<PAGE>
[Consulting Group]
Since 1973
Consulting Group
Capital Markets Funds
Large Capitalization Growth Investments
Large Capitalization Value Equity Investments
Small Capitalization Growth Investments
Small Capitalization Value Equity Investments
International Equity Investments
Emerging Markets Equity Investments
Balanced Investments
Intermediate Fixed Income Investments
Long-Term Bond Investments
Mortgage Backed Investments
High Yield Investments
Multi-Sector Fixed Income Investments
International Fixed Income Investments
Municipal Bond Investments
Government Money Investments
--------------------------------------------------------------------------------
INVESTMENT PRODUCTS: NOT FDIC INSURED o NO BANK GUARANTEE o MAY LOSE VALUE
--------------------------------------------------------------------------------
Prospectus [LOGO]TRAK(R)
December 29, 2000 ------------------------------------
Personalized Investment Advisory Service
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Investments, Risks and Performance 3
----------------------------------------------------
Large Capitalization Growth Investments 4
----------------------------------------------------
Large Capitalization Value Equity Investments 6
----------------------------------------------------
Small Capitalization Growth Investments 8
----------------------------------------------------
Small Capitalization Value Equity Investments 12
----------------------------------------------------
International Equity Investments 16
----------------------------------------------------
Emerging Markets Equity Investments 18
----------------------------------------------------
Balanced Investments 20
----------------------------------------------------
Intermediate Fixed Income Investments 22
----------------------------------------------------
Long-Term Bond Investments 24
----------------------------------------------------
Mortgage Backed Investments 26
----------------------------------------------------
High Yield Investments 28
----------------------------------------------------
Multi-Sector Fixed Income Investments 30
----------------------------------------------------
International Fixed Income Investments 34
----------------------------------------------------
Municipal Bond Investments 36
----------------------------------------------------
Government Money Investments 38
----------------------------------------------------
More on the Portfolios' Investments 40
----------------------------------------------------
The Manager 44
----------------------------------------------------
Asset Allocation Programs 51
----------------------------------------------------
Investment and Account Information 52
----------------------------------------------------
Account Transactions 52
----------------------------------------------------
Valuation of Shares 53
----------------------------------------------------
Dividends and distributions 53
----------------------------------------------------
Taxes 53
----------------------------------------------------
Financial Highlights 55
----------------------------------------------------
Appendix A A-1
----------------------------------------------------
Appendix B B-1
----------------------------------------------------
</TABLE>
1
Consulting Group Capital Markets Funds
<PAGE>
This page intentionally left blank
2
Consulting Group Capital Markets Funds
<PAGE>
Investments, Risks and Performance
About the portfolios
The manager selects and oversees professional money managers who are responsi-
ble for investing the assets of the portfolios comprising the Consulting Group
Capital Markets Funds (each a "Portfolio").
You should know:
. You could lose money on your investment in a Portfolio, or the Portfolio may
not perform as well as other investments
. An investment in any of the Portfolios is not a bank deposit and is not in-
sured or guaranteed by the FDIC or any other government agency
Principal risks of investing in fixed income securities and equity securities
The Portfolios invest in fixed income securities and equity securities. Risks
common to investments in fixed income securities and equity securities are set
forth below. Because each Portfolio has a different investment strategy, there
are also principal risks that are specific to an investment in a particular
Portfolio. These unique risks are described in the Portfolio summaries begin-
ning on the next page.
Fixed Income Securities:
. When interest rates go up, prices of fixed income securities go down
. An issuer of a security may default on its obligation to pay principal and/or
interest or the security's credit rating may be downgraded
. An issuer of a security may prepay principal earlier than scheduled, which
would force an underlying fund to reinvest in lower yielding securities. This
is known as call or prepayment risk
. Slower than expected principal payments may extend a security's life. This
locks in a below-market interest rate, increases the security's duration and
reduces the value of the security. This is known as extension risk
Equity Securities:
. Stock prices may decline generally
. If an adverse event occurs, such as the issuance of an unfavorable earnings
report, the value of a particular issuer's security may be depressed
3
Consulting Group Capital Markets Funds
<PAGE>
Large Capitalization Growth Investments
Investment objective
Capital appreciation.
Principal investment strategies
The Portfolio invests primarily in the common stocks of companies with favora-
ble growth prospects and total market capitalizations of $1 billion or more at
the time of purchase.
How the subadvisors select the Portfolio's investments
The manager has selected three subadvisors to manage the Portfolio. Each
subadvisor manages its portion of the Portfolio's assets using a different in-
vestment style. Each subadvisor's investment approach is described below.
Barclays Global Fund Advisors ("Barclays") is a passive, index-based manager
which uses a quantitative investment approach to create a portfolio which fully
replicates the performance of the Russell 1000 Growth Index. The percentage of
the Portfolio's assets allocated to Barclays is 60%.
TCW Investment Management Company (" TCW") employs an active management style
and seeks to invest in high quality companies with opportunities for growth
that are not fully reflected in stock market valuations. TCW utilizes a " bot-
tom-up" investment strategy that focuses primarily on assessing the operating
prospects of each prospective holding. Companies targeted for investment typi-
cally are those believed to have strong and enduring business models and inher-
ent advantages over competitors. TCW generally sells a security when a stock
price reflects full value as calculated by TCW's proprietary model or when a
security fails to meet operational expectations. The percentage of the Portfo-
lio's assets allocated to TCW is 20%.
Turner Investment Partners, Inc. (" Turner") employs an active management style
and seeks to invest in companies with improving earnings dynamics in each of
ten broad market sectors. In order to identify potential investments, the
subadvisor utilizes (i) a proprietary computer model which ranks stocks by sec-
tor and size by examining 80 factors; (ii) fundamental analysis of stocks se-
lected by the proprietary model, including communications with company manage-
ment, industry experts and competitors; and (iii) technical analysis, including
examination of money flow and relative strength. The subadvisor will sell a
stock because of a poor ranking from the model, concern about the fundamentals
of a stock, a downward revision in earnings estimates from Wall Street analysts
or company management, or changes in money flow for a stock. The percentage of
the Portfolio's assets allocated to Turner is 20%.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks associated with in-
vesting in equity securities generally. These principal risks are described on
page 3. Your investment in the Portfolio is also subject to the following spe-
cific risks:
. Large cap or growth stocks may fall out of favor with investors
. A share price that is generally more volatile than that of Large Capitaliza-
tion Value Equity Investments because of the Portfolio's focus on growth
stocks
The bar chart and tables below indicate the risks and returns of investing in
the Portfolio. The bar chart shows changes in the performance of the Portfolio
from year to year since its founding on November 18, 1991. The table shows how
the Portfolio's average annual returns for different calendar periods compare
to those of the Portfolio's benchmark index and its Lipper peer group. The
Portfolio's past performance does not necessarily indicate how the Portfolio
will perform in the future.
[GRAPH]
Percentage Total Returns for
Large Capitalization Growth Investments
92 6.52%
93 0.20%
94 0.26%
95 31.66%
96 20.71%
97 29.03%
98 38.05%
99 32.84%
Calendar years ended December 31
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* 32.84% 30.33% 20.71% 11/18/91
Russell 1000 Growth Index 20.91% 28.04% 20.86% **
Lipper Growth Funds Average 30.43% 25.26% 20.67% **
Lipper Large Cap Growth Funds Average 41.37% 29.44% 20.67% **
----------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/18/91.
4
Consulting Group Capital Markets Funds
<PAGE>
Large Capitalization Growth Investments, continued
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 26.04 % 4th/1998
Worst (9.26)% 3rd/1998
------------------------------------------------------------------------------------------------
Year-to-date (0.19)% through 3rd/2000
------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's benchmark is the
Russell 1000 Growth Index. The
index is comprised of those
Russell 1000 securities with
greater-than-average growth
orientation. The Russell 1000
Index is composed of the 1000
largest U.S. companies by market
capitalization. Unlike the
Portfolio, the benchmark is
unmanaged and does not include
any expenses. In addition, the
Portfolio compares its
performance with the Lipper
Large-Cap Growth Funds Average
and Lipper Growth Funds Average.
Lipper Large-Cap Growth Funds
Average is an average of the
reinvested performance of funds
that normally invest in
companies with long-term
earnings expected to grow
significantly faster than the
earnings of the stocks
represented in a major unmanaged
stock index. These funds will
normally have an above-average
price-to-earnings ratio, price-
to-book ratio and three-year
earnings growth figure, compared
to the U.S. diversified large-
cap funds universe average.
Large-cap funds will generally
invest at least 75% of their
assets in companies with market
capitalizations (on a three-year
weighted basis) greater than
300% of the dollar-weighted
median market capitalization of
the S&P Mid-Cap 400 Index.
Lipper Growth Funds Average is
an average of the reinvested
performance of funds that
normally invest in companies
with long-term earnings expected
to grow significantly faster
than the earnings of the stocks
represented in major unmanaged
stock indices.
Fee table
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio and is based upon expenses of the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
Shareholder fees None
(fees paid directly from your
investment)
Maximum annual TRAK(R) fee 1.50%
Annual Portfolio operating expenses
(expenses that are deducted from
portfolio assets)
Management fees 0.60%
Other expenses 0.11%
-----
Total annual Portfolio operating
expenses 0.71%
=====
</TABLE>
Example
This example is intended to help you compare the cost of investing in the Port-
folio with the cost of investing in other mutual funds. Your actual costs may
be higher or lower.
The example assumes:
. You invest $10,000 in the Portfolio for the time periods indicated;
. You reinvest all dividends and distributions;
. You redeem at the end of each period;
. Your investment has a 5% return each year; and
. The Portfolio's operating expenses remain the same.
Under these assumptions, your costs, including the maximum annual TRAK(R) fee,
would be:
<TABLE>
<CAPTION>
After 1 After 3 After 5 After 10
year years years years
<S> <C> <C> <C>
$224 $691 $1,185 $2,544
</TABLE>
5
Consulting Group Capital Markets Funds
<PAGE>
Large Capitalization Value Equity Investments
Investment objective
Total return consisting of capital appreciation and dividend income.
Principal investment strategies
The Portfolio invests primarily in common stock of companies with total market
capitalizations of $1 billion or more at the time of purchase. The majority of
the Portfolio's investments are expected to pay regular dividends.
How the subadvisors select the Portfolio's investments
The manager has selected four subadvisors to manage the Portfolio. Each
subadvisor manages its portion of the Portfolio's assets using a different in-
vestment style. Each subadvisor's investment approach is described below.
The Boston Company Asset Management ("TBCAM") seeks total return by investing
in portfolios of highly liquid common stocks that in its opinion have above av-
erage appreciation potential. The subadvisor employs an active portfolio man-
agement style using a proprietary quantitative model to identify those compa-
nies which demonstrate characteristics of both value and positive market momen-
tum. Those stocks ranking highest through quantitative analysis are then evalu-
ated using qualitative fundamental analysis to verify the quantitative scores
and to make recommendations for investment. The subadvisor assesses a company's
value by looking at traditional measures such as its price-to-earnings and
price-to-book ratios, as well as extensive balance sheet analysis, including
the company's break-up worth. The firm looks for momentum in a company's rising
expectations about earnings or sales, or through a return to financial health
following management changes or restructuring. The percentage of the Portfo-
lio's assets allocated to TBCAM is 20%.
Chartwell Investment Partners ("Chartwell") employs "top-down" and "bottom-up"
management techniques in managing its portion of the Portfolio's assets.
Chartwell focuses on a combination of low price to sales, price to earnings,
price to cash flow and price to book ratios, along with a preference for pre-
mium yielding issues. Specific price targets are established for each stock se-
lected for the Portfolio. The subadvisor then shifts its focus to identifying
those companies with evidence of a major catalyst for change. Stocks are evalu-
ated through such factors as management/board changes, the extent to which per-
formance incentives are in place, the degree of insider ownership, positive re-
structuring and acquisition opportunities. The percentage of the Portfolio's
assets allocated to Chartwell is 20%.
Parametric Portfolio Associates ("Parametric") seeks to track the performance
of the Russell 1000 Value Index. The subadvisor uses a quantitative process to
identify stocks which the firm believes are underpriced relative to their un-
derlying value. The subadvisor then looks for companies from that list with
rising earnings expectations, reasonable valuations and positive market momen-
tum through an analysis of the company's fundamentals, including factors such
as revenues, cash flow, earnings and analyst ratings. The subadvisor designs
the portfolio to have a risk profile similar to that of the Russell 1000 Value
Index. The percentage of the Portfolio's assets allocated to Parametric is 10%.
Barclays Global Fund Advisors ("Barclays") is a passive, index-based manager
which uses a quantitative investment approach to create a portfolio which fully
replicates the performance of the Russell 1000 Value Index. The percentage of
the Portfolio's assets allocated to Barclays is 50%.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks associated with in-
vesting in equity securities generally. These risks are described on page 3.
Your investment in the Portfolio is also subject to the following specific
risks:
. Large cap or value stocks may fall out of favor with investors
. The Portfolio can invest in issuers with a broad range of market capitaliza-
tions. To the extent the Portfolio invests in companies at the lower end of
such range, the Portfolio's investments may be more volatile and less liquid
than other large cap funds
The bar chart and tables indicate the risks and returns of investing in the
Portfolio. The bar chart below shows changes in the performance of the Portfo-
lio from year to year since its founding on November 18, 1991. The table on the
next page shows how the Portfolio's average annual returns for different calen-
dar periods compare to those of the Portfolio's benchmark index and its Lipper
peer group. The Portfolio's past performance does not necessarily indicate how
the Portfolio will perform in the future.
[GRAPH]
Percentage Total Returns for
Large Capitalization Value Equity Investments
92 4.44%
93 9.88%
94 (3.63)%
95 33.92%
96 20.42%
97 31.45%
98 12.62%
99 6.10%
Calendar years ended December 31
6
Consulting Group Capital Markets Funds
<PAGE>
Large Capitalization Value Equity Investments, continued
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* 6.10% 20.43% 14.14% 11/18/91
Russell 1000 Value Index 7.35% 23.07% 18.83% **
Lipper Multi-Cap Value Funds Average 7.02% 18.43% 15.61% **
---------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/18/91.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 16.84 % 4th/1998
Worst (14.09)% 3rd/1998
------------------------------------------------------------------------------------------------
Year-to-date 2.05 % through 3rd/2000
------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's benchmark is the
Russell 1000 Value Index. The
index represents the stocks in
the Russell 1000 Index with less
than average growth orientation.
The Russell 1000 Index includes
the 1,000 largest U.S. companies
by market capitalization. Unlike
the Portfolio, the benchmark is
unmanaged and does not include
any expenses. In addition, the
Portfolio compares its
performance with the Lipper
Multi-Cap Value Funds Average.
It is an average of the
reinvested performance of funds
that normally invest in
companies considered to be
undervalued relative to a major
unmanaged stock index based on
price-to-current earnings, book
value, asset value or other
factors. These funds will
normally have a below-average
price-to-earnings ratio, price-
to-book ratio and three-year
earnings growth figure, compared
to the U.S. diversified multi-
cap funds universe average.
Multi-cap funds will generally
have between 25% to 75% of their
assets invested in companies
with market capitalizations (on
a three-year weighted basis)
greater than 300% of the dollar-
weighted median market
capitalization of the S&P Mid-
Cap 400 Index.
Fee table
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio and is based upon expenses of the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
Shareholder fees None
(fees paid directly from your
investment)
Maximum annual TRAK(R) fee 1.50%
Annual Portfolio operating expenses
(expenses that are deducted from
Portfolio assets)
Management fees 0.67%
Other expenses 0.11%
-----
Total annual Portfolio operating
expenses 0.78%
=====
</TABLE>
Example
This example is intended to help you compare the cost of investing in the Port-
folio with the cost of investing in other mutual funds. Your actual cost may be
higher or lower.
The example assumes:
. You invest $10,000 in the Portfolio for the time periods indicated;
. You reinvest all dividends and distributions;
. You redeem at the end of each period;
. Your investment has a 5% return each year; and
. The Portfolio's operating expenses remain the same.
Under these assumptions, your costs, including the maximum annual TRAK(R) fee,
would be:
<TABLE>
<CAPTION>
After 1 After 3 After 5 After 10
year years years years
<S> <C> <C> <C>
$231 $712 $1,220 $2,615
</TABLE>
7
Consulting Group Capital Markets Funds
<PAGE>
Small Capitalization Growth Investments
Investment objective
Capital appreciation.
Principal investment strategies
The Portfolio invests primarily in common stock of small capitalization
"growth" companies. The Portfolio considers small cap companies to have total
market capitalizations at the time of purchase below the maximum market capi-
talization permitted for a stock in the Russell 2000 Growth Index. As of June
30, 2000, that maximum market capitalization was $3.85 billion. A portion of the
Portfolio's assets will be invested in common stocks of companies with market
capitalizations at the lower range of the Russell 2000 Growth Index.
