
information regarding each Trustee and executive officer of the Trust as well
as the Portfolios' investment officers.
INVESTMENT MANAGER
The Consulting Group, located at 222 Delaware Avenue, Wilmington, Delaware
19801, serves as the Trust's Manager. The Consulting Group is a division of
MMC, a registered investment adviser whose principal executive offices are
located at 388 Greenwich Street, New York, New York 10013. MMC is a wholly
owned subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings"), which is
in turn a wholly owned subsidiary of Travelers Group Inc. ("Travelers").
The Trust has entered into an investment management agreement (the
"Management Agreement") with the Manager which, in turn, has entered into an
advisory agreement ("Advisory Agreement") with each Advisor selected for the
Portfolios. It is the Manager's responsibility to select, subject to the review
and approval of the Board of Trustees, the Advisors who have distinguished
themselves by able performance in their respective areas of expertise in asset
management and to review their continued performance. Although the Manager does
not serve as investment manager for any other registered investment company,
the Manager and its related office, the Consulting Services Group of Smith
Barney, have over 20 years of experience in evaluating investment advisers for
individuals and institutional investors. As of March 31, 1998, MMC rendered
advisory services with respect to assets with a value in excess of $100
billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
the Manager provides to the Trust investment management evaluation services
principally by performing initial due diligence on prospective Advisors for
each Portfolio and thereafter monitoring Advisor performance through
quantitative and qualitative analysis as well as periodic in-person, telephonic
and written consultations with Advisors. In evaluating prospective Advisors,
the Manager considers, among other factors, each Advisor's level of expertise;
relative performance and consistency of performance over a minimum period of
five years; level of adherence to investment discipline or philosophy;
personnel, facilities and financial strength; and quality of service and client
communications. The Manager has responsibility for communicating performance
expectations and evaluations to Advisors and ultimately recommending to the
Board of Trustees of the Trust whether Advisors' contracts should be renewed,
modified or terminated. The Manager provides written reports to the Board of
Trustees regarding the results of its evaluation and monitoring functions. The
Manager is also responsible for conducting all operations of the Trust except
those operations contracted to the Advisors, custodian, transfer agent or
administrator.
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Each Portfolio pays the Manager a fee for its services that is computed daily
and paid monthly based on the value of the average net assets of the Portfolio
at a rate as follows: Government Money Investments, 0.15%; Intermediate Fixed
Income Investments, 0.40%; Long-Term Bond Investment, 0.40%; Municipal Bond
Investments, 0.40%; Mortgage Backed Investments, 0.50%; High Yield Investments,
0.70%; Balanced Investments, 0.60%; Large Capitalization Value Equity
Investments, with respect to the portion of the portfolio managed by TBCAM,
0.60% and with respect to the balance allocated to Parametric, the Manager has
agreed to waive fees so that the rate is 0.50% of the first $300 million and
0.45% thereafter; Large Capitalization Growth Investments, with respect to the
portion of the portfolio managed by Provident, 0.60% and with respect to the
balance allocated to BGI, the Manager has agreed to waive fees so that the rate
is 0.50% of the first $300 million and 0.45% thereafter; Small Capitalization
Value Equity Investments, with respect to the portion of the portfolio managed
by NFJ, 0.80% and with respect to the balance allocated to BGI, the Manager has
agreed to waive fees so that the rate is 0.45% of the first $200 million, 0.40%
of the next $100 million and 0.35% thereafter; Small Capitalization Growth
Investments, with respect to the portion managed by Berger Associates, WSA,
WestPeak and Montgomery, 0.80% and with respect to the balance allocated to
Mellon, the Manager has agreed to waive fees so that the rate is 0.45% of the
first $200 million, 0.40% of the next $100 million and 0.35% thereafter;
International Equity Investments, with respect to the portion of the portfolio
managed by Oechsle, 0.70% and with respect to the balance allocated to State
Street, the Manager has agreed to waive fees so that the rate is 0.37%;
International Fixed Income Investments, 0.50%; and Emerging Markets Equity
Investments, 0.90%.
The Manager in turn pays each Advisor a fee for its services provided to each
Portfolio that is computed daily and paid monthly based on the value of the
average net assets of the Portfolio at a rate as follows: Government Money
Investments, 0.15%; Intermediate Fixed Income Investments, 0.20% of the first
$500 million and 0.15% thereafter; Long-Term Bond Investments, 0.20%; Municipal
Bond Investments, 0.20%; Mortgage Backed Investments, 0.25%; High Yield
Investments, 0.45%; Balanced Investments, 0.30%; Large Capitalization Value
Equity Investments, with respect to the portion of the portfolio managed by
TBCAM, 0.30% and with respect to the balance allocated to Parametric, the rate
is 0.20% of the first $300 million and 0.15% thereafter; Large Capitalization
Growth Investments, with respect to the portion of the portfolio managed by
Provident, 0.30% and with respect to the balance allocated to BGI, 0.02%; Small
Capitalization Value Equity Investments, with respect to the portion of the
portfolio managed by NFJ, 0.50% on the first $450 million and 0.45% thereafter;
with respect to the portion managed by Babson, 0.50% of the first $100 million
and 0.45% thereafter; and with respect to the balance allocated to Mellon, the
rate is 0.06%; Small Capitalization Growth Investments, with respect to the
portion of the Portfolio managed by Berger Associates, Montgomery, WestPeak and
WSA, 0.50% and with respect to the balance allocated to Mellon, the rate is
0.06%; International Equity Investments, with respect to the portion of the
portfolio managed by Oechsle, 0.40% and with respect to the balance allocated
to State Street, the rate is 0.07%; International Fixed Income Investments,
0.25%; and Emerging Markets Equity Investments, 0.60%.
Investors should be aware that the Manager may be subject to a conflict of
interest when making decisions regarding the retention and compensation of
particular Advisors. However, the Manager's decisions, including the identity
of an Advisor and the specific amount of the Manager's compensation to be paid
to the Advisor, are subject to review and approval by a majority of the Board
of Trustees and separately by a majority of the Trustees who are not affiliated
with the Manager or any of its affiliates.
The Trust has received an exemption (the "Exemption") from certain provisions
of the 1940 Act which would otherwise require the Manager to obtain formal
shareholder approval prior to engaging and entering into investment advisory
agreements with Advisors. The Exemption is based on, among other things: (1)
the Manager will select, monitor, evaluate and allocate assets to, the Advisors
and ensure that the Advisors comply with the relevant Portfolio's investment
objective, policies and restrictions; (2) shares of the Portfolios relying on
the Exemption will not be subject to any sales loads or redemption fees or
other charges for redeeming shares; (3) the Trust will provide to shareholders
certain information about a new Advisor and its investment advisory contract
within 90 days of the engagement of a new Advisor; (4) the Trust will disclose
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in this Prospectus the terms of the Exemption; and (5) the Trustees, including
a majority of the "non-interested" Trustees, must approve each investment
advisory contract in the manner required under the 1940 Act. Any changes to the
Management Agreement between the Trust and the Manager still require
shareholder approval. In accordance with the terms of the Exemption, a majority
of the shareholders of each Portfolio have approved the operation of the Trust
in accordance with the Exemption.
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also
subject to approval by the stockholders of each of Travelers and Citicorp. Upon
consummation of the merger, the surviving corporation would be a bank holding
company subject to regulation under the Bank Holding Company Act of 1956 (the
"BHCA"), the requirements of the Glass-Steagall Act and certain other laws and
regulations. Although the effects of the merger of Travelers and Citicorp and
compliance with the requirements of the BHCA and the Glass-Steagall Act are
still under review, the Manager does not believe that its compliance with
applicable law following the merger of Travelers and Citicorp will have a
material adverse effect on its ability to continue to provide the Trust with
the same level of investment advisory services that it currently receives.
ADVISORS
The Advisors have agreed to the foregoing fees, which are generally lower
than the fees they charge to institutional accounts for which they serve as
investment adviser, and perform all administrative functions associated with
serving in that capacity in recognition of the reduced administrative
responsibilities they have undertaken with respect to the Portfolios. By virtue
of the management, supervisory and administrative functions performed by the
Manager and MMC, and the fact that Advisors are not required to make decisions
regarding the allocation of assets among the major sectors of the securities
markets, the Advisors serve in a sub-advisory capacity to the Portfolios.
Subject to the supervision and direction of the Manager and, ultimately, the
Board of Trustees, each Advisor's responsibilities are limited to managing the
securities held by the Portfolio it serves in accordance with the Portfolio's
stated investment objective and policies, making investment decisions for the
Portfolio and placing orders to purchase and sell securities on behalf of the
Portfolio.
The following sets forth certain information about each of the Advisors:
Standish, Ayer serves as Advisor to Intermediate Fixed Income Investments and
Government Money Investments. Standish, Ayer is owned by 21 individuals, each
of whom is an active employee of Standish, Ayer. No individual owns more than
20% of the voting securities of Standish, Ayer. Standish, Ayer has been
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended (the "Advisers Act"), since 1940 and is also registered as a
commodity trading adviser with the National Futures Association. Standish, Ayer
provides investment advisory services to individual and institutional clients.
As of September 30, 1997, Standish, Ayer had assets under management of
approximately $36.7 billion. Standish, Ayer's principal executive offices are
located at One Financial Center, Boston, Massachusetts 02111. Richard Doll has
been a Vice President since joining the firm in November 1984 and a Director of
Standish, Ayer since January 1, 1987 and has been responsible for the day-to-
day management of Intermediate Fixed Income Investments since its inception.
Prior to that time, he served as Vice President of Bank of New England.
Jennifer Pline has been a Vice President of Standish, Ayer since January 4,
1990 and has been responsible for the day-to-day management of Government Money
Investments since its inception. She completed her MBA at Boston College in
1987 and then joined Standish, Ayer.
National Asset Mgmt. serves as Advisor to Long-Term Bonds Investments.
National Asset Mgmt. has been a registered investment adviser under the
Advisers Act since 1979 and provides investment advisory services primarily to
institutions such as charitable trusts and pensions plans. As of September 30,
1997, National Asset Mgmt. had assets under management of $8.0 billion.
National Asset Mgmt.'s principal executive offices are located at 101 South
Fifth Street, Louisville, Kentucky. Michael C. Heyman, a principal with the
firm, is responsible for the day-to-day management of Long-Term Bond
Investments.
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Smith Affiliated serves as Advisor to Municipal Bond Investments. Of the
outstanding voting securities of Smith Affiliated, 80% is owned by Robert G.
Smith, CEO and President of Smith Affiliated. Smith Affiliated has been a
registered investment adviser under the Advisers Act since April 1982, serving
as investment advisor to individuals and institutions. As of September 30,
1997, Smith Affiliated had assets under management of approximately $800
million. Smith Affiliated's principal executive offices are located at 880
Third Avenue, New York, New York 10022. John Pandolfino, Vice President, has
been a Portfolio Manager of Smith Affiliated since 1989 and, with Tom Morrison,
Portfolio Analyst, is responsible for the day-to-day management of Municipal
Bond Investments.
Atlantic Analytics serves as Advisor to Mortgage Backed Investments.
Registered as an investment adviser under the Advisers Act since 1984, Atlantic
Analytics is controlled by J. Anthony Huggins and Jon M. Knight, each a
principal of Atlantic Analytics. Atlantic Analytics serves as an investment
adviser to institutional investors including banks, insurance companies,
foundations and tax-exempt funds. As of September 30, 1997, Atlantic Analytics
and International Portfolio Analytics Ltd., an affiliate of Atlantic Analytics,
had assets under management exceeding $2.5 billion. Atlantic Analytic's
principal executive offices are located at 201 East Pine Street, Suite 600,
Orlando, Florida 32801. A team management approach is employed for the
management of Mortgage Backed Investments. The investment management committee
is comprised of the department heads of Trading, Structuring and Portfolio
Administration and is responsible for the portfolio management process. The
risk management committee comprised of the Firm's two principals, is
responsible for oversight.
Alliance Capital serves as Advisor to High Yield Investments. Alliance
Capital is an international investment manager with assets under management as
of March 31, 1998 totaling approximately $248 billion. Alliance Capital's
clients are primarily major corporate benefit funds, public employee retirement
systems, investment companies, foundations and endowment funds. Alliance
Capital Management Corporation ("ACMC") is the general partner of Alliance
Capital. As of December 31, 1997, The Equitable Life Assurance Society of the
United States ("Equitable"), ACMC and Equitable Capital Management Corporation
("ECMC") were the beneficial owners of approximately 57.0% of the outstanding
units of Alliance Capital. ACMC, ECMC and ACMC, Inc. are wholly owned
subsidiaries of Equitable. Equitable, a New York life insurance company, had
total assets as of December 31, 1997 of approximately $82 billion. Equitable is
a wholly owned subsidiary of The Equitable Companies Incorporated, a Delaware
corporation ("ECI"). As of December 31, 1997, AXA-UAP, a French insurance
holding company, owned approximately 59% of the issued and outstanding shares
of the common stock of ECI. Nelson R. Jantzen and Sheryl A. Rothman are
primarily responsible for the day-to-day management of High Yield Investments.
Mr. Jantzen, a Senior Vice President and Co-Head of the High Yield Group, has
been with Alliance Capital for 25 years. Ms. Rothman is a Vice President and
Portfolio Manager and has been with Alliance Capital for 13 years.
Palley-Needelman serves as Advisor to Balanced Investments. The outstanding
shares of capital stock of Palley-Needelman are owned by Roger B. Palley and
Chet J. Needelman. Palley-Needelman, the predecessor of which has been
registered as an investment adviser under the Advisers Act since 1974, provides
investment advisory services to individuals and institutions, including
retirement plans, foundations and endowments. As of September 30, 1997, Palley-
Needelman had assets under management of approximately $4.9 billion. Palley-
Needelman's principal executive offices are located at 800 Newport Center
Drive, Suite 450, Newport Beach, California 92660. Roger Palley has been the
President of Palley-Needelman since 1985 and has been responsible for the day-
to-day management of Balanced Investments since its commencement of operations
on February 16, 1993.
TBCAM serves as an Advisor to Large Capitalization Value Equity Investments.
Registered as an investment advisor under the Advisers Act since 1970, TBCAM is
a wholly owned indirect subsidiary of Mellon Bank Corporation. As of September
30, 1997, TBCAM had assets under management of approximately $21.3 billion.
TBCAM's principal executive offices are located at One Boston Place, Boston,
Massachusetts. Robert J. Eastman has been a Vice President of TBCAM since 1991
and has been responsible
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for the day-to-day management of Large Capitalization Value Equity Investments
since December 31, 1996. Prior to joining TBCAM in 1991, Mr. Eastman served as
a Portfolio Manager/Quantitative Analyst with Trinity Investment Management
Corp.
Parametric also serves as an Advisor to Large Capitalization Value Equity
Investments. Parametric is an investment management firm organized as a general
partnership. Parametric is the successor to Parametric Portfolio Associates,
Inc., formerly a wholly owned subsidiary of Pacific Financial Asset Management
Corporation ("PFAMCo"), which became a subsidiary partnership of PIMCO Advisors
L.P. on November 15, 1994 as a part of the consolidation of the investment
advisory and other businesses of PFAMCo and certain of its subsidiaries with
Thomson Advisory Group L.P. ("Consolidation"). The consolidation closed in
November 1994. Parametric has two partners, PIMCO Advisors as the supervisory
partner, and Parametric Management, Inc. as the managing partner. Parametric
Portfolio Associates, Inc., the predecessor to Parametric, commenced operations
in 1987. Parametric is a registered investment adviser and as of October 31,
1997 had assets under management of $2.5 billion. Parametric's principal
executive offices are located at 7310 Columbia Center, 701 Fifth Avenue,
Seattle, Washington 98104. David Stein and Linda Mauzy are primarily
responsible for the day-to-day management of those assets of the Portfolio
allocated to Parametric for management. Mr. Stein has been a Managing Director
with Parametric since 1996. Ms. Mauzy has been a Portfolio Manager with
Parametric or its predecessor since 1988.
Provident serves as Advisor to Large Capitalization Growth Investments.
Registered as an investment adviser under the Advisers Act since 1951,
Provident is a wholly owned subsidiary of UAM. Provident provides investment
advisory services to individual and institutional clients. As of September 30,
1997, Provident had assets under management of approximately $21.5 billion.
Provident's principal executive offices are located at 300 North Lake Avenue,
Pasadena, California 91101. Thomas J. Condon is a managing director of
Provident and has been with Provident for thirteen years. Paula B. Blacher,
CFA, has been a Vice President of Provident, and has been responsible for the
day-to-day management of Large Capitalization Growth Investments, since
November 1991. Prior to that time, she served as a Portfolio Manager of
Provident.
BGI also serves as an Adviser to Large Capitalization Growth Investments. BGI
is a wholly-owned subsidiary of Barclays Bank PLC. As of August 31, 1997, BGI
was responsible for managing or providing investment advice for assets
exceeding $482 billion represented in part by other open-end management
investment companies. BGI's principal executive offices are located at 45
Fremont Street, San Francisco, California 94105. BGI uses a team-management
approach to manage indexed portfolios. The investment group of BGI is
responsible for the day-to-day management of those assets of the Portfolio
allocated to BGI.
NFJ serves as an Adviser to Small Capitalization Value Equity Investments.
NFJ is an investment management firm organized as a general partnership. NFJ is
the successor to NFJ Investment Group, Inc., formerly a wholly owned subsidiary
of PFAMCo, which became a subsidiary partnership of PIMCO Advisors as a part of
the Consolidation described above. NFJ has two partners, PIMCO Advisors as the
supervisory partner, and NFJ Management, Inc. as the managing partner. NFJ
Investment Group, Inc., the predecessor to NFJ, commenced operations in 1989.
NFJ is registered with the SEC as an investment advisor and, as of October 31,
1997, had assets under management of approximately $2.2 billion. NFJ's
principal executive offices are located at 2121 San Jacinto Street, Suite 1440,
Dallas, Texas 75201. Since June 1996, Benno Fischer and Paul Magnuson have
shared the day-to-day management of those assets allocated to NFJ. Mr. Fischer
has been a Managing Director and Portfolio Manager of NFJ or its predecessors
since January, 1989 and has been responsible for the day-to-day management of
those assets of the Portfolio allocated to NFJ or its predecessor for
management since August 1, 1993, the date on which NFJ's predecessor began
serving as an Advisor to the Portfolio. Mr. Magnuson has been a Senior Research
Analyst and Portfolio Manager since he joined NFJ in August, 1992. Prior to
that time, Mr. Magnuson was a Portfolio Manager at NationsBank.
Babson also serves as an Adviser to Small Capitalization Value Equity
Investments. Babson, a subsidiary of Mass Mutual Holding Company, has been in
the investment advisory business since 1940 and has assets
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under management as of March 31, 1998, of $20 billion. Babson's executive
offices are located at One Memorial Drive, Cambridge, Massachusetts 02142-1300.
Peter C. Schliemann is primarily responsible for the day-to-day management of
the assets allocated to Babson. Mr. Schliemann has been a portfolio manager
with Babson since 1979.
Mellon serves as an Advisor to Small Capitalization Growth Investments and
Small Capitalization Value Equity Investments. Mellon is a wholly owned
subsidiary of MBC Investment Corporation, which itself is a subsidiary of
Mellon Bank. Mellon is a professional counseling firm which manages diversified
stock and bond portfolios for institutional clients. As of September 30, 1997,
Mellon had assets under management exceeding $66 billion. Mellon's principal
executive offices are located at 595 Market Street, Suite 3000, San Francisco,
California 94105. Mellon uses a team-management approach to manage indexed
portfolios. The investment group of Mellon will be responsible for the day-to-
day management of those assets of the Portfolio allocated to Mellon.
Berger Associates also serves as an Advisor to Small Capitalization Growth
Investments. Registered as an investment adviser since 1973, Berger Associates
is a majority owned subsidiary of Kansas City Southern Industries, Inc. Berger
Associates provides investment advisory services to various mutual funds, and
other institutional investors, and as of October 31, 1997, had assets under
management of approximately $3.9 billion. Berger Associate's principal
executive offices are located at 210 University Blvd., Suite 900, Denver,
Colorado 80206. William Keithler is primarily responsible for the day-to-day
management of the portion of the Portfolio's assets allocated to Berger
Associates. Mr. Keithler has been with Berger Associates since 1993. Prior to
that time, he served as Senior Vice President of INVESCO Trust Co.
WSA also serves as an Advisor to Small Capitalization Growth Investments.
Registered as an investment adviser since October 1987, WSA is wholly owned by
its employees. WSA provides investment advisory services to various
institutional clients and as of September 30, 1997, had assets under management
of approximately $1.5 billion. WSA's executive office is located at 1200
Prospect Street, Suite 100, La Jolla, California 92037. William Jeffery III,
the President of WSA along with Kenneth F. McCain and Richard S. Coons are
primarily responsible for the day-to-day management of the portion of the
Portfolio's assets allocated to WSA. Messrs. Jeffery and McCain are founding
partners of the firm, having worked together since 1974. Mr. Coons joined the
firm in 1989.
Westpeak also serves as an Advisor of Small Capitalization Growth
Investments. Registered as an investment advisor since July 1991, Westpeak is a
wholly-owned subsidiary of New England Investment Companies, L.P. Westpeak
provides investment advisory services primarily to various institutional
clients; and as of October 31, 1997, had assets under management of
approximately $2.5 billion. Westpeak's principal executive offices are located
at 1011 Walnut Street, Suite 400, Boulder, Colorado 80302. Gerald H. Scriver is
President and CEO and a Portfolio Manager at Westpeak and is responsible for
the day-to-day management of the assets of Small Capitalization Growth
Investments allocated to Westpeak. Mr. Scriver has been President and CEO of
Westpeak since its inception in 1991.
Montgomery also serves as Advisor to Small Capitalization Growth Investments.
Montgomery, a Delaware limited liability company, is a subsidiary of
Commerzbank AG. Montgomery was formed in 1997 as an investment advisor
registered with the SEC under the Advisers Act. On July 31, 1997, Montgomery
Asset Management, L.P. completed the sale of substantially all of its assets to
Montgomery. Montgomery Asset Management, L.P. had been registered as an
investment advisor since 1990. As of September 30, 1997, Montgomery had assets
under management of approximately $10 billion from individuals and
institutions. Montgomery's principal offices are located at 101 California
Street, San Francisco, CA 94111. Andrew Pratt, portfolio manager and principal,
is responsible for the day-to-day management of Small Capitalization Growth
Investments.
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Oechsle serves as an Advisor to International Equity Investments. Oechsle
Group, L.P., a Delaware limited partnership, is the sole General Partner of
Oechsle. Oechsle's business consists exclusively of global investment
management services. The General Partners of Oechsle Group, L.P., are
individuals who also serve as officers of Oechsle. The General Partners are:
Walter Oechsle; L. Sean Roche; Singleton Dewey Keesler, Jr.; Stephen Langer;
Steven Schaefer; Warren Walker; and Andrew Parlin. Oechsle has been a
registered investment adviser under the Advisers Act since 1986. Oechsle
provides investment advisory services to individual and institutional clients.
As of October 31, 1997, Oechsle had assets under management of approximately
$9.5 billion. Oechsle's principal executive offices are located at One
International Place, Boston, Massachusetts 02110. Walter Oechsle is the
Managing General Partner and a Portfolio Manager of Oechsle, and has been
responsible for the day-to-day management of those assets of International
Equity Investments allocated to Oechsle, since November 1991. Mr. Oechsle has
been Managing General Partner of Oechsle since its inception in 1986. In
addition, since November 1997, Kathleen Harris has shared responsibility for
the day-to-day management of those assets allocated to Oechsle. Ms. Harris has
been employed by Oechsle since January 1995. Prior to her employment with
Oechsle, she was Portfolio Manager and Investment Director for the State of
Wisconsin Investment Board, where she managed international equity assets. Mr.
Oechsle and Ms. Harris manage the assets with the assistance of Oechsle's
entire investment team, which contributes to country asset allocations, stock
selection, and currency decisions.
State Street serves as an Advisor to International Equity Investments. State
Street is a division of State Street Bank and Trust Company. State Street
provides investment advisory services to a wide variety of institutional
clients world-wide and, as of June 30, 1997, had assets under management of
approximately $314 billion. State Street's principal executive offices are
located at Two International Place, Boston, Massachusetts 02110. Peter G. Leahy
and Eric Brandhorst are primarily responsible for the day-to-day management of
State Street's portion of International Equity Investments. Mr. Leahy has been
with State Street since 1991 and Mr. Brandhorst has been with State Street
since 1994. Prior to 1991, Mr. Leahy was a Portfolio Manager at Bankers Trust
Investment Management. Prior to 1994, Mr. Brandhorst was an Analyst with
Wellington Management Co.
Julius Baer serves as Advisor to International Fixed Income Investments.
Julius Baer is a majority owned subsidiary of Julius Baer Securities Inc., a
registered broker-dealer and investment adviser, which in turn is a wholly
owned subsidiary of Baer Holding Ltd. Julius Baer Securities Inc. owns 93% of
the outstanding stock of Julius Baer and 7% is owned by three employees. Julius
Baer has been registered as an investment adviser under the Advisers Act since
April 1983. Directly and through Julius Baer Securities Inc., Julius Baer
provides investment management services to a wide variety of individual and
institutional clients, including registered investment companies. As of October
31, 1997, Julius Baer had assets under management of approximately $4.8 billion
and Julius Baer Securities Inc. had assets under management of approximately
$181 million. Julius Baer's principal executive offices are located at 330
Madison Avenue, New York, New York 10017. Edward Dove, a Director of Fixed-
Income and Portfolio Manager of Julius Baer, has been employed by Julius Baer
since 1992, and has been responsible for the day-to-day management of
International Fixed Income Investments since that time. Prior to that time, he
was employed as a fixed-income manager by Chemical Global Investors Limited in
London.
Govett serves as Advisor for Emerging Markets Equity Investments. Govett was
organized in the 1920's and is registered under the Advisers Act. With its
principal office for North American operations at 250 Montgomery Street, San
Francisco, California 94104, Govett is a majority-owned subsidiary of Allied
Irish Bank PLC, a financial services company. Govett's sole business is the
provision of investment advice and services on behalf of institutions, private
clients, investment trusts and open-ended funds. As of September 30, 1997,
Govett had approximately $5.7 billion in assets under management. Rachael
Maunder is primarily responsible for the day-to-day management of the
Portfolio's assets. Ms. Maunder has been a Manager of emerging markets funds of
Govett since 1991. Prior to that time, she served as Assistant Director of
Invesco Management in London.
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ADMINISTRATOR
MMC serves as the Trust's administrator and generally oversees all aspects of
the Trust's administration and operations. MMC provides investment management
and administration services to investment companies that had aggregate assets
under management as of November 30, 1997, in excess of $85 billion. Each
Portfolio pays MMC a fee for these services that is computed daily and paid
monthly at the annual rate of 0.20% of the value of the Portfolio's average
daily net assets.
EXPENSES OF THE PORTFOLIOS
Each Portfolio bears its own expenses, which generally include all costs not
specifically borne by the Manager, the Advisors, and MMC. Included among a
Portfolio's expenses are: costs incurred in connection with the Portfolio's
organization; investment management and administration fees; fees for necessary
professional and brokerage services; fees for any pricing service; the costs of
regulatory compliance; and costs associated with maintaining the Trust's legal
existence and shareholder relations. The Trust's agreement with the Manager
provides that it will reduce its fees to a Portfolio to the extent required by
applicable state laws for certain expenses that are described in the Statement
of Additional Information.
PORTFOLIO TRANSACTIONS
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 of the Trust 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.
PURCHASE OF SHARES
GENERAL
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 (an "Introducing Broker").
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.
Under an Advisory Service an investor typically pays a periodic fee at rates
that may vary based upon a variety of factors. Currently the maximum annual
rate for assets invested in the Portfolios under a Smith Barney Advisory
Service is 1.50%. The fee may be paid either by redemption of Portfolio shares
or by separate payment. This fee may be reduced or waived at various levels of
assets, for participation by employees of Travelers and its subsidiaries and
for participation by certain individual retirement accounts, retirement plans
for self-employed individuals and employee benefit plans subject to the
Employee Retirement
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Income Security Act of 1974, as amended (collectively "Plans"). Advisory
Services may provide different services than those described above and,
accordingly, fees may be subject to negotiation. Fees may differ based upon a
number of factors, including, but not limited to, the type of account, the size
of the account, the amount of Advisory Service assets and the number and range
of supplemental advisory services to be provided under the Advisory Service.
Financial Consultants receive a portion of any fee paid in consideration of
providing services to clients participating in a Smith Barney Advisory Service.
Investors should be aware that through Smith Barney Advisory Services the
Consulting Group serves as investment adviser to each participant in such
service and receives a fee from each participant that does not vary based on
the Portfolios recommended for the participant's investments. At the same time,
the Consulting Group serves as the Trust's Manager with responsibility for
identifying, retaining, supervising and compensating each Portfolio's Advisor
and receives a fee from each Portfolio. The portion of such fee that is
retained by the Manager varies based on the Portfolio involved. Consequently,
the Consulting Group, when making asset allocation recommendations for
participants in Smith Barney Advisory Services, may be presented with a
conflict of interest as to the specific Portfolios recommended for investment.
The Consulting Group, however, is subject to and intends to comply fully with
standards of fiduciary duty that require that it act solely in the best
interest of the participant when making investment recommendations.
Other Advisory Services. Shares of the Portfolios are also available for
purchase by or for the benefit of clients of certain investment advisers as a
means of implementing asset allocation recommendations based on an investor's
investment objectives and risk tolerances. In order to qualify to purchase
shares on behalf of its clients, the investment adviser must be approved by the
Consulting Group. Investors purchasing shares through investment advisory
services other than Smith Barney Advisory Services may bear different fees for
different levels of services as agreed upon with the investment advisers
offering the programs. Investment advisers interested in utilizing the
Portfolios for the purposes described above should call (302) 888-4104.
Payment for shares of the Trust is due at Smith Barney or at an Introducing
Broker no later than the third business day after the order is placed (the
"Settlement Date"). Investors who make payment prior to the Settlement Date may
permit the payment to be held in their brokerage accounts or may designate a
temporary investment (such as a money market fund) for the payment until the
Settlement Date. When an investor makes payment before the Settlement Date, the
funds will be held as a free credit balance in the investor's brokerage account
and Smith Barney will benefit from the temporary use of the funds. If the
investor instructs Smith Barney to invest the funds in a Smith Barney money
market fund, the amount of the investment will be included as part of the
average daily net assets of both the Portfolio and the Smith Barney money
market fund. Affiliates of Smith Barney that serve these funds in an investment
advisory or administrative capacity will benefit by receiving fees from both of
the funds, computed on the basis of their average daily net assets. The Board
of Trustees has been advised of the benefits to Smith Barney resulting from
these settlement procedures and will take these benefits into consideration
when reviewing the Management Agreement, the Advisory Agreements and the
Administration Agreement.
Systematic Investment Plan. The Trust offers shareholders a Systematic
Investment Plan under which shareholders may authorize Smith Barney to place a
purchase order each month or quarter for Portfolio shares in an amount not less
than $100 per month or quarter. The purchase price is paid automatically from
cash held in the shareholder's Smith Barney brokerage account, through the
automatic redemption of the shareholder's shares of a Smith Barney money market
fund, or through the liquidation of other securities held in the investor's
Smith Barney brokerage account. If an investor's assets are held in a Smith
Barney FMA(R) account, the shareholder may arrange for pre-authorized automatic
fund transfers, on a regular basis, from the shareholder's bank account to the
shareholder's FMA account. Shareholders may utilize this service in conjunction
with the Systematic Investment Plan to facilitate regular Advisory Service
investments. For further information regarding the Systematic Investment Plan,
the FMA account or the automatic funds transfer service, shareholders should
contact their Financial Consultants.
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Minimum Investment. The minimum initial investment in the Trust is $10,000
and the minimum investment in any individual Portfolio is $100. There is no
minimum subsequent investment. Smith Barney Advisory Service accounts for
employees of Smith Barney, accounts of their immediate families and individual
retirement accounts and certain employee benefit plans for those persons will
be subject to a $5,000 minimum investment. The Trust reserves the right at any
time to vary the initial and subsequent investment minimums.
Purchase orders for shares of a Portfolio received by Smith Barney or by an
Introducing Broker prior to the close of regular trading on the New York Stock
Exchange, Inc. (the "NYSE") (currently 4:00 p.m., New York time) on any day
that a Portfolio's net asset value is calculated are priced according to the
net asset value determined on that day. Purchase orders received after the
close of the NYSE are priced as of the time the net asset value per share is
next determined. See "Net Asset Value" below for a description of the times at
which a Portfolio's net asset value per share is determined.
REDEMPTION OF SHARES
REDEMPTIONS IN GENERAL
Shares of a Portfolio may be redeemed at no charge on any day that the
Portfolio calculates its net asset value as described below under "Net Asset
Value." Redemption requests received in proper form prior to the close of
regular trading on the NYSE will be effected at the net asset value per share
determined on that day. Redemption requests received after the close of regular
trading on the NYSE will be effected at the net asset value next determined. A
Portfolio is required to transmit redemption proceeds for credit to the
shareholder's account at Smith Barney or at an Introducing Broker at no charge
within seven days after receipt of a redemption request. Generally, these funds
will not be invested for the shareholder's benefit without specific instruction
and the Introducing Broker will benefit from the use of temporarily uninvested
funds. A shareholder who pays for Portfolio shares by personal check will be
credited with the proceeds of a redemption of those shares when the purchase
check has been collected, which may take up to 15 days or more. Shareholders
who anticipate the need for more immediate access to their investment should
purchase shares with Federal funds or bank wire or by a certified or cashier's
check. Redemption proceeds held by investors either in the form of uninvested
cash balances in their Smith Barney brokerage accounts or as unnegotiated
checks from the Transfer Agent will generally not earn any income for those
investors, who should discuss alternative investments with their Financial
Consultants or other advisers.
Redemption requests may be given to Smith Barney or to an Introducing Broker.
Smith Barney or the Introducing Broker will transmit all properly received
redemption requests to the Transfer Agent. In order to be effective, a
redemption request of a shareholder other than an individual may require the
submission of documents commonly required to assure the safety of a particular
account. A redemption request received by Smith Barney or an Introducing Broker
will be deemed to have been received by the Transfer Agent for purposes of
determining the time when the redemption becomes effective.
Each investor's investment advisory agreement with the Consulting Group
relating to participation in a Smith Barney Advisory Service provides that,
absent separate payment by the participant, fees charged by the Manager
pursuant to that agreement may be paid through automatic redemptions of a
portion of the participant's account. Termination of a Smith Barney Advisory
Service account must be effected by a redemption order for the participant's
entire Trust account.
Automatic Cash Withdrawal Plan. The Trust offers shareholders an automatic
cash withdrawal plan, under which shareholders who own shares with a value of
at least $10,000 may elect to receive cash payments of at least $100 monthly or
quarterly. The withdrawal plan will be carried over on exchanges between
Portfolios of the Trust. For further information regarding the automatic cash
withdrawal plan, shareholders should contact a Financial Consultant.
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INVOLUNTARY REDEMPTIONS
Due to the relatively high cost of maintaining small accounts, the Trust may
redeem an account having a current value of $7,500 or less as a result of
redemptions, but not as a result of a fluctuation in a Portfolio's net asset
value or redemptions to pay the Smith Barney Advisory Service fees, after the
shareholder has been given at least 30 days in which to increase the account
balance to more than that amount. Proceeds of an involuntary redemption will be
deposited in the shareholder's brokerage account unless Smith Barney is
instructed to the contrary. Investors should be aware that involuntary
redemptions may result in the liquidation of Portfolio holdings at a time when
the value of those holdings is lower than the investor's cost of the investment
or may result in the realization of taxable capital gains.
NET ASSET VALUE
Each Portfolio's net asset value per share is calculated by MMC on each day,
Monday through Friday, except on days on which the NYSE is closed. The NYSE is
currently scheduled to be closed on New Year's Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas, and on the preceding Friday when one of those
holidays falls on a Saturday or on the subsequent Monday when one of those
holidays falls on a Sunday.
Net asset value per share is determined for each of the Portfolios as of the
close of trading on the NYSE and is computed by dividing the value of a
Portfolio's net assets by the total number of its shares outstanding.
Generally, a Portfolio's investments are valued at market value or, in the
absence of a market value, at fair value as determined by or under the
direction of the Board of Trustees.
Securities that are primarily traded on foreign exchanges are generally
valued for purposes of calculating a Portfolio's net asset value at the
preceding closing values of the securities on their respective exchanges,
except that, when an occurrence subsequent to the time a value was so
established is likely to have changed that value, the fair market value of
those securities will be determined by consideration of other factors by or
under the direction of the Board of Trustees. A security that is primarily
traded on a domestic or foreign stock exchange is valued at the last sale price
on that exchange or, if no sales occurred during the day, these investments are
quoted at the mean between the current bid and ask prices. Debt securities of
U.S. issuers (other than U.S. Government Securities and short-term investments)
are valued by MMC after consultation with the pricing service. When, in the
judgment of the pricing service, quoted bid prices are available and are
representative of the bid side of the market, these investments are valued at
the mean between the quoted bid and ask 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. All portfolio securities held by Government Money
Investments and short-term dollar-denominated investments of the other
Portfolios that mature in 60 days or less are valued on the basis of amortized
cost (which involves valuing an investment at its cost and, thereafter,
assuming a constant amortization to maturity of any discount or premium,
regardless of the effect of fluctuating interest rates on the market value of
the investment) when the Board of Trustees has determined that amortized cost
represents fair value. An option that is written by a Portfolio is generally
valued at the last sale price or, in the absence of the last sale price, the
last offer price. An option that is purchased by the Portfolio is generally
valued at the last sale price or, in the absence of the last sale price, the
last bid price. The value of a futures contract is equal to the unrealized gain
or loss on the contract that is determined by marking the contract to the
current settlement price for a like contract on the valuation date of the
futures contract. A settlement price may not be used if the market makes a
limit move with respect to a particular futures contract or if the securities
underlying the futures contract experience significant price fluctuations after
the determination of the settlement price. When a settlement price cannot be
used, futures contracts will be valued at their fair market value as determined
by or under the direction of the Board of Trustees.
All assets and liabilities initially expressed in foreign currency values
will be converted into U.S. dollar values at the mean between the bid and
offered quotations of the currencies against U.S. dollars as last quoted by a
recognized dealer. If the bid and offered quotations are not available, the
rate of exchange will be determined in good faith by the Board of Trustees. In
carrying out the Board's valuation policies, MMC may consult with an
independent pricing service retained by the Trust. Further information
regarding the Portfolios' valuation policies is contained in the Statement of
Additional Information.
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EXCHANGE PRIVILEGE
Shares of a Portfolio may be exchanged without payment of any exchange fee
for shares of another Portfolio at their respective net asset values. Portfolio
shares are not exchangeable with shares of other Smith Barney Mutual Funds.
An exchange of shares is treated for federal income tax purposes as a
redemption (sale) of shares given in exchange by the shareholder, and an
exchanging shareholder may, therefore, realize a taxable gain or loss in
connection with the exchange. Shareholders exchanging shares of a Portfolio for
shares of another Portfolio should review the disclosure provided herein
relating to the exchanged-for shares carefully prior to making an exchange. The
exchange privilege is available to shareholders residing in any state in which
Portfolio shares being acquired may be legally sold.
Although the exchange privilege is an important benefit, excessive exchange
transactions can be detrimental to a Portfolio's performance and its
shareholders. The Manager may determine that a pattern of frequent exchanges is
excessive and contrary to the best interests of a Portfolio's other
shareholders. In this event, the Trust may, at its discretion, decide to limit
additional purchases and/or exchanges by the shareholder. Upon such a
determination, the Trust will provide notice in writing or by telephone to the
shareholder at least 15 days prior to suspending the exchange privilege and
during the 15-day period the shareholder will be required to (a) redeem his or
her shares in the Portfolio or (b) remain invested in the Portfolio or exchange
into any of the other Portfolios, which position the shareholder would expect
to maintain for a significant period of time. All relevant factors will be
considered in determining what constitutes an abusive pattern of exchanges.
For further information regarding the exchange privilege, investors should
contact their Financial Consultants. The Trust reserves the right to reject any
exchange request and the exchange privilege may be modified or terminated after
60 days' written notice to shareholders.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Net investment income (i.e., income other than long- and short-term capital
gains) and net realized long- and short-term capital gains will be determined
separately for each Portfolio. Dividends derived from net investment income and
distributions of net realized long- and short-term capital gains paid by a
Portfolio to a shareholder will be automatically reinvested (at current net
asset value) in additional shares of that Portfolio (which will be deposited in
the shareholder's account) unless the shareholder instructs the Trust, in
writing, to pay all dividends and/or distributions in cash. Dividends
attributable to substantially all the net investment income of Government Money
Investments will be declared daily and paid monthly. Shareholders of that
Portfolio receive dividends from the day following the purchase up to and
including the date of redemption. Dividends attributable to the net investment
income of Intermediate Fixed Income Investments, Long-Term Bond Investments,
Mortgage Backed Investments, Municipal Bond Investments, Balanced Investments,
High Yield Investments, and International Fixed Income Investments are declared
and paid monthly. Dividends attributable to the net investment income of the
remaining Portfolios are declared and paid at least annually. Distributions of
any net realized long-term and short-term capital gains earned by a Portfolio
will be made annually.
TAXES
As each Portfolio is treated as a separate entity for federal income tax
purposes, the amounts of net investment income and net realized capital gains
subject to tax will be determined separately for each Portfolio (rather than on
a Trust-wide basis).
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Each Portfolio separately has qualified and intends to qualify each year as a
regulated investment company for federal income tax purposes. The requirements
for qualification will cause each of the Portfolios to maintain a diversified
asset portfolio.
A regulated investment company will not be subject to federal income tax on
its net investment income and its capital gains that it distributes to
shareholders, so long as it meets certain overall distribution requirements and
other conditions under the Code. Each Portfolio intends to satisfy these
overall distribution requirements and any other required conditions. In
addition, each Portfolio is subject to a 4% nondeductible excise tax measured
with respect to certain undistributed amounts of ordinary income and capital
gains. The Trust intends to have each Portfolio pay additional dividends and
make additional distributions as are necessary in order to avoid application of
the excise tax, if such payments and distributions are determined to be in the
best interest of the Portfolio's shareholders. Dividends declared by a
Portfolio in October, November or December of any calendar year and payable to
shareholders of record on a specified date in such a month shall be deemed to
have been received by each shareholder on December 31 of such calendar year and
to have been paid by the Portfolio not later than such December 31 provided
that such dividend is actually paid by the Portfolio during January of the
following year.
Dividends derived from a Portfolio's taxable net investment income and
distributions of a Portfolio's net realized short-term capital gains (including
short-term gains from investments in tax exempt obligations) will be taxable to
shareholders as ordinary income for federal income tax purposes, regardless of
how long shareholders have held their Portfolio shares and whether the
dividends or distributions are received in cash or reinvested in additional
shares. Distributions of net realized long-term capital gains (including long-
term gains from investments in tax exempt obligations) will be taxable to
shareholders as long-term capital gains for federal income tax purposes,
regardless of how long a shareholder has held his Portfolio shares and whether
the distributions are received in cash or reinvested in additional shares.
Distributions of capital gains paid by all the Portfolios will not qualify for
the dividend received deduction for corporations; however, dividends paid by a
Portfolio, to the extent derived from dividends attributable to certain types
of stock issued by U.S. corporations, will qualify for the dividend received
deduction for corporations. Some states, if certain asset and diversification
requirements are satisfied, permit shareholders to treat their portions of a
Portfolio's dividends that are attributable to interest on U.S. Treasury
securities and certain U.S. Government Securities as income that is exempt from
state and local income taxes. Dividends attributable to repurchase agreement
earnings are, as a general rule, subject to state and local taxation.
Dividends paid by Municipal Bond Investments that are derived from interest
earned on qualifying tax-exempt obligations are expected to be "exempt-
interest" dividends that shareholders may exclude from their gross incomes for
federal income tax purposes if the Portfolio satisfies certain asset percentage
requirements. To the extent that the Portfolio invests in bonds, the interest
on which is a specific tax preference item for federal income tax purposes
("AMT-Subject Bonds"), any exempt-interest dividends derived from interest on
AMT-Subject Bonds will be a specific tax preference item for purposes of the
federal individual and corporate alternative minimum taxes. In any event, all
exempt-interest dividends will be a component of the "current earnings"
adjustment item for purposes of the federal corporate alternative minimum
income tax.
Net investment income or capital gains earned by the Portfolios investing in
foreign securities may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries that entitle the Portfolios to a reduced rate of tax or exemption
from tax on this related income and gains. It is impossible to determine the
effective rate of foreign tax in advance since the amount of these Portfolios'
assets to be invested within various countries is not known. The Portfolios
intend to operate so as to qualify for treaty-reduced rates of tax where
applicable. Furthermore, if a Portfolio qualifies as a regulated investment
company and if more than 50% of the value of the Portfolio's assets at the
close of the taxable year consists of stocks or securities of foreign
corporations, the Portfolio may elect, for U.S. federal income tax purposes, to
treat foreign income taxes paid by the Portfolio that can be treated as income
taxes under U.S. income tax principles as paid by its shareholders. The Trust
anticipates that
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International Equity Investments and Emerging Markets Equity Investments will
qualify for and make this election in most, but not necessarily all, of its
taxable years. If a Portfolio were to make an election, an amount equal to the
foreign income taxes paid by the Portfolio would be included in the income of
its shareholders and the shareholders would be entitled to credit their
portions of this amount against their U.S. tax liabilities, if any, or to
deduct such portions from their U.S. taxable income, if any. Shortly after any
year for which it makes an election, a Portfolio will report to its
shareholders, in writing, the amount per share of foreign tax that must be
included in each shareholder's gross income and the amount which will be
available for deduction or credit. No deduction for foreign taxes may be
claimed by a shareholder who does not itemize deductions. Certain limitations
will be imposed on the extent to which the credit (but not the deduction) for
foreign taxes may be claimed.