How the subadvisors select the Portfolio's investments
The manager has selected five subadvisors to manage the Portfolio. Each
subadvisor manages its portion of the Portfolio's assets using a different in-
vestment style. Each subadvisor's investment approach is described below.
Mellon Capital Management ("Mellon") is a passive, index-based manager that
seeks to fully replicate the performance of the Russell 2000 Growth Index. It
minimizes performance differences from the index through systematic quantita-
tive methods. The percentage of the Portfolio's assets allocated to Mellon is
40%.
Wall Street Associates ("Wall Street") is an active manager and follows a bot-
tom-up investment style. It looks for companies with superior earnings growth,
strong balance sheets, attractive valuations and potentially positive earning
surprises. The percentage of the Portfolio's assets allocated to Wall Street is
20%.
Westpeak Investment Advisors ("Westpeak") is an active manager and employs a
value-oriented and research-driven approach to identify reasonably priced
growth stocks that are likely to have positive earnings surprises and revi-
sions. The firm uses a value constraint to ensure that the growth stocks se-
lected are reasonably priced. The percentage of the Portfolio's assets allo-
cated to Westpeak is 15%.
Kern Capital Management ("Kern") is an active manager. Its investment style fo-
cuses fundamental research on uncovering innovative small-cap companies early
in their growth cycle. The firm's bottom-up investment process, which targets
the four most innovative sectors (technology, healthcare, consumer and servic-
es) involves (i) detailed financial analysis, (ii) in-depth meetings with cor-
porate management, (iii) discussions with brokerage firm and industry analysts
and (iv) competitive analysis for discovering attractively priced small-cap
companies. The percentage of the Portfolio's assets allocated to Kern is 15%.
Westfield Capital Management Co., Inc. ("Westfield") uses an active management
style and favors investing in earnings growth stocks given its conviction that
stock prices follow earnings progress and that they offer the best opportunity
for superior real rates of return. The subadvisor believes that reasonably
priced stocks with high earning potential are best identified through in-depth,
fundamental research. The subadvisor believes that the small cap portion of the
market is under-researched, and therefore less efficient than the large cap
sector. It generally sells a security when a stock price exceeds full value as
calculated by the subadvisor or as evidenced by declining earnings growth rates
and balance sheet trends. The percentage of the Portfolio's assets allocated to
Westfield is 10%.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks associated with in-
vesting in equity securities generally. These principal risks are described on
page 3. Your investment in the Portfolio is also subject to the following spe-
cific risks:
. Growth stocks or small capitalization stocks may fall out of favor with in-
vestors
. Recession or adverse economic trends may have a greater adverse affect on the
earnings or financial condition of smaller companies than on larger ones
. Greater volatility of share price because of the focus on small cap compa-
nies. Compared to large cap companies, small cap companies or the market for
their equity securities are more likely to:
. Be more sensitive to changes in earnings results and investor expectations
. Have more limited product lines, capital resources and management depth
. Experience sharper swings in market values
. Be harder to sell at the times and prices the subadvisor believes appropri-
ate
. Offer greater potential for gain and loss
8
Consulting Group Capital Markets Funds
<PAGE>
Small Capitalization Growth Investments, continued
The bar chart and tables below indicate the risks and returns of investing
in the Portfolio. The bar chart shows changes in the performance of the Portfo-
lio from year to year since its founding on November 18, 1991. The table also
shows how the Portfolio's average annual returns for different
calendar periods compare to those of the Portfolio's benchmark index and its
Lipper peer group. The Portfolio's past performance does not necessarily indi-
cate how the Portfolio will perform in the future.
[GRAPH]
Percentage Total Returns for
Small Capitalization Growth Investments
92 11.42%
93 23.52%
94 13.11%
95 34.19%
96 18.88%
97 10.30%
98 2.17%
99 49.55%
Calendar years ended December 31
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* 49.55% 21.87% 21.05% 11/18/91
Russell 2000 Growth Index 43.09% 18.99% 15.09% **
Lipper Small-Cap Growth Funds Average 61.80% 22.33% 21.15% **
----------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/18/91.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 36.13% 4th/1999
Worst (23.81%) 3rd/1998
------------------------------------------------------------------------------------------------
Year-to-date 0.84% through 3rd/2000
------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's benchmark is The
Russell 2000 Growth Index. This
index represents stocks in the
Russell 2000 Index with better
than average growth orientation.
The Russell 2000 Index includes
the smallest 2000 U.S. stocks
out of Russell 3000 Universe.
Unlike the Portfolio, the
benchmark is unmanaged and does
not include any expenses. In
addition, the Portfolio compares
its performance with the Lipper
Small Cap Growth Funds Average.
Lipper Small Cap Growth Funds
Average is an average of the
reinvested performance of funds
that normally invest in
companies with long-term
earnings expected to grow
significantly faster than the
earnings of the stocks
represented in a major unmanaged
stock index. These funds will
normally have an above-average
price-to-earnings ratio, price-
to-book ratio and three-year
earnings growth figure, compared
to the U.S. diversified small-
cap funds universe average.
Small-cap funds will generally
invest at least 75% of their
assets in companies with market
capitalizations (on a three-year
weighted basis) of less than
250% of the dollar-weighted
median market capitalization of
the S&P Small-Cap 600 Index.
Fee table
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio based upon the expenses of the Portfolio's latest fis-
cal year.
<TABLE>
<S> <C>
Shareholder fees None
(fees paid directly from your
investment)
Maximum annual TRAK(R) fee 1.50%
Annual Portfolio operating expenses
(expenses that are deducted from
Portfolio assets)
Management fees 0.80%
Other expenses 0.18%
-----
Total annual Portfolio operating
expenses 0.98%
=====
</TABLE>
9
Consulting Group Capital Markets Funds
<PAGE>
Small Capitalization Growth Investments, continued
Example
This example is intended to help you compare the cost of investing in the Port-
folio with the cost of investing in other mutual funds. Your actual costs may
be higher or lower.
The example assumes:
. You invest $10,000 in the Portfolio for the time periods indicated;
. You reinvest all dividends and distributions;
. You redeem at the end of each period;
. Your investment has a 5% return each year; and
. The Portfolio's operating expenses remain the same.
Under these assumptions, your costs, including the maximum annual TRAK(R) fee,
would be:
<TABLE>
<CAPTION>
After 1 After 3 After 5 After 10
year years years years
<S> <C> <C> <C>
$251 $773 $1,321 $2,816
</TABLE>
10
Consulting Group Capital Markets Funds
<PAGE>
This page intentionally left blank
11
Consulting Group Capital Markets Funds
<PAGE>
Small Capitalization Value Equity Investments
Investment objective
Above average capital appreciation.
Principal investment strategies
The Portfolio invests primarily in common stocks of small capitalization "val-
ue" companies. The active subadvisors primarily invest the Portfolio's assets
in the common stocks of companies with total market capitalizations at the time
of purchase below the maximum market capitalization permitted for a stock in
the Russell 2000 Value Index. As of June 30, 2000, that maximum market capital-
ization was $1.50 billion. The Portfolio may also invest a portion of its assets
in common stocks of companies with total market capitalization of $550 million
or less at the time of purchase.
How the subadvisors select the Portfolio's investments
The manager has selected three subadvisors to manage the Portfolio. Each
subadvisor manages its portion of the Portfolio's assets using a different in-
vestment style. Each subadvisor's investment approach is described below.
Mellon Capital Management ("Mellon") is a passive, index based manager that
seeks to fully replicate the performance of the Russell 2000 Value Index. It
minimizes performance differences from the index through systematic quantita-
tive methods. The percentage of the Portfolio's assets allocated to Mellon is
60%.
NFJ Investment Group ("NFJ") uses an active management style that invests in a
diversified portfolio of small capitalization common stocks that it believes
are undervalued in the marketplace generally and within their respective indus-
tries. These securities are characterized as having below average price-to-
earnings ratios and improving fundamentals. These securities are often out of
favor, and widespread securities analyst coverage is not common. The subadvisor
also considers valuation factors such as price-to-book, price-to-cash flow,
dividend policy and industry outlook in selecting stocks for investment. The
percentage of the Portfolio's assets allocated to NFJ is 25%.
Rutabaga Capital Management LLC ("Rutabaga") uses an active management style
and focuses exclusively on micro and small cap stocks and looks to unearth un-
common or currently unfavored stocks. The subadvisor's analysts employ exten-
sive "bottom-up" fundamental research to identify high quality companies with
catalysts to increase margins and intrinsic value, but that are neglected or
misperceived by the market. All candidates are subject to careful group consid-
eration, with the final decisions being made by the portfolio manager. This
process focuses on clearly identifying the catalysts that should generate ac-
celerating earnings growth and thereby drive future stock performance. The
subadvisor also attempts to mitigate downside risk by buying stocks in compa-
nies with leading market positions, but with low valuations and low investor
expectations. The percentage of the Portfolio's assets allocated to Rutabaga is
15%.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks associated with in-
vesting in equity securities generally. These risks are described on page 3.
Your investment in the Portfolio is also subject to the following specific
risks:
. Value stocks or small capitalization stocks fall out of favor with investors
. Greater volatility of share price because of the focus on small cap compa-
nies. Compared to large companies, small cap companies or the market for
their equity securities are more likely to:
. Be more sensitive to changes in earnings results and investor expectations
. Have more limited product lines, capital resources and management depth
. Experience sharper swings in market values
. Be harder to sell at the times and prices the subadvisors believe appropri-
ate
. Offer greater potential for gain and loss
The bar chart and tables on the next page indicate the risks and returns
of investing in the
Portfolio. The bar chart shows changes in the performance of the Portfo-
lio from year to year since its founding on November 18, 1991. The table
also shows how the Portfolio's average annual returns for different
calendar periods compare to those of the Portfolio's benchmark index and its
Lipper peer group. The Portfolio's past performance does not necessarily indi-
cate how the Portfolio will perform in the future.
12
Consulting Group Capital Markets Funds
<PAGE>
Small Capitalization Value Equity Investments, continued
[GRAPH]
Percentage Total Returns for
Small Capitalization Value Equity Investments
92 23.65%
93 (4.27)%
94 (8.54)%
95 24.54%
96 25.05%
97 35.94%
98 (8.88)%
99 (3.96)%
Calendar years ended December 31
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* (3.96)% 13.13% 9.55% 11/18/91
Russell 2000 Value Index (1.49)% 13.14% 15.10% **
Lipper Small-Cap Value Funds Average 5.92 % 13.57% 9.59% **
-----------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/18/91.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
Year Return Quarter/Year
------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 17.74 % 4th/1992
Worst (18.18)% 3rd/1998
------------------------------------------------------------------------------------------------
Year-to-date 8.50 % through 3rd/2000
------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's benchmark is The
Russell 2000 Value Index. The
index represents stocks in the
Russell 2000 Index with less
than average growth orientation.
The Russell 2000 Index is
comprised of the smallest 2000
U.S. stocks out of the Russell
3000 Universe. Unlike the
Portfolio, the benchmark is
unmanaged and does not include
any expenses. In addition, the
Portfolio compares its
performance with the Lipper
Small-Cap Value Funds Average.
It is an average of the
reinvested performance of funds
that normally invest in
companies considered to be
undervalued relative to a major
unmanaged stock index based on
price-to-current earnings, book
value, asset value or other
factors. These funds will
normally have a below average
price-to-earnings ratio, price-
to-book ratio and three-year
earnings growth figure, compared
to the U.S. diversified small-
cap funds universe average.
Small-cap funds will generally
invest at least 75% of their
assets in companies with market
capitalizations (on a three-year
weighted basis) of less than
250% of the dollar-weighted
median market capitalization of
the S&P Small-Cap 600 Index.
Fee table
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio and is based upon expenses of the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
Shareholder fees None
(fees paid directly from your
investment)
Maximum annual TRAK(R) fee 1.50%
Annual Portfolio operating expenses
(expenses that are deducted from
Portfolio assets)
Management fees 0.76%
Other expenses 0.15%
-----
Total annual Portfolio operating
expenses 0.91%
=====
</TABLE>
13
Consulting Group Capital Markets Funds
<PAGE>
Small Capitalization Value Equity Investments, continued
Example
This example is intended to help you compare the cost of investing in the Port-
folio with the cost of investing in other mutual funds. Your actual costs may
be higher or lower.
The example assumes:
. You invest $10,000 in the Portfolio for the time periods indicated;
. You reinvest all dividends and distributions.
. You redeem at the end of each period;
. Your investment has a 5% return each year; and
. The Portfolio's operating expenses remain the same.
Under these assumptions, your costs, including the maximum annual TRAK(R) fee,
would be:
<TABLE>
<CAPTION>
After 1 After 3 After 5 After 10
year years years years
<S> <C> <C> <C>
$244 $751 $1,285 $2,746
</TABLE>
14
Consulting Group Capital Markets Funds
<PAGE>
This page intentionally left blank
15
Consulting Group Capital Markets Funds
<PAGE>
International Equity Investments
Investment objective
Capital appreciation.
Principal investment strategies
The Portfolio invests primarily in equity securities of companies located out-
side the U.S. The Portfolio focuses on companies located in developed markets,
but may also invest a portion of its assets in securities of companies located
in emerging markets. The Portfolio intends to diversify its assets by investing
primarily in securities of issuers located in at least three foreign countries.
The Portfolio generally attempts to hedge against unfavorable changes in cur-
rency exchange rates by engaging in forward currency transactions and trading
currency futures contracts and options on these futures. However, the Portfolio
may not always choose or be able to hedge its currency exposure.
How the subadvisors select the Portfolio's investments
The manager has selected three subadvisors to manage the Portfolio. Each
subadvisor manages its portion of the Portfolio's assets using a different in-
vestment style. Each subadvisor's investment approach is described below.
State Street Global Advisors ("SSGA") uses a quantitative process to construct
a portfolio that fully replicates the performance of the Morgan Stanley Capital
International Europe Australia Far East (EAFE) Index. The EAFE Index consists
of securities of companies located in 20 countries outside of North America and
represents approximately 60% of the total market value of all publicly traded
stocks in these countries. The percentage of the Portfolio's assets allocated
to SSGA is 40%.
Oechsle International Advisors, LLC ("Oechsle") first seeks to identify the
most attractive foreign markets by ranking their expected returns through coun-
try and currency analysis. It then selects investments within attractive mar-
kets through both a top-down and bottom-up company analysis. The percentage of
the Portfolio's assets allocated to Oechsle is 30%.
Scudder Kemper Investments, Inc. ("Scudder") evaluates the prospects of foreign
economies and analyzes individual companies to identify investment opportuni-
ties. In defining country allocations, the Portfolio may focus on global, eco-
nomic, industrial and investment themes. Individual stocks are purchased on the
basis of wide-ranging fundamental and valuation criteria. The subadvisor util-
izes a "three-circle" approach that includes extensive research on global
themes, company analysis and country analysis. The percentage of the Portfo-
lio's assets allocated to Scudder is 30%.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks associated with in-
vesting in equity securities generally. The principal risks associated with in-
vesting in equity securities are described on page 3.
Your investment is also subject to the unique risks of investing in foreign is-
suers. These risks are more pronounced to the extent that the Portfolio invests
in countries with emerging markets or the Portfolio invests significantly in
any one foreign country. These risks include:
. Less information about foreign issuers or markets may be available because of
less rigorous accounting standards or regulatory practices
. Many foreign markets are smaller, less-liquid and more volatile than U.S.
markets. In a changing market, the subadvisors may not be able to sell the
Portfolio's securities in amounts and at prices they consider reasonable
. The U.S. dollar may appreciate against non-U.S. currencies
. Economic, political or social instability in foreign countries may signifi-
cantly disrupt the principal financial markets in which the Portfolio invests
16
Consulting Group Capital Markets Funds
<PAGE>
International Equity Investments, continued
The bar chart and tables shown below indicate the risks of investing in the
Portfolio. The bar chart shows changes in the performance of the Portfolio from
year to year since the Portfolio's inception on November 18, 1991. The table
shows how the Portfolio's average annual returns for different calendar periods
compare to those of the Portfolio's benchmark index and its Lipper peer group.
The Portfolio's past performance does not necessarily indicate how the Portfo-
lio will perform in the future.
[GRAPH]
Percentage Total Returns for
International Equity Investments
92 (6.68)%
93 28.97%
94 9.50%
95 9.64%
96 4.87%
97 1.73%
98 22.51%
99 41.52%
Calendar years ended December 31
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* 41.52% 15.19% 12.88% 11/18/91
EAFE Index 26.96% 12.83% 11.33% **
Lipper International Funds Average 41.04% 15.13% 12.91% **
----------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/18/91.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 28.41 % 4th/1999
Worst (13.97)% 3rd/1988
------------------------------------------------------------------------------------------------
Year-to-date (13.87)% through 3rd/2000
------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's benchmark is the
Morgan Stanley Capital Interna-
tional EAFE--Capitalization
Weighted Index. The index is a
composite portfolio of equity
total returns for the countries
of Europe, Australia, New Zea-
land and the Far East. Unlike
the Portfolio, the benchmark is
unmanaged and does not include
any expenses. In addition, the
Portfolio compares its perfor-
mance with the Lipper Interna-
tional Funds Average. It is an
average of the reinvested per-
formance of funds that invest
their assets in securities whose
primary trading markets are out-
side of the United States.