As noted above, shareholders, out of their own assets, will pay an Advisory
Service fee. For most shareholders who are individuals, this fee will be
treated as a "miscellaneous itemized deduction" for federal income tax
purposes. Under current federal income tax law, an individual's miscellaneous
itemized deductions for any taxable year shall be allowed as a deduction only
to the extent that the aggregate of these deductions exceeds 2% of adjusted
gross income. Such deductions are also subject to the general limitation on
itemized deductions for individuals having, in 1997, adjusted gross income in
excess of $121,200 ($60,600 for married individuals filing separately).
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually. Shareholders will also receive, if
appropriate, various written notices after the close of the Portfolios' taxable
year with respect to certain foreign taxes paid by the Portfolios and certain
dividends and distributions that were, or were deemed to be, received by
shareholders from the Portfolios during the Portfolios' prior taxable year.
Shareholders should consult with their own tax advisors with specific reference
to their own tax situations.
CUSTODIAN AND TRANSFER AGENT
PNC is located at 17th and Chestnut Streets, Philadelphia, Pennsylvania 19103
and Chase is located at 4 Chase MetroTech Center, Brooklyn, New York 11245, and
each serves as a Custodian for the Trust.
First Data Investors Services Group, Inc. is located at Exchange Place,
Boston, Massachusetts 02109 and serves as the Trust's transfer agent.
PERFORMANCE OF THE PORTFOLIOS
YIELD
The Trust may, from time to time, include the yield and effective yield of
Government Money Investments in advertisements or reports to shareholders or
prospective investors. Current yield for Government Money Investments will be
based on income received by a hypothetical investment over a given 7-day period
(less expenses accrued during the period and the maximum Smith Barney Advisory
Service fee during the period), and then "annualized" (i.e., assuming that the
7-day yield would be received for 52 weeks, stated in terms of an annual
percentage return on the investment). "Effective yield" for Government Money
Investments will be calculated in a manner similar to that used to calculate
yield, but will reflect the compounding effect of earnings on reinvested
dividends.
For Intermediate Fixed Income Investments, Long-Term Bond Investments,
Mortgage Backed Investments, High Yield Investments and Municipal Bond
Investments, from time to time, the Trust may advertise the 30-day "yield" and,
with respect to Municipal Bond Investments, an "equivalent taxable yield." The
yield of a Portfolio refers to the income generated by an investment in the
Portfolio over the 30-day period identified in the advertisement and is
computed by dividing the net investment income per share earned by the
Portfolio during the period (less the maximum Smith Barney Advisory Service fee
during the period) by the net asset value per share on the last day of the
period. This income is "annualized" by assuming that the amount of income is
generated each month over a one-year period and is compounded semi-annually.
The annualized income is then shown as a percentage of the net asset value.
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EQUIVALENT TAXABLE YIELD
The equivalent taxable yield of Municipal Bond Investments demonstrates the
yield on a taxable investment necessary to produce an after-tax yield equal to
the Portfolio's tax-exempt yield. It is calculated by increasing the yield
shown for the Portfolio, calculated as described above, to the extent necessary
to reflect the payment of specified tax rates. Thus, the equivalent taxable
yield always will exceed the Portfolio's yield.
TOTAL RETURN
From time to time, the Trust may advertise a Portfolio's (other than
Government Money Investments') "average annual total return" over various
periods of time. This total return figure shows the average percentage change
in value of an investment in the Portfolio from the beginning date of the
measuring period to the ending date of the measuring period and is reduced by
the maximum Smith Barney Advisory Service fee during the measuring period. The
figure reflects changes in the price of the Portfolio's shares and assumes that
any income, dividends and/or capital gains distributions made by the Portfolio
during the period are reinvested in shares of the Portfolio. Figures will be
given for recent one-, five- and ten-year periods (if applicable) and may be
given for other periods as well (such as from commencement of the Portfolio's
operations or on a year-by-year basis). When considering average total return
figures for periods longer than one year, investors should note that a
Portfolio's annual total return for any one year in the period might have been
greater or less than the average for the entire period. A Portfolio also may
use aggregate total return figures for various periods, representing the
cumulative change in value of an investment in the Portfolio for the specific
period (again reflecting changes in the Portfolio's share price, the effect of
the maximum Smith Barney Advisory Service fee during the period and assuming
reinvestment of dividends and distributions). Aggregate total returns may be
shown by means of schedules, charts or graphs, and may indicate subtotals of
the various components of total return (that is, the change in value of initial
investment, income dividends and capital gains distributions).
It is important to note that yield and total return figures are based on
historical earnings and are not intended to indicate future performance. The
Statement of Additional Information describes the method used to determine a
Portfolio's yield and total return. Shareholders may make inquiries regarding a
Portfolio, including current yield quotations or total return figures, of his
or her Financial Consultant.
In reports or other communications to shareholders or in advertising
material, a Portfolio may quote total figures that do not reflect Smith Barney
Advisory Service fees (provided that these figures are accompanied by
standardized total return figures calculated as described above), as well as
compare its performance with that of other mutual funds as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar independent
services that monitor the performance of mutual funds or with other appropriate
indices of investment securities, such as the Salomon Brothers World Government
Bond Index, Lehman Brothers Government Bond Index and Lehman Brothers Mortgage-
Backed Securities Index. The performance information also may include
evaluations of the Portfolios published by nationally recognized ranking
services and by financial publications that are nationally recognized, such as
Barron's, Business Week, CDA Investment Technologies, Inc., Changing Times,
Forbes, Fortune, Institutional Investor, Investor's Daily, Kiplinger's Personal
Finance Magazine, Money, Morningstar Mutual Fund Values, The New York Times,
USA Today and The Wall Street Journal.
ADDITIONAL INFORMATION
The Trust was organized under the laws of the Commonwealth of Massachusetts
pursuant to a Master Trust Agreement dated April 12, 1991, as amended, and is a
business entity commonly known as a "Massachusetts business trust." Each of the
Portfolios offers shares of beneficial interest of separate series with a par
value of $0.001 per share. When matters are submitted for shareholder vote,
shareholders of each of the Portfolios will have one vote for each full share
held and proportionate, fractional votes for fractional shares held. Generally,
shares of the Trust vote by individual Portfolio on all matters except (i)
matters affecting all of the Portfolios, or (ii) when the 1940 Act requires
that shares of the Portfolios be voted in the
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aggregate. Normally, no meetings of shareholders will be held for the purpose
of electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees. Shareholders of record of no less than two-thirds of the outstanding
shares of a Portfolio may remove a Trustee through a declaration in writing or
by vote cast in person or by proxy at a meeting called for that purpose. A
meeting will be called upon the written request of holders of 10% of the
Portfolio's outstanding shares. Shareholders who satisfy certain criteria will
be assisted by the Trust in communicating with other shareholders in seeking
the holding of such a meeting.
The Trust sends to each shareholder a semi-annual report and an audited
annual report, each of which includes a list of the investment securities held
by the Portfolios. Shareholders may seek information regarding a Portfolio,
including the current performance of the Portfolio, from their Financial
Consultants.
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No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, the Statement
of Additional Information or the Trust's official sales literature in
connection with the offering of shares, and if given or made, such other
information or representations must not be relied upon as having been
authorized by the Trust. This Prospectus does not constitute an offer in any
state in which, or to any person to whom, such offer may not lawfully be made.
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Consulting Group Capital Markets Funds
Government Money Investments
Intermediate Fixed Income Investments
Long-Term Bond Investments
Municipal Bond Investments
Mortgage Backed Investments
Balanced Investments
Large Capitalization Value Equity Investments
Large Capitalization Growth Investments
Small Capitalization Value Equity Investments
Small Capitalization Growth Investments
International Equity Investments
International Fixed Income Investments
Emerging Markets Equity Investments
High Yield Investments
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PROSPECTUS
July 1, 1998
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Smith Barney Inc.
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APPENDIX A
INVESTMENT INDICES
Following are definitions of indicies that are utilized in the Client's
Recommendation and Review.
LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX
Composed of publicly issued, fixed rate, non-convertible domestic debt in three
major classifications: industrial, utility, financial as well as the domestic
debt of the U.S. Government or any agency thereof. All issues have at least one
year to maturity, or an outstanding par value of at least $100 million for U.S.
Government issues and $50 million for corporate issues. All corporate issues
have a minimum rating of Baa by Moody's or BBB by Standard & Poor's.
LEHMAN BROTHERS LONG TERM GOVERNMENT/CORPORATE BOND INDEX
Includes all bonds covered by the Lehman Brothers Government/Corporate Bond
Index, with maturities of 10 years or longer. Total return includes income and
appreciation/ depreciation as a percentage of original investment.
LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX
A subset of the Lehman Brothers Government/Corporate Bond Index covering issues
with maturities up to ten years.
LEHMAN BROTHERS MORTGAGE BACKED SECURITIES BOND INDEX
Contains all fixed securities issued and backed by mortgage pools of GNMA's,
FHLMC's, FNMA's, Graduated Payment Mortgage (GPM's), but not Graduated Equity
Mortgages (GEM).
LEHMAN BROTHERS MUNICIPAL BOND INDEX
A composite measure of the total return performance of the municipal bond
market, which includes more than two million different bond issues. For
simplicity, the market is divided into seven major sectors, with the
performance of each sector weighted according to issue volume (adjusted
annually).
LIPPER CORPORATE DEBT FUNDS A RATED AVERAGE
An average of the reinvested performance of funds that invest at least 65% of
their assets in corporate debt issues rated "A" or better or government issues.
LIPPER CORPORATE DEBT FUNDS A RATED INDEX
An equally weighted performance index, adjusted for capital gains distributions
and income dividends of the largest qualifying funds having this investment
objective.
LIPPER GENERAL MUNICIPAL FUNDS AVERAGE
An average of the reinvested performance of funds that invest at least 65% of
their assets in municipal debt issues in the top four credit ratings.
LIPPER GENERAL MUNICIPAL FUNDS INDEX
An equally weighted performance index, adjusted for capital gains distributions
and income dividends of the largest qualifying funds having this investment
objective.
LIPPER GENERAL WORLD FUNDS AVERAGE
An average of the reinvested performance of the following twelve Lipper
investment objectives: Gold Oriented, Global, Global Small Company,
International, International Small Company, European Region, Pacific Ex Japan,
Pacific Region, Emerging Markets, Japanese, Latin American and Canadian Funds.
LIPPER GROWTH FUNDS AVERAGE
An average of the reinvested performance of funds that normally invest in
companies whose long-term earnings are expected to grow significantly faster
than the earnings of the stocks represented in the major unmanaged stock
indices.
LIPPER GROWTH FUNDS INDEX
An equally weighted performance index, adjusted for capital gains distributions
and income dividends of the largest qualifying funds having this investment
objective.
LIPPER INTERNATIONAL FUNDS AVERAGE
An average of the reinvested performance of funds that invest its assets in
securities whose primary trading markets are outside of the United States.
LIPPER INTERNATIONAL FUNDS INDEX
An equally weighted performance index, adjusted for capital gains distributions
and income dividends of the largest qualifying funds having this investment
objective.
LIPPER SMALL COMPANY GROWTH FUNDS AVERAGE
An average of the reinvested performance of funds that by their prospectus or
portfolio practice, limit investments to companies on the basis of the size of
the company.
LIPPER SMALL COMPANY GROWTH FUNDS INDEX
An equally weighted performance index, adjusted for capital gains distributions
and income dividends of the largest qualifying funds having this investment
objective.
LIPPER U.S. MORTGAGE FUNDS AVERAGE
An average of the reinvested performance of funds that invest at least 65% of
their assets in mortgages/securities issued or guaranteed as to principal and
interest by the U.S. Government and certain federal agencies.
MORGAN STANLEY EAFE (CAPITALIZATION WEIGHTED)
A composite portfolio of equity (stock market) total returns for the countries
of Europe, Australia, New Zealand and the Far East. The return for each country
is weighted on the basis of its market capitalization.
MORGAN STANLEY EMERGING EQUITY MARKETS FREE GROSS DIVIDEND INDEX
A composite portfolio consisting of equity total returns for countries with low
to middle per capita income, as determined by the World Bank. Some of these
countries include: Argentina, Greece, India, Malaysia, Portugal and Turkey. The
return for each country is weighted on the basis of its total market
capitalization.
90-DAY TREASURY BILL INDEX
Unweighted average of weekly auction offering rates of 90-Day Treasury Bills.
Treasury Bills are backed by the full faith and credit of the U.S. Government.
RUSSELL 1000 INDEX
The 1,000 largest U.S. companies by market capitalization, the smallest of
which has about $457 million in market capitalization. The average market
capitalization for a company in this index is $3.42 billion.
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APPENDIX A
INVESTMENT INDICES--(CONTINUED)
RUSSELL 1000 VALUE INDEX
Contains those Russell 1000 securities with less-than-average growth
orientation. Companies in this index generally have low price-to-book and
earnings ratios and higher dividend yields than stocks in the Russell 1000
Growth Index.
RUSSELL 1000 GROWTH INDEX
Contains those Russell 1000 securities with greater-than-average growth
orientation. Companies in this index tend to exhibit high price-to-book and
earnings ratios and lower dividend yields than stocks in the Russell 1000 Value
Index.
RUSSELL 2000 INDEX
Composed of the 2,000 smallest U.S. securities as determined by total market
capitalization, representing about 7.1% of the U.S. equity market
capitalization. The average market capitalization for a company in this index
is $155 million, with the largest being $457 million.
RUSSELL 2000 VALUE INDEX
Contains those Russell 2000 securities with less-than-average growth
orientation. Companies in this index generally have low price-to-book and
earnings ratios and higher dividend yields than stocks in the Russell 2000
Growth Index.
RUSSELL 2000 GROWTH INDEX
Contains those Russell 2000 securities with greater-than-average growth
orientation. Companies in this index tend to exhibit high price-to-book and
earnings ratios and lower dividend yields than stocks in the Russell 2000 Value
Index.
STANDARD & POOR'S 500 INDEX
Tracks the total return of 500 of the largest stocks (400 industrial, 40
utility, 20 transportation and 40 financial companies) in the United States,
which represent about 78% of the New York Stock Exchange's total market
capitalization. The return of each stock is weighted on the basis of the
stock's capitalization.
SALOMON BROTHERS NON-U.S. GOVERNMENT BOND INDEX
A market capitalization-weighted index consisting of government bond markets of
Austria, France, Spain, Australia, Germany, Sweden, Belgium, Italy, United
Kingdom, Canada, Japan, Denmark and the Netherlands.
WILSHIRE LARGE COMPANY GROWTH EQUITY INDEX
Focuses on the top 750 companies of the Wilshire 5000 in terms of market
capitalization. The smallest company's capitalization is $675 million. The
index excludes companies meeting one or more of the following criteria: less
than 5 years of operating history, high dividend payout companies, low price-
to-book companies or low return on equity.
WILSHIRE LARGE COMPANY VALUE EQUITY INDEX
Focuses on the top 750 companies of the Wilshire 5000 in terms of market
capitalization. The smallest company's capitalization is $675 million. The
index excludes companies that do not rank favorably on a relative basis due to
their high P/E and price-to-book ratios, or low yield.
WILSHIRE SMALL COMPANY GROWTH EQUITY INDEX
Focuses on companies that rank between 751-1,750 of the Wilshire 5000 in terms
of market capitalization. The smallest company's capitalization is $58 million.
The index excludes companies meeting one or more of the following criteria:
less than two years operating history, high yield, little or no earnings growth
or low beta.
WILSHIRE SMALL COMPANY VALUE EQUITY INDEX
Focuses on companies that rank between 751-1,750 of the Wilshire 5000 in terms
of market capitalization. The smallest company's capitalization is $58 million.
The index excludes companies that do not rank favorably on a relative basis due
to their high price-to-earnings and price-to-book ratios, or low yield.
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APPENDIX B
The following are copies of the proposed and final exemptions from the
Department of Labor from certain provisions of the Employee Retirement Income
Security Act of 1974 relating to the purchase of shares and participation in
TRAK by certain retirement plans.
PROPOSED EXEMPTION
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PENSION AND WELFARE BENEFITS ADMINISTRATION
[APPLICATION NO. D-8723]
PROPOSED EXEMPTIONS; SHEARSON LEHMAN BROTHERS, INC.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the Department of
Labor (the Department) of proposed exemptions from certain of the prohibited
transaction restrictions of the Employee Retirement Income Security Act of 1974
(the Act) and/or the Internal Revenue Code of 1986 (the Code).
WRITTEN COMMENTS AND HEARING REQUESTS: All interested persons are invited to
submit written comments or request for a hearing on the pending exemptions,
unless otherwise stated in the Notice of Proposed Exemption, within 45 days
from the date of publication of this FEDERAL REGISTER Notice. Comments and
request for a hearing should state: (1) The name, address, and telephone number
of the person making the comment or request, and (2) the nature of the person's
interest in the exemption and the manner in which the person would be adversely
affected by the exemption. A request for a hearing must also state the issues
to be addressed and include a general description of the evidence to be
presented at the hearing. A request for a hearing must also state the issues to
be addressed and include a general description of the evidence to be presented
at the hearing.
ADDRESSES: All written comments and request for a hearing (at least three
copies) should be sent to the Pension and Welfare Benefits Administration,
Office of Exemption Determinations, room N-5649, U.S. Department of Labor, 200
Constitution Avenue NW., Washington, DC 20210. Attention: Application No.
stated in each Notice of Proposed Exemption. The applications for exemption and
the comments received will be available for public inspection in the Public
Documents Room of Pension and Welfare Benefits Administration, U.S. Department
of Labor, room N-5507, 200 Constitution Avenue N.W., Washington, DC 20210.
NOTICE TO INTERESTED PERSONS: Notice of the proposed exemptions will be
provided to all interested persons in the manner agreed upon by the applicant
and the Department within 15 days of the date of publication in the FEDERAL
REGISTER. Such notice shall include a copy of the notice of proposed exemption
as published in the FEDERAL REGISTER and shall inform interested persons of
their right to comment and to request a hearing (where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in 29 CFR
part 2570, subpart B (55 FR 32836, 32847, August 10, 1990). Effective December
31, 1978, section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713,
October 17, 1978) transferred the authority of the Secretary of the Treasury to
issue exemptions of the type requested to the Secretary of Labor. Therefore,
these notices of proposed exemption are issued solely by the Department.
The applications contain representations with regard to the proposed
exemptions which are summarized below. Interested persons are referred to the
applications on file with the Department for a complete statement of the facts
and representations.
SHEARSON LEHMAN BROTHERS, INC. (SHEARSON LEHMAN), LOCATED IN NEW YORK, NY
[Application No. D-8723]
PROPOSED EXEMPTION
Section I. Covered Transactions
The Department is considering granting an exemption under the authority of
section 408(a) of the Act and section 4975(c)(2) of the Code and in accordance
with the procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the restrictions of
section 406(a) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1)(A) through (D) shall
not apply to the proposed purchase or redemption of shares by an employee
benefit plan, an individual retirement account (the IRA) or a retirement plan
for a self-employed individual (the Keogh Plan; collectively, the Plans) in the
Shearson Lehman-established Trust for TRAK Investments (the Trust) in
connection with such Plans' participation in the TRAK Personalized Investment
Advisory Service (the TRAK Program). In addition, the restrictions of section
406(b)(1) and (b)(2) of the Act and the sanctions resulting from the
application of section 4975 of the Code by reason of section 4975(c)(1)(E)
shall not apply to the provision, by the Consulting Group Division of Shearson
Lehman (the Consulting Group), investment advisory services to an independent
fiduciary of a participating Plan (the Independent Plan Fiduciary) which may
result in such fiduciary's selection of a portfolio grouping (the Portfolio-
Type) in the TRAK Program for the investment of Plan assets.
This proposed exemption is subject to the following conditions that are set
forth below in section II.
Section II. General Conditions
(1) The participation of Plans in the TRAK Program will be approved by a Plan
fiduciary which is independent of Shearson Lehman.
(2) The total fees paid to the Consulting Group and its affiliates will
constitute no more than reasonable compensation.
(3) No Plan will pay a fee or commission by reason of the acquisition or
redemption of shares in the Trust.
(4) The terms of each purchase or redemption of Trust shares shall remain at
least as favorable to an investing Plan as those obtainable in an arm's length
transaction with an unrelated party.
(5) The Consulting Group will provide written documentation to an Independent
Plan Fiduciary of its recommendations or evaluations based upon objective
criteria.
(6) Any recommendation or evaluation made by the Consulting Group to an
Independent Plan Fiduciary will be implemented only at the express direction of
such independent fiduciary.
(7) The Consulting Group will generally give investment advice to an
Independent Plan Fiduciary with respect to Portfolio-Types. However, in the
case of a Plan providing for participant-directed investments (the Section
404(c) Plan), the Consulting Group will provide investment advice that is
limited to the Portfolios made available under the Plan.
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(8) Any sub-adviser (the Sub-Adviser) that is appointed by the Consulting
Group to exercise investment discretion over a Portfolio will be independent of
Shearson Lehman and its affiliates.
(9) Immediately following the acquisition by a Portfolio of any securities
that are issued by Shearson Lehman and/or its affiliates, the percentage of
that Portfolio's net assets invested in such securities will not exceed one
percent.
(10) The quarterly investment advisory fee that is paid by a Plan to the
Consulting Group for investment advisory services rendered to such Plan will be
offset by such amount as is necessary to assure that the Consulting Group
retains no more than 20 basis points from any Portfolio which contains
investments attributable to the Plan investor.
(11) The Consulting Group will not retain an investment advisory or management
fee from the Government Money Investments Portfolio.
(12) With respect to its participation in the TRAK Program prior to purchasing
Trust shares.
(a) Each Plan will receive the following written or oral disclosures from the
Consulting Group:
(1) A copy of the prospectus (the Prospectus) for the Trust discussing the
investment objectives of the Portfolios comprising the Trust, the policies
employed to achieve these objectives, the corporate affiliation existing
between the Consulting Group, Shearson Lehman and its subsidiaries and the
compensation paid to such entities.
(2) Upon written or oral request to Shearson Lehman, a Statement of Additional
Information supplementing the Prospectus which describes 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.
(3) A copy of the investment advisory agreement between the Consulting Group
and such Plan relating to participation in the TRAK Program.
(4) A copy of the respective investment advisory agreement between the
Consulting Group and the Sub-Advisers upon written request to Shearson Lehman.
(5) In the case of a Section 404(c) Plan, if required by the arrangement
negotiated between the Consulting Group and the Plan, an explanation by a
Shearson Lehman Financial Consultant (the Financial Consultant) to eligible
participants in such Plan, of the services offered under the TRAK Program and
the operation and objectives of the Portfolios.
(b) If accepted as an investor in the TRAK Program, an Independent Plan
Fiduciary of an IRA or Keogh Plan, will be required to acknowledge, in writing,
prior to purchasing Trust shares that such fiduciary has received copies of
such documents.