Fee table
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio based upon expenses of the Portfolio's latest fiscal
year.
<TABLE>
<S> <C>
Shareholder fees None
(fees paid directly from your
investment)
Maximum annual TRAK(R) fee 1.50%
Annual Portfolio operating expenses
(expenses that are deducted from
Portfolio assets)
Management fees 0.77%
Other expenses 0.17%
-----
Total annual Portfolio operating
expenses 0.94%
=====
</TABLE>
Example
This example is intended to help you compare the cost of investing in the Port-
folio with the cost of investing in other mutual funds.
The example assumes:
. You invest $10,000 in the Portfolio for the time periods indicated;
. You reinvest all dividends and distributions;
. You redeem at the end of each period;
. Your investment has a 5% return each year; and
. The Portfolio's operating expenses remain the same.
Under these assumptions, your costs, including the maximum TRAK(R) fee, would
be:
<TABLE>
<CAPTION>
After 1 After 3 After 5 After 10
year years years years
<S> <C> <C> <C>
$247 $761 $1,301 $2,776
</TABLE>
17
Consulting Group Capital Markets Funds
<PAGE>
Emerging Markets Equity Investments
Investment objective.
Long-term capital appreciation.
Principal investment strategies
The Portfolio invests primarily in equity securities of issuers located in
countries with emerging markets. The Portfolio considers an emerging market
country to be one having per capita income in the low to middle ranges, as de-
termined by the International Bank for Reconstruction and Development (The
World Bank). To diversify its investments, the Portfolio invests primarily in
securities of issuers located in at least three foreign countries. The Portfo-
lio may also invest a portion of its assets in closed-end investment companies
that invest in emerging markets. The Portfolio generally attempts to hedge
against unfavorable changes in currency exchange rates by engaging in forward
currency transactions and trading currency futures contracts and options on
these futures. However, the Portfolio may not always choose or be able to hedge
its currency exposure.
How the subadvisors select the Portfolio's investments
The manager has selected three subadvisors to manage the Portfolio. Each
subadvisor manages its portion of the Portfolio's assets using a different in-
vestment style. Each subadvisor's investment approach is described below.
Foreign & Colonial Emerging Markets Ltd. ("Foreign & Colonial") is an active
manager. Its style combines a rigorous "top-down" macroeconomic approach to
country allocation with fundamental, "bottom-up" stock selection. Investment
decisions are founded on the primary research undertaken by the team of invest-
ment managers. Risk is controlled through a core/satellite approach to country
allocation and a focus on quality companies that must pass rigorous selection
criteria. Country allocation decisions are made within a disciplined framework
and revolve around analysis of key political and macro-economic variables. The
percentage of the Portfolio's assets allocated to Foreign & Colonial is 30%.
State Street Global Advisors ("SSGA") uses quantitative analysis to identify
countries and stocks which are under-valued relative to their growth rates. It
employs an investment process that combines top-down country selection with
bottom-up stock selection to determine an optimal country and security mix. The
percentage of the Portfolio's assets allocated to SSGA is 20%.
Baring Asset Management ("Baring") looks for unrecognized "growth" stocks
through an investment process that combines top-down country allocation, bot-
tom-up company research and risk analysis to determine an optimal country and
security mix. This process is driven by structured fundamental research using a
disciplined investment framework at both the country and company levels. The
fundamental research is supported by quantitative screening at the country lev-
el. The percentage of the Portfolio's assets allocated to Baring is 50%.
Principal risks of investing in the Portfolio
Because the Portfolio invests primarily in equity securities, your investment
in the Portfolio is subject to the risks associated with investing in equity
securities generally. These risks are described on page 3.
Your investment is also subject to the unique risks of investing in securities
of foreign issuers. These risks are more pronounced because the Portfolio in-
vests in countries with emerging markets. The market value for emerging market
equity securities historically has been very volatile and an investment in the
Portfolio involves a substantial degree of risk. These risks include:
. Less information about emerging market issuers or markets may be available
because of less rigorous disclosure or accounting standards or regulatory
practices
. Most emerging markets are smaller, less liquid and more volatile than devel-
oped markets. In a changing market, the subadvisors may not be able to sell
portfolio securities in amounts and at prices they consider reasonable
. Economic, political or social instability in an emerging market country or
region may significantly disrupt the principal financial market
. The economies of emerging market countries may grow at slower rates than ex-
pected or suffer a downturn or recession
. Emerging market countries may experience rising interest rates, or, more sig-
nificantly, rapid inflation or hyperinflation
. The Portfolio could experience a loss from settlement and custody practices
in some emerging markets
. Withholding and other foreign taxes may decrease the Portfolio's return
18
Consulting Group Capital Markets Funds
<PAGE>
Emerging Markets Equity Investments, continued
The bar chart and tables below indicate the risks and returns of investing
in the Portfo-
lio. The bar chart shows changes in the performance of the Portfolio from year
to year since the Portfolio's inception on April 21, 1994. The table shows how
the Portfolio's average annual returns for different calendar periods compare
to those of the Portfolio's benchmark index. The Portfolio's past performance
does not necessarily indicate how the Portfolio will perform in the future.
[GRAPH]
Percentage Total Returns for
Emerging Markets Equity Investments
95 (2.52)%
96 13.16%
97 (8.06)%
98 (32.02)%
99 67.81%
Calendar years ended December 31
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* 67.81% 2.96% 2.90% 4/21/94
Morgan Stanley Emerging Markets Free Index 26.96% 12.83% 11.93% **
Lipper Emerging Markets Funds Average 70.26% 4.60% 2.46% **
-----------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 4/21/94.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 30.40 % 4th/1999
Worst (23.67)% 3rd/1998
------------------------------------------------------------------------------------------------
Year-to-date (21.48)% through 3rd/2000
------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's benchmark is the
Morgan Stanley Emerging Markets
Free Index. The index is com-
posed of equity total returns of
countries with low to middle per
capita incomes, as determined by
the World Bank. Unlike the Port-
folio, the benchmark is unman-
aged and does not include any
expenses. In addition, the Port-
folio compares its performance
with the Lipper Emerging Markets
Funds Average. It is an average
of the reinvested performance of
funds that invest at least 65%
of total assets in emerging mar-
ket equity securities, where
emerging market is defined by a
country's gross national product
per capita or other economic
measures.
Fee table
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio based upon expenses of the Portfolio's latest fiscal
year.
<TABLE>
<S> <C>
Shareholder fees None
(fees paid directly from your
investment)
Maximum annual TRAK(R) fee 1.50%
Annual Portfolio operating expenses
(expenses that are deducted from
Portfolio assets)
Management fees 1.10%
Other expenses 0.56%
-----
Total annual Portfolio operating
expenses 1.66%
=====
</TABLE>
Example
This example is intended to help you compare the cost of investing in the Port-
folio with the cost of investing in other mutual funds. Your actual costs may
be higher or lower.
The example assumes:
. You invest $10,000 in the Portfolio for the time periods indicated;
. You reinvest all dividends and distributions;
. You redeem at the end of each period;
. Your investment has a 5% return each year; and
. The Portfolio's operating expenses remain the same.
Under these assumptions, your costs, including the maximum annual TRAK fee,
would be:
<TABLE>
<CAPTION>
After 1 After 3 After 5 After 10
year years years years
<S> <C> <C> <C>
$319 $974 $1,654 $3,467
</TABLE>
19
Consulting Group Capital Markets Funds
<PAGE>
Balanced Investments
Investment objective
Total return through a combination of current income and capital appreciation.
Principal investment strategies
The Portfolio balances its investments across both common stocks and investment
grade fixed income securities issued by corporate and governmental issuers. The
Portfolio intends to maintain at least a quarter of its assets in fixed-income
senior securities, preferred stocks and convertible debt securities and con-
vertible preferred stocks to the extent their value is attributable to their
fixed income characteristics.
How the subadvisors select the Portfolio's investments
The manager has selected two subadvisors to manage the Portfolio, an equity
subadvisor and a fixed income subadvisor.
Laurel Capital Advisors ("Laurel") manages the equity portion of the Portfo-
lio's assets. In selecting stocks for investment, it focuses on common stocks
of companies which it believes are undervalued and which exhibit improving
earnings momentum, while maintaining sector weightings similar to the S&P 500
Index. The percentage of the Portfolio's assets allocated to Laurel is 60%.
Seix Investment Advisors ("Seix") manages the fixed income portion of the Port-
folio's assets. The subadvisor combines traditional credit research with pro-
prietary analysis that seeks to identify mispriced or undervalued fixed-income
securities such as U.S. government securities and corporate bonds. It empha-
sizes those securities that have a potential for higher income while maintain-
ing a duration that is approximately equal to the Lehman Brothers Aggregate
Bond Index. The percentage of the Portfolio's assets allocated to Seix is 40%.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks of investing in equity
securities and of investing in fixed income securities generally. These risks
are described on page 3. The market prices of common stocks are generally more
volatile than fixed income investments. As a balanced investment, the Portfo-
lio's net asset value may be less volatile than other equity oriented portfo-
lios. However, since the Portfolio invests a significant portion of its assets
in fixed income securities, it has less potential for capital appreciation.
The market value of foreign securities may go down because of unfavorable for-
eign government actions, political, economic or market instability or the ab-
sence of accurate information about foreign companies. These risks may be more
severe for securities of issuers in emerging markets. Foreign securities are
sometimes less liquid and harder to value than securities of U.S. issuers.
The bar chart and tables below indicate the risks and returns of investing in
the Portfolio. The bar chart shows changes in the performance of the Portfolio
from year to year since its founding on February 16, 1993. The table shows how
the Portfolio's average annual returns for different calendar periods compare
to those of the Portfolio's benchmark indices and its Lipper peer group. The
Portfolio's past performance does not necessarily indicate how the Portfolio
will perform in the future.
[GRAPH]
Percentage Total Returns for
Balanced Investments
94 (2.68)%
95 27.41%
96 15.32%
97 20.29%
98 8.43%
99 9.47%
Calendar years ended December 31
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* 9.47 % 15.97% 12.31% 2/16/93
Lehman Gov/Corp Bond Index (2.15)% 7.61% 5.93% **
S&P 500 21.03 % 28.54% 21.96% **
Lipper Balanced Funds Average 8.92 % 16.37% 12.33% **
-----------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 2/16/93.
20
Consulting Group Capital Markets Funds
<PAGE>
Balanced Investments, continued
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 11.66 % 2nd/1997
Worst (8.06)% 3rd/1998
------------------------------------------------------------------------------------------------
Year-to-date 3.62 % through 3rd/2000
------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's benchmarks are
Standard & Poor's 500 Index and
the Lehman Brothers Government/
Corporate Bond Index. The S&P
500 is an index of 500 of the
largest stocks in the U.S. The
Lehman Index is a composite of
debt securities of the U.S.
government and its agencies and
publicly issued fixed income,
investment grade, non-
convertible corporate debt
securities. Unlike the
Portfolio, the benchmarks are
unmanaged and do not include any
expenses. In addition, the
Portfolio compares its
performance with the Lipper
Balanced Funds Average. It is an
average of the reinvested
performance of funds whose
primary objective is to conserve
principal by maintaining at all
times a balanced portfolio of
both stocks and bonds.
Typically, the stock/bond ratio
ranges around 60 percent/40
percent, respectively.
The Consulting Group has de-
signed this Portfolio for in-
vestors who participate in the
TRAK(R) Advisory Service through
employee benefit plans which do
not make the full range of Capi-
tal Markets Funds offered
through this prospectus avail-
able to participants. The Con-
sulting Group will not recommend
this Portfolio to investors in
advisory programs which make all
of the Capital Markets Funds
available.
Fee table
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio and is based upon expenses of the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
Shareholder fees None
(fees paid directly from your
investment)
Maximum annual TRAK(R) fee 1.50%
Annual Portfolio operating expenses
(expenses that are deducted from
Portfolio assets)
Management fees 0.78%
Other expenses 0.38%
-------
Total annual Portfolio operating
expenses 1.16%
=======
Management and Administration fee
waivers* (0.16)%
-------
Net annual portfolio expenses 1.00%
=======
</TABLE>
* Management has agreed to waive a portion of management and administration
fees. The manager may change or eliminate the management and/or administra-
tion fee waivers at any time.
Example
This example is intended to help you compare the cost of investing in the Port-
folio with the cost of investing in other mutual funds. Your actual costs may
be higher or lower.
The example assumes:
You invest $10,000 in the Portfolio for the time periods indicated;
. You reinvest all dividends and distributions;
. You redeem at the end of each period;
. Your investment has a 5% return each year; and
. The Portfolio's operating expenses remain the same.
Under these assumptions, your costs, including the maximum annual TRAK(R) fee,
would be:
<TABLE>
<CAPTION>
After After After After
1 year 3 years 5 years 10 years
<S> <C> <C> <C>
$269 $826 $1,410 $2,993
</TABLE>
21
Consulting Group Capital Markets Funds
<PAGE>
Intermediate Fixed Income Investments
Investment objective
Current income and reasonable stability of principal.
Principal investment strategies
The Portfolio invests primarily in fixed income securities and instruments is-
sued by governmental and corporate issuers. These securities include mortgage-
related and asset-backed securities, although the Portfolio will not invest
more than 5% of its assets at the time of purchase in asset-backed securities.
Credit quality. The Portfolio invests exclusively in securities rated invest-
ment grade by a nationally recognized rating organization, or, if unrated, of
equivalent quality as determined by the subadvisor.
Maturity. The Portfolio's average maturity ranges from three to ten years. Av-
erage maturity is a weighted average of the stated maturities of the debt secu-
rities the Portfolio owns. Individual investments may be of any maturity.
How the subadvisors select the Portfolio's investments
The manager has selected three subadvisors to manage the Portfolio. Each
subadvisor manages its portion of the Portfolio's assets using a different in-
vestment style. Each subadvisor's investment approach is described below.
Pacific Investment Management Company ("PIMCO") employs top-down and bottom-up
investment techniques. It implements the following "top-down" strategies: dura-
tion and volatility analyses, sector evaluation and yield curve shape analysis.
The subadvisor also employs the following "bottom-up" strategies: credit analy-
sis, quantitative research, issue selection and cost-effective trading. The
percentage of the Portfolio's assets allocated to PIMCO is 40%.
Metropolitan West Asset Management, LLC ("MWAM") seeks to consistently
outperform the benchmark while maintaining below average volatility. The
subadvisor believes consistent outperformance is gained through the measured
application of five value-added strategies: limited average maturity/duration
shifts, yield curve management, utilization of all sectors of the bond market,
quantitative security selection and sophisticated buy/sell execution strate-
gies. The percentage of the Portfolio's assets allocated to MWAM is 20%.
BlackRock Financial Management, Inc. ("BlackRock") employs a relative value ap-
proach which entails portfolio duration within a narrow range and value added
through sector and sub-sector rotation within the corporate and mortgage sec-
tors. The subadvisor evaluates securities within a risk management framework
which consists of determining interest rate risk, yield curve risk, cash flow
risk, credit risk and liquidity risk of securities. The percentage of the Port-
folio's assets allocated to BlackRock is 40%.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks associated with in-
vesting in fixed income securities generally. These risks are described on page
3.
Your investment is also subject to the following specific risks:
. Greater sensitivity to rising interest rates than Government Money Invest-
ments because of the Portfolio's longer average maturity
. Greater exposure to prepayment and extension risks because the Portfolio may
invest a portion of its assets in mortgage-related and asset-backed securi-
ties
. Increased volatility in share price to the extent the Portfolio holds mort-
gage derivative securities having imbedded leverage or unusual interest rate
reset terms
The bar chart and tables indicate the risks and returns of investing in the
Portfolio. The bar chart below shows changes in the performance of the Portfo-
lio from year to year since its founding on November 18, 1991. The table on the
next page shows how the Portfolio's average annual returns for different calen-
dar periods compare to those of the Portfolio's benchmark index and its Lipper
Investor Services peer group. The Portfolio's past performance does not neces-
sarily indicate how the Portfolio will perform in the future.
[GRAPH]
Percentage Total Returns for
Intermediate Fixed Income Investments
92 5.86%
93 10.49%
94 (2.76)%
95 14.67%
96 3.64%
97 7.45%
98 7.23%
99 (0.43)%
Calendar years ended December 31
22
Consulting Group Capital Markets Funds
<PAGE>
Intermediate Fixed Income Investments, continued
AVERAGE ANNUAL TOTAL RETURNS
(for the period ended December 31, 1999)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* (0.43)% 6.40% 5.84% 11/18/91
Lehman Brothers Intermediate Gov/Corp Bond
Index 0.49 % 6.93% 6.21% **
Lipper Intermediate Investment Grade Debt
Funds Average (1.23)% 6.85% 6.47% **
------------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/18/91.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 5.08 % 1st/1993
Worst (2.30)% 1st/1994
--------------------------------------------------------------------------------------------------
Year-to-date 5.86 % through 3rd/2000
--------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's primary
benchmark is the Lehman Brothers
Intermediate
Government/Corporate Bond Index.
The index is composed of debt
securities of the U.S.
government and its agencies and
publicly issued, fixed rate,
non-convertible, investment-
grade domestic corporate debt
with at least one year remaining
to maturity. Unlike the
Portfolio, the benchmark is
unmanaged and does not include
any expenses. In addition, the
Portfolio compares its
performance with the Lipper
Intermediate Investment Grade
Debt Funds Average. It is an
average of the reinvested
performance of funds that invest
at least 65% of their assets in
corporate investment grade debt
issues rated in the top four
grades by a nationally
recognized rating organization
with dollar-weighted average
maturities of five to ten years.
Fee table
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio and is based upon expenses for the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
Shareholder fees None
(fees paid directly from your
investment)
Maximum annual TRAK(R) fee 1.50%
Annual Portfolio operating expenses
(expenses that are deducted from
Portfolio assets)
Management fees 0.61%
Other expenses 0.17%
-----
Total annual Portfolio operating
expenses 0.78%
=====
</TABLE>
Example
This example is intended to help you compare the cost of investing in the Port-
folio with the cost of investing in other mutual funds. Your actual costs may
be higher or lower.
The example assumes:
. You invest $10,000 in the Portfolio for the time periods indicated;
. You reinvest all dividends and distributions;
. You redeem at the end of each period;
. Your investment has a 5% return each year; and
. The Portfolio's operating expenses remain the same.
Under these assumptions, your costs, including the maximum annual TRAK(R) fee,
would be:
<TABLE>
<CAPTION>
After 1 After 3 After 5 After 10
year years years years
<S> <C> <C> <C>
$231 $712 $1,220 $2,615
</TABLE>
23
Consulting Group Capital Markets Funds
<PAGE>
Long-Term Bond Investments
Investment objective
Total return consisting of current income and appreciation of capital through
investments in fixed income securities without regard to remaining maturity.
Principal investment strategies
The Portfolio invests primarily in fixed income securities issued by U.S. gov-
ernmental and corporate issuers, U.S. dollar denominated fixed income securi-
ties of foreign issuers and mortgage-related and asset-backed securities. The
Portfolio will not invest more than 25% of its assets in privately issued mort-
gage-related securities.
Credit quality. The Portfolio invests exclusively in securities rated invest-
ment grade by a nationally recognized rating organization, or, if unrated, of
equivalent quality as determined by the subadvisor, Western Asset Management
Company.
Maturity. The Portfolio's average maturity is at least 10 years. Average matu-
rity is a weighted average of the stated maturity of debt securities the Port-
folio owns. Individual investments may be of any maturity.
How the subadvisor selects the Portfolio's investments
The subadvisor emphasizes three key strategies to enhance the Portfolio's total
return:
. Adjusting the allocation of the Portfolio among the key sectors of the fixed-
income market--government, corporate and mortgage and asset-backed--depending
upon its forecast of relative values.
. Tracking the duration of the overall portfolio so that it falls within a nar-
row band relative to the benchmark index, with adjustment made to reflect the
subadvisor's long-term outlook for interest rates.
. Purchasing under-valued securities in each of the key sectors of the bond
market while keeping overall quality high.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks associated with in-
vesting in fixed income securities generally. These risks are described on page
3.
Your investment is also subject to the following specific risks:
. Greater sensitivity to rising interest rates than Intermediate Fixed Income
Investments because of the Portfolio's longer average maturity
. Greater exposure to prepayment and extension risks because the Portfolio may
invest a portion of its assets in mortgage-related and asset-backed securi-
ties
The bar chart and tables below indicate the risks and returns of investing in
the Portfolio. The bar chart shows changes in the performance of the Portfolio
from year to year since its founding on November 18, 1991. The table shows how
the Portfolio's average annual returns for different calendar periods compare
to those of the Portfolio's benchmark index and its Lipper peer group. The
Portfolio's past performance does not necessarily indicate how the Portfolio
will perform in the future.
[GRAPH]
Percentage Total Returns for
Long-Term Bond Investments
92 5.93%
93 10.02%
94 (5.12)%
95 18.13%
96 3.11%
97 12.90%
98 10.63%
99 (9.57)%
Calendar years ended December 31
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* (9.57)% 6.59% 5.62% 11/18/91
Lehman Brothers Gov/Corp Bond Index (2.15)% 7.61% 6.93% **
Lipper Corporate Debt Funds A Rated Average (2.50)% 6.96% 6.60% **
-------------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/18/91.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 6.76 % 3rd/1998
Worst (3.95)% 1st/1999
------------------------------------------------------------------------------------------------
Year-to-date 10.04 % through 3rd/2000
------------------------------------------------------------------------------------------------
</TABLE>
24
Consulting Group Capital Markets Funds
<PAGE>
Long-Term Bond Investments, continued
BENCHMARKS
The Portfolio's primary bench-
mark is the Lehman Brothers
Government/Corporate Bond Index.
The index is composed of debt
securities of the U.S. govern-
ment and its agencies and pub-
licly issued fixed rate, non-
convertible, investment-grade
corporate debt securities with
at least one year remaining to
maturity. Unlike the Portfolio,
the benchmark is unmanaged and
does not include any expenses.
In addition, the Portfolio com-
pares its performance with the
Lipper Corporate Debt Funds A
Rated Average. It is an average
of the reinvested performance of
funds that invest at least 65%
of their assets in corporate
debt issues rated "A" or better
by a nationally recognized rat-
ing organization or government
issues.
Fee table
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio and is based upon expenses for the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
Shareholder fees None
(fees paid directly from your
investment)
Maximum annual TRAK(R) fee 1.50%
Annual Portfolio operating expenses
(expenses that are deducted from
Portfolio assets)
Management fees 0.60%
Other expenses 0.32%
-----
Total annual Portfolio operating
expenses 0.92%
=====
</TABLE>
Example
This example is intended to help you compare the cost of investing in the Port-
folio with the cost of investing in other mutual funds. Your actual costs may
be higher or lower.
The example assumes:
. You invest $10,000 in the Portfolio for the time periods indicated;
. You reinvest all dividends and distributions;
. You redeem at the end of each period;
. Your investment has a 5% return each year; and
. The Portfolio's operating expenses remain the same.
Under these assumptions, your costs, including the maximum annual TRAK(R) fee,
would be:
<TABLE>
<CAPTION>
After 1 After 3 After 5 After 10
year years years years
<S> <C> <C> <C>
$245 $755 $1,291 $2,756
</TABLE>
25
Consulting Group Capital Markets Funds
<PAGE>
Mortgage Backed Investments
Investment objective
High current income and secondarily capital appreciation, each to the extent
consistent with the protection of capital.
Principal investment strategies
The Portfolio invests primarily in mortgage-related securities representing
pools of mortgage loans assembled for sale to investors by various U.S. govern-
mental agencies, and government-related organizations, and private issuers. The
Portfolio will not invest more than 25% of its assets in privately issued mort-
gage-related securities.
The Portfolio may also invest in mortgage-related derivative securities such as
government stripped mortgage-backed securities (SMBS) and collateralized mort-
gage obligations (CMOs). SMBS represent the right to receive either principal
or interest payments on U.S. government securities. Interests in CMOs entitle
the holder to specified cash flows from a pool of mortgages. In order to en-
hance current income, the Portfolio may enter into mortgage dollar roll trans-
actions with respect to mortgage-related securities issued by U.S. governmental
agencies or instrumentalities.
How the subadvisor selects the Portfolio's investments
The subadvisor, Utendahl Capital Management CFI, uses a quantitative
computer-modelled in-
vestment process to seek to identify and capitalize on inefficiencies in the
mortgage-backed securities market.
The subadvisor generally maintains the portfolio's average duration within a
narrow band around the duration of the entire mortgage-backed securities mar-
ket. Duration is an approximate measure of the sensitivity of the market value
of the Portfolio's holdings to changes in interest rates. The subadvisor nor-
mally focuses the Portfolio's holdings on mortgage related securities issued by
U.S. government agencies and government related organizations.
Credit quality. The Portfolio generally invests in securities rated no lower
than "A" at the time of purchase by a nationally recognized rating agency or,
if unrated, of equivalent quality as determined by the subadvisor. However, up
to 20% of the Portfolio's assets may be invested in securities rated as low as
"B" by a nationally recognized rating organization or, if unrated, of equiva-
lent quality as determined by the subadvisor, upon the concurrence of the man-
ager.
Principal risks of investing in the Portfolio
Because mortgage-related securities are a type of fixed income security, your
investment in the Portfolio is subject to the risks of investing in fixed in-
come securities generally. These risks are described on page 3.
Your investment is also subject to the specific risks of investing primarily in
mortgage related securities. Mortgage-related securities generally represent
direct or indirect interests in the principal and interest payments on individ-
ual pools of mortgage loans. The mortgage loans typically allow the mortgagor
(i.e., the homeowner) to prepay principal on their mortgages whenever they
choose. For this reason, your investment is also subject to:
. Increased prepayment and extension risk which increases price and yield vola-
tility
. Increased volatility in share price to the extent the Portfolio holds mort-
gage derivative securities having imbedded leverage or unusual interest rate
reset terms
. To the extent the Portfolio enters into mortgage dollar roll transactions,
the risk that the securities the Portfolio has agreed to purchase will be
worth less on the repurchase date than the repurchase price because of
changes in interest rates and market conditions
Payments of principal and interest on mortgage pools issued by government re-
lated organizations are not guaranteed by the U.S. government. Although mort-
gage pools issued by U.S. agencies are guaranteed with respect to payments of
principal and interest, such guarantee does not apply to losses resulting from
declines in the market value of such securities.
26
Consulting Group Capital Markets Funds
<PAGE>
Mortgage Backed Investments, continued
The bar chart and tables below indicate the risks and returns of investing in
the Portfolio. The bar chart shows changes in the performance of the Portfolio
from year to year since its founding on November 18, 1991. The table shows how
the Portfolio's average annual returns for different calendar periods compare
to those of the Portfolio's benchmark index and its Lipper peer group. The
Portfolio's past performance does not necessarily indicate how the Portfolio
will perform in the future.
[GRAPH]
Percentage Total Returns for
Mortgage Backed Investments
92 6.55%
93 6.20%
94 (2.08)%
95 15.46%
96 4.69%
97 8.78%
98 6.93%
99 0.83%
Calendar years ended December 31
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* 0.83% 7.23% 6.02% 11/18/91
Lehman Mortgage Backed Index 1.86% 7.98% 4.86% **
Lipper U.S. Mortgage Funds Average 0.71% 7.03% 5.94% **
---------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/18/91.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 4.95 % 2nd/1995
Worst (2.16)% 1st/1994
------------------------------------------------------------------------------------------------
Year-to-date 6.83 % through 3rd/2000
------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's primary
benchmark is Lehman Brothers
Mortgage Backed Securities
Index. The index contains most
fixed rate securities issued and
backed by mortgage pools of
federal agencies or government
related organizations. Unlike
the Portfolio, the benchmark is
unmanaged and does not include
any expenses. In addition, the
Portfolio compares its
performance with the Lipper U.S.
Mortgage Funds Average. It is 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.
Fee table
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio and is based upon expenses of the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
Shareholder fees None
(fees paid directly from your
investment)
Maximum annual TRAK(R) fee 1.50%
Annual Portfolio operating expenses
(expenses that are deducted from
Portfolio assets)
Management fees 0.70%
Other expenses 0.27%
-------
Total annual Portfolio operating
expenses 0.97%
Management and Administration
Fee waivers* (0.12)%
-------
Net annual Portfolio operating
expenses 0.85%
=======
</TABLE>
* Management has agreed to waive a portion of management and administration
fees because it has voluntarily agreed to limit total annual portfolio oper-
ating expenses (excluding interest expense) to 0.80% of average net assets.
The interest expense for the most recent fiscal year was 0.05% of average net
assets. The manager may change or eliminate this expense limitation at any
time.
Example
This example is intended to help you compare the cost of investing in the Port-
folio with the cost of investing in other mutual funds. Your actual costs may
be higher or lower.
The example assumes:
. You invest $10,000 in the Portfolio for the time periods indicated;
. You reinvest all dividends and distributions;
. You redeem at the end of each period;
. Your investment has a 5% return each year; and
. The Portfolio's operating expenses remain the same.
Under these assumptions, your costs, including the maximum annual TRAK(R) fee,
would be:
<TABLE>
<CAPTION>
After 1 After 3 After 5 After 10
year years years years
<S> <C> <C> <C>
$250 $770 $1,316 $2,806
</TABLE>
27
Consulting Group Capital Markets Funds
<PAGE>
High Yield Investments
Investment objective
A high level of current income by investing primarily in below investment grade
debt securities.
Principal investment strategies
The Portfolio invests primarily in fixed income securities of corporate issuers
located in the United States. The Portfolio may invest a portion of its assets
in securities of issuers located in developed foreign countries. The Portfolio
may also invest up to 10% of its assets in equity and equity-related securi-
ties, including convertible securities, preferred stock, warrants and rights.
Credit quality. The Portfolio invests primarily in fixed-income securities
rated below investment grade by two or more nationally recognized rating orga-
nizations, or, if unrated, of equivalent quality as determined by the
subadvisor, Alliance Capital Management L.P. Securities rated below investment
grade are commonly known as "junk bonds."
Duration. The Portfolio's average duration ranges from two to six years. Dura-
tion is an approximate measure of the sensitivity of the market value of the
Portfolio's holdings to changes in interest rates. Individual securities may be
of any maturity.
How the subadvisor selects the Portfolio's investments
The subadvisor employs a relative value investment process, looking for securi-
ties of companies with improving or stable credit quality trends. The Portfolio
focuses on investments in the "BB" and "B" quality spectrum. The investing
process includes:
. Extensive portfolio research on issuers and their business conditions
. Thorough analysis of issuers and their credit quality
. Emphasis on general economic and interest rate trends and forecasts
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks of investing in fixed
income securities generally. However, these risks, which are described on page
3, are significantly greater for the Portfolio because of its focus on non-in-
vestment grade fixed income securities.
Investment in high yield securities involves substantial risk of loss. These
securities are considered speculative with respect to the issuer's ability to
pay interest and principal and are susceptible to default or decline in market
value because of adverse economic and business developments. The market values
for high yield securities tend to be very volatile, and these securities are
less liquid than investment grade debt securities. For these reasons, your in-
vestment in the Portfolio is subject to the following specific risks:
. Increased price sensitivity to changing interest rates
. Greater risk of loss because of default or declining credit quality
. Adverse company specific events are more likely to render the issuer unable
to make interest and/or principal payments
. A negative perception of the high yield market develops, depressing the price
and liquidity of high yield securities. This negative perception could last
for a significant period of time
The market value of foreign securities may decline because of unfavorable for-
eign government actions, political, economic or market instability or the ab-
sence of accurate information about foreign companies. These risks may be more
severe for securities of issuers in emerging markets. Foreign securities are
sometimes less liquid and harder to value than securities of U.S. issuers.
28
Consulting Group Capital Markets Funds
<PAGE>
High Yield Investments, continued
The bar chart and tables below indicate the risks and returns of investing in
the Portfolio. The bar chart shows changes in the performance of the Portfolio
from year to year since its founding on July 13, 1998. The table shows how the
Portfolio's average annual returns for different calendar periods compare to
those of the Portfolio's benchmark index. The Portfo-
lio's past performance does not necessarily indicate how the Portfolio will
perform in the future.
[GRAPH]
Percentage Total Returns for
High Yield Investments
99 (6.96)%
Calendar year ended December 31
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* (6.96)% n/a (3.62)% 7/13/98
CS First Boston Global High Yield Index 3.28 % n/a (0.78)% **
----------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 7/13/98.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 2.11 % 2nd/1999
Worst (6.03)% 4th/1999
------------------------------------------------------------------------------------------------
Year-to-date (1.94)% through 3rd/2000
------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's benchmark is CS
First Boston Global High Yield
Index, a broad-based market
measure of high yield bonds,
commonly known as "junk bonds".
Because the index is not a
managed portfolio, there are no
advisory fees or internal
management expenses reflected in
the index's performance. An
investor cannot invest directly
in an index.