(c) With respect to a Section 404(c) Plan, written acknowledgement of the
receipt of such documents will be provided by the Independent Plan Fiduciary
(i.e., the plan administrator, trustee or named fiduciary, as the recordholder
of Trust shares). Such Independent Plan Fiduciary will be required to represent
in writing to Shearson Lehman that such fiduciary is (1) independent of
Shearson Lehman and its affiliates and (2) knowledgeable with respect to the
Plan in administrative matters and funding matters related thereto, and able to
make an informed decision concerning participation in the TRAK Program.
(d) With respect to a Plan that is covered under title I of the Act, where
investment decisions are made by a trustee, investment manager or a named
fiduciary, such Independent Plan Fiduciary will be required to acknowledge, in
writing, receipt of such documents and represent to Shearson Lehman that such
fiduciary is (1) independent of Shearson Lehman and its affiliates, (2) capable
of making an independent decision regarding the investment of Plan assets and
(3) knowledgeable with respect to the Plan in administrative matters and
funding matters related thereto, and able to make an informed decision
concerning participation in the TRAK Program.
(13) Each Plan will receive the following written or oral disclosures with
respect to its ongoing participation in the TRAK Program.
(a) The Trust's semi-annual and annual report which will include financial
statements for the Trust and investment management fees paid by each Portfolio.
(b) A written quarterly monitoring report containing an analysis and an
evaluation of a Plan investor's account to ascertain whether the Plan's
investment objectives have been met and recommending, if required, changes in
Portfolio allocations.
(c) If required by the arrangement negotiated between the Consulting Group and
a Section 404(c) Plan, a quarterly, detailed investment performance monitoring
report, in writing, provided to an Independent Plan Fiduciary of such Plan
showing Plan level asset allocations, Plan cash flow analysis and annualized
risk adjusted rates of return for Plan investments. In addition, if required by
such arrangement, Financial Consultants will meet periodically with Independent
Plan Fiduciaries of Section 404(c) Plans to discuss the performance monitoring
report as well as with eligible participants to review their accounts'
performance.
(d) If required by the arrangement negotiated between the Consulting Group and
a Section 404(c) Plan, a quarterly participant performance monitoring report
provided to a Plan participant which accompanies the participant's benefit
statement and describes the investment performance of the Portfolios, the
investment performance of the participant's individual investment in the TRAK
Program, and gives market commentary and toll-free numbers that will enable the
participant to obtain more information about the TRAK Program or to amend his
or her investment allocations.
(e) On a quarterly and annual basis, written disclosures to all Plans of the
(1) percentage of each Portfolio's brokerage commissions that are paid to
Shearson Lehman and its affiliates and (2) the average brokerage commission per
share paid by each Portfolio to Shearson Lehman and its affiliates, as compared
to the average brokerage commission per share paid by the Trust to brokers
other than Shearson Lehman and its affiliates, both expressed as cents per
share.
(14) Shearson Lehman shall maintain, for a period of six years, the records
necessary to enable the persons described in paragraph (15) of this section to
determine whether the conditions of this exemption have been met, except that
(a) a prohibited transaction will not be considered to have occurred if, due to
circumstances beyond the control of Shearson Lehman and/or its affiliates, the
records are lost or destroyed prior to the end of the six year period, and (b)
no party in interest other than Shearson Lehman shall be subject to the civil
penalty that may be assessed under section 502(1) of the Act, or the taxes
imposed by section 4975(a) and (b) of the Code, if the records are not
maintained, or are not available for examination as required by paragraph (15)
below.
(15) (a) Except as provided in section (b) of this paragraph and
notwithstanding any provisions of subsections (a)(2)and (b) of section 504 of
the Act, the records referred to in paragraph (14) of this section shall be
unconditionally available at their customary location during normal business
hours by:
(1) Any duly authorized employee or representative of the Department or the
Internal Revenue Service (the Service):
(2) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary:
(3) Any contributing employer to any participating Plan or any duly authorized
employee representative of such employer; and
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<PAGE>
(4) Any participant or beneficiary of any participating Plan, or any duly
authorized representative of such participant or beneficiary.
(b) None of the persons described above in subparagraphs (2)-(4) of this
paragraph (15) shall be authorized to examine the trade secrets of Shearson
Lehman or commercial or financial information which is privileged or
confidential.
The availability of this exemption is subject to the express condition that
the material facts and representations contained in the application are true
and complete, and that the application accurately describes all material facts
which are the subject of this exemption.
SUMMARY OF FACTS AND REPRESENTATIONS
1. Shearson Lehman, whose principal executive offices are located in New York,
New York, is a wholly owned subsidiary of Shearson Lehman Brothers Holdings,
Inc. (Shearson Holdings). Shearson Holdings is one of the leading full-line
securities firms servicing institutions, governments and individual investors
in the United States and throughout the world. Shearson Holdings conducts its
principal businesses through two divisions--Shearson Lehman Brothers (referred
to herein as Shearson Lehman) and Lehman Brothers. Shearson Lehman is
responsible for individual investor services and asset management while Lehman
Brothers is responsible for securities underwriting, financial advisory,
investment and merchant banking services and securities and commodities trading
as principal and agent. Shearson Holdings is a member of all principal
securities and commodities exchanges in the United States and the National
Association of Securities Dealers, Inc. In addition, it holds memberships or
associate memberships on several principal foreign securities and commodities
exchanges.
Shearson Holdings was incorporated in Delaware on December 29, 1983. The
American Express Company owns 100 percent of Shearson Holdings' issued and
outstanding common stock, which represents 92 percent of its issued and
outstanding voting stock. The 8 percent remaining shares of Shearson Holdings'
issued and outstanding voting stock is preferred stock which is owned by Nippon
Life Insurance Company. Although Shearson Holdings is not an operating company
and, as such, it maintains no assets under management, as of December 31, 1991,
Shearson Lehman and its subsidiaries rendered investment advisory services with
respect to $91 billion in assets.
2. On April 12, 1991, Shearson Lehman formed the Trust, a no load, open-end,
diversified management investment company registered under the Investment
Company Act of 1940, as amended. The Trust is organized as a Massachusetts
business trust and it has an indefinite duration. As of January 17, 1992, the
Trust had net assets of $132,608,001.
The Trust consists of twelve different portfolios which range from Government
Money Investments to International Fixed Income Investments and which pay
monthly or annual dividends to investors. The Portfolios currently have a per
share value ranging from $0 per share for Balanced Investments to $9.45 per
share for Small Capitalization Growth Equity Investments. The composition of
the Portfolios covers a spectrum of investments which include U.S. Government-
related securities of equity or debt securities issued by foreign or domestic
corporations. The Portfolios are further categorized under four major
Portfolio-Types./1/
3. Shares in the Trust are offered by Shearson Lehman, as distributors, at no
load, to participants in the TRAK Program./2/ Although investors in the Trust
currently consist of institutions and individuals, it is proposed that
prospective investors will include plans for which Shearson Lehman may or may
not currently maintain investment accounts. A majority of these Plans will be
IRAs or Keogh Plans. In addition, it is proposed that Plans for which Shearson
Lehman or an affiliate serves as a prototype sponsor and/or a nondiscretionary
trustee or custodian be permitted to invest in the Trust./3/
The applicant represents that the initial purchase of shares in the Trust by a
Plan may give rise to a prohibited transaction where Shearson Lehman or an
affiliate has a party in interest relationship with the Plan. Shearson Lehman
also acknowledges that a prohibited transaction could arise upon a subsequent
purchase or redemption of shares in the Trust by a participating Plan inasmuch
as the party in interest relationship between Shearson Lehman and the Plan may
have been established at that point. Accordingly, Shearson Lehman has requested
prospective exemptive relief from the Department with respect to the purchase
and redemption of shares in the Trust by participating Plans which it does not
sponsor or have discretionary investment authority over the Plan's assets which
would be invested in Trust shares./4/ Such shares will be held in a brokerage
account maintained by the Plan with Shearson Lehman. No commissions or fees
will be paid with respect to such transactions.
According to the applicant, the minimum initial investment in the Trust is set
at $20,000, and may be reduced periodically to $10,000. Effectively, therefore,
a Plan with less than $20,000 in assets ($10,000 when the minimum has been
reduced) would not be able to participate in the TRAK Program. The minimum
investment in a Portfolio is $100.
4. Overall responsibility for the management and supervision of the Trust and
the Portfolios rests with the Trust's Board of Trustees (The Trustees) which is
comprised of twelve members. The Trustees approve all significant agreements
involving the Trust and the persons and companies that provide services to the
Trust and the Portfolios. Three of the Trustees and all of the Trust's
executive officers are affiliated with Shearson Lehman and/or its affiliates.
The nine remaining Trustees are not affiliated with Shearson Lehman.
5. Boston Advisors, located in Boston, Massachusetts, is a wholly owned
subsidiary of The Boston Company, a financial services holding company which
is, in turn, wholly owned by Shearson Lehman. Boston Advisors provides
investment management, investment advisory and/or administrative services to
investment companies with total assets in excess of $83 billion as of July 31,
1991. Boston Advisors serves as the Trust's administrator. In
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/1/ Because a Portfolio is not precluded from investing in securities that are
issued by Shearson Lehman or its affiliates, Shearson Lehman represents that,
as a limitation, the percentage of that Portfolio's net assets invested in
these securities will never exceed one percent.
/2/ According to the Statement of Additional Information which accompanies the
Prospectus for the TRAK Program, shares in the Trust are not certificated for
reasons of economy and convenience. Boston Safe Deposit and Trust Company, the
Trust's custodian, however, maintains a record of each investor's ownership of
shares. Although Trust shares are transferable and accord voting rights to
their owners, they do not confer pre-emptive rights (i.e., the privilege of a
shareholder to maintain a proportionate share of ownership of a company by
purchasing a proportionate share of any new stock issues). Shearson Lehman
represents that in the context of an open-end investment company, that
continuously issues and redeems shares, a pre-emptive right would make the
normal operations of the Trust impossible. Therefore, such right is precluded
in the charter documents of the Trust's Master Trust Agreement as well as those
of other open-end investment companies.
As for voting rights, Shearson Lehman states that they are accorded to
recordholders of Trust shares. Shearson Lehman notes that a recordholder of
Trust shares may determine to seek the submission of proxies by Plan
participants and vote Trust shares accordingly. In the case of individual
account plans such as Section 404(c) Plans. Shearson Lehman notes that most
Plans will pass-through the vote to participants on a pro-rata basis.
/3/ The Department notes that the general standards of fiduciary conduct
promulgated under the Act would apply to the participation in the TRAK Program
by an Independent Plan Fiduciary. Section 404 of the Act requires that a
fiduciary discharge his duties respecting a plan solely in the interest of the
plan's participants and beneficiaries and in a prudent fashion. Accordingly, an
Independent Plan Fiduciary must act prudently with respect to the decision to
enter into the TRAK Program with the Consulting Group as well as with respect
to the negotiation of services that will be performed thereunder and the
compensation that will be paid to Shearson Lehman and its affiliates. The
Department expects that an Independent Plan Fiduciary, prior to entering in the
TRAK Program, to understand fully all aspects of such arrangement following
disclosure by Shearson Lehman of all relevant information.
/4/ The applicant represents that employee benefit plans for are maintained by
Shearson Lehman may purchase or redeem shares in the Trust under the provisions
of Prohibited Transaction Exemption (PTE) 77-3 (42 FR 18734, April 8, 1977).
The applicant further represents that, although the exemptive relief proposed
above would not permit Shearson Lehman or an affiliate, while serving as a Plan
fiduciary with discretionary authority over the management of a Plan's assets,
to invest a Plan's assets in the Trust shares, a purchase or redemption of
Trust shares under such circumstances will comply with the terms and conditions
of class PTE 77-4 (42 FR 18732, April 8, 1977). The Department expresses no
opinion herein as to whether such transactions will comply with the terms and
conditions of PTEs 77-3 and 77-4.
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particular, Boston Advisors calculates the net asset value/5/ of the
Portfolios' shares and manages all aspects of the Portfolios' administration
and operation. In addition, Boston Advisors is responsible for managing each
Portfolio's temporary investments in money market instruments, as well as
making arrangements for, and managing collateral received with respect to, the
lending of securities by each Portfolio.
6. Organized within Shearson Lehman, is the Consulting Group, which is located
in Wilmington, Delaware. The Consulting Group serves as the investment manager
of the Trust and the underlying Portfolios. Although the Consulting Group has
not previously served as investment manager for a registered investment
company, it and its related division, the Consulting Services Division of
Shearson Lehman (Consulting Services), have over eighteen years of experience
in evaluating investment advisers for individual and institutional investors.
Together the Consulting Group and Consulting Services provide various financial
consulting services to over 30,000 accounts, representing more than $30 billion
in client assets. Account sizes range from institutional accounts in excess of
$1 billion to individual accounts with $100,000 minimum investments. As of July
31, 1991, the Consulting Group rendered advisory services with respect to
assets with a value in excess of $42.7 billion.
7. Under its investment management agreement, the Consulting Group is required
to make recommendations to the Trustees regarding (a) the investment policies of
each Portfolio and (b) the selection and retention of certain Sub-Advisers which
exercise investment discretion over each Portfolio./6/ In addition, through the
TRAK Program, the Consulting Group provides investors with non-binding,
generalized asset allocation recommendations with respect to such investors'
investments in the Portfolios. For example, the Consulting Group evaluates an
investor's risk tolerances and financial goals, provides investment advice as to
the appropriate mix of investment types designed to balance the investor's risk
tolerances as part of a long-term investment strategy and provides the investor
with advice about implementing its investment decisions through the Trust.
However, the applicant states that the Consulting Group does not have any
discretionary authority or control with respect to the allocation of an
investor's assets among the Portfolios.
In the case of an IRA, a Keogh Plan or a Title I Plan, the applicant
represents that all of the Consulting Group's recommendations and evaluations
will be presented to a Plan fiduciary which is independent of Shearson Lehman
and will be implemented only if accepted and acted upon by such Independent
Plan Fiduciary. In the case of a Section 404(c) Plan, Shearson Lehman
represents that participants in such Plan will be presented with the Consulting
Group's recommendations and evaluations only to the extent agreed to by
Shearson Lehman and the Plan sponsor. Shearson Lehman expects that some
sponsors of Section 404(c) Plans will elect to have the Consulting Group's
recommendations and evaluations passed-through to participants, while others
will elect to have the Independent Plan Fiduciary responsible for selecting the
Portfolios made available to Plan participants receive such advice./7/
8. As stated above, the Consulting Group is responsible for selecting the Sub-
Advisers which provide discretionary advisory services with respect to the
investment of the assets of the individual Portfolios on the basis of their
"able" performance in their respective areas of expertise in asset management.
The applicant represents that there are presently eleven Sub-Advisers, all of
which are independent of, and will remain independent of, Shearson Lehman and/or
its affiliates./8/ The Sub-Advisers are registered investment advisers under the
Investment Adviser's Act of 1940. They maintain their principal executive
offices in the eastern and western regions of the United States. As of June 30,
1991, the Sub-Advisers had assets under management ranging from $62 million to
$51 billion.
9. In order for a Plan to participate in the TRAK Program, Shearson Lehman or
the Consulting Group will provide an Independent Plan Fiduciary with a copy of
the Trust Prospectus discussing the investment objectives of the Portfolios
comprising the Trust, the policies employed to achieve these objectives, the
corporate affiliation existing between the Consulting Group, Shearson Lehman
and its subsidiaries and the compensation paid to such entities. In addition,
upon written or oral request to Shearson Lehman, the Independent Plan Fiduciary
will be given a Statement of Additional Information supplementing the
Prospectus which describes 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./9/ Further, each Plan will be given a copy of the
investment advisory agreement between the Consulting Group and such Plan
relating to participation in the TRAK Program, and upon written request to
Shearson Lehman, with a copy of the respective investment advisory agreement
between the Consulting Group and the Sub-Advisers.
With respect to a Section 404(c) Plan, Financial Consultants affiliated with
Shearson Lehman will explain the services offered under the TRAK Program to
eligible Section 404(c) Plan participants as well as the operation and
objectives of the Portfolios, if required by the arrangement negotiated between
the Consulting Group and the Plan./10/
If accepted as a Trust investor, an Independent Plan Fiduciary will be
required by
- -------
/5/ Each Portfolio's net asset value per share is calculated by Boston
Advisors on each weekday, except on days on which the New York Stock Exchange
(the NYSE) is closed. In general, the net asset value for securities is
determined as of the close of trading on the NYSE or a foreign exchange by
dividing the value of a Portfolio net assets by the total number of its shares
outstanding. Typically, a Portfolio's investments are valued at market value.
However, in the absence of a market value, Portfolio investments are valued at
fair market value as determined by, or under the direction of, the Trustees.
/6/ Subject to the supervision and direction of the Trustees, the Consulting
Group was required to perform initial "due diligence" on prospective Sub-
Advisers for each Portfolio and thereafter to monitor each Sub-Adviser's
performance through qualitative and quantitative analysis as well as through
periodic, in person, telephonic and written consultations. The Consulting Group
is also required to communicate its performance expectations and evaluations to
the Sub-Advisers and ultimately recommend whether a Sub-Adviser's contract
should be renewed, modified or terminated. In this regard, the Consulting Group
is further obligated to provide written reports to the Trustees of its
evaluation and monitoring functions.
/7/ If the Independent Plan Fiduciary of a Section 404(c) Plan is the
recipient of the Consulting Group's investment advice, the applicant explains
that the Consulting Group will work with the Independent Plan Fiduciary by
identifying and drafting investment objectives, selecting investment categories
or actual Portfolios to be offered to Plan participants. In addition to these
services (and as described above), the applicant explains that the Consulting
Group will provide an Independent Plan Fiduciary with a detailed investment
performance monitoring report on a quarterly basis. Furthermore, a Financial
Consultant affiliated with Shearson Lehman will meet periodically with the
Independent Plan Fiduciary to discuss the investment performance monitoring
report.
However, if investment advisory services are provided directly to a
participant in a Section 404(c) Plan, the applicant explains (as also described
herein above) that a Financial Consultant will provide a participant with pre-
enrollment meetings and ongoing communications regarding the TRAK Program. In
addition, the applicant notes that the Consulting Group will recommend long
term investment allocations to the participant and provide the participant with
a written, quarterly performance monitoring report.
/8/ Although there are presently twelve Portfolios comprising the Trust, there
are only eleven Sub-Advisers. One Sub-Adviser, Standish, Ayer and Wood, Inc.
advises both the Government Money Investments Portfolio and the Intermediate
Fixed Income Investments Portfolio.
/9/ In the case of a Section 404(c) Plan, the applicant represents that the
Plan administrator, trustee or named fiduciary, as the recordholder of Trust
shares, will make available the Trust's Prospectus to Section 404(c) Plan
participants. In addition, Shearson Lehman will make available to such
Independent Plan Fiduciaries sufficient quantities of Prospectuses for this
purpose, as well as provide Statements of Additional Information to any party
upon request.
/10/ The Department is expressing no opinion as to whether the information
provided under the TRAK Program is sufficient to enable a participant to
exercise independent control over assets in his or her account as contemplated
by section 404(c) of the Act.
B-4
<PAGE>
Shearson Lehman to acknowledge, in writing, prior to purchasing Trust shares
that such fiduciary has received copies of the aforementioned documents. With
respect to a Plan that is covered by Title I of the Act (e.g., a defined
contribution plant), where investment decisions will be made by a trustee,
investment manager or a named fiduciary. Shearson Lehman will require (except
if relying on Class PTE 77-3) that such Independent Plan Fiduciary acknowledge
in writing receipt of such documents and represent to Shearson Lehman that such
fiduciary is (a) independent of Shearson Lehman and its affiliates, (b) capable
of making an independent decision regarding the investment of Plan assets and
(c) knowledgeable with respect to the Plan in administrative matters and
funding matters related thereto, and able to make an informed decision
concerning participation in the TRAK Program.
With respect to Section 404(c) Plan, written acknowledgment of the receipt of
such documents will be provided by the Independent Plan Fiduciary (i.e., the
Plan administrator, trustee or named fiduciary, as the recordholder of Trust
shares). Such Independent Plan Fiduciary will be required to represent, in
writing, to Shearson Lehman that such fiduciary is (a) independent of Shearson
Lehman and its affiliates and (b) knowledgeable with respect to the Plan in
administrative matters and funding matters related thereto, and able to make an
informed decision concerning participation in the TRAK Program.
10. The books of the Trust will be audited annually by independent public
accountants selected by the Trustees and approved by the investors. All
investors will receive copies of an audited financial report no later than 60
days after the close of each Trust fiscal year. The books and financial records
of the Trust will be open for inspection by any investor, as well as the
Department and the Service, at all times during regular business hours.
11. As noted under the TRAK Program, the Consulting Group will provide the
Independent Plan Fiduciary with asset allocation advice related to the
Portfolios. In this regard, the applicant states that the Consulting Group's
asset allocation advice will not focus on recommendations that a Plan's assets
be allocated to a specific Portfolio. Rather, the applicant represents that the
Consulting Group will recommend only that Plan assets be allocated among
particular types of Portfolios (e.g., Growth, Fixed Income, etc.)
After the selection of specific Portfolios by an Independent Plan Fiduciary,
the Consulting Group will continue to render general Portfolio-Type selection
advice to Plans or Plan fiduciaries relating to asset allocations among the
selected Portfolios. However, in the case of a Section 404(c) Plan in which at
least three to five Portfolios may be selected by the Plan sponsor, the
Consulting Group's initial asset allocation advice will be limited to the
suggested Portfolio-Types offered under the Plan. The Consulting Group may also
work with the Independent Plan Fiduciary to identify and draft investment
objectives, select investment categories or actual Portfolios to be offered to
Plan participants, if such fiduciary is the recipient of the Consulting Group's
asset allocation advice, or recommend appropriate long-term investment
allocations to an individual participant, if the participant receives such
advice.
12. The Consulting Group will also identify a Plan's risk tolerances and
investment objectives, the performance of each Portfolio in which assets are
invested, and recommend, in writing, an appropriate allocation of assets among
the Portfolio-Types that conform to these tolerances and objectives. The
Consulting Group will not have the authority to implement its advice or
recommendations and will not participate in the deliberations regarding the
decision by an investor of whether or not to act upon such advice. As noted
earlier, the applicant represents that the decision of a Plan to invest in the
TRAK Program will be made by an unrelated Plan fiduciary acting on the basis of
his or her own investigation into the advisability of participating in the TRAK
Program.
13. The Consulting Group will provide, at least quarterly, monitoring reports
to a Title I, IRA or Keogh Plan containing an analysis and evaluation of the
Plan's account to ascertain whether the investor's objectives are being met and
recommending, when appropriate, changes in the allocation among the Portfolios.
If required by the arrangement negotiated with the Independent Plan Fiduciary,
the Consulting Group will provide an Independent Plan Fiduciary of a Section
404(c) Plan with a written, detailed investment performance monitoring report,
that will contain Plan level asset allocations showing the performance of the
Plan's investment vehicles and the performance of relevant indices for
evaluating the performance of each Portfolio, a Plan cash flow analysis and
annualized risk adjusted rates of return for Plan investment vehicles. Such
report will be provided on a quarterly basis.