Fee table
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio and is based upon expenses of the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
Shareholder fees None
(fees paid directly from your
investment)
Maximum annual TRAK(R) fee 1.50%
Annual Portfolio operating expenses
(expenses that are deducted from
Portfolio assets)
Management fees 0.90%
Other expenses 0.30%
-----
Total annual Portfolio operating
expenses 1.20%
=====
</TABLE>
Example
This example is intended to help you compare the cost of investing in the Port-
folio with the cost of investing in other mutual funds. Your actual costs may
be higher or lower.
The example assumes:
. You invest $10,000 in the Portfolio for the time periods indicated;
. You redeem at the end of each period;
. You reinvest all dividends and distributions;
. Your investment has a 5% return each year; and
. The Portfolio's operating expenses remain the same.
Under these assumptions, your costs, including the maximum annual TRAK(R) fee,
would be:
<TABLE>
<CAPTION>
After After After After
1 year 3 years 5 years 10 years
<S> <C> <C> <C>
$273 $838 $1,430 $3,032
</TABLE>
29
Consulting Group Capital Markets Funds
<PAGE>
Multi-Sector Fixed Income Investments
Investment objective
Total return consisting of capital appreciation and income.
Principal investment strategies
The Portfolio invests primarily in fixed-income securities issued by U.S. gov-
ernmental and corporate issuers and mortgage-related and asset-backed securi-
ties.
How the subadvisors select the Portfolio's investments
The manager has selected four subadvisors to manage the Portfolio. Each
subadvisor focuses on a different segment of the fixed income marketplace. Each
subadvisor's investment approach is described below.
Metropolitan West Asset Management LLC ("MWAM") seeks to consistently
outperform the benchmark while maintaining below average volatility. The
subadvisor believes consistent outperformance is gained through the measured
application of five value-added strategies: limited average maturity/duration
shifts, yield curve management, utilization of all sectors of the bond market,
quantitative security selection and sophisticated buy/sell execution strate-
gies. The percentage of the Portfolio's assets allocated to MWAM is 50%.
Western Asset Management Company ("Western") focuses on investment grade long-
term fixed income securities, including those issued by U.S. governmental and
corporate issuers, U.S. dollar denominated fixed income securities of foreign
issuers and mortgage-backed and asset-backed securities. It emphasizes three
key strategies to enhance the Portfolio's total return:
. Adjusting the allocation of the Portfolio among the key sectors of the fixed
income market (government, corporate and mortgage and asset-backed) depending
on its forecast of relative values
. Tracking the duration of the overall Portfolio so that it falls within a
narrow band relative to the benchmark index, with adjustment made to reflect
its long-term outlook for interest rates
. Purchasing under-valued securities in each of the key sectors of the bond
market while keeping overall quality high.
The percentage of the Portfolio's assets allocated to Western is 20%.
Utendahl Capital Management CFI ("Utendahl") focuses on mortgage-related
securities represent-
ing pools of mortgage loans assembled for sale to investors by various U.S.
government agencies, government-related organizations and private issuers. The
Portfolio may also invest in mortgage-related derivative securities such as
government stripped mortgage-backed securities ("SMBS") and collaterized mort-
gage obligations ("CMOs"). SMBS represent the right to receive either principal
or interest payments of U.S. government securities. Interests in CMOs entitle
the holder to specified cash flows from a pool of mortgages. In order to en-
hance current income, the Portfolio may enter into mortgage dollar roll trans-
actions with respect to mortgage-related securities issued by U.S. governmental
agencies or instrumentalities.
The subadvisor uses a quantitative computer-modelled investment process to seek
to identify and capitalize on inefficiencies in the mortgage-backed securities
market. The subadvisor generally maintains the Portfolio within a narrow band
around the duration of the entire mortgage-backed market and normally focuses
on mortgage-related securities issued by U.S. government agencies and govern-
ment related organizations. The percentage of the Portfolio's assets allocated
to Utendahl is 20%.
Alliance Capital Management L.P. ("Alliance") focuses on below investment grade
fixed income securities, also known as "high yield" securities and commonly re-
ferred to as "junk bonds." It invests primarily in fixed income securities of
corporate issuers located in the U.S., but may also invest in securities of is-
suers located in developed foreign countries. It may also invest a portion of
the Portfolio in equity and equity-related securities, including convertible
securities, preferred stocks, warrants and rights.
The subadvisor invests primarily in fixed income securities whose average dura-
tion ranges from two to six years. Individual securities may be of any maturi-
ty.
The subadvisor employs a relative value investment process, looking for securi-
ties of companies with improving or stable credit quality trends. It focuses on
investments in the "BB" and "B" quality spectrum. The investing process
includes:
. Extensive research of issuers and their business conditions
. Thorough analysis of issuers and their credit quality
. Emphasis on general economic and interest rate trends and forecasts.
The percentage of the Portfolio's assets allocated to Alliance is 10%.
30
Consulting Group Capital Markets Funds
<PAGE>
Multi-Sector Fixed Income Investments, continued
Credit Quality. The intermediate maturity, long-term maturity and mortgage-re-
lated portions of the Portfolio are invested primarily in securities rated in-
vestment grade by a nationally recognized statistical rating organization, or,
if unrated, of equivalent quality as determined by the subadvisor. The high
yield portion of the Portfolio will primarily be invested in fixed income secu-
rities rated below investment grade, or, if unrated, of equivalent quality as
determined by the subadvisor. Securities rated below investment grade are com-
monly known as "junk bonds."
Duration and Maturity. The Portfolio's average duration is normally within one
year of the duration of the Lehman Brothers Aggregate Bond Index. Duration is
an approximate measure of the sensitivity of the market value of the Portfo-
lio's holdings to changes in interest rates. Individual securities may be of
any maturity.
Principal risks of investing in the Portfolio
An investment in the Portfolio involves specific risks relating to the nature
of its investment strategies. You should invest in the Portfolio only if you
are capable of bearing the risks described below.
. You could lose money on your investment in the portfolio, or the portfolio
may not perform as well as other investments
. The manager's judgment about the attractiveness and risk adjusted return
potential of particular asset classes, investment styles or other issues may
prove to be wrong
. When interest rates go up, prices of fixed income securities decline
. An issuer of a security may prepay principal earlier than scheduled, which
would force the portfolio to reinvest in lower yielding securities. This is
known as call or prepayment risk
. An issuer of a security may default on its obligation to pay principal and/or
interest or the security's credit rating may be downgraded
. Slower than expected principal payments may extend a security's life. This
locks in a below-market interest rate, increases the security's duration and
reduces the value of the security. This is known as extension risk
. Greater sensitivity to rising interest rates because of the Portfolio's
longer average maturity and because the Portfolio invests a portion of its
assets in high yield securities
. Increased volatility in share price because the Portfolio invests a portion
of its assets in high yield securities and holds mortgage derivative securi-
ties with embedded leverage or unusual interest rate reset terms
. The Portfolio may not fully benefit from or may lose money on derivatives if
changes in their value do not correspond accurately to changes in the value
of the underlying securities
Performance
Because this Portfolio commenced operations on October 1, 1999, the Portfolio
does not yet have a sufficient operating history to generate the performance
information which other Portfolios show in bar and table form at this location
of the prospectus.
Year to date: 6.37% (through 3rd Quarter 2000)
BENCHMARK
The Portfolio's primary benchmark
is Lehman Brothers Aggregate Bond
Index. The Index is composed of
the Lehman Intermediate
Government/Corporate Bond Index
and the Lehman Mortgage-Backed
Securities Index and also
includes treasury issues, agency
issues, corporate bond issues and
mortgage-backed securities.
Unlike the Portfolio, the
benchmark is unmanaged and does
not include any expenses.
Fee table
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio and is based upon estimated expenses for the Portfo-
lio's current fiscal year.
<TABLE>
<S> <C>
Shareholder fees None
(fees paid directly from your
investment)
Maximum annual TRAK(R) fee* 1.50%
Annual Portfolio operating expenses
(expenses that are deducted from
Portfolio assets)
Management fee 0.85%
Other expenses 0.32%
-------
Total annual Portfolio operating
expenses** 1.17%
Management and Administration fee
waivers** (0.37)%
-------
Net annual Portfolio operating
expenses 0.80%
=======
</TABLE>
* Fee payable under the TRAK(R) Personalized Investment Advisory Service for
asset allocation services. See "Asset Allocation Programs."
** Management has agreed to waive a portion of management and administration
fees because it has voluntarily agreed to limit total annual Portfolio oper-
ating expenses to 0.80% of average net assets. The manager may change or
eliminate this expense limitation at any time.
31
Consulting Group Capital Markets Funds
<PAGE>
Multi-Sector Fixed Income Investments, continued
Example
This example is intended to help you compare the cost of investing in the Port-
folio with the cost of investing in other mutual funds. Your actual costs may
be higher or lower.
The example assumes:
. You invest $10,000 in the Portfolio for the time periods indicated;
. You reinvest all dividends and distributions;
. You redeem at the end of each period;
. Your investment has a 5% return each year; and
. The Portfolio's operating expenses remain the same.
Under these assumptions, your costs including the maximum annual TRAK(R) fee,
would be:
<TABLE>
<CAPTION>
After
After 1 After 3 5 After 10
year years years years
<S> <C> <C> <C>
$270 $829 $1,415 $3,003
</TABLE>
32
Consulting Group Capital Markets Funds
<PAGE>
This page intentionally left blank
33
Consulting Group Capital Markets Funds
<PAGE>
International Fixed Income Investments
Investment objective
Maximize current income consistent with the protection of principal.
Principal investment strategies
The Portfolio invests primarily in non-U.S. dollar denominated fixed income se-
curities issued by foreign governments and corporations and supranational enti-
ties. The Portfolio invests primarily in fixed income securities of issuers lo-
cated in at least three countries and will not invest more than 25% of its as-
sets in the securities of governments or corporations in any one country. The
Portfolio attempts to hedge against unfavorable changes in currency exchange
rates by engaging in forward currency transactions and trading currency futures
contracts and options on these futures.
Credit Quality: The Portfolio invests in securities rated investment grade by a
nationally recognized rating organization, or if unrated, of equivalent quality
as determined by the subadvisor, Julius Baer Investment Management. The Portfo-
lio may invest up to 10% of its assets in emerging market debt securities rated
below investment grade, or if unrated, of equivalent quality as determined by
the subadvisor.
Duration: The Portfolio's average duration ranges from two to eight years. Du-
ration is an approximate measure of the sensitivity of the market value of the
Portfolio's holdings to changes in interest rates. The Portfolio may invest in
individual securities of any maturity.
How the subadvisor selects the Portfolio's investments
The subadvisor applies portfolio economic analysis to select a portfolio of
high-quality, well-diversified foreign bonds. From a universe of 20 developed
countries outside the U.S., the subadvisor forecasts which bond markets offer
the best opportunity to outperform the U.S. bond market, considering factors
such as currencies, local bond market conditions, issuers and instruments. It
pays particular attention to markets that offer attractive yields. The
subadvisor employs a proprietary computer model to analyze exchange rates to
assist in its forecasts and to help manage the risk of the Portfolio.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks associated with in-
vesting in fixed income securities generally. These risks are described on page
3.
Your investment is also subject to the unique risks of investing in securities
of foreign issuers. These risks are more pronounced to the extent that the
Portfolio invests in countries with emerging markets or the Portfolio invests
significantly in any one foreign country. These risks include:
. Less information about foreign issuers or markets may be available because of
less rigorous accounting standards or regulatory practices
. Many foreign markets are smaller, less-liquid and more volatile than U.S.
markets. In a changing market, the subadvisor may not be able to sell the
Portfolio's securities in amounts and at prices the subadvisor considers
reasonable
. The foreign governmental issuer may default on, declare a moratorium on, or
restructure its obligations
. The U.S. dollar may appreciate against non-U.S. currencies
. Economic, political or social instability in foreign countries may signifi-
cantly disrupt the principal financial markets in which the Portfolio invests
The bar chart and tables indicate the risks and returns of investing in the
Portfolio. The bar chart below shows changes in the performance of the Portfo-
lio from year to year since the Portfolio's inception on November 18, 1991. The
table on the next page shows how the Portfolio's average annual returns for
different calendar periods compare to those of the Portfolio's benchmark index
and its Lipper peer group. The Portfolio's past performance does not necessar-
ily indicate how the Portfolio will perform in the future.
[GRAPH]
Percentage Total Returns for
International Fixed Income Investments
92 3.23%
93 13.83%
94 2.30%
95 23.85%
96 8.69%
97 (2.38)%
98 17.64%
99 (6.83)%
Calendar years ended December 31
34
Consulting Group Capital Markets Funds
<PAGE>
International Fixed Income Investments, continued
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* (6.83)% 7.57% 7.76% 11/18/91
Salomon Smith Barney Non-U.S. Gov. Bond
Index (5.07)% 5.90% 7.68% **
Lipper International Income Funds Average (4.25)% 6.79% 6.74% **
-----------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/18/91.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 11.45 % 1st/1995
Worst (5.43)% 1st/1999
------------------------------------------------------------------------------------------------
Year-to-date (7.09)% through 3rd/2000
------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's primary bench-
mark is the Salomon Smith Barney
Non-U.S. Government Bond Index.
The index is a market capital-
ization-weighted index consist-
ing of government bond markets
in 13 developed countries, ex-
cluding the U.S. Unlike the
Portfolio, the benchmark is un-
managed and does not include any
expenses. In addition, the Port-
folio compares its performance
with the Lipper International
Income Funds Average. It is an
average of the reinvested per-
formance of funds that invest
primarily in U.S. dollar and
non-U.S. dollar debt securities
located in at least three coun-
tries, excluding the United
States, except in periods of
market weakness.
Fee table
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio based upon expenses of the Portfolio's latest fiscal
year.
<TABLE>
<S> <C>
Shareholder fees None
(fees paid directly from your
investment)
Maximum annual TRAK(R) fee 1.50%
Annual Portfolio operating expenses
(expenses that are deducted from
Portfolio assets)
Management fees 0.70%
Other expenses 0.28%
-----
Total annual Portfolio operating
expenses 0.98%
=====
</TABLE>
Example
This example is intended to help you compare the cost of investing in the Port-
folio with the cost of investing in other mutual funds. Your actual costs may
be higher or lower.
The example assumes:
. You invest $10,000 in the Portfolio for the time periods indicated;
. You reinvest all dividends and distributions;
. You redeem at the end of each period;
. Your investment has a 5% return each year; and
. The Portfolio's operating expenses remain the same.
Under these assumptions, your costs, including the maximum annual TRAK(R) fee,
would be:
<TABLE>
<CAPTION>
After 1 After 3 After 5 After 10
year years years years
<S> <C> <C> <C>
$251 $773 $1,321 $2,816
</TABLE>
The Portfolio is a "non-diversified portfolio," which means that it
is permitted to invest in a limited number of issuers. To the extent
the Portfolio concentrates its investments in a limited number of is-
suers or countries, it is subject, to a greater extent, to the risks
associated with those issuers or countries.
35
Consulting Group Capital Markets Funds
<PAGE>
Municipal Bond Investments
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 preserva-
tion of capital.
Principal investment strategies
The Portfolio invests principally in tax exempt general obligation, revenue and
private activity bonds and notes, which are issued by or on behalf of states,
territories or possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities (including
Puerto Rico, the Virgin Islands and Guam). Tax exempt means that the bonds pay
interest that is excluded from gross income for federal income tax purposes.
The Portfolio's investments generally include municipal obligations with a full
range of maturities and broad issuer and geographic diversification.
Credit quality. The Portfolio limits its investments to municipal obligations
that are rated investment grade or higher by a nationally recognized rating or-
ganization, or, if unrated, of equivalent quality as determined by the
subadvisor, Smith Affiliated Capital Corporation.
How the subadvisor selects the Portfolio's investments
The subadvisor uses an active fixed-income management style that focuses first
on the appropriate maturity allocation for the Portfolio within a given market
environment. The maturity allocation is supplemented by a long-term market sec-
tor rotation. The subadvisor focuses primarily on:
. ""Vital service" revenue bonds (i.e., water, electric, power, sewer and se-
lect transportation authority) and secondarily on general obligation bonds of
high-quality issuers.
. Using portfolio credit analysis to evaluate the relative attractiveness of
various securities and sectors.
. Broad geographic and issuer diversification.
Maturity. The Portfolio is generally composed of a full range of maturities.
Individual investments may be of any maturity.
Principal risks of investing in the Portfolio
Because municipal obligations are a type of fixed income security, your invest-
ment in the Portfolio is subject to the risks associated with investing in
fixed income securities generally. These risks are described on page 3.
Your investment in the Portfolio is also subject to the following specific
risks:
. New federal or state legislation may adversely affect the tax-exempt status
of securities held by the Portfolio or the financial ability of the munici-
palities to repay these obligations
. The issuer of municipal obligations may not be able to make timely payments
because of general economic downturns or increased governmental costs
It is possible that some of the Portfolio's income distributions may be, and
distributions of the Portfolio's gains will be, subject to federal taxation.
The Portfolio may realize taxable gains on the sale of its securities or other
transactions, and some of the Portfolio's income distributions may be subject
to the federal alternative minimum tax. This may result in a lower tax-adjusted
return. In addition, distribution of the Portfolio's income and gains will be
subject to state taxation.
The bar chart and tables indicate the risks and returns of investing in the
Portfolio. The bar chart below shows changes in the performance of the Portfo-
lio from year to year since its founding on November 18, 1991. The table on the
next page shows how the Portfolio's average annual returns for different calen-
dar periods compare to those of the Portfolio's benchmark index and its Lipper
peer group. The Portfolio's past performance does not necessarily indicate how
the Portfolio will perform in the future.
[GRAPH]
Percentage Total Returns for
Municipal Bond Investments
92 8.13%
93 12.59%
94 (10.20)%
95 20.12%
96 2.10%
97 8.82%
98 5.39%
99 (5.62)%
Calendar years ended December 31
36
Consulting Group Capital Markets Funds
<PAGE>
Municipal Bond Investments, continued
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
Year Years Portfolio Date
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* (5.62)% 5.83% 4.91% 11/18/91
Lehman Municipal Bond Index (2.06)% 6.91% 6.42% **
Lipper General Municipal Debt Funds Average (4.58)% 5.78% 5.72% **
-------------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in an advisory
program. These programs charge an annual fee, which in the case of TRAK(R)
may be up to 1.5%.
** Index comparison begins on 11/18/91.
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 8.99 % 1st/1995
Worst (8.16)% 1st/1994
------------------------------------------------------------------------------------------------
Year-to-date 8.07% through 3rd/2000
------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS
The Portfolio's primary bench-
mark is the Lehman Brothers Mu-
nicipal Bond Index. The index is
a composite measure of the total
return performance of the munic-
ipal bond market. Unlike the
Portfolio, the benchmark is un-
managed and does not include any
expenses. In addition, the Port-
folio compares its performance
with the Lipper General Munici-
pal Debt Funds Average. It is an
average of the reinvested per-
formance of funds that invest at
least 65% of their assets in mu-
nicipal debt issues in the top
four credit ratings as deter-
mined by a nationally recognized
rating organization.
Fee table
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio and is based upon expenses of the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
Shareholder fees None
(fees paid directly from your
investment)
Maximum annual TRAK(R) fee 1.50%
Annual Portfolio operating expenses
(expenses that are deducted from
Portfolio assets)
Management fees 0.60%
Other expenses 0.19%
----
Total annual Portfolio operating
expenses 0.79%
====
</TABLE>
Example
This example is intended to help you compare the cost of investing in the Port-
folio with the cost of investing in other mutual funds. Your actual costs may
be higher or lower.
The example assumes:
. You invest $10,000 in the Portfolio for the time periods indicated;
. You reinvest all dividends and distributions;
. You redeem at the end of each period;
. Your investment has a 5% return each year; and
. The Portfolio's operating expenses remain the same.
Under these assumptions, your costs, including the maximum annual TRAK(R) fee,
would be:
<TABLE>
<CAPTION>
After 1 After 3 After 5 After 10
year years years years
<S> <C> <C> <C>
$232 $715 $1,225 $2,626
</TABLE>
37
Consulting Group Capital Markets Funds
<PAGE>
Government Money Investments
Investment objective
To provide maximum current income to the extent consistent with the maintenance
of liquidity and the preservation of capital.
Principal investment strategies
The Portfolio invests exclusively in U.S. dollar denominated short-term debt
securities issued or guaranteed by the U.S. government, its agencies, or in-
strumentalities and in repurchase agreements with respect to these securities.
Credit quality. The Portfolio invests exclusively in U.S. treasury securities
and other U.S. government securities rated by a nationally recognized rating
organization in the two highest short-term rating categories or, if unrated, of
equivalent quality as determined by the subadvisor, Standish Ayer & Wood, Inc..
Maturity. Individual securities must have remaining maturities of 397 days or
less. The Portfolio maintains a dollar-weighted portfolio maturity of 90 days
or less.
How the subadvisor selects the Portfolio's investments
The Portfolio seeks to maintain a constant net asset value of $1 per share by
investing in securities which the subadvisor believes present minimal credit
risks. It focuses on improving the Portfolio's yield by:
. Actively managing sector allocations and the average maturity of the Portfo-
lio.
. Monitoring the spread relationships between U.S. Treasury and government
agency issues and purchasing agencies when they provide a yield advantage.
. Adjusting average portfolio maturity to reflect the subadvisor's outlook on
interest rates.
Principal risks of investing in the Portfolio
Your investment in the Portfolio is subject to the risks associated with in-
vesting in fixed income securities generally. These risks are described on page
3. Because the Portfolio invests exclusively in short-term, high-quality debt
securities, these risks are less significant than in the case of Portfolios
which invest in longer-term securities or in below investment grade securities.
Investment in short-term U.S. government securities is generally the most con-
servative investment approach of all the Portfolios. Over time, the Portfolio
is likely to underperform other investment options.
The Portfolio seeks to maintain a $1 share price. However, the maintenance of a
$1 share price is not guaranteed and you may lose money on your investment.
The bar chart and tables below indicate the risks and returns of investing in
the Portfolio. The bar chart shows changes in the performance of the Portfolio
from year to year since its founding on November 18, 1991. The table shows how
the Portfolio's average annual returns for different calendar periods compare
to the return on the 90-day Treasury bill. The Portfolio's past performance
does not necessarily indicate how the Portfolio will perform in the future.
[GRAPH]
Percentage Total Returns for
Government Money Investments
92 3.25%
93 2.69%
94 3.71%
95 5.48%
96 4.91%
97 5.04%
98 4.99%
99 4.58%
Calendar years ended December 31
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1999)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Five Life of Inception
year years Portfolio Date
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio (without advisory program fee)* 4.58% 5.00% 4.32% 11/18/91
90-day T-bill Index 4.74% 5.11% 4.54% **
--------------------------------------------------------------------------
</TABLE>
* The Portfolio is available only to investors participating in advisory pro-
grams. These programs charge an annual fee, which in the case of TRAK(R)
Personalized Investment Advisory Service may be up 1.5%
** Index comparison begins on 11/18/91.
The portfolio's 7-day yield as of December 31, 1999 was 5.11%.
38
Consulting Group Capital Markets Funds
<PAGE>
Government Money Investments, continued
PORTFOLIO'S BEST AND WORST CALENDAR QUARTERS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
return Quarter/Year
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Best 1.40% 2nd/1995
Worst 0.65% 1st & 2nd/1993
-------------------------------------------------------------------------------------------------
Year-to-date 4.26% through 3rd/2000
-------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARK
The Portfolio's benchmark is the
rate of return of the 90 day
Treasury bill. Unlike the
Portfolio, the benchmark is
unmanaged and does not include
any expenses.
Fees and Expenses
This table describes the fees and expenses you may pay if you buy and hold
shares of the Portfolio and is based upon expenses for the Portfolio's latest
fiscal year.
<TABLE>
<S> <C>
Shareholder fees None
(fees paid directly from your
investment)
Maximum annual TRAK(R) fee 1.50 %
Annual Portfolio operating expenses
(expenses that are deducted from
Portfolio assets)
Management fees 0.35 %
Other expenses 0.43 %
-----
Total annual Portfolio operating
expenses 0.78 %
Management and Administration fee
waivers and expense
reimbursements* (0.18)%
-----
Net annual Portfolio operating
expenses 0.60 %
=====
</TABLE>
* Management has agreed to waive a portion of management and administration
fees because it has voluntarily agreed to limit total annual Portfolio oper-
ating expenses to 0.60% of average net assets. The manager may change or
eliminate this expense limitation at any time.
Example
This example is intended to help you compare the cost of investing in the Port-
folio with the cost of investing in other mutual funds. Your actual costs may
be higher or lower.
The example assumes:
. You invest $10,000 in the Portfolio for the time periods indicated;
. You reinvest all dividends and distributions;
. You redeem at the end of each period;
. Your investment has a 5% return each year; and
. The Portfolio's operating expenses remain the same.
Under these assumptions, your costs, including the maximum annual TRAK(R) fee,
would be:
<TABLE>
<CAPTION>
After 1 After 3 After 5 After 10
year years years years
<S> <C> <C> <C>
$231 $712 $1,220 $2,615
</TABLE>
39
Consulting Group Capital Markets Funds
<PAGE>
More on the Portfolios' Investments
The section entitled "Investments, Risks and Performance" describes the Portfo-
lios' investment objectives and their principal investment strategies and
risks. This section provides some additional information about the Portfolios'
investments and certain investment management techniques the Portfolios may
use. More information about the Portfolios' investments and portfolio manage-
ment techniques, some of which entail risk, is included in the Statement of Ad-
ditional Information (SAI). To find out how to obtain an SAI, please turn to
the back cover of this prospectus.
Percentage Limits
Some Portfolio policies in this
section are stated as a percent-
age of assets. These percentages
are applied at the time of pur-
chase of a security and subse-
quently may be exceeded because
of changes in the values of a
Portfolio's investments.
Equity Investments. The equity oriented Portfolios may invest in all types of
equity securities. Equity securities include exchange-traded and over-the-
counter common and preferred stocks, warrants, rights, convertible securities,
depositary receipts and shares, trust certificates, limited partnership inter-
ests, shares of other investment companies and real estate investment trusts
and equity participations.
Fixed Income Investments. The fixed income oriented Portfolios (except Govern-
ment Money Investments, Municipal Bond Investments and Balanced Investments,
which limit their investments to certain types of fixed income instruments) may
invest in all types of fixed income securities. The equity oriented Portfolios
may invest a portion of their assets in fixed income securities. Fixed income
investments include bonds, notes (including structured notes), mortgage-related
and asset-backed securities (Intermediate Fixed Income Investments, Long-Term
Bond Investments, Mortgage Backed Investments, Multi-Sector Fixed Income In-
vestments and Balanced Investments only), convertible securities, eurodollar
and yankee dollar instruments, preferred stocks and money market instruments.
Fixed income securities may be issued by corporate and governmental issuers and
may have all types of interest rate payment and reset terms, including fixed
rate, adjustable rate, zero coupon, contingent, deferred, payment-in-kind and
auction rate features.
An individual security's maturity is the date upon which the issuer must pay
back the face amount of the security. A security may have an "effective" matu-
rity which is shorter or longer than its stated maturity depending on the de-
gree of prepayment or extension risk associated with that security. Duration is
the measure of an individual security's price sensitivity to changing interest
rates. The longer a security's duration, the more sensitive that security's
price will be to changes in interest rates.
Mortgage-related securities may be issued by private companies or by agencies
of the U.S. government and represent direct or indirect participations in, or
are collateralized by and payable from, mortgage loans secured by real proper-
ty. Intermediate Fixed Income Investments, Long-Term Bond Investments and Mort-
gage Backed Investments may each invest up to 25% of their assets in privately
issued mortgage-related securities. Long-Term Bond Investments, Balanced In-
vestments and Intermediate Fixed Income Investments may each invest up to 5% of
their respective assets and Multi-Sector Fixed Income Investments may invest up
to 10% of its assets in asset-backed securities, which represent participations
in, or are secured by and payable from, assets such as installment sales or
loan contracts, leases, credit card receivables and other categories of receiv-
ables. A Portfolio's investments in asset-backed securities will be rated in
the highest rating category at the time of investment.
Certain debt instruments may pay principal only at maturity or may represent
only the right to receive payments of principal or payments of interest on un-
derlying pools of mortgages or government securities, but not both. The value
of these types of instruments may change more drastically than debt securities
that pay both principal and interest during periods of changing interest rates.
Interest only mortgage-backed securities are particularly subject to prepayment
risk. A Portfolio may obtain a below market yield or incur a loss on such in-
struments during periods of declining interest rates. Principal only instru-
ments are particularly subject to extension risk. For mortgage derivatives and
structured securities that have imbedded leverage features, small changes in
interest or prepayment rates may cause large and sudden price movements. Mort-
gage derivatives can also become illiquid and hard to value in declining mar-
kets.
Foreign Securities. Investments in securities of foreign entities and securi-
ties quoted or denominated in foreign currencies involve special risks. These
include possible political and economic instability and the possible imposition
of exchange controls or other restrictions on investments. If a Portfolio in-
vests in securities denominated or quoted in currencies other than the U.S.
dollar, changes in foreign currency rates relative to the U.S. dollar will af-
fect the U.S. dollar value of the Portfolio's assets.
Emerging market investments offer the potential of significant gains but also
involve greater risks than investing
Consulting Group Capital Markets Funds
40
<PAGE>
More on the Portfolios' Investments, continued
in more developed countries. Political or economic instability, lack of market
liquidity and government actions such as currency controls or seizure of pri-
vate businesses or property may be more likely in emerging markets. The Con-
sulting Group generally considers all of the western European countries, Cana-
da, Australia, New Zealand, Hong Kong, Singapore and Japan to have developed
markets and economies and the rest of the countries in the world to have emerg-
ing markets and economies.
Economic and monetary union (EMU) in Europe began to be implemented on January
1, 1999, when 11 European countries adopted a single currency--the euro. For
participating countries, EMU means sharing a single currency and single offi-
cial interest rate and adhering to agreed upon limits on government borrowing.
Budgetary decisions will remain in the hands of each participating country, but
will be subject to each country's commitment to avoid "excessive deficits" and
other more specific budgetary criteria. A European Central Bank is responsible
for setting the official interest rate to maintain price stability within the
euro zone. EMU is driven by the expectation of a number of economic benefits,
including lower transaction costs, reduced exchange risk, greater competition,
and a broadening and deepening of European financial markets. However, there
are a number of significant risks associated with EMU. Monetary and economic
union on this scale has never been attempted before. There is a significant de-
gree of uncertainty as to whether participating countries will remain committed
to EMU in the face of changing economic conditions. This uncertainty may in-
crease the volatility of the international markets.
Each Portfolio which is not an international oriented Portfolio (International
Equity Investments, International Fixed Income Investments and Emerging Markets
Equity Investments), may invest up to 10% of its assets in foreign securities,
including emerging market securities.
Municipal Obligations. Municipal Bond Investments invests primarily in munici-
pal obligations, which are debt obligations issued by or on behalf of states,
cities, municipalities and other public authorities. The two principal classi-
fications of municipal obligations are "general obligation" securities and
"revenue" securities. General obligation securities are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue securities are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as the
user of a facility being financed. Revenue securities may include private ac-
tivity bonds which may be issued by or on behalf of public authorities to fi-
nance various privately operated facilities and are not payable from the unre-
stricted revenues of the issuer. As a result, the credit quality of private ac-
tivity bonds is frequently related directly to the credit standing of private
corporations or other entities.
The secondary market for municipal obligations may be less liquid than for most
taxable fixed income securities which may limit the Portfolio's ability to buy
and sell these obligations at times and prices the manager believes would be
advantageous. There may be less information available about the financial con-
dition of an issuer of municipal obligations than about issuers of other pub-
licly traded securities. Also, state and federal bankruptcy laws could hinder
the Portfolio's ability to recover interest or principal in the event of a de-
fault by the issuer.
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 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 also will not invest more
than 25% of its total 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; tax-free
prefunded bonds secured or backed by the U.S. Treasury or other U.S. government
guaranteed securities; and pollution control bonds.
41
Consulting Group Capital Markets Funds
<PAGE>
More on the Portfolios' Investments, continued
Credit Quality
A Portfolio's rating criteria
are applied at the time of pur-
chase. If a security is subse-
quently downgraded, the
subadvisor may, but is not re-
quired to, sell the security. If
a security is rated differently
by two or more rating organiza-
tions, the subadvisor may use
the higher rating to determine
the security's rating category.
Securities are considered in-
vestment grade if they are:
. rated in one of the top four
long-term rating categories by
a nationally recognized sta-
tistical rating organization.
. unrated securities that the
subadvisor believes to be of
comparable quality.
Securities are considered below
investment grade if they are
rated below the top four long-
term ratings or are of equiva-
lent quality if unrated. Below
investment grade securities,
also known as "high yield secu-
rities," (commonly known as
"junk bonds") are subject to:
. the increased risk of an is-
suer's inability to meet prin-
cipal and interest obliga-
tions.
. greater price volatility be-
cause of a heightened sensi-
tivity to changing interest
rates.
. less liquidity.
Derivative contracts. Each Portfolio, except Government Money Investments, may,
but is not required to, use derivative contracts for any of the following pur-
poses:
. To hedge against adverse changes caused by changing interest rates, stock
market prices or currency exchange rates in the market value of securities
held by or to be bought for a Portfolio.
. As a substitute for purchasing or selling securities.
. To shorten or lengthen the effective maturity or duration of a Portfolio's
fixed income investments.
. To enhance a Portfolio's potential gain in non-hedging situations.