In addition, to the extent required by the arrangement negotiated with the
Consulting Group, a Section 404(c) Plan participant will receive a written,
quarterly performance monitoring report with his or her quarterly benefit
statement which includes the investment performance of the Portfolios, the
investment performance for the participant's account, and specifies market
commentary and toll-free numbers for such participant to call Shearson Lehman
in order to obtain more information about the TRAK Program or to amend the
participant's investment allocations. Further, if required by such arrangement,
a Financial Consultant will meet periodically with an Independent Plan
Fiduciary of a Section 404(c) Plan to review and discuss the investment
performance monitoring report. The Financial Consultant may also meet
periodically with an eligible participant to review the performance of the
participant's account. The applicant notes that this intermittent contact will
not prevent the participant from contacting the Financial Consultant at any
time to inquire about his or her participation in the TRAK Program.
Finally, on a quarterly and annual basis, the Consulting Group will provide
written disclosures to all Plans with respect to (1) the percentage of each
Trust Portfolio's brokerage commissions that are paid to Shearson Lehman and
its affiliates and (2) the average brokerage commission per share paid by each
Portfolio to Shearson Lehman as compared to the average brokerage commission
per share paid by each Portfolio to brokers other than Shearson Lehman and its
affiliates, both expressed as cents per share.
14. Shares of a Portfolio will be redeemed by Shearson Lehman, at no charge,
and generally on a daily basis (weekends and holidays excepted) when the
Portfolio calculates its net asset value. Redemption requests received in
proper form prior to the close of trading on the NYSE will be affected at the
net asset value per share determined on that day. Redemption requests received
after the close of regular trading on the NYSE will be effected at the net
asset value at the close of business of the next day, except on weekends or
holidays when the NYSE is closed. A Portfolio is required to transmit
redemption proceeds for credit to an investor's account with Shearson Lehman or
to an "introducing" broker/11/ within 7 days after receipt of the redemption
request. In the case of an IRA or Keogh Plan investor, Shearson Lehman will not
hold redemption proceeds as free credit balances and will, in the absence of
receiving investment instructions, place all such assets in
- -------
/11/ According to the applicant, Shearson Lehman provides clearance,
settlement and other back office services to other broker-dealers. The
applicant notes that Shearson Lehman may also provide confirmations and account
statements to clients of brokers who have "introduced" clients to Shearson
Lehman such as The Robinson Humphrey Company, Inc. a wholly-owned broker-dealer
subsidiary of Shearson Lehman.
B-5
<PAGE>
a money market fund that is not affiliated with Shearson Lehman. In the case of
Plans that are covered by title I of the Act, the redemption proceeds will be
invested by Shearson Lehman in accordance with the investment directions of the
Independent Plan Fiduciary responsible for the management of the Plan's assets.
With respect to a Section 404(c) Plan, the treatment of such investment assets
will depend upon the arrangement for participant investment instructions
selected by the Plan sponsor./12/ In the event that the Independent Plan
Fiduciary does not give other investment directions, such assets will be swept
weekly into a money market fund that is not affiliated with Shearson Lehman for
the benefit of the Plan.
Due to the high costs of maintaining small accounts, the Trust may also redeem
an account having a current value of $7,500 or less, after the investor has
been given at least 30 days in which to increase the account balance to more
than the $7,500 amount. Proceeds of an involuntary redemption will be deposited
in the investor's brokerage account unless Shearson Lehman is otherwise
instructed.
15. Shares of a Portfolio may be exchanged by an investor with another
investor in the TRAK Program without payment of any exchange fee for shares of
another Portfolio at their respective net asset values. However, Portfolio
shares are not exchangeable with shares of other funds within the Shearson
Lehman Group of funds or portfolio families.
16. With respect to brokerage transactions that are entered into under the
TRAK Program for a Portfolio, such transactions may be executed through
Shearson-Lehman and other affiliated broker-dealers, if in the judgment of the
Sub-Adviser, the use of such broker-dealer is likely to result in price and
execution at least as favorable, and at a commission charge at least as
comparable to those of other qualified broker-dealers. In addition, Shearson
Lehman may not execute transactions for a Portfolio on the floor of any
national securities exchange but it may effect transactions by transmitting
orders to other brokers for execution. In this regard, Shearson Lehman is
required to pay fees charged by those persons performing the floor brokerage
elements out of the brokerage compensation it receives from a Portfolio.
17. Each Portfolio bears its own expenses, which generally include all costs
that are not specifically borne by the Consulting Group, the Sub-Advisers or
Boston Advisors. Included among a Portfolio's expenses are costs incurred in
connection with the Portfolio's organization, investment management and
administration fees, fees for necessary professional and brokerage services,
fees for any pricing service, the costs of regulatory compliance and costs
associated with maintaining the Trust's legal existence and shareholder
relations. No Portfolio, however, will impose sales charges on purchases,
reinvested dividends, deferred sales charges, redemption fees, nor will any
Portfolio incur distribution expenses.
18. The total fees that are paid to the Consulting Group and its affiliates
will constitute no more than reasonable compensation. In this regard, for its
asset allocation and related services, the Consulting Group charges an investor
a quarterly investment advisory fee. This "outside fee" is negotiated between
the Consulting Group and the investor and it varies up to an annual maximum of
1.50 percent of the net asset value of the investor's Trust shares computed
each quarter based on the value determined on the last calendar day of the
previous calendar quarter. The outside fee is charged directly to an investor
and it is not affected by the allocation of assets among the Portfolios nor by
whether an investor follows or ignores the Consulting Group's advice./13/ For
Plan investors, the outside fee for a calendar quarter will be reduced by an
amount equal to, for all Portfolios in which Plan assets are invested (a) the
value of Plan assets invested in a Portfolio on the last calendar day of the
previous calendar quarter (or the value of an initial investment in the
Portfolio, as of the day such initial investment is made during the calendar
quarter) multiplied by (b) a reduction factor (the Reduction Factor) which is
described in below, multiplied by (c) a fraction, the numerator of which is the
number of days in the period for which the outside fee is being assessed and
the denominator of which is the actual number of days in the calendar year of
which that period is a part. For subsequent investments or redemptions
aggregating to more than $5,000, the pro-rated fee for credit for the balance of
the quarter will be calculated on the basis of the net percentage of the outside
fee paid for the quarter during which the subsequent investment or redemption is
made.
In addition, for investment management and related services provided to the
Trust, the Consulting Group is paid, from each Portfolio, a management fee
which computed daily and paid monthly at an annual rate ranging from .15
percent to .70 percent of the value of the Portfolio's average daily net assets
depending upon the Portfolio's objective. From these management fees, the
Consulting Group compensates the Sub-Adviser. This "inside fee," which is the
difference between the individual Portfolio's total management fee and the fee
paid by the Consulting Group to the Sub-Adviser, varies from 20 to 30 basis
points depending on the Portfolio (except for the Government Money Investments
Portfolio which, for competitive purposes, pays a management fee equal to the
Sub-Adviser's fee). Each Portfolio also pays Boston Advisors a management fee
that is computed daily and paid monthly for the services it performs as
administrator to the Trust at an annual fixed rate of .20 percent of the value
of the Portfolio's average daily net assets. Such fee is also included in the
total management fee.
The management fees that are paid at the Portfolio level to Boston Advisors,
the Consulting Group and the Sub-Advisers are set forth in the table below. For
purposes of the table, Boston Advisors is referred to as "BA", the Consulting
Group as "CG" and the Sub-Advisers as "SA." As noted in the table, the sum of
the management fees paid by a Portfolio to Boston Advisors plus the fees
retained by the Consulting Group and the Sub-Advisers equals the total
management fee paid by that Portfolio.
- -------
/12/ Shearson Lehman explains that, under one alternative, Plan participants
who give instructions to redeem shares of a Portfolio must give corresponding
instructions to reinvest proceeds in another investment vehicle made available
under the Plan, thus ensuring that a participant's investment assets are
continually invested. Under a second alternative which is described above,
Shearson Lehman represents that participants will not be required to give
corresponding instructions and all investment assets for which no investment
instructions have been given will be swept into a money market fund that is not
affiliated with Shearson Lehman. In this regard, the Department is expressing
no opinion regarding whether any of the arrangements described above comply
with the requirements of section 404(c) of the Act.
/13/ The applicant represents that the outside fee is not imposed on
accounts of employees of American Express and its subsidiaries, including
Shearson Lehman, accounts of their immediate families and IRAs and certain
employee pension benefit plans for these persons. The applicant states that
this fee is waived to encourage employees to invest in Shearson Lehman. With
respect to IRAs or Plans maintained by Shearson Lehman and its affiliates, the
applicant asserts that such waiver would be required by PTE 77-3.
B-6
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
TOTAL TOTAL FEE SA RETAINED CG RETAINED
MANAGE- BA FEE SA/CG FEE FEE
PORTFOLIO MENT FEE (PERCENT) (PERCENT) (PERCENT) (PERCENT)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government Money Invest-
ments..................... 0.35 0.20 0.15 0.15 0.00
Intermediate Fixed Income
Investments............... .60 .20 .40 .20 .20
Total Return Fixed Income
Investments............... .60 .20 .40 .20 .20
Municipal Bond Invest-
ments..................... .60 .20 .40 .20 .20
Mortgage Backed Invest-
ments..................... .70 .20 .50 .25 .25
Balanced Investments...... .80 .20 .60 .30 .30
Large Capitalization Value
Equity Investments........ .80 .20 .60 .30 .30
Large Capitalization
Growth Investments........ .80 .20 .60 .30 .30
Small Capitalization Value
Equity Investments........ .80 .20 .60 .30 .30
Small Capitalization
Growth Investments........ .80 .20 .60 .30 .30
International Equity In-
vestments................. .90 .20 .70 .40 .30
International Fixed Income
Investments............... .70 .20 .50 .25 .25
- --------------------------------------------------------------------------------
</TABLE>
Shearson Lehman proposes to offset, quarterly, against the outside fee such
amount as is necessary to assure that the Consulting Group retains no more than
20 basis points from any Portfolio on investment of assets attributable to any
Plan./14/ In this way, the aggregate of the inside fees and the outside fees
retained by the Consulting Group will remain constant regardless of the
distribution of a Plan's assets among the Portfolio.
Shearson Lehman has developed the following example to demonstrate how the fee
offset mechanism would work:
Assume that as of March 31, 1992, the average daily value of Trust Portfolio
shares held by a Plan investor was $1,000. Investment assets attributable to
the Plan were distributed among five Trust Portfolios: (1) Government Money
Investments in which the Plan made a $50 investment and from which the
Consulting Group would not retain an inside fee; (2) Total Return Fixed Income
investments in which the Plan made a $200 investment and the Consulting Group
would retain an inside fee of .20 percent; (3) Small Capitalization Growth
Investments in which the Plan made a $250 investment and the Consulting Group
would be entitled to receive an inside fee of .30 percent; (4) Large
Capitalization Growth Investments in which the Plan made a $250 investment and
the Consulting Group would retain an inside fee of .30 percent; and (5)
International Equity Investments in which the Plan made a $250 investment and
the Consulting Group would be entitled to receive an inside fee of .30 percent.
Assume that the Plan investor pays the maximum annual outside fee of 1.50
percent so that the total outside fee for the calendar quarter April 1 through
June 30, prior to the fee offset would be ($1,000) 1.50% (.25)=$3.75.
Under the proposed fee offset, the outside fee charged to the Plan must be
reduced by a Reduction Factor to ensure that the Consulting Group retains an
inside fee of no more than .20% from each of the Portfolios on investment
assets attributable to the Plan. The following table shows the Reduction Factor
as applied to each of the Portfolios comprising the Trust:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CG REDUC-
RETAINED FEE TION
FEE OFFSET FACTOR
(PER- (PER- (PER-
PORTFOLIO CENT) CENT) CENT)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Government Money Investments............................. 0.00 0.20 0.00
Intermediate Fixed Income Investments.................... .20 .20 .00
Total Return Fixed Income Investments.................... .20 .20 .00
Municipal Bond Investments............................... .20 .20 .00
Mortgage Backed Investments.............................. .25 .20 .05
Balanced Investments..................................... .30 .20 .10
Large Capitalization Value Equity Investments............ .30 .20 .10
Large Capitalization Growth Investments.................. .30 .20 .10
Small Capitalization Value Equity Investments............ .30 .20 .10
Small Capitalization Growth Investments.................. .30 .20 .10
International Equity Investments......................... .30 .20 .10
International Fixed Income Investments................... .25 .20 .05
- --------------------------------------------------------------------------------
</TABLE>
Under the proposed fee offset, a Reduction Factor of .10% is applied against
the quarterly outside fee with respect to the value of Plan assets that have
been invested in Portfolios (3), (4) and (5) only. As noted above Portfolios
(1) and (2) do not involve a Reduction Factor because the fee retained by the
Consulting Group for these Portfolios does not exceed 20 basis points.
Therefore, the quarterly offset for the plan investor is computed as follows:
(.25) [($250) .10%+($250) .10%+($250) .10%]=$0.1875.
In the foregoing example, the Plan investor, like all other investors in the
TRAK Program, would receive a statement for its TRAK account on or about April
15, 1992. This statement would show the outside fee to be charged for the
calendar quarter April 1, through June 30 (i.e., $3.75-$0.1875=$3.5625). The
Plan investor would be asked to pay the outside fee for that quarter by May 3,
1992 (i.e., the third day of the second month of the calendar quarter). If the
outside fee were not paid by that date, Shearson Lehman would debit the account
of the Plan investor (as with other investors) for the amount of the outside
fee (pursuant to the authorization contained in the TRAK Investment Advisory
Agreement, and as described in the Statement of Additional Information appended
to the Prospectus)./15/
Because the Consulting Group will retain no inside fee with respect to assets
invested in the
- -------
/14/ Shearson Lehman asserts that it chose 20 basis points as the maximum
net fee retained for management services rendered to the Portfolios because
this amount represents the lowest percentage management fee charged by Shearson
Lehman among the Portfolios (excluding the Government Money Investments
Portfolio for which Shearson Lehman charges no management fee).
/15/ The applicant explains that the foregoing example illustrates the fact
that the outside fee and the fee offset are computed contemporaneously and that
Plan investors will get the benefit of the fee offset contemporaneously upon
the payment of the outside fee. Because the inside fee is paid monthly and the
fee offset is computed quarterly, the applicant also explains that Shearson
Lehman does not receive the benefit of a "float" as a result of such
calculations because the fee offset will always be realized no later than the
time that the outside fee is paid (i.e., on or about the third day of the
second month of the calendar quarter). Since the inside fee is paid at the end
of each calendar month, the applicant further explains that Plan investors will
realize the full benefit of the offset before the time that the inside fee is
paid for the second and third months of the calendar quarter.
B-7
<PAGE>
Government Money Investment Portfolio, Shearson Lehman notes that a potential
conflict may exist by reason of the variance in net inside fees among the
Government Money Investments Portfolio and the other Portfolios. Shearson
Lehman also recognizes that this factor could result in the Consulting Group's
recommendation of a higher-fee generating Portfolio-Type to an investing Plan.
To address this potential conflict, Shearson Lehman will disclose to all
participants in the TRAK Program that the Consulting Group will retain no
inside fee for assets invested in the Government Money Investments Portfolio.
19. In summary, it is represented that the proposed transactions will meet the
statutory criteria for an exemption under section 408(a) of the Act because:
(a) The investment of a Plan's assets in the TRAK Program will be made and
approved by a Plan fiduciary which is independent of Shearson Lehman and its
affiliates such that Independent Plan Fiduciaries will maintain complete
discretion with respect to participating in the TRAK Program; (b) Independent
Plan Fiduciaries will have an opportunity to redeem their shares in the Trust
in such fiduciaries' individual discretion; (c) no Plan will pay a fee or
commission by reason of the acquisition or redemption of shares in the Trust;
(d) prior to making an investment in TRAK, each Independent Plan Fiduciary will
receive offering materials and disclosures from either Shearson Lehman or the
Consulting Group which disclose all material facts concerning the purpose,
structure, operation and investment in the TRAK Program; (e) the Consulting
Group will provide written documentation to an Independent Plan Fiduciary of
its recommendations or evaluations, including the reasons and objective
criteria forming the basis for such recommendations or evaluations; (f) any
sub-Adviser that is appointed by the Consulting Group to exercise investment
discretion over a Portfolio will always be independent of Shearson Lehman and
its affiliates; (g) the annual investment advisory fee that is paid by a Plan
to the Consulting Group for investment advisory services rendered to such Plan
will be offset by such amount as is necessary to assure that the Consulting
Group retains no more than 20 basis points from any Portfolio on investment
assets attributable to the Plan investor; (h) the Consulting Group or Shearson
Lehman will make periodic written disclosures to participating Plans with
respect to the financial condition of the TRAK Program, the total fees that it
and its affiliates will receive from such Plan investors and the value of the
Plan's interest in the TRAK Program; and (i) on a quarterly and annual basis,
the Consulting Group will provide written disclosures to all Plans with respect
to (1) the percentage of each Trust Portfolio's brokerage commissions that are
paid to Shearson Lehman and its affiliates and (2) the average brokerage
commission per share paid by each Portfolio to Shearson Lehman as compared to
the average brokerage commission per share paid by each Portfolio to brokers
other than Shearson Lehman and its affiliates, both expressed as cents per
share.
FOR FURTHER INFORMATION CONTACT:
Ms. Jan D. Broady of the Department, telephone (202) 523-8881. (This is not a
toll-free number.)
GENERAL INFORMATION
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption under section
408(a) of the Act and/or section 4975(c)(20) of the Code does not relieve a
fiduciary or other party in interest of disqualified person from certain other
provisions of the Act and/or the Code, including any prohibited transaction
provisions to which the exemption does not apply and the general fiduciary
responsibility provisions of section 404 of the Act, which among other things
require a fiduciary to discharge his duties respecting the plan solely in the
interest of the participants and beneficiaries of the plan and in a prudent
fashion in accordance with section 404(a)(1)(b) of the act, nor does it affect
the requirement of section 401(a) of the Code that the plan must operate for
the exclusive benefit of the employees of the employer maintaining the plan and
their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the Act and/or
section 4975(c)(2) of the Code, the Department must find that the exemption is
administratively feasible, in the interests of the plan and of its participants
and beneficiaries and protective of the rights of participants and
beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to, and not in
derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional rules.
Furthermore, the fact that a transaction is subject to an administrative or
statutory exemption is not dispositive of whether the transaction is in fact a
prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the express
condition that the material facts and representations contained in each
application are true and complete, and that each application accurately
describes all material terms of the transaction which is the subject to the
exemption.
Signed at Washington, DC, this 31st day of March 1992.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
(FR Doc. 92-7712 Filed 4-2-92; 8:45 am)
BILLING CODE 4510-29-M
FINAL EXEMPTION
SHEARSON LEHMAN BROTHERS, INC. (SHEARSON LEHMAN), LOCATED IN NEW YORK, NY
[Prohibited Transaction Exemption 92-77; Exemption Application No. D-8723]
EXEMPTION
Section I. Converted Transactions
The restrictions of section 406(a) of the Act and the sanctions resulting from
the application of section 4975 of the Code, by reason of section 4975(c)(1)
(A) through (D) shall not apply to the proposed purchase or redemption of
shares by an employee benefit plan, an individual retirement account (the IRA)
or a retirement plan for a self-employed individual (the Keogh Plan;
collectively, the Plans) in the Shearson Lehman-established Trust for TRAK
Investments (the Trust) in connection with such Plans' participation in the
TRAK Personalized Investment Advisory Service (the TRAK Program). In addition,
the restrictions of section 406 (b)(1) and (b)(2) of the Act and the sanctions
resulting from the application of section 4975 of the Code by reason of section
4975(c)(1)(E) shall not apply to the provision, by the Consulting Group
Division of Shearson Lehman (the Consulting Group), of investment advisory
services to an independent fiduciary of a participating Plan (the Independent
Plan Fiduciary) which may result in such fiduciary's selection of a portfolio
grouping (the Portfolio-Type) in the TRAK Program for the investment of Plan
assets.
This exemption is subject to the following conditions that are set forth below
in section II.
Section II. General Conditions
(1) The participation of Plans in the TRAK Program will be approved by an
Independent Plan Fiduciary. For purposes of this requirement, an employee,
officer or director of Shearson Lehman and/or its affiliates covered by an IRA
not subject to title I of the Act will be considered an Independent Plan
Fiduciary with respect to such IRA.
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<PAGE>
(2) The total fees paid to the Consulting Group and its affiliates will
constitute no more than reasonable compensation.
(3) No Plan will pay a fee or commission by reason of the acquisition or
redemption of shares in the Trust.
(4) The terms of each purchase or redemption of Trust shares shall remain at
least as favorable to an investing Plan as those obtainable in an arm's length
transaction with an unrelated party.
(5) The Consulting Group will provide written documentation to an Independent
Plan Fiduciary of its recommendations or evaluations based upon objective
criteria.
(6) Any recommendation or evaluation made by the Consulting Group to an
Independent Plan Fiduciary will be implemented only at the express direction of
such independent fiduciary.
(7) The Consulting Group will generally give investment advice to an
Independent Plan Fiduciary with respect to Portfolio-Types. However, in the
case of a Plan providing for participant-directed investments (the Section
404(c) Plan), the Consulting Group will provide investment advice that is
limited to the Portfolios made available under the Plan.
(8) Any sub-adviser (the Sub-Adviser) that acts for the Trust to exercise
investment discretion over a Portfolio will be independent of Shearson Lehman
and its affiliates.
(9) Immediately following the acquisition by a Portfolio of any securities
that are issued by Shearson Lehman and/or its affiliates, the percentage of
that Portfolio's net assets invested in such securities will not exceed one
percent.
(10) The quarterly investment advisory fee that is paid by a Plan to the
Consulting Group for investment advisory services rendered to such Plan will be
offset by such amount as is necessary to assure that the Consulting Group
retains no more than 20 basis points from any Portfolio which contains
investments attributable to the Plan investor.
(11) The Consulting Group will not retain an investment advisory or management
fee from the Government Money Investments Portfolio.
(12) With respect to its participation in the TRAK Program prior to purchasing
Trust shares
(a) Each Plan will receive the following written or oral disclosures from the
Consulting Group:
(1) A copy of the prospectus (The Prospectus) for the Trust discussing the
investment objectives of the Portfolios comprising the Trust, the policies
employed to achieve these objectives, the corporate affiliation existing
between the Consulting Group, Shearson Lehman and its subsidiaries and the
compensation paid to such entities.
(2) Upon written or oral request to Shearson Lehman, a Statement of Additional
Information supplementing the Prospectus which describes 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.
(3) A copy of the investment advisory agreement between the Consulting Group
and such Plan relating to participation in the TRAK Program.
(4) Upon written request of Shearson Lehman, copy of the respective investment
advisory agreement between the Consulting Group and the Sub-Advisers.
(5) In the case of a Section 404(c) Plan, if required by the arrangement
negotiated between the Consulting Group and the Plan, an explanation by a
Shearson Lehman Financial Consultant (the Financial Consultant) to eligible
participants in such Plan, of the services offered under the TRAK Program and
the operation and objectives of the Portfolios.
(b) If accepted as an investor in the TRAK Program, an Independent Plan
Fiduciary of an IRA or Keogh Plan, will be required to acknowledge, in writing,
prior to purchasing Trust shares that such fiduciary has received copies of
such documents.