. To increase a Portfolio's liquidity.
The Portfolios may use various types of derivative instruments, including op-
tions on securities and securities indices, futures and options on futures (ex-
cept Government Money Investments, Municipal Bond Investments and Balanced In-
vestments) and, for those Portfolios that invest directly in foreign securi-
ties, forward currency contracts, currency futures contracts and options on
currencies and currency futures. A derivative contract will obligate or entitle
a Portfolio to deliver or receive an asset or a cash payment based on the
change in value of one or more designated securities, currencies or indices.
Even a small investment in derivative contracts can have a big impact on a
Portfolio's interest rate, stock market and currency exposure. Therefore, using
derivatives can disproportionately increase Portfolio losses and reduce oppor-
tunities for gains when interest rates, stock prices or currency rates are
changing. A Portfolio may not fully benefit from or may lose money on deriva-
tives if changes in their value do not correspond accurately to changes in the
value of the Portfolio's holdings. The other party to certain derivative con-
tracts presents the same types of credit risk as issuers of fixed income secu-
rities. Derivatives can also make a Portfolio's assets less liquid and harder
to value, especially in declining markets.
Mortgage Dollar Rolls. Mortgage Backed Investments, Balanced Investments and
Multi-Sector Fixed Income Investments may enter into mortgage dollar roll
transac-tions to earn additional income. In these transactions, a Portfolio
sells a U.S. agency mortgage-backed security and simultaneously agrees to re-
purchase at a future date another U.S. agency mortgage-backed security with the
same interest rate and maturity date, but generally backed by a different pool
of mortgages. The Portfolio loses the right to receive interest and principal
payments on the security it sold. However, the Portfolio benefits from the in-
terest earned on investing the proceeds of the sale and may receive a fee or a
lower repurchase price. The benefits from these transactions depend upon the
subadvisor's ability to forecast mortgage prepayment patterns on different
mortgage pools. The Portfolio may lose money if, during the period between the
time it agrees to the forward purchase of the mortgage securities and the set-
tlement date, these securities decline in value because of market conditions or
prepayments on the underlying mortgages.
High Yield Securities. High Yield Investments and Multi-Sector Fixed Income In-
vestments can invest in high yield securities. These are commonly known as
"junk bonds" and involve a substantial risk of loss. These securities are con-
sidered speculative with respect to the issuer's ability to pay interest and
principal and are susceptible to default or decline in market value be-cause of
adverse economic and business developments. The market values for high yield
securities tend to be very volatile, and these securities are less liquid than
investment grade debt securities. The Portfolio may experience increased price
sensitivity to changing interest rates and greater risk of loss because of de-
fault or declining credit quality. In addition, adverse company specific
42
Consulting Group Capital Markets Funds
<PAGE>
More on the Portfolios' Investments, continued
events are more likely to render the issuer unable to make interest and/or
principal payments. A negative perception of the high yield market may develop,
depressing the price and liquidity of high yield securities. This negative per-
ception could last for a significant period of time.
Swaps. Emerging Markets Equity Investments, with respect to 15% of the total
assets allocated to SSGA, may enter into index swaps.
Index swaps involve the exchange by the Portfolio with another party of the re-
spective amounts payable with respect to a notional principal amount related to
one or more indices. The Portfolio may enter into these transactions to pre-
serve a return or spread on a particular investment or portion of its assets,
as a duration management technique or to protect against any increase in the
price of securities the Portfolio anticipates purchasing at a later date. Swaps
have risks associated with them, including possible default by the counterparty
to the transaction, illiquidity and, where swaps are used as hedges, the risk
that the use of a swap could result in losses greater than if the swap had not
been employed.
Defensive investing. The Portfolios may depart from their principal investment
strategies in response to adverse market, economic or political conditions by
taking temporary defensive positions in all types of money market and short
term debt securities. The Portfolios' investments in these assets are managed
by SSB Citi Fund Management LLC ("SSB Citi").
Impact of high portfolio turnover. Each Portfolio may engage in active and fre-
quent trading to achieve its principal investment strategies. This may lead to
the realization and distribution to shareholders of higher capital gains, which
would increase their tax liability. Frequent trading also increases transaction
costs, which could detract from a Portfolio's performance.
Order of Exemption. The Trust is subject to an Order of Exemption from the De-
partment of Labor requiring the Portfolios to limit its investments in the secu-
rities of affiliates of Salomon Smith Barney, including Citigroup, Inc., to one
percent of the Portfolio's net assets. However this percentage limitation may
be exceeded where the amount held by the subadvisor is used to replicate an
established third party index such as the S&P 500 Index.
Investment Policies. The Portfolios' non-fundamental investment policies gener-
ally may be changed by the Board of Trustees without shareholder approval.
More information about investment styles. If a subadvisor follows a passive
style, the subadvisor's principal objective is to mirror the return of a bench-
mark index. The subadvisor may seek to achieve that goal by investing in all of
the securities in the index or by selecting certain securities in the index
with respect to which the subadvisor believes there is a high correlation be-
tween changes in the value of the index and these securities. An active
subadvisor seeks to outperform the index by selecting securities which the
subadvisor believes will appreciate in value at a rate greater than the index.
However, if the subadvisor is incorrect in its estimate of a security's perfor-
mance, the Portfolio may underperform the index. A risk controlled subadvisor
uses an active management style but employs investment criteria that are in-
tended to limit the positive or negative variances from the index. A top down
investment approach places greater emphasis on selecting the industries or sec-
tors, or in the case of an international fund, country allocations, that the
subadvisor believes will outperform the market rather than on individual stock
selection. Consequently, these subadvisors place greater emphasis upon economic
and market trends. A subadvisor using a bottom up approach primarily emphasizes
the outlook for individual companies. Stock picking and not overall market
trends or industry or sector weightings is most important. A subadvisor using a
contrarian approach primarily focuses on companies which are out of favor
and/or its market value is depressed. The subadvisor believes the stock market
will adjust ultimately to reflect the intrinsic value of these companies. If a
subadvisor or Portfolio focuses upon growth stocks, the emphasis is upon compa-
nies whose earnings are expected to increase at a rate that exceeds the average
of the market as a whole. Value investing seeks to identify companies that have
an underlying value that is not currently reflected in the company's market
price. The subadvisor anticipates that over time the market will reflect the
underlying value in the market price.
Potential Conversion. The High Yield Investments reserves the right, if ap-
proved 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 sub-
stantially the same investment objective, policies and restrictions. At least
30 days' written notice of any action would be given to all shareholders if,
and when, such a proposal is approved.
43
Consulting Group Capital Markets Funds
<PAGE>
The Manager
The manager. The Consulting Group, a division of SSB Citi, serves as the man-
ager for the Portfolios. SSB Citi is a wholly-owned subsidiary of Salomon Smith
Barney Holdings Inc., which in turn is a wholly-owned subsidiary of Citigroup
Inc. Citigroup businesses produce a broad range of financial services--asset
management, banking and consumer finance, credit and charge cards, insurance,
investments, investment banking and trading--and use diverse channels to make
them available to consumer and corporate customers around the world. As manag-
er, the Consulting Group selects and oversees professional money managers who
are responsible for investing the assets of the Portfolios. The Consulting
Group was established to match the investment needs of institutional investors
and substantial individual investors with appropriate and well-qualified in-
vestment advisors. Since 1973, the Consulting Group has grown to become one of
the nation's foremost organizations providing portfolio evaluation, asset allo-
cation, market analysis and investment advisor selection services.
The Portfolios are part of a series of portfolios which comprise the Consulting
Group Capital Markets Funds (the "Trust"). The Trust is a series company that
consists of the Portfolios and the following additional portfolios which are
offered in separate prospectuses, copies of which can be obtained from any Sal-
omon Smith Barney Financial Consultant:
. Multi-Strategy Market Neutral Investments
. S&P 500 Index Investments
. Global Sciences and Technology Investments
The Evaluation Process
The Consulting Group screens
more than 3,000 registered in-
vestment advisory firms, tracks
the performance of more than 700
firms on its comprehensive data-
base and evaluates the strength
and performance of advisory
firms in Consulting Group pro-
grams each year. Throughout the
evaluation, the Consulting Group
focuses on a number of key is-
sues:
. level of expertise
. relative performance and
consistency of performance
. strict adherence to investment
discipline or philosophy
. personnel, facility and finan-
cial strength
. quality of service and commu-
nication.
The subadvisors. The subadvisors are responsible for the day-to-day investment
operations of the Portfolios in accordance with each Portfolio's investment ob-
jectives and policies. The name and address of each subadvisor, and the name
and background of each portfolio manager, is included on pages 45-49.
The subadvisor selection process. Subject to the review and approval of the
Portfolios' Trustees, the Consulting Group is responsible for selecting, super-
vising and evaluating subadvisors who manage the Portfolios' assets. The Con-
sulting Group may adjust the allocation of a Portfolio's assets among the
subadvisors by up to 10%. Any adjustment affecting more than 10% of a Portfo-
lio's assets can only be made by the Board of Trustees. The Consulting Group
employs a rigorous evaluation process to select those subadvisors that have
distinguished themselves through consistent and superior performance. The Con-
sulting Group is also responsible for communicating performance expectations
and evaluations to the subadvisors and ultimately recommending to the Board of
Trustees whether a subadvisor's contract should be renewed. The Consulting
Group provides written reports to the Trustees regarding the results of its
evaluation and monitoring functions.
The Portfolios rely upon an exemptive order from the Securities and Exchange
Commission which permits the manager to select new subadvisors or replace ex-
isting subadvisors without first obtaining shareholder approval. The Trustees,
including a majority of the "non-interested" Trustees, must approve each new
subadvisory contract. This allows the manager to act more quickly to change
subadvisors when it determines that a change is beneficial to shareholders by
avoiding the delay of calling and holding shareholder meetings to approve each
change. In accordance with the exemptive order, the Portfolios will provide in-
vestors with information about each new subadvisor and its subadvisory contract
within 90 days of the engagement of a new subadvisor.
44
Consulting Group Capital Markets Funds
<PAGE>
The Manager, continued
The subadvisors, portfolio managers and the percentage of Portfolio assets each
subadvisor manages are described below.
<TABLE>
<CAPTION>
Fund Subadvisor Percentage Portfolio Manager
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Large Capitalization Growth Barclays Global Fund Advisors 60% Barclays uses a team management
Investments 45 Fremont Street approach to manage indexed
San Francisco, CA 94105 portfolios.
TCW Investment Management 20% Glen Bickerstaff
Company Mr. Bickerstaff has been
865 South Figueroa Street responsible for the day-to-day
Suite 1800 management of the Portfolio
Los Angeles, CA 90017 since 2000. He joined the firm
in 1998. Prior to joining TCW,
he was a senior portfolio
manager of Transamerica
Investments Services.
Turner Investment Partners, 20% Robert Turner, CFA
Inc. Mr. Turner has been primarily
1235 Westlakes Drive responsible for the day-to-day
Suite 350 management of the Portfolio
Berwyn, PA 19312 since 2000. He has been
chairman and chief investment
officer of the firm since 1990
and has 19 years of investment
experience.
Large Capitalization Value The Boston Company Asset 20% Robert J. Eastman
Equity Investments Management L.L.C. Mr. Eastman has been
One Boston Place responsible for the day-to-day
Boston, MA 02108 management of the Portfolio
since 1996. He has been a vice
president of the firm since
1991.
Parametric Portfolio Associates 10% David Stein
7310 Columbia Center Tom Seto
701 Fifth Avenue Mr. Stein has been primarily
Seattle, WA 98164 responsible for the day-to-day
management of the Portfolio
since 1996. Mr. Stein, a
managing director of
Parametric, joined the firm in
1997 and has had 13 years of
investment experience. Mr. Seto
is a portfolio manager and
joined Parametric in 1998 and
has 8 years of investment
experience.
Barclays Global Fund Advisors 50% Barclays uses a team management
45 Fremont Street approach to manage indexed
San Francisco, CA 94105 portfolios.
Chartwell Investment Partners 20% Bernard Schaffer
1235 Westlakes Drive, Suite 330 Mr. Schaffer has been primarily
Berwyn, PA 19312 responsible for the day-to-day
management of the Portfolio
since 1999. He has been with
Chartwell since 1997 and has
had 29 years of investment
experience.
</TABLE>
45
Consulting Group Capital Markets Funds
<PAGE>
The Manager, continued
<TABLE>
<CAPTION>
Fund Subadvisor Percentage Portfolio Manager
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Capitalization Growth Mellon Capital Management 40% Mellon uses a team management
Investments Corporation approach to manage indexed
595 Market Street, Suite 3000 portfolios.
San Francisco, CA 94105
Wall Street Associates 20% William Jeffery, III
1200 Prospect Street, Suite 100 Kenneth McCain
La Jolla, CA 92037 Messrs. Jeffery and McCain have
been primarily responsible for
the day-to-day management of
the Portfolio since 1997.
Messrs. Jeffery and McCain are
founding partners of the firm
and have over 25 years of
investment experience.
Westpeak Investment Advisors, 15% Gerald Scriver
L.P. Mr. Scriver has been primarily
1011 Walnut Street, Suite 400 responsible for the day-to-day
Boulder, CO 80302 management of the Portfolio
since 1997. He has been
president, chief investment
officer and chief executive
officer of the firm since its
inception in 1991.
Kern Capital Management LLC 114 15% David G. Kern
West 47th Street, Suite 1926 Mr. Kern has been primarily
New York, NY 10036 responsible for the day-to-day
management of the Portfolio
since 1999. He has been with
Kern since 1997 and has had 13
years of investment experience.
Westfield Capital Management 10% Randall Watts
Co., Inc. Mr. Watts has been primarily
One Financial Center responsible for the day-to-day
Boston, MA 02111 management of the Portfolio
since 2000. He has been with
Westfield since 1992 and has 10
years of investment experience.
Small Capitalization Value Mellon Capital Management 60% Mellon uses a team management
Equity Investments Corporation approach to manage indexed
595 Market Street, Suite 3000 portfolios.
San Francisco, CA 94105
NFJ Investment Group 25% Benno Fischer
2121 San Jacinto Street, Paul Magnuson
Suite 1840 Messrs. Fischer and Magnuson
Dallas, TX 75201 have been responsible for the
day-to-day management of the
Portfolio since 1993. Mr.
Fischer is a managing director
and has been with NFJ since
1989. Mr. Magnuson is a
portfolio manager and has been
with NFJ since 1992.
</TABLE>
46
Consulting Group Capital Markets Funds
<PAGE>
The Manager, continued
<TABLE>
<CAPTION>
Fund Subadvisor Percentage Portfolio Manager
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Capitalization Value Rutabaga Capital Management LLC 15% Peter Schliemann
Equity Investments-- Two Oliver Street Mr. Schliemann has been
(Continued) Boston, MA 02109 primarily responsible for the
day-to-day management of the
Portfolio since 2000. Mr.
Schliemann founded Rutabaga in
1999, and is President. Prior
to founding Rutabaga, he was a
director, executive vice
president and portfolio manager
of David L. Babson & Co. Inc.
International Equity State Street Global Advisors 40% State Street utilizes a team
Investments Two International Place management approach.
Boston, MA 02110
Oechsle International Advisors, 30% Kathleen Harris
LLC Ms. Harris had shared
One International Place management responsibility since
Boston, MA 02110 1997. She has been with Oechsle
since 1997. Previously, Ms.
Harris was portfolio manager
and investment director for the
State of Wisconsin Investment
Board, where she managed the
fund's international equity
assets. Prior to that time, she
was a fund manager and equity
analyst for the Northern Trust
Company.
Scudder Kemper Investments, Inc. 30% Scudder uses a team management
345 Park Avenue approach.
New York, NY 10154
Emerging Markets Equity State Street Global Advisors 20% State Street uses a team
Investments Two International Place management approach.
Boston, MA 02110
Foreign & Colonial Emerging 30% Foreign & Colonial utilizes a
Markets Ltd. team management approach.
8th Floor
Exchange House
Primrose Street
London EC2A 2NY
England
Baring Asset Management, Inc. 50% Baring utilizes a team
125 High Street management approach.
Boston, MA 02110
</TABLE>
47
Consulting Group Capital Markets Funds
<PAGE>
The Manager, continued
<TABLE>
<CAPTION>
Fund Subadvisor Percentage Portfolio Manager
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Investments Laurel Capital Advisors, LLP 60% Bert Mullins
One Mellon Bank Center, Mr. Mullins is a senior vice
Suite 151-3925 president and has been with the
Pittsburgh, PA 15258 firm for 9 years and has had 34
years of investment experience.
He has been primarily
responsible for the day-to-day
management of the Portfolio
since January 1999.
Seix Investment Advisors 40% Christina Seix
300 Tice Boulevard Ms. Seix is Chairman and Chief
Woodcliff Lake, NJ 07675 Investment Officer of the firm.