(c) With respect to a Section 404(c) Plan, written acknowledgement of the
receipt of such documents will be provided by the Independent Plan Fiduciary
(i.e., the Plan administrator, trustee or named fiduciary, as the recordholder
of Trust shares). Such Independent Plan Fiduciary will be required to represent
in writing to Shearson Lehman that such fiduciary is (1) independent of
Shearson Lehman and its affiliates and (2) knowledgeable with respect to the
Plan in administrative matters and funding matters related thereto, and able to
make an informed decision concerning participation in the TRAK Program.
(d) With respect to a Plan that is covered under Title 1 of the Act, where
investment decisions are made by a trustee, investment manager or named
fiduciary, and Independent Plan Fiduciary will be required to acknowledge, in
writing, receipt of such documents and represent to Shearson Lehman that such
fiduciary is (1) independent of Shearson Lehman and its affiliates, (2) capable
of making an independent decision regarding the investment of Plan assets and
(3) knowledgeable with respect to the Plan in administrative matters and
funding matters related thereto, and able to make an informed decision
concerning participation in the TRAK Program.
(13) Each Plan will receive the following: written or oral disclosures with
respect to its ongoing participation in the TRAK Program;
(a) The Trust's semi-annual and annual report which will include financial
statements for the Trust and investment management fees paid by each Portfolio.
(b) A written quarterly monitoring report containing an analysis and an
evaluation of a Plan investor's account to ascertain whether the Plan's
investment objectives have been met and recommending, if required, changes in
Portfolio allocations.
(c) If required by the arrangement negotiated between the Consulting Group and
a Section 404(c) Plan, a quarterly, detailed investment performance monitoring
report, in writing, provided to an Independent Plan Fiduciary of such Plan
showing Plan level asset allocations. Plan cash flow analysis and annualized
risk adjusted rates of return for Plan investments. In addition, if required by
such arrangement, Financial Consultants will meet periodically with Independent
Plan Fiduciaries of Section 404(c) Plans to discuss the performance monitoring
report as well as with eligible participants to review their accounts'
performance.
(d) If required by the arrangement negotiated between the Consulting Group and
a Section 404(c) Plan, a quarterly participant performance monitoring report
provided to a Plan participant which accompanies the participant's benefit
statement and describes the investment performance of the Portfolios, the
investment performance of the participant's individual investment in the TRAK
Program, and gives market commentary and toll-free numbers that will enable the
participant to obtain more information about the TRAK Program or to amend his
or her investment allocations.
(e) On a quarterly and annual basis, written disclosures to all Plans of the
(1) percentage of each Portfolio's brokerage commissions that are paid to
Shearson Lehman and its affiliates and (2) the average brokerage commission per
share paid by each Portfolio to Shearson Lehman and its affiliates, as compared
to the average brokerage commission per share paid by the Trust to brokers
other than Shearson Lehman and its affiliates, both expressed as cents per
share.
(14) Shearson Lehman shall maintain, for a period of six years, the records
necessary to enable the persons described in paragraph (10) of this section to
determine whether the conditions of this exemption have been met, except that
(a) a prohibited transaction will not
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<PAGE>
be considered to have occurred if, due to circumstances beyond the control of
Shearson Lehman and/or its affiliates, the records are lost or destroyed prior
to the end of the six year period, and (b) no party in interest other than
Shearson Lehman shall be subject to the civil penalty that may be assessed
under section 502(i) of the Act, or to the taxes imposed by section 4975 (a)
and (b) of the Code, if the records are not maintained, or are not available
for examination as required by paragraph (15) below.
(15) (a) Except as provided in section (b) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section 504 of
the Act, the records referred to in paragraph (14) of this section shall be
unconditionally available at their customary location during normal business
hours by:
(1) Any duly authorized employee or representative of the Department or the
Internal Revenue Service (the Service);
(2) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(3) Any contributing employer to any participating Plan or any duly authorized
employee representative of such employer; and
(4) Any participant or beneficiary of any participating Plan, or any duly
authorized representative of such participant or beneficiary.
(b) None of the persons described above in subparagraphs (2)-(4) of this
paragraph (15) shall be authorized to examine the trade secrets of Shearson
Lehman or commercial or financial information which is privileged or
confidential.
Section III. Definitions
For purposes of this exemption:
(1) An "affiliate" of Shearson Lehman includes--
(a) Any person directly or indirectly through one or more intermediaries,
controlling, controlled by, or under common control with Shearson Lehman. (For
purposes of this subsection, the term "control" means the power to exercise a
controlling influence over the management or policies of a person other than an
individual.)
(b) Any officer, director or partner in such person, and
(c) Any corporation or partnership of which such person is an officer,
director or a 5 percent partner or owner.
(2) An "Independent Plan Fiduciary" is a Plan fiduciary which is independent
of Shearson Lehman and its affiliates and is either
(a) A Plan administrator, trustee or named fiduciary, as the recordholder of
Trust shares of a Section 404(c) Plan,
(b) A participant in a Keogh Plan,
(c) An individual covered under a self-directed IRA which invests in Trust
shares, or
(d) A trustee, investment manager or named fiduciary responsible for
investment decisions in the case of a title I Plan that does not permit
individual direction as contemplated by Section 404(c) of the Act.
For a more complete statement of the facts and representations supporting the
Department's decision to grant this exemption, refer to the notice of proposed
exemption (the Notice) published on April 3, 1992 at 57 FR 11514.
EFFECTIVE DATE: This exemption is effective as of April 3, 1992.
WRITTEN COMMENTS
The Department received one comment letter with respect to the Notice and no
requests for a public hearing. The letter, which was submitted by Shearson
Lehman, addresses certain clarifications to the Notice, including
clarifications to the General Conditions and the Summary of Facts and
Representations. Discussed below are the changes suggested by Shearson Lehman
and the Department's responses thereto. In addition, the Department has made
several clarifying changes to the final exemption which are also discussed
below.
With respect to the General Conditions that are set forth in Section II of the
Notice. Shearson Lehman wishes to make several clarifications. In this regard,
Shearson Lehman notes that, in general, in the case of IRAs that are maintained
by employees of Shearson Lehman or its affiliates, such employees should be
considered "Independent Plan Fiduciaries." In addition, Shearson Lehman
requests that Condition (1) should read as follows in order that it will
conform to the other General Conditions:
The participation of plans in the TRAK Program will be approved by an
Independent Plan Fiduciary.
To clarify that Sub-Advisers act for the Trust after having been approved by
the Trust in accordance with the terms of section 15(a) and (c) of the
Investment Company Act of 1940, as amended (the 1940 Act), or any exemption
granted by the Securities and Exchange Commission, Shearson Lehman recommends
that Condition (8) of the General Conditions be modified to read as follows:
Any sub-adviser (the Sub-Adviser) that acts for the Trust to exercise
investment discretion over a Portfolio will be independent of Shearson Lehman
and its affiliates.
In the case of a Plan covering one or more employees of the Plan sponsor (such
as a Section 404(c) Plan), Shearson Lehman notes that Condition (10) requires
only that the investment advisory fee paid by the Plan be offset in the manner
described in the condition (i.e., the offset will be determined based on the
aggregate investment of the Plan accounts). Shearson Lehman represents that it
does not have control over how the Plan, for internal expenses, allocates the
offset among individual accounts. As long as the fee is offset at the Plan
level, Shearson Lehman represents that it cannot be construed to have any
economic incentive to provide investment allocation advice favoring one
Portfolio over another.
Shearson Lehman observes that several of the General Conditions refer to
"Shearson Lehman and its affiliates" but the Notice does not define the term
"affiliate." After giving due consideration to this comment, the Department has
determined to add a new Section III to the exemption titled "Definitions" in
which the terms "affiliate," and "Independent Plan Fiduciary" are defined as
follows:
An "affiliate" of Shearson Lehman includes (a) any person directly or
indirectly through one or more intermediaries, controlling, controlled by, or
under common control with Shearson Lehman (For purposes of this subsection, the
term "control" means the power to exercise a controlling influence over the
management of policies of a person other than an individual.) (b) any officer,
director or partner in such person, and (c) any corporation or partnership of
which such person is an officer, director or a 5 percent partner or owner.
An "Independent Plan Fiduciary" is a Plan fiduciary which is independent of
Shearson Lehman and its affiliates and is either (a) a Plan administrator,
trustee or named fiduciary, as the recordholder of Trust shares of a Section
404(c) Plan, (b) a participant in a Keogh Plan, (c) an individual covered under
a self-directed IRA which invests in Trust shares, or (d) a trustee, investment
manager or named fiduciary responsible for investment decisions in the case of
a Title I Plan that does not permit individual direction as contemplated by
section 404(c) of the Act.
With respect to modifications to the Summary of Facts and Representations,
Shearson Lehman represents that the first paragraph of Item 1 of the Notice
which was based on the application for exemption confuses the descriptions of
Shearson Holdings, Shearson Lehman and Shearson Lehman Brothers. Accordingly,
Shearson Lehman requests that the third, fourth and fifth sentences of that
paragraph be amended to read as follows:
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<PAGE>
Shearson Holdings conducts its principal businesses through two divisions of
Shearson Lehman--Shearson Lehman Brothers and Lehman Brothers. Shearson Lehman
Brothers is responsible for individual investor services and asset management
while Lehman Brothers is responsible for securities underwriting, financial
advisory, investment and merchant banking services and securities and
commodities trading as principal and agent. Shearson Lehman is a member of all
principal securities and commodities exchanges in the United States and the
National Association of Securities Dealers, Inc.
Shearson Lehman also wishes to update the second sentence of the second
paragraph under Item 2 of the Notice by noting that the Balanced Investments
Portfolio is expected to be offered in July 1992 at an initial per share value
of $8.00.
In order that Footnote 1 of the Notice more closely tracks the language of
Condition (9). Shearson Lehman suggests the following modification:
Because a Portfolio is not precluded from investing in securities that are
issued by Shearson Lehman or its affiliates. Shearson Lehman represents that,
as a limitation, immediately following the acquisition by a Portfolio of any
securities that are issued by Shearson Lehman and/or its affiliates, the
percentage of that Portfolio's net assets invested in such securities will not
exceed one percent.
Since Shearson Lehman cannot assure that Section 404(c) Plans participating in
the TRAK Program will pass through voting rights to participants on a pro rata
basis, it recommends that the second paragraph of Footnote 2 of the Notice be
amended to read as follows:
In the case of individual account plans such as Section 404(c) Plans, Shearson
Lehman believes that most Plans will pass-through the vote to participants on a
pro rata basis.
Shearson Lehman also represents that it may serve as prototype sponsor for
Plans participating in the TRAK Program. Therefore, the third sentence of the
second paragraph under Item 3 of the Notice should be amended by adding the
following language:
Accordingly, Shearson Lehman has requested prospective exemptive relief from
the Department with respect to the purchase and redemption of shares in the
Trust by participating Plans which it does not sponsor (other than only as
prototype sponsor) of have discretionary investment authority over the Plan's
assets which would be invested in Trust shares.
To clarify that Plans for which Shearson Lehman has a pre-existing
relationship will be able to participate in TRAK, Shearson Lehman asks that the
second sentence of Footnote 4 be amended to read as follows:
The applicant further represents that although the exemptive relief proposed
above would not permit Shearson Lehman or an affiliate, while serving as a Plan
fiduciary with discretionary authority over the management of a Plan's assets,
to invest in Trust shares those assets over which it exercises discretionary
authority, a purchase or redemption of Trust shares under such circumstances
would be permissible if made in compliance with the terms and conditions of
Class Prohibited Transaction Exemption (PTE) 77-4 [42 FR 16732. April 8, 1977).
Shearson Lehman represents that the Trust's Board of Directors consists of
seven members, four of whom are not affiliated with Shearson Lehman and three
of whom are affiliated with Shearson Lehman, all in accordance with the
provisions of section 10(b) of the 1940 Act. Accordingly, Shearson Lehman
recommends that Item 4 of the Notice be amended to read as follows:
Overall responsibility for the management and supervision of the Trust and the
Portfolios rests with the Trust's Board of Trustees (the Trustees) which
currently is comprised of seven members. The Trustees approve all significant
agreements involving the Trust and the persons and companies who provide
services to the Trust and the Portfolios. Three of the Trustees and all of the
Trust's executive officers are affiliated with Shearson Lehman and/or its
affiliates. The four remaining Trustees are not affiliated with Shearson
Lehman.
Because the applicant now represents that not all services described in
Footnote 7 of the Notice will be provided to every Section 404(c) Plan.
Shearson Lehman believes that an updated, clarifying paragraph should be added
to the footnote which would read as follows:
The applicant notes that not all of the services described in the preceding
two paragraphs will be provided to every Section 404(c) Plan. The services
provided to each Plan will depend on the arrangement negotiated between
Shearson Lehman and the Independent Plan Fiduciary.
Shearson Lehman represents that it cannot assure that the Plan administrator,
trustee or named fiduciary of a Section 404(c) Plan will make available a copy
of the Trust Prospectus to each participant. Therefore, it requests that
Footnote 8 of the Notice be amended to read as follows:
In the case of a Section 404(c) Plan, the applicant represents that the Plan
administrator, trustee or named fiduciary, as the recordholder of Trust shares,
will receive a copy of the Trust Prospectus. If requested by such Plan
administrator, trustee or named fiduciary, Shearson Lehman will make available
to such Independent Plan Fiduciary sufficient quantities of Prospectuses for a
distribution to Plan participants, as well as provide Statements of Additional
Information to any party upon request.
Item 15 of the Notice inadvertently states that investors in the TRAK Program
may exchange Portfolio shares with one another. Shearson Lehman wishes to
clarify that the first sentence of Item 15 should be amended to read as
follows:
Shares of a Portfolio may be exchanged by an investor, without any exchange
fee, for shares of another Portfolio at their respective net asset values.
Shearson Lehman states that PTE 77-3 applies only to employee benefit plans
and is, therefore, inapplicable to IRAs maintained by employees of Shearson
Lehman or its affiliates. In addition, Shearson Lehman states that it does not
currently charge an outside fee for such IRA accounts but it may do so in the
future. Accordingly, Shearson Lehman recommends that the first and last
sentences of Footnote 13 of the Notice be amended to read as follows:
The applicant represents that the outside fee is not currently imposed on
accounts of American Express and its subsidiaries, including Shearson Lehman,
accounts of their immediate families and IRAs and certain employee pension
benefit plans for these persons * * * With respect to employee pension benefit
plans maintained by Shearson Lehman or its affiliates for their employees, the
applicant asserts that such waiver would be required by PTE 77-3.
With respect to the TRAK fee structure described in the Notice in Item 18 and
the accompanying example, Shearson Lehman wishes to make two clarifications.
First, because the TRAK fee and corresponding fee offset for a calendar quarter
are based on the "net asset value" of Trust Portfolio shares at the end of the
immediately preceding calendar quarter rather than the "average daily value" of
Trust Portfolio shares, Shearson Lehman requests that the first sentence of the
example be amended to read as follows:
Assume that as of March 31, 1992, the net asset value of Trust Portfolio
shares held by a Plan Investor was $2,000.
Second, Shearson Lehman has updated its submission by representing that the
last parenthetical of the last paragraph of the example should not refer to the
"Statement of Additional Information" but should instead refer to the "TRAK
Program Description."
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<PAGE>
Therefore, Shearson Lehman recommends that the parenthetical read as follows:
(pursuant to the authorization contained in the TRAK Investment Advisory
Agreement, and as described in the TRAK Program Description appended to the
Prospectus)
Finally, Shearson Lehman suggests that Clause (e) under Item 19 should be
modified to track the language of Condition (5) as follows:
the Consulting Group will provide written documentation to an Independent Plan
Fiduciary of its recommendations or evaluations based on objective criteria.
The Department has reviewed the clarifications and amendments as described
above, and concurs with these changes. Accordingly, upon consideration of the
entire record, including the written comment received, the Department has
determined to grant the exemption subject to the aforementioned changes.
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[APPLICATION NOS. D-9337 AND D-9415]
SMITH BARNEY SHEARSON (SBS), LOCATED IN NEW YORK, NY
NEW AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemption to modify and replace prohibited
transaction exemption (PTE) 92-77 involving Shearson Lehman Brothers, Inc.
(Shearson Lehman).
- --------------------------------------------------------------------------------
SUMMARY: This document contains a notice of pendency before the Department of
Labor (the Department) of a proposed individual exemption which, if granted,
would replace PTE 92-77 (55 FR 45833, October 5, 1992). PTE 92-77 permits the
purchase or redemption of shares by an employee benefit plan, an individual
retirement account (the IRA) or a retirement plan for a self-employed
individual (the Keogh Plan; collectively the Plans) in the Trust for TRAK
Investments (the Trust) established by Shearson Lehman, in connection with such
loans' participation in the TRAK Personalized Investment Advisory Service (the
TRAK Program). In addition, PTE 92-77 permits the provision, by the Consulting
Group Division of Shearson Lehman (the Consulting Group), of investment
advisory services to an independent fiduciary of a participating Plan (the
Independent Plan Fiduciary) which may result in such fiduciary's selection of a
portfolio (the Portfolio) in the TRAK Program for the investment of Plan
assets. These transactions are described in a notice of pendency that was
published in the Federal Register on April 3, 1992 at 57 FR 11514. PTE 92-77 is
effective as of April 3, 1992.
If granted, the proposed exemption would replace PTE 92-77, which as discussed
below, expired by operation of the law. The new proposed exemption would permit
the replacement of Shearson Lehman with a newly-merged entity known as "Smith
Barney Shearson, Inc." It would also permit the adoption of a daily-traded
collective investment fund (the GIC Fund) for Plans providing for participant
directed investments (the Section 404(c) Plans). The proposed exemption would
provide conditional relief that is identical to that provided by PTE 92-77. In
addition, the proposed exemption would affect participants and beneficiaries
of, and fiduciaries with respect to, Plans participating in the TRAK Program.
DATES: Written comments and requests for a public hearing should be received by
the Department on or before the expiration of 60 days from the publication of
this proposed exemption in the Federal Register. If granted, the proposed
exemption will be effective July 31, 1993 for transactions that are covered by
PTE 92-77. With respect to transactions involving the GIC Fund, the proposed
exemption will be effective as of the date the grant notice is published in the
Federal Register.
ADDRESSES: All written comments and requests for a public hearing (preferably,
three copies) should be sent to the Office of Exemption Determinations, Pension
and Welfare Benefits Administration, Room N-5849, U.S. Department of Labor, 200
Constitution Avenue, NW., Washington, DC 20210. Attention: Application Nos. D-
9337 and D-9415. The applications pertaining to the proposed exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Pension and Welfare Benefits Administration. U.S.
Department of Labor, Room N-3307, 200 Constitution Avenue, NW., Washington, DC
20210.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady, Office of Exemption
Determinations, Pension and Welfare Benefits Administration, U.S. Department of
Labor, telephone (202) 219-8881. (This is not a toll-free number.)
SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency before the
Department of a proposed exemption that would replace PTE 92-77. PTE 92-77
provides an exemption from certain prohibited transaction restrictions of
section 406 of the Employee Retirement Income Security Act of 1974 (the Act)
and from the sanctions resulting from the application of section 4975 of the
Internal Revenue Code of 1986 (the Code), as amended, by reason of section
4975(c)(1) of the Code. The proposed exemption was requested in an application
filed by SBS pursuant to section 408(a) of the Act and section 4975(c)(2) of
the Code, and in accordance with the procedures (the Procedures) set forth in
29 CFR Part 2570, Subpart 3 (55 FR 32836, August 10, 1990). Effective December
31, 1978, section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713,
October 17, 1978) transferred the authority of the Secretary of the Treasury to
issue exemptions of the type requested to the Secretary of Labor. Accordingly,
this proposed replacement exemption is being issued solely by the Department.
As stated briefly above, PTE 92-77 allows Shearson Lehman to make the TRAK
Program available to Plans that acquire shares in the Trust subject to certain
conditions. Specifically, PTE 92-77 provides exemptive relief from section
406(a) of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (D) of the Code,
with respect to the purchase or redemption of shares in the Trust by Plans
investing therein. In addition, PTE 92-77 provides exemptive relief from the
restrictions of section 408(b)(1) and (b)(2) of the Act and the sanctions
resulting from the application of section 4975 of the Code, by reason of
section 4975(c)(1)(E) of the Code, with respect to the provision, by the
Consulting Group of Shearson Lehman, of investment advisory services to an
Independent Plan Fiduciary of a Plan participating in the TRAK Program which
may result in such fiduciary's selection of a Portfolio in the TRAK Program for
the investment of Plan assets.
Subsequent to the granting of PTE 92-77, Shearson Lehman informed the
Department that it had signed an asset purchase agreement with Primerica
Corporation (Primerica) and Smith Barney Harris Upham & Company, Inc. (Smith
Barney), an indirect wholly owned subsidiary. The terms of the agreement
provided for the sale of substantially all of the assets of Shearson Lehman and
its Asset Management Divisions (collectively, the Shearson Divisions) to Smith
Barney./1/ The transaction was completed on July 31, 1993. As a result of the
transaction, most of the assets and business of the Shearson Divisions were
transferred to Smith Barney which, upon merger with Shearson Lehman, was
renamed "Smith Barney Shearson." (Smith Barney Shearson is denoted herein as
SBS.) Shearson
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/1/ Shearson Lehman's other primary division, Lehman Brothers, which is
responsible for securities underwriting, financial advisory, investment and
merchant banking services and commodities trading as a principal and agent has
been retained by Shearson Lehman it has been renamed "Lehman Brothers Inc."
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<PAGE>
Lehman received cash and an interest-bearing note from SBS. As further
consideration for the asset sale, SBS agreed to pay future contingent amounts
based upon the combined performance of SBS and certain other Shearson Divisions
acquired from Shearson Lehman. Shearson Lehman also assigned to the American
Express Company (American Express) the right to receive 2.5 million shares of
certain convertible preferred stock issued by Primerica and a warrant. As
consideration for the assignment, American Express agreed to pay Shearson
Lehman for the stock and the warrant based on their value as of March 12, 1993,
the date of the Asset Purchase Agreement. At present, SBS offers the TRAK
Program to investors through one or more of its subsidiaries or divisions.
Since PTE 92-77 was granted, SBS informed the Department that it wished to
modify the exemption in order to improve the TRAK Program and make it more
responsive to the needs of investors. Specifically, SBS proposes to add to the
Portfolios currently available under the TRAK Program, the GIC Fund, which is
designed to invest primarily in guaranteed investment contracts (the GIC's),
synthetic GIC products and/or units of other GIC collective funds. The GIC Fund
will not differ in any material respects from the Government Money Investments
Portfolio which generally permits daily redemptions of its shares. In addition,
the GIC Fund will operate in a manner that is consistent with the requirements
of PTE 92-77. SBS believes it is important to offer the GIC Fund to Section
404(c) Plans because these Plans may prefer to offer participants this type of
investment option instead of the Government Money Investments Portfolio
presently offered to such Plans under the TRAK Program. Therefore, SBS requests
exemptive relief in order that the GIC Fund may be added to the Portfolios that
are available under the Trust.
The proposed GIC Fund will be a collective trust fund established and
maintained by Smith Barney Shearson Trust Company (SBS Trust), a wholly owned
subsidiary of Primerica. The GIC Fund will invest primarily in a portfolio of
GICs with varying maturities issued by highly-rated insurance companies, and/or
units of other collective funds invested in GICs. The GIC Fund may also invest
in asset-backed investment products designed to offer risk and return
characteristics similar to those of GICs (i.e., synthetic GIC products). In
addition, the GIC Fund may hold short-term, low risk securities where the
investment of all fund assets in GICs and/or units of other GIC collective
funds is not feasible.
SBS Trust will serve as the trustee of the GIC Fund. SBS Trust will employ a
sub-adviser (the Sub-Adviser) which is independent of SBS and its affiliates to
make recommendations on purchases of GICs and/or units of other GIC collective
funds. Currently, SBS Trust employs Morley Capital Management (Morley Capital)
of Lake Oswego, Oregon as the Sub-Adviser of the GIC Fund. SBS Trust will also
employ Boston Company Investors Services Group (ISG), a business group of The
Boston Company to provide custody and valuation services and The Shareholder
Services Group, Inc. (TSSG), an entity which is indirectly owned by American
Express, as transfer agent. Both ISG and TSSG are not affiliated with SBS.
SBS represents that the GIC Fund will not pay a management or other similar
fee to it or SBS Trust. (SBS Trust's fees for general trust services provided
to a Section 404(c) Plan is included in such plan's investment advisory or
"outside" fee.) A management fee may be paid to Morley Capital or any other
Sub-Adviser which is independent of SBS and its affiliates. The GIC Fund will
pay ISG, as custodian and provider of fund valuation services, a fee for such
services, and TSSG, as transfer agent, a fee of $8.50 to $9.50 per Section
404(c) Plan, plus out-of-pocket expenses. With respect to the fees paid to SBS
and its affiliates, the GIC Fund will not differ materially from the Government
Money Investments Portfolio in that it will not pay a management or other
similar fee to SBS or SBS Trust.
SBS will describe the GIC Fund, in the prospectus (the Prospectus) and
promotional materials it furnishes to Section 404(c) Plan participants who are
interested in investing in the GIC Fund. Such disclosures will reflect, in all
material respects, the information discussed above.
Because of the foregoing material changes to the factual representations
supporting PTE 92-77, the Department has determined that the prior exemption
was no longer effective as of July 31, 1993, the date Shearson Lehman sold the
assets described above to SBS. Thus, the Department is of the view that PTE 92-
77 would be unavailable for use by SBS and its subsidiaries with respect to the
subject transactions.
Accordingly, the Department has decided to publish a new exemption which, if
granted, would replace PTE 92-77. Under the replacement exemption, all
references to Shearson Lehman would be replaced with references to SBS. In
addition, the replacement exemption would incorporate the new GIC Fund, SBS
Trust, ISG and TSSG. Further, the replacement exemption would have an effective
date of July 31, 1993 for transactions described in PTE 92-77. With respect to
transactions involving the GIC Fund, the replacement exemption would become
effective as of the date of the grant of the notices of pendency.
NOTICE TO INTERESTED PERSONS
Notice of the proposed exemption will be mailed by first class mail to each
Plan which invests in the TRAK Program. The notice will contain a copy of the
notice of proposed exemption as published in the Federal Register and an
explanation of the rights of interested persons to comment on and/or request
such a hearing with respect thereto. Such notice will be sent to the above-
named parties within 30 days of the publication of the proposed exemption in
the Federal Register. Written comments and hearing request are due within 60
days of the publication of the proposed exemption in the Federal Register.
GENERAL INFORMATION
The attention of interested persons is directed to the following:
(1) This fact that a transaction is the subject of an exemption under section
408(a) of the Act and section 4973(c)(2) of the Code does not relieve a
fiduciary or other party in interest or disqualified person from certain other
provisions of the Act and the Code, including any prohibited transaction
provisions to which the exemption does not apply and the general fiduciary
responsibility provisions of section 404 of the Act, which require, among other
things, a fiduciary to discharge his or her duties respecting the plan solely
in the interest of the participants and beneficiaries of the plan and in a
prudent fashion in accordance with section 404(a)(1)(B) of the Act; nor does it
affect the requirements of section 401(a) of the Code that the Plan operate for
the exclusive benefit of the employees of the employer maintaining the plan and
their beneficiaries;
(2) Before an exemption can be granted under section 408(a) of the Act and
section 4975(c)(2) of the Code, the Department must find that the exemption is
administratively feasible, in the interest of the plan and of its participants
and beneficiaries and protective of the rights of participants and
beneficiaries of the plan; and
(3) The proposed exemption, if granted, will be supplemental to, and not in
derogation of, any other provisions of the Act and the Code, including
statutory or administrative exemptions. Furthermore, the fact that a
transaction is subject to an administrative or statutory exemption is not
dispositive of whether the transaction is in fact a prohibited transaction.
(4) In addition to transactions involving the GIC Fund, the proposed
exemption, if granted, will be applicable to the transactions previously
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described in PTE 92-77 only if the conditions specified therein are met.
WRITTEN COMMENTS AND HEARING REQUESTS
All interested persons are invited to submit written comments or requests for
a hearing on the proposed replacement exemption to the address above, within
the time period set forth above. All comments will be made a part of the
record. Comments and requests for a hearing should state the reasons for the
writer's interest in the proposed exemption. Comments received will be
available for public inspection with the referenced applications at the address
set forth above.
PROPOSED EXEMPTION
Under the authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the Procedures cited above, the Department proposes
to replace PTE 92-77 as follows:
Section 1. Covered Transactions
(a) The restrictions of section 406(a) of the Act and the sanctions resulting
from the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (D) of the Code, shall not apply to the purchase or
redemption of shares by Plans in the SBS-established Trust in connection with
such Plans' participation in the TRAK Personalized Investment Advisory Service.
(b) The restrictions of action 406(b) of the Act and the sanctions resulting
from the application of section 4975 of the Code by reason of section
4975(c)(1)(E) and (F) of the Code, shall not apply to the provision, by the
Consulting Group, of investment advisory services to an Independent Plan
Fiduciary of a participating Plan which may result in such fiduciary's
selection of a Portfolio in the TRAK Program for the investment of Plan assets.
The proposed exemption is subject to the following conditions that are set
forth in Section II.
Section II. General Conditions
(a) The participation of Plans in the TRAK Program will be approved by an
Independent Plan Fiduciary. For purposes of this requirement, an employee,
officer or director of SBS and/or its affiliates covered by an IRA not subject
to Title I of the Act will be considered an Independent Plan Fiduciary with
respect to such IRA.
(b) The total fees paid to the Consulting Group and its affiliates will
constitute no more than reasonable compensation.
(c) No Plan will pay a fee or commission by reason of the acquisition or
redemption of shares in the Trust.
(d) The terms of each purchase or redemption of Trust shares shall remain at
least as favorable to an investing Plan as those obtainable in an arm's length
transaction with an unrelated party.
(e) The Consulting Group will provide written documentation to an Independent
Plan Fiduciary of its recommendations or evaluations based upon objective
criteria.
(f) Any recommendation or evaluation made by the Consulting Group to an
Independent Plan Fiduciary will be implemented only at the express direction of
such independent fiduciary.
(g) The Consulting Group will generally give investment advice in writing to
an Independent Plan Fiduciary with respect to all available Portfolios.
However, in the case of a Section 404(c) Plan, the Consulting Group will
provide investment advice that is limited to the Portfolios made available
under the Plan.
(h) Any Sub-Adviser that acts for the Trust to exercise investment discretion
over a Portfolio will be independent of SBS and its affiliates.
(i) Immediately following the acquisition by a Portfolio of any securities
that are issued by SBS and/or its affiliates, the percentage of that
Portfolio's net assets invested in such securities will not exceed one percent.
(j) The quarterly investment advisory fee that is paid by a Plan to the
Consulting Group for investment advisory services rendered to such Plan will be
offset by such amount as is necessary to assure that the Consulting Group
retains no more than 20 basis points from any Portfolio (with the exception of
the Government Money Investments Portfolio and the GIC Fund Portfolio for which
the Consulting Group and SBS Trust will retain no investment management fee)
which contains investments attributable to the Plan investor.
(k) With respect to its participation in the TRAK Program prior to purchasing
Trust shares.
(1) Each Plan will receive the following written or oral disclosures from the
Consulting Group:
(A) A copy of the Prospectus for the Trust discussing the investment
objectives of the Portfolios comprising the Trust, the policies employed to
achieve these objectives, the corporate affiliation existing between the
Consulting Group, SBS and its subsidiaries and the compensation paid to such
entities.
(B) Upon written or oral request to SBS, a Statement of Additional Information
supplementing the Prospectus which describes 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.
(C) A copy of the investment advisory agreement between the Consulting Group
and such Plan relating to participation in the TRAK Program.
(D) Upon written request of SBS, a copy of the respective investment advisory
agreement between the Consulting Group and the Sub-Advisers.
(E) In the case of a section 404(c) Plan, if required by the arrangement
negotiated between the Consulting Group and the Plan, an explanation by an SBS
Financial Consultant (the Financial Consultant) to eligible participants in
such Plan, of the services offered under the TRAK Program and the operation and
objectives of the Portfolios.
(F) Copies of PTE 92-77 and documents pertaining to the proposed replacement
exemption.
(2) If accepted as an investor in the TRAK Program, an Independent Plan
Fiduciary of an IRA or Keogh Plan, is required to acknowledge in writing, prior
to purchasing Trust shares that such fiduciary has received copies of the
documents described above in subparagraph (k)(1) of this section.
(3) With respect to a section 404(c) Plan, written acknowledgement of the
receipt of such documents will be provided by the Independent Plan Fiduciary
(i.e., the Plan administrator, trustee or named fiduciary, as the recordholder
of Trust shares). Such Independent Plan Fiduciary will be required to represent
in writing to SBS that such fiduciary is (a) independent of SBS and its
affiliates and (b) knowledgeable with respect to the Plan in administrative
matters and funding matters related thereto, and able to make an informed
decision concerning participation in the TRAK Program.
(4) With respect to a Plan that is covered under Title I of the Act, where
investment decisions are made by a trustee, investment manager or a named
fiduciary, such Independent Plan Fiduciary is required to acknowledge, in
writing, receipt of such documents and represent to SBS that such fiduciary is
(a) independent of SBS and its affiliates, (b) capable of making an independent
decision regarding the investment of Plan assets and (c) knowledgeable with
respect to the Plan in administrative matters and funding matters related
thereto, and able to make an informed decision concerning participation in the
TRAK Program.
B-14
<PAGE>
(l) Subsequent to its participation in the TRAK Program, each Plan receives
the following written or oral disclosures with respect to its ongoing
participation in the TRAK Program:
(1) The Trust's semi-annual and annual report which will include financial
statement for the Trust and investment management fees paid by each Portfolio.
(2) A written quarterly monitoring statement containing an analysis and an
evaluation of a Plan investor's account to ascertain whether the Plan's
investment objectives have been met and recommending, if required, changes in
Portfolio allocations.
(3) If required by the arrangement negotiated between the Consulting Group and
a section 404(c) Plan, a quarterly, detailed investment performance monitoring
report, in writing, provided to an Independent Plan Fiduciary of such Plan
showing, Plan level asset allocation, Plan cash flow analysis and annualized
risk adjusted rates of return for Plan investments. In addition, if required by
such arrangement, Financial Consultants will meet periodically with Independent
Plan Fiduciaries of section 404(c) Plans to discuss the report as well as with
eligible participants to review their accounts' performance.
(4) If required by the arrangement negotiated between the Consulting Group and
a section 404(c) Plan, a quarterly participant performance monitoring report
provided to a Plan participant which accompanies the participant's benefit
statement and describes the investment performance of the Portfolios, the
investment performance of the participant's individual investment in the TRAK
Program, and gives market commentary and toll-free numbers that will enable the
participant to obtain more information about the TRAK Program or to amend his
or her investment allocations.
(5) On a quarterly and annual basis, written disclosures to all Plans of the
(a) percentage of each Portfolio's brokerage commissions that are paid to SBS
and its affiliates and (b) the average brokerage commission per share paid by
each Portfolio to SBS and its affiliates; as compared to the average brokerage
commission per share paid by the Trust to brokers other than SBS and its
affiliates, both expressed as cents per share.
(m) SBS shall maintain, for a period of six years, the records necessary to
enable the persons described in paragraph (n) of this section to determine
whether the conditions of this exemption have been met, except that (1) a
prohibited transaction will not be considered to have occurred if, due to
circumstances beyond the control of SBS and/or its affiliates, the records are
lost or destroyed prior to the end of the six year period, and (2) no party in
interest other than SBS shall be subject to the civil penalty that may be
assessed under section 502(i) of the Act, or to the taxes imposed by section
4975(a) and (b) of the Code, if the records are not maintained, or are not
available for examination as required by paragraph (n) below.
(n)(1) Except as provided in section (2) of this paragraph and notwithstanding
any provisions of subsections (a)(2) and (b) of section 504 of the Act, the
records referred to in paragraph (m) of this section shall be unconditionally
available at their customary location during normal business hours by:
(A) Any duly authorized employee or representative of the Department or the
Service;
(B) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to any participating Plan or any duly authorized
employee representative of such employer; and
(D) Any participant or beneficiary of any participating Plan, or any duly
authorized representative of such participant or beneficiary.
(2) None of the persons described above in subparagraphs (B)-(D) of this
paragraph (n) shall be authorized to examine the trade secrets of SBS or
commercial or financial information which is privileged or confidential.
Section III. Definitions
For purposes of this exemption:
(a) An "affiliate" of SBS includes--
(1) Any person directly or indirectly through one or more intermediaries,
controlling, controlled by, or under common control with SBS. (For purposes of
this subsection, the term "control" means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.)
(2) Any officer, director or partner in such person, and
(3) Any corporation or partnership of which such person is an officer,
director or a 5 percent partner or owner.
(b) An "Independent Plan Fiduciary" is a Plan fiduciary which is independent
of SBS and its affiliates and is either--
(1) A Plan administrator, sponsor, trustee or named fiduciary, as the
recordholder of Trust shares of a section 404(c) Plan.
(2) A participant in a Keogh Plan.
(3) An individual covered under a self-directed IRA which invests in Trust
shares, or
(4) A trustee, investment manager or named fiduciary responsible for
investment decisions in the case of a Title I Plan that does not permit
individual direction as contemplated by section 404(c) of the Act.
Section IV. Effective Dates
This exemption will be effective as of July 31, 1993, except for transactions
involving the GIC Fund. The exemption will be effective upon its grant with
respect to the inclusion of the GIC Fund in the TRAK Program.
The availability of this proposed exemption is subject to the express
condition that the material facts and representations contained in the
applications for exemption are true and complete and accurately describe all
material terms of the transactions. In the case of continuing transactions, if
any of the material facts or representations described in the applications
change, the exemption will cease to apply as of the date of such change. In the
event of any such change, an application for a new exemption must be made to
the Department.
For a more complete statement of the facts and representations supporting the
Department's decision to grant PTE 92-77, refer to the proposed exemption and
grant notice which are cited above.
Signed at Washington, D.C. this 23rd day of March, 1994.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 94-7271 Filed 3-28-94; 8:45 am]
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<PAGE>
- --------------------------------------------------------------------------------
[PROHIBITED TRANSACTION EXEMPTION 94-45; APPLICATION NOS. D-9337 AND D-9415]
SMITH BARNEY, INC. (SBI) LOCATED IN NEW YORK, NY
AGENCY: Pension and Welfare Benefits Administration.
ACTION: Grant of individual exemption to modify and replace prohibited
transaction exemption (PTE) 92-77 involving Shearson Lehman Brothers, Inc.
(Shearson Lehman).
- --------------------------------------------------------------------------------
SUMMARY: This document contains an individual exemption which supersedes PTE
92-77 (57 FR 45833, October 5, 1992)./1/ This exemption permits the replacement
of Shearson Lehman with an entity known as "Smith Barney Inc."/2/ It also
allows SBI to adopt a daily-traded collective investment fund (the GIC Fund)
for Plans investing in the Consulting Group Capital Markets Funds (the Trust).
The exemption provides conditional relief that is identical to that provided by
PTE 92-77 and it will affect participants and beneficiaries of, and fiduciaries
with respect to, Plans participating in the Trust.
EFFECTIVE DATE: This exemption is effective July 31, 1993 for transactions that
are covered by PTE 92-77. With respect to transactions involving the GIC Fund,
the exemption is effective March 29, 1994.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady, Office of Exemption
Determinations, Pension and Welfare Benefits Administration, U.S. Department of
Labor, telephone (202) 219-8881. (This is not a toll-free number.)
SUPPLEMENTARY INFORMATION: On March 29, 1994, the Department of Labor (the
Department) published a notice of proposed exemption (the Notice) in the
FEDERAL REGISTER (59 FR 14680) that would replace PTE 92-77. PTE 92-77 provides
an exemption from certain prohibited transaction restrictions of section 406 of
the Employee Retirement Income Security Act of 1974 (the Act) and from the
sanctions resulting from the application of section 4975 of the Internal
Revenue Code of 1986 (the Code), as amended, by reason of section 4975(c)(1) of
the Code. The proposed exemption was requested in an application filed by SBI
pursuant to section 408(a) of the Act and section 4975(c)(2) of the Code, and
in accordance with the procedures (the Procedures) set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, August 10, 1990). Effective December 31, 1978,
section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17,
1978) transferred the authority of the Secretary of the Treasury to issue
exemptions of the type requested to the Secretary of Labor. Accordingly, this
replacement exemption is being issued solely by the Department.
The Notice gave interested persons an opportunity to comment on the proposed
exemption and to request a public hearing. The only written comments submitted
to the Department during the comment period were made by SBI. These comments
expressed SBI's substantive concerns about the Notice and offered suggestions
for clarifying certain language of the Notice. Discussed below are SBI's
comments and the Department's responses thereto. Also discussed is a comment
made by the Department.
SBI's Comments
SBI notes that there is an ambiguity regarding the effective date of the GIC
Fund. SBI represents that the Notice provides in the last paragraph under the
heading "Supplementary Information," that with respect to transactions
involving the GIC Fund, the exemption "would become effective as of the date of
the grant of the notice of pendency." However, under the captions EFFECTIVE
DATES and DATES, SBI explains that the Notice states that the exemption will be
effective "upon its grant," or "as of the date the grant notice is published."
Because it was the intention of the parties that the effective date for
transactions involving the GIC Fund would be March 29, 1994, the date of
publication of the Notice in the FEDERAL REGISTER, SBI requests that the
Department make the exemption retroactive to this date for the GIC Fund.
The Department has considered SBI's comment and has made the requested
modification.
SBI wishes to modify the exemption in order that it may offer the GIC Fund to
both fiduciary-directed Plans as well as Plans providing for participant-
directed investments (the Section 404(c) Plans). The Department believes this
comment has merit and that it would be potentially beneficial to participants
and beneficiaries since it provides different types of Plans participating in
the TRAK Program with the opportunity to invest in the GIC Fund.
SBI explains that in the preamble to the Notice there is a statement to the
effect that it will "describe the GIC Fund in a prospectus (the Prospectus) and
promotional materials that will be furnished to Section 404(c) Plan
participants." SBI represents that interests in the GIC Fund are not subject to
the registration and Prospectus delivery requirements of the Securities Act of
1933. Also, SBI points out that the conditions of PTE 92-77 require it to
deliver copies of the Trust Prospectus only to the Plan administrator and not
to the individual participants. Because it has no practical means of delivering
Prospectuses or other disclosures to participants, SBI indicates that the
responsibility for providing these materials to participants rests with the
Plan administrator. In this regard, SBI represents that the disclosure
information it will make available to all Plans proposing to invest in the GIC
Fund will include copies of the Trust Prospectus and a separate description of
the GIC Fund's investment objectives, policies and processes. SBI explains that
its description of the GIC Fund will be designed to provide a participant with
sufficient information in order that the participant can make an informed
investment decision.
The Department concurs with these comments.
In addition to principal comments discussed above, SBI has made certain
technical clarifications and updates to the Notice in the following areas:
(1) General.
a. Redesignations. SBI explains that effective December 31, 1993, Primerica
Corporation changed its name to "The Travelers Inc." and that effective May 9,
1994, the "Trust for TRAK Investments" was renamed "Consulting Group Capital
Markets Funds." Also effective June 1, 1994, "Smith Barney Shearson Inc." was
renamed "Smith Barney Inc."
(2) Supplementary Information.
a. Asset Sale Transaction. SBI explains that the transaction by which Smith
Barney Harris Upham & Company, Inc. (Smith Barney) acquired Shearson Lehman and
its Asset Management Divisions was an asset sale and not a merger. Accordingly,
SBI suggests that the fourth sentence of the third paragraph under the heading
"Supplementary Information," read as follows: "As a result of the transaction,
most of the assets and business of the Shearson divisions were transferred to
- -------
/1/ PTE 92-77 provides exemptive relief from section 406(a) of the Act and the
sanctions resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1) (A) through (D) of the Code, with respect to the purchase
or redemption of shares in the Trust for TRAK Investments (which has been
redesignated as the "Consulting Group Capital Markets Funds" and is referred to
herein as the Trust) by Plans investing therein. In addition, PTE 92-77
provides exemptive relief from the restrictions of section 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section 4975 of
the Code, by reason of section 4975(c)(1)(E) of the Code, with respect to the
provision, by the Consulting Group of Shearson Lehman, of investment advisory
services to an Independent Plan Fiduciary of a Plan participating in the TRAK
Personalized Investment Advisory Service (the TRAK Program) which may result in
such fiduciary's selection of a Portfolio in the TRAK Program for the
investment of Plan assets.
/2/ Effective June 1, 1994, Smith Barney Shearson, Inc. (SBS) was renamed
"Smith Barney Inc." Hereinafter, SBS is referred to in this grant notice as
either "Smith Barney Inc." or "SBI."
B-16
<PAGE>
Smith Barney, which was renamed "Smith Barney Shearson Inc.' "
b. Fees Paid to Transfer Agent. SBI represents that in the seventh paragraph
under the heading "Supplementary Information," the Notice states that The
Shareholder Services Group (TSSG), as transfer agent, will charge a fee of
$8.50 to $9.50 per plan for its transfer agency services. While these are the
current expected fee levels, SBI notes that such fees may increase or decrease
in the future. Because TSSG is no longer an affiliate, SBI requests that the
paragraph be amended to provide that TSSG as transfer agent will receive a
reasonable fee for its services rather than specifying a precise dollar amount.
(3) General Conditions.
a. Written Disclosures. Section II(k)(1)(F) of the General Conditions of the
Notice states that SBI will provide copies of PTE 92-77 and documents
pertaining to the proposed replacement exemption to each Plan participating in
the TRAK Program. SBI wishes to clarify that the "documents pertaining to the
proposed replacement exemption" refer to copies of the Notice and, when issued,
the final exemption.
The Department concurs with the above supplemental clarifications to the
Notice that have been made by SBI and hereby incorporates these changes, as
well as the substantive changes also described above, by reference into the
Notice and, where applicable, into this final exemption.
Department's Comment
Section III of the Notice, which is captioned "Definitions," provides several
meanings of the term "Independent Plan Fiduciary" in subparagraph (b). For
purposes of the exemption, the term "Independent Plan Fiduciary" may include a
Plan administrator, a participant in a Keogh Plan, an individual covered under
a self-directed IRA or a trustee of a Title I Plan that does not permit
participant-directed investments as contemplated under section 404(c) of the
Act. However, due to an oversight, the definition does not extend to a
participant in a Section 404(c) Plan. Because the TRAK Program is being
marketed as an investment alternative to Section 404(c) Plans and the
individual participant of such Plan makes the decision on whether to invest
therein, the Department has amended the definition of the term "Independent
Plan Fiduciary" by providing a new subparagraph (b)(5) which includes a Section
404(c) Plan participant.
Accordingly, after consideration of the entire exemption record, including the
written comments, the Department has determined to grant the replacement
exemption as modified herein.
GENERAL INFORMATION
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption under section
408(a) of the Act and section 4975(c)(2) of the Code does not relieve a
fiduciary or other party in interest or disqualified person from certain other
provisions of the Act and the Code, including any prohibited transaction
provisions to which the exemption does not apply and the general fiduciary
responsibility provisions of section 404 of the Act, which require, among other
things, a fiduciary to discharge his or her duties respecting the plan solely
in the interest of the participants and beneficiaries of the plan and in a
prudent fashion in accordance with section 404(a)(1)(B) of the Act; nor does it
affect the requirements of section 401(a) of the Code that the plan operate for
the exclusive benefit of the employees of the employer maintaining the plan and
their beneficiaries;
(2) In accordance with section 408(a) of the Act and section 4975(c)(2) of the
Code, the Department has found that the exemption is administratively feasible,
in the interest of the Plans and their participants and beneficiaries and
protective of the rights of participants and beneficiaries of the Plans; and
(3) The exemption is supplemental to, and not in derogation of, any other
provisions of the Act and the Code, including statutory or administrative
exemptions. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction.
(4) In addition to transactions involving the GIC Fund, the exemption is
applicable to the transactions previously described in PTE 92-77 only if the
conditions specified therein are met.
EXEMPTION
Under the authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the Procedures cited above, the Department hereby
replaces PTE 92-77 as follows:
Section I. Covered Transactions
(a) The restrictions of section 406(a) of the Act and the sanctions resulting
from the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (D) of the Code, shall not apply to the purchase or
redemption of shares by Plans in the SBI-established Trust in connection with
such Plans' participation in the TRAK Personalized Investment Advisory Service.
(b) The restrictions of section 406(b) of the Act and the sanctions resulting
from the application of section 4975 of the Code by reason of section
4975(c)(1)(E) and (F) of the Code, shall not apply to the provision, by the
Consulting Group, of investment advisory services to an Independent Plan
Fiduciary of a participating Plan which may result in such fiduciary's
selection of a Portfolio in the TRAK Program for the investment of Plan assets.
The exemption is subject to the following conditions that are set forth in
Section II.
Section II. General Conditions
(a) The participation of Plans in the TRAK Program will be approved by an
Independent Plan Fiduciary. For purposes of this requirement, an employee,
officer or director of SBI and/or its affiliates covered by an IRA not subject
to Title I of the Act will be considered an Independent Plan Fiduciary with
respect to such IRA.
(b) The total fees paid to the Consulting Group and its affiliates will
constitute no more than reasonable compensation.
(c) No Plan will pay a fee or commission by reason of the acquisition or
redemption of shares in the Trust.
(d) The terms of each purchase or redemption of Trust shares remain at least
as favorable to an investing Plan as those obtainable in an arm's length
transaction with an unrelated party.
(e) The Consulting Group will provide written documentation to an Independent
Plan Fiduciary of its recommendations or evaluations based upon objective
criteria.
(f) Any recommendation or evaluation made by the Consulting Group to an
Independent Plan Fiduciary will be implemented only at the express direction of
such independent fiduciary.
(g) The Consulting Group will generally give investment advice in writing to
an Independent Plan Fiduciary with respect to all available Portfolios.
However, in the case of a Section 404(c) Plan, the Consulting Group will
provide investment advice that is limited to the Portfolios made available
under the Plan.
(h) Any Sub-Adviser that acts for the Trust to exercise investment discretion
over a Portfolio will be independent of SBI and its affiliates.
(i) immediately following the acquisition by a Portfolio of any securities
that are issued by SBI and/or its affiliates, the percentage of that
Portfolio's net assets invested in such securities will not exceed one percent.
(j) The quarterly investment advisory fee that is paid by a Plan to the
Consulting Group for investment advisory services rendered to
B-17
<PAGE>
such Plan will be offset by such amount as is necessary to assure that the
Consulting Group retains no more than 20 basis points from any Portfolio (with
the exception of the Government Money Investments Portfolio and the GIC Fund
Portfolio for which the Consulting Group and SBI Trust will retain no
investment management fee) which contains investments attributable to the Plan
investor.
(k) With respect to its participation in the TRAK Program prior to purchasing
Trust shares.
(1) Each Plan will receive the following written or oral disclosures from the
Consulting Group:
(A) A copy of the Prospectus for the Trust discussing the investment
objectives of the Portfolios comprising the Trust, the policies employed to
achieve these objectives, the corporate affiliation existing between the
Consulting Group, SBI and its subsidiaries and the compensation paid to such
entities./3/
(B) Upon written or oral request to SBI, a Statement of Additional Information
supplementing the Prospectus which describes 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.
(C) A copy of the investment advisory agreement between the Consulting Group
and such Plan relating to participation in the TRAK Program.
(D) Upon written request of SBI, a copy of the respective investment advisory
agreement between the Consulting Group and the Sub-Advisers.
(E) In the case of a Section 404(c) Plan, if required by the arrangement
negotiated between the Consulting Group and the Plan, an explanation by an SBI
Financial Consultant (the Financial Consultant) to eligible participants in
such Plan, of the services offered under the TRAK Program and the operation and
objectives of the Portfolios.
(F) Copies of PTE 92-77 and documents pertaining to the replacement exemption.
(2) If accepted as an investor in the TRAK Program, an Independent Plan
Fiduciary of an IRA or Keogh Plan, is required to acknowledge, in writing,
prior to purchasing Trust shares that such fiduciary has received
copies of the documents described above in subparagraph (k)(1) of this Section.
(3) With respect to a Section 404(c) Plan, written acknowledgement of the
receipt of such documents will be provided by the Independent Plan Fiduciary
(i.e., the Plan administrator, trustee or named fiduciary, as the recordholder
of Trust shares). Such Independent Plan Fiduciary will be required to represent
in writing to SBI that such fiduciary is (a) independent of SBI and its
affiliates and (b) knowledgeable with respect to the Plan in administrative
matters and funding matters related thereto, and able to make an informed
decision concerning participation in the TRAK Program.
(4) With respect to a Plan that is covered under Title I of the Act, where
investment decisions are made by a trustee, investment manager or a named
fiduciary, such Independent Plan Fiduciary is required to acknowledge, in
writing, receipt of such documents and represent to SBI that such fiduciary is
(a) independent of SBI and its affiliates, (b) capable of making an independent
decision regarding the investment of Plan assets and (c) knowledgeable with
respect to the Plan in administrative matters and funding matters related
thereto, and able to make an informed decision concerning participation in the
TRAK Program.
(l) Subsequent to its participation in the TRAK Program, each Plan receives
the following written or oral disclosures with respect to its ongoing
participation in the TRAK Program:
(1) The Trust's semi-annual and annual report which will include financial
statement for the Trust and investment management fees paid by each Portfolio.
(2) A written quarterly monitoring statement containing an analysis and an
evaluation of a Plan investor's account to ascertain whether the Plan's
investment objectives have been met and recommending, if required, changes in
Portfolio allocations.
(3) If required by the arrangement negotiated between the Consulting Group and
a Section 404(c) Plan, a quarterly, detailed investment performance monitoring
report, in writing, provided to an Independent Plan Fiduciary of such Plan
showing, Plan level asset allocations, Plan cash flow analysis and annualized
risk adjusted rates of return for Plan investments. In addition, if required by
such arrangement, Financial Consultants will meet periodically with Independent
Plan Fiduciaries of Section 404(c) Plans to discuss the report as well as with
eligible participants to review their accounts' performance.
(4) If required by the arrangement negotiated between the Consulting Group and
a Section 404(c) Plan, a quarterly participant performance monitoring report
provided to a Plan participant which accompanies the participant's benefit
statement and describes the investment performance of the Portfolios, the
investment performance of the participant's individual investment in the TRAK
Program, and gives market commentary and toll-free numbers that will enable the
participant to obtain more information about the TRAK Program or to amend his
or her investment allocations.
(5) On a quarterly and annual basis, written disclosures to all Plans of the
(a) percentage of each Portfolio's brokerage commissions that are paid to SBI
and its affiliates and (b) the average brokerage commission per share paid by
each Portfolio to SBI and its affiliates, as compared to the average brokerage
commission per share paid by the Trust to brokers other than SBI and its
affiliates, both expressed as cents per share.
(m) SBI shall maintain, for a period of six years, the records necessary to
enable the persons described in paragraph (n) of this Section to determine
whether the conditions of this exemption have been met, except that (1) a
prohibited transaction will not be considered to have occurred if, due to
circumstances beyond the control of SBI and/or its affiliates, the records are
lost or destroyed prior to the end of the six year period, and (2) no party in
interest other than SBI shall be subject to the civil penalty that may be
assessed under section 502(i) of the Act, or to the taxes imposed by section
4975(a) and (b) of the Code, if the records are not maintained, or are not
available for examination as required by paragraph (n) below.
(n)(1) Except as provided in section (2) of this paragraph and notwithstanding
any provisions of subsections (a)(2) and (b) of section 504 of the Act, the
records referred to in paragraph (m) of this Section shall be unconditionally
available at their customary location during normal business hours by:
(A) Any duly authorized employee or representative of the Department or the
Internal Revenue Service;
(B) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to any participating Plan or any duly authorized
employee representative of such employer; and
(D) Any participant or beneficiary of any participating Plan, or any duly
authorized representative of such participant or beneficiary.
- -------
/3/ The fact that certain transactions and fee arrangements are the subject of
an administrative exemption does not relieve the Independent Plan Fiduciary
from the general fiduciary responsibility provisions of section 404 of the Act.
In this regard, the Department expects the Independent Plan Fiduciary to
consider carefully the totality of fees and expenses to be paid by the Plan
including the fees paid directly to SBI or to other third parties and paid
directly through the Trust to SBI.
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<PAGE>
(2) None of the persons described above in subparagraphs (B)-(D) of this
paragraph (n) shall be authorized to examine the trade secrets of SBI or
commercial or financial information which is privileged or confidential.
Section III. Definitions
For purposes of this exemption:
(a) An "affiliate" of SBI includes--
(1) Any person directly or indirectly through one or more intermediaries,
controlling, controlled by, or under common control with SBI. (For purposes of
this subsection, the term "control" means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.)
(2) Any officer, director or partner in such person, and
(3) Any corporation or partnership of which such person is an officer,
director or a 5 percent partner or owner.
(b) An "Independent Plan Fiduciary" is a Plan fiduciary which is independent
of SBI and its affiliates and is either
(1) A Plan administrator, sponsor, trustee or named fiduciary, as the
recordholder of Trust shares of a Section 404(c) Plan,
(2) A participant in a Keogh Plan,
(3) An individual covered under a self-directed IRA which invests in Trust
shares,
(4) A trustee, investment manager or named fiduciary responsible for
investment decisions in the case of a Title I Plan that does not permit
individual direction as contemplated by Section 404(c) of the Act, or
(5) A participant in a Section 404(c) Plan.
Section IV. Effective Dates
This exemption will be effective as of July 31, 1993, except for transactions
involving the GIC Fund. The exemption will be effective March 29, 1994 with
respect to the inclusion of the GIC Fund in the TRAK Program.
The availability of this exemption is subject to the express condition that
the material facts and representations contained in the applications for
exemption are true and complete and accurately describe all material terms of
the transactions. In the case of continuing transactions, if any of the
material facts or representations described in the applications change, the
exemption will cease to apply as of the date of such change. In the event of
any such change, an application for a new exemption must be made to the
Department.
For a more complete statement of the facts and representations supporting the
Department's decision to grant PTE 92-77, refer to the proposed exemption and
grant notice which are cited above.
Signed at Washington, DC, this 16th day of June 1994.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 94-15006 Filed 6-20-94; 8:45 am]
BILLING CODE 4510-28-P
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<PAGE>
institutional and individual clients of Smith Barney's predecessor with
appropriate and qualified money management organizations throughout the
nation. In 1989, the Consulting Group was created with the restructuring and
segregation of research and investment advisory evaluation services functions
of the Consulting Services Division of Smith Barney. The Consulting Group's
analysts draw on over 20 years of experience in performing asset manager
searches for institutional and individual clients. They rely on the Consulting
Group's comprehensive database of money management firms, through which it
tracks the historical and ongoing performance of over 800 registered
investment advisors, and over 300 evaluations annually of investment 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.
GETTING STARTED
Getting started is easy. Prospective clients should make an appointment to
speak with a Financial Consultant. The Financial Consultant will assist in the
preparation of a Request. After the prospective client completes the Request,
the Financial Consultant will forward this document for evaluation and
processing by the Consulting Group. When the Consulting Group completes its
review, the Financial Consultant will review the Recommendation with the
client and provide the client with a copy of this description of TRAK together
with the accompanying Prospectus of the Trust and a copy of the form of
investment advisory agreement between the Consulting Group and the client
relating to participation in TRAK, as well as a copy of that agreement for the
client's records. Upon the client's execution of the investment advisory
agreement and its acceptance by Smith Barney, the Financial Consultant will
implement the client's investment decisions. The client will be sent a
confirmation of his or her investments, which will be accompanied by a copy of
a brochure required by federal law that contains more detailed information
about the Consulting Group and TRAK.
PARTICIPATION
The annual fee for participation in TRAK is payable quarterly, partially in
advance, and varies based upon the value of the client's Portfolio shares at
the initiation of the advisory relationship and on a continuing basis at the
last day of the preceding calendar quarter as follows: 1.50% of the value of
TRAK assets up to $500,000, 1.20% of the value in excess of $500,000 up to
$1,000,000 and 1.00% of the account value in excess of $1,000,000. The annual
participation fee on TRAK assets and minimum initial investment may be subject
to negotiation. The minimum initial TRAK investment is $10,000 and there is no
minimum subsequent investment. As a shareholder in the Portfolios, the client
will also bear a proportionate share of the Portfolios' fees and expenses,
which are described in detail in the accompanying Prospectus. The TRAK fee in
respect of an initial investment will begin to accrue on the business day
following the initial investment in the Portfolios (the "Opening Date"), will
be based on the proportion of the current quarter then remaining and will be
payable on the fifth business day after the initial investment is made.
Notwithstanding the foregoing, if the initial investment is made within five
business days of the end of any quarter, the initial fee payment will cover
the period from the Opening Date through the last day of the following
quarter, and the fee will be pro-rated accordingly. Each time that additional
funds aggregating $5,000 or more are invested in Portfolios during any one
quarter, the applicable fee, pro-rated for the number of days then remaining
in the quarter and covering the amount of such additional funds, shall be
charged and shall become due two business days later. Each time that Portfolio
shares aggregating $5,000 or more are redeemed during any one quarter, the
client will receive a credit to the Account in which the Portfolio shares were
held, for the TRAK fee applicable to the Portfolio shares redeemed, based on
the proportion of the quarter remaining after the redemption is effected. Such
credit shall be applied on the day that the quarterly fee is due for the
quarter in which the Portfolio shares are redeemed, or two business days after
the Portfolio shares are redeemed, whichever is later. For purposes of
calculating additional fees or credits during a quarter, additional
investments and redemptions are netted, and accordingly may offset each other.
iii
<PAGE>
In the case of individual retirement accounts, retirement plans for self-
employed individuals and employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended (collectively, "Plans"),
the minimum initial TRAK investment is $10,000 and the fee for participation
in TRAK by a Plan will be reduced by an amount equal to, for all Portfolios in
which Plan assets are invested, (A) the value of Plan assets invested in a
Portfolio on the last calendar day of the previous calendar quarter (or on the
day an initial investment is made during the calendar quarter), multiplied by
(B) the reduction factor specified below, multiplied by (C) a fraction, the
numerator of which is the number of days in the period for which the TRAK fee
is being assessed and the denominator of which is the actual number of days in
the calendar year of which that period is a part. The reduction factor for
Portfolios (1) through (4) on page (ii) above shall be 0%; for Portfolios (5)
and (12) shall be 0.05%; and for Portfolios (6) through (11) and (13) shall be
0.10%.
For subsequent investments or redemptions aggregating to $5,000 or more, the
pro-rated fee or credit for the balance of the quarter will be calculated on
the basis of the net percentage TRAK fee paid for the quarter during which the
subsequent investment or redemption was made.
TRAK participants should note that, although the Consulting Group as the
Trust's Manager receives a fee in respect of Government Money Investments, the
entire amount of that fee is paid by the Manager to that Portfolio's Advisor.
Thus, the Manager retains no management fee in respect of that Portfolio.
Once a TRAK program is active, Reviews covering all settled TRAK activity
for the preceding quarter (except as provided below) will be mailed on or
about the 20th day of April, July, October and January of each year and will
contain a debit notice indicating the amount of the fee payable, partially in
advance, for the current calendar quarter. Clients may select to receive a
Review on a semi-annual basis, rather than on a quarterly basis. Clients that
select this option nevertheless will be responsible for paying their annual
TRAK fee on a quarterly basis. The quarterly fee will be payable on the tenth
business day of the second month of each quarter. If the client pays this fee
by check, these funds will be deposited in the client's Smith Barney brokerage
Account and may be invested in shares of a Smith Barney money market fund
designated by the client until the specified payment date. To relieve the
client of the burden of making separate payment, however, each client's
investment advisory agreement provides that fees charged by the Consulting
Group pursuant to the agreement may be paid through automatic redemption, on
the specified payment date, of a portion of the Portfolio shares held in the
client's Account. Unless otherwise specified by the client, automatic payments
will be made first from redemptions of shares of Government Money Investments;
next from free credit balances held in the client's Smith Barney brokerage
Account; next from redemptions of shares of any money market fund held in that
brokerage Account in which free credit balances are routinely and
automatically invested; and next from redemptions of shares of the other
Portfolios successively in the order listed on page (ii) above until the
payment obligation is satisfied. Clients may terminate their participation in
TRAK at any time by giving five days' notice to Smith Barney. If a termination
is effected within five business days of receipt of the confirmation and
brochure described above, any TRAK fee paid will be credited to the client's
Account or paid by check mailed to the client if the client so instructs. The
Consulting Group reserves the right to reject any investor's participation in
TRAK. Termination of a TRAK program by a client must be effected by a
redemption order for all Portfolio shares held in the Account.
The Consulting Group serves as investment advisor to each client in TRAK,
for which it receives a fee from the client that does not vary based on the
Portfolios recommended for the client's investments. At the same time, the
Consulting Group serves as the Trust's Manager with responsibility for
identifying, retaining, supervising and compensating each Portfolio's
Advisor(s) and receives a fee from each Portfolio, a varying portion of which
is retained by the Manager based on the Portfolio involved. Consequently, the
Consulting Group, when making asset allocation recommendations for TRAK
clients, may be presented with a conflict of interest as to the specific
Portfolios recommended for investment. The fee structure for Plan TRAK
programs is intended to minimize any such conflict of interest. The Consulting
Group is subject to and intends to comply fully with standards of fiduciary
duty that require that it act solely in the best interest of the client when
making investment recommendations.
CERTAIN QUALIFIED EMPLOYEE BENEFIT PLANS MAY INVEST IN THE TRAK PROGRAM ON
TERMS WHICH DIFFER FROM THOSE OUTLINED ABOVE. TO FIND OUT MORE ABOUT THIS,
PLEASE CONTACT YOUR FINANCIAL CONSULTANT.
iv
<PAGE>
SMITH BARNEY PROVIDES A BROAD RANGE OF INVESTMENT SERVICES
TO INDIVIDUALS, FINANCIAL INSTITUTIONS, GOVERNMENTS AND
CORPORATIONS IN THE UNITED STATES AND AROUND THE WORLD. THE
FIRM IS A MEMBER OF TRAVELERS GROUP INC., A LEADING
DIVERSIFIED FINANCIAL SERVICE COMPANY LISTED ON THE NEW YORK
STOCK EXCHANGE, INC. UNDER THE SYMBOL TRV.
(C)1998 SMITH BARNEY INC.
TK2088 1/98
29XXX C5
STATEMENT OF ADDITIONAL INFORMATION
CONSULTING GROUP CAPITAL MARKETS FUNDS
December 29, 1997
As Amended February 2, 1998
As Amended July 1, 1998
222 Delaware Avenue ~ Wilmington, Delaware 19801 ~
(212) 816-8725
This Statement of Additional Information supplements the
information contained in the current Prospectus (the "Prospectus") of
Consulting Group Capital Markets Funds (the "Trust"), dated July 1,
1998, 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 a nationally recognized statistical
rating organization ("NRSRO") such as 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.
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 a NRSRO, 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
Consistent with applicable regulatory requirements, each
portfolio, other than Municipal Bond Investments may lend portfolio
securities to brokers, dealers and other financial organizations. 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 Receipts
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. A 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. A 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. A 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. A 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. A Portfolio will not invest in oil, gas or other mineral
leases or exploration or development programs.
9. A 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. A 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. A 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. A 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. A 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 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 Concert Series 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
Administratio
n Fee
Government Money Investments
$490,756
$654,342
Intermediate Fixed Income
Investments
1,325,38
7
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
8,514,67
0
3,452,366
Large Capitalization Growth
Investments
6,413,99
7
3,126,348
Small Capitalization Value Equity
Investments
2,721,37
7
1,039,277
Small Capitalization Growth
Investments
3,060,29
7
1,217,818
International Equity Investments
5,372,44
6
1,986,030
International Fixed Income
Investments
641,164
256,466
Emerging Markets Equity
Investments
1,690,74
9
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
Managemen
t Fee
Administrati
on Fee
Government Money Investments
$381,354
$508,472
Intermediate Fixed Income
Investments
1,102,33
2
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
6,468,34
0
2,660,110
Large Capitalization Growth
Investments
5,143,03
1
2,085,238
Small Capitalization Value Equity
Investments
2,188,47
1
823,189
Small Capitalization Growth
Investments
2,217,55
0
828,378
International Equity Investments
4,205,66
2
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
Managemen
t Fee
Administrati
on 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
5,293,94
6
1,764,649
Large Capitalization Growth
Investments
3,720,76
0
1,240,253
Small Capitalization Value Equity
Investments
1,754,75
6
584,919
Small Capitalization Growth
Investments
1,405,67
4
468,558
International Equity Investments
4,163,11
5
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(r) 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 and
Semi-Annual Report for the six-month period ended February 28, 1998,
were previously sent to all shareholders and is incorporated into this
Statement of Additional Information by reference.
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