She has been with the firm for
8 years and has had 27 years of
investment experience. Ms. Seix
has been primarily responsible
for the day-to-day management
of the portfolio since January
1999.
Intermediate Fixed Income Metropolitan West Asset 20% MWAM utilizes a
Investments Management, LLC team management approach.
11766 Wilshire Boulevard
Suite 1580
Los Angeles, CA 90025
Pacific Investment Management 40% William C. Powers
Company Mr. Powers is a Managing
840 Newport Center Drive, Director at Pacific Investment
Suite 300 Management Company and has been
Newport Beach, CA 92660 with the firm for 10 years. He
has had 17 years of investment
experience.
Black Rock Financial 40% Black Rock utilizes a team
Management, Inc. approach.
345 Park Avenue
New York, NY 10154
Long-Term Bond Investments Western Asset Management 100% Western utilizes a team
Company management approach.
117 East Colorado Boulevard
Pasadena, CA 91105
Mortgage Backed Investments Utendahl Capital Management CFI 100% Utendahl utilizes a team
(Successor to Atlantic management approach.
Portfolio Analytics &
Management, Inc.)
201 East Pine Street,
Suite 825
Orlando, FL 32801
High Yield Investments Alliance Capital Management 100% Alliance
L.P. 1345 Avenue of the utilizes a
Americas team management
New York, NY 10105 approach.
</TABLE>
48
Consulting Group Capital Markets Funds
<PAGE>
The Manager, continued
<TABLE>
<CAPTION>
Fund Subadvisor Percentage Portfolio Manager
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Multi-Sector Fixed Income Metropolitan West Asset 50% MWAM utilizes a
Investments Management, LLC team management
approach
11766 Wilshire Boulevard
Suite 1580
Los Angeles, CA 90025
Western Asset Management 20% Western utilizes
a team
Company management approach.
117 East Colorado Boulevard
Pasadena, CA 91105
Utendahl Capital Management CFI 20% Utendahl utilizes a team
management approach.
201 East Pine Street, Suite 825
Orlando, FL 32801
Alliance Capital Management 10% Nelson R. Jantzen
L.P. 1345 Avenue of the Sheryl A. Rothman
Americas Mr. Jantzen is a senior vice
New York, NY 10105 president and co-head of the
High Yield Group and has had 26
years of investment experience.
Ms. Rothman is a senior vice
president and portfolio manager
and has 16 years of investment
experience.
International Fixed Income Julius Baer Investment 100% Edward Dove
Investments Management Inc. Mr. Dove has been primarily
330 Madison Avenue responsible for the day-to-day
New York, NY 10017 management of the Portfolio
since 1992. He is a Director of
Fixed Income and Portfolio
Manager at Julius Baer and has
had 19 years of investment
experience.
Municipal Bond Investments Smith Affiliated Capital 100% Smith utilizes a team
Corporation management approach.
880 Third Avenue
New York, NY 10022
Government Money Investments Standish Ayer & Wood, Inc. 100% Jennifer Pline
One Financial Center Ms. Pline has been primarily
Boston, MA 02111 responsible for the day-to-day
management of the Portfolio
since its inception in 1991.
Ms. Pline is a Vice President
and joined Standish in 1987.
</TABLE>
49
Consulting Group Capital Markets Funds
<PAGE>
The Manager, continued
Management Fees. The Consulting daily net assets for administra-
Group receives fees from each tion services. The Consulting
Portfolio for its services. In Group and SSB Citi may voluntar-
turn, the Consulting Group pays ily waive a portion or all of
the subadvisors a portion of their respective fees otherwise
this fee for their services. In payable to them. The chart below
addition, each Portfolio pays SSB shows the management fees paid by
Citi a fee at an annual rate of each Portfolio.
0.20% of its average
<TABLE>
<CAPTION>
Actual
Management
Fee Paid
During
Most
Recent
Management Fiscal
Portfolio Fee Year
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Large Capitalization Growth Investments 0.60% 0.40%
Large Capitalization Value Equity Investments 0.60% 0.47%
Small Capitalization Growth Investments 0.80% 0.62%
Small Capitalization Value Equity Investments 0.80% 0.56%
International Equity Investments 0.70% 0.57%
Emerging Markets Equity Investments 0.90% 0.90%
Balanced Investments 0.60% 0.58%
Intermediate Fixed Income Investments 0.40% 0.41%
Long-Term Bond Investments 0.40% 0.40%
Mortgage Backed Investments 0.50% 0.50%
High Yield Investments 0.70% 0.70%
Multi-Sector Fixed Income Investments 0.65% 0.36%
International Fixed Income Investments 0.50% 0.50%
Municipal Bond Investments 0.40% 0.40%
Government Money Investments 0.15% 0.13%
</TABLE>
Possible Conflict of Interest. The advisory fee paid by each Portfolio in the
Trust to the manager and the portion of that advisory fee paid by the manager
to each subadvisor varies depending upon the Portfolio of the Trust selected.
For this reason, the manager could retain a larger portion of the advisory fee
by recommending to clients in its asset allocation program certain Portfolios
in the Trust over other Portfolios for asset allocation. You should consider
this possible conflict of interest when evaluating the manager's asset alloca-
tion recommendation. The manager intends to comply with standards of fiduciary
duty that require it to act solely in the best interest of a participant when
making investment recommendations.
Consulting Group Capital Markets Funds
50
<PAGE>
Asset Allocation Programs
Shares of the Trust's Portfolios are available to participants in advisory pro-
grams or asset based fee programs sponsored by Salomon Smith Barney Inc., in-
cluding the TRAK(R) Personalized Investment Advisory Service, or other quali-
fied investment advisors approved by the Consulting Group. The advisory serv-
ices provide investors with asset allocation recommendations, which are imple-
mented through the Portfolios.
Advisory services generally include:
. evaluating the investor's investment objectives and time horizon
. analyzing the investor's risk tolerance
. recommending an allocation of assets among the Portfolios in the Trust
. providing monitoring reports containing an analysis and evaluation of an in-
vestor's account and recommending any changes
While an advisory service makes a recommendation, the ultimate investment deci-
sion is up to the investor and not the provider of the advisory service.
Under an advisory service, an investor typically pays an advisory fee that may
vary based on a number of factors. The maximum fee for assets invested in the
Trust under a Salomon Smith Barney advisory service is 1.50% of average quar-
ter-end net assets. This fee may be reduced in certain circumstances. The fee
under a Salomon Smith Barney advisory program may be paid either by redemption
of shares of the Trust or by separate payment.
51
Consulting Group Capital Markets Funds
<PAGE>
Investment and Account Information
Account Transactions
Purchase of Shares. You may purchase shares of a Portfolio if you are a partic-
ipant in an advisory program or asset based fee program sponsored by Salomon
Smith Barney, including TRAK(R), or by qualified investment advisors not affil-
iated with Salomon Smith Barney. Purchases of shares of a Portfolio must be
made through a brokerage account maintained with Salomon Smith Barney or
through a broker that clears securities transactions through Salomon Smith Bar-
ney (an introducing broker). You may establish a brokerage account with Salomon
Smith Barney free of charge in order to purchase shares of a Portfolio.
. The minimum initial aggregate investment in the TRAK program is $10,000. The
minimum investment in a Portfolio is $100.
. There is no minimum on additional investments.
. The minimum initial aggregate investment in the TRAK program for employees of
Salomon Smith Barney and members of their immediate families, and retirement
accounts or plans for those persons, is $5,000.
. The Portfolios and the TRAK program may vary or waive the investment minimums
at any time.
. You may establish a Systematic Withdrawal/Investment Schedule. For more in-
formation, contact your Investment Professional or consult the SAI.
Shares of the Portfolios are sold at net asset value per share without imposi-
tion of a sales charge but will be subject to any applicable advisory program
fee. All orders to purchase accepted by Salomon Smith Barney or the introducing
broker before 4:00 p.m., Eastern time, will receive that day's share price. Or-
ders accepted after 4:00 p.m. will receive the next day's share price. All pur-
chase orders must be in good order to be accepted. This means you have provided
the following information:
. Name of the Portfolio
. Account Number
. Dollar amount or number of shares to be purchased
. Signatures of each owner exactly as the account is registered
Each Portfolio reserves the right to reject purchase orders or to stop offering
its shares without notice. No order will be accepted unless Salomon Smith Bar-
ney has received and accepted an advisory agreement signed by the investor par-
ticipating in the TRAK(R) program or other advisory program sponsored by Salo-
mon Smith Barney. With respect to investors participating in advisory programs
sponsored or asset based fee program by entities other than Salomon Smith
Barney, Salomon Smith Barney
must have received and accepted the appropriate documents before the order will
be accepted. Payment for shares must be received by Salomon Smith Barney or the
introducing broker within three business days after the order is placed in good
order.
Redemption of Shares. You may sell shares of a Portfolio at net asset value on
any day the New York Stock Exchange is open by contacting your broker. All re-
demption requests accepted by Salomon Smith Barney or an introducing broker be-
fore 4:00 p.m. Eastern time on any day will be executed at that day's share
price. Orders accepted after 4:00 p.m. will be executed at the next day's
price. All redemption orders must be in good form, which may require a signa-
ture guarantee (available from most banks, dealers, brokers, credit unions and
federal savings and loan associations, but not from a notary public) to assure
the safety of your account. If you discontinue your Salomon Smith Barney advi-
sory service, you must redeem your shares in the Portfolios.
Each Portfolio has the right to suspend redemptions of shares and to postpone
the transmission of redemption proceeds to a shareholder's account at Salomon
Smith Barney or at an introducing broker for up to seven days, as permitted by
law. Redemption proceeds held in an investor's brokerage account generally will
not earn any income and Salomon Smith Barney or the introducing broker may ben-
efit from the use of temporarily uninvested funds. A shareholder who pays for
shares of a Portfolio by personal check will be credited with the proceeds of a
redemption of those shares after the purchaser's check has cleared, which may
take up to 15 days.
Exchange of Shares. An investor that participates in an advisory program may
exchange shares in a Portfolio for shares in any other Portfolio in the Trust
at net asset value without payment of an exchange fee. Be sure to consider the
investment objectives and policies of any Portfolio into which you make an ex-
change. An exchange is a taxable transaction except for exchanges within a re-
tirement account.
The Consulting Group may limit additional exchanges and/or purchases by a
shareholder if it determines that the shareholder is pursuing a pattern of fre-
quent exchanges. Excessive exchange transactions can adversely affect a Portfo-
lio's performance, hurting the Portfolio's other shareholders. If the Consult-
ing Group discovers a pattern of frequent exchanges, it will provide notice in
writing or by telephone to the shareholder at least 15 days before suspending
his or her exchange privilege. During the 15-day period the shareholder will be
re-
52
Consulting Group Capital Markets Funds
<PAGE>
Investment and Account Information, continued
quired either to redeem his or her shares in the Portfolio or establish an al-
location which the shareholder expects to maintain for a significant period of
time.
Accounts with Low Balances. If your account falls below $7,500 as a result of
redemptions (and not because of performance or payment of the Salomon Smith
Barney Advisory Service fees), Salomon Smith Barney or the introducing broker
may ask you to increase the size of your account to $7,500 within thirty days.
If you do not increase the account to $7,500, Salomon Smith Barney may redeem
the shares in your account at net asset value and remit the proceeds to you.
The proceeds will be deposited in your brokerage account unless you instruct
otherwise.
Valuation of shares
Each Portfolio offers its shares at their net asset value per share. Each Port-
folio calculates net asset value once daily as of the close of regular trading
on the New York Stock Exchange (generally at 4:00 p.m., New York time) on each
day the exchange is open. The exchange is closed on certain holidays listed in
the SAI. If the exchange closes early, the Portfolio accelerates calculation of
net asset value and transaction deadlines to the actual closing time.
A Portfolio generally values its fund securities based on market prices or quo-
tations. A Portfolio's currency conversions, if any, are done when the London
stock exchange closes. When reliable market prices or quotations are not avail-
able, or when the Consulting Group believes they are unreliable or that the
value of a security has been materially affected by events occurring after the
securities or currency exchanges close, a Portfolio may price those securities
at fair value. Fair value is determined in accordance with procedures approved
by the Portfolios' Board of Trustees. A mutual fund that uses fair value to
price securities may value those securities higher or lower than another fund
using market quotations to price the same securities.
International markets may be open, and trading may take place, on days when
U.S. markets are closed. For this reason, the values of foreign securities
owned by a Portfolio could change on days when shares of the Portfolio cannot
be bought or redeemed.
Dividends and distributions
Each Portfolio intends to distribute all or substantially all of its net in-
vestment income and realized capital gains, if any, for each taxable year. Gov-
ernment Money Investments declares dividends, if any, from net investment in-
come daily and pays dividends monthly. Shareholders in Government Money Invest-
ments receive dividends from the day following purchase through the date of
redemption. The other fixed income oriented Portfolios and Balanced Investments
declare and pay dividends, if any, from net investment income monthly. The eq-
uity oriented Portfolios declare and pay dividends, if any, from net investment
income annually. All of the Portfolios declare and distribute realized net cap-
ital gains, if any, annually, typically in December. All dividends and capital
gains are reinvested in shares of the Portfolio that paid them unless the
shareholder elects to receive them in cash.
The equity oriented Portfolios expect distributions to be primarily from capi-
tal gains. Balanced Investments expects distributions to be from both capital
gains and income. The fixed income oriented Portfolios expect distributions to
be primarily from income.
Taxes
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Transactions Federal Tax Status
------------------------------------------------------------------------------
<S> <C>
Sales or exchange of shares Usually capital gain
or loss (except no
gain or loss for
Government Money
Investments); long-
term only if shares
owned more than one
year
------------------------------------------------------------------------------
Distributions of long term Long-term capital
capital gain gain
------------------------------------------------------------------------------
Distributions of short term Ordinary income
capital gain
------------------------------------------------------------------------------
Dividends from net Ordinary income (for
investment income all Portfolios
except Municipal
Bond Investments)
------------------------------------------------------------------------------
Any of the above received by Not a taxable event
a retirement account
------------------------------------------------------------------------------
</TABLE>
Long-term capital gain distributions are taxable to you as long-term capital
gain regardless of how long you have owned your shares. You may want to avoid
buying shares when a Portfolio is about to declare a capital gain distribution
or a taxable dividend, because it will be taxable to you even though it may ac-
tually be a return of a portion of your investment.
Dividends paid by Municipal Bond Investments that are derived from interest
earned on qualifying tax-exempt obligations are expected to be "exempt-inter-
est" dividends that shareholders may exclude from their gross incomes for fed-
eral income tax purposes if the Portfolio satisfies certain asset percentage
requirements.
53
Consulting Group Capital Markets Funds
<PAGE>
Investment and Account Information, continued
After the end of each year, you will receive a Form 1099 indicating your divi-
dends and distributions for the prior year, which are taxable as described
above even if reinvested, and your redemptions during that year. If you do not
provide the Portfolios with your correct taxpayer identification number and any
required certifications, you may be subject to backup withholding of 31% of a
Portfolio's distributions, dividends (other than exempt-interest dividends) and
redemption proceeds. Because each shareholder's circumstances are different and
special tax rules may apply, you should consult your tax adviser about your in-
vestment in a Portfolio.
As noted above, investors, out of their own assets, will pay an advisory serv-
ice fee. For most investors who are individuals, this fee will be treated as a
"miscellaneous itemized deduction" for federal income tax purposes. Under cur-
rent federal income tax law, an individual's miscellaneous itemized deductions
for any taxable year will be allowed as a deduction only to the extent the ag-
gregate of these deductions exceeds 2% of adjusted gross income. Such deduc-
tions are also subject to the general limitation on itemized deductions for in-
dividuals having, in 2000, adjusted gross income in excess of $128,950 ($64,475
for married individuals filing separately).
54
Consulting Group Capital Markets Funds
<PAGE>
Financial Highlights
The financial highlights tables are intended to help you understand the perfor-
mance of each portfolio for the past five years(or since inception if less than
5 years). The information in the follow-
ing tables was audited by KPMG LLP, independent auditors, whose report, along
with each portfolio's financial statements, is included in the annual report
(available upon request). Certain information reflects financial results for a
single share. Total return represents the rate that a shareholder would have
earned (or lost) on a share of a fund assuming reinvestment of all dividends
and distributions.
For a share of beneficial interest
outstanding throughout each year ended August
31:
Large Capitalization Growth Investments
-------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year $24.35 $17.30 $17.27 $13.10 $12.13
--------------------------------------------------------------
Income (Loss) From
Operations:
Net investment income (loss) (0.04) 0.01 0.04 0.07 0.07
Net realized and unrealized
gain 7.87 7.87 1.31 4.72 1.46
--------------------------------------------------------------
Total Income From Operations 7.83 7.88 1.35 4.79 1.53
--------------------------------------------------------------
Less Distributions From:
Net investment income -- (0.01) (0.08) (0.08) (0.06)
Net realized gains (2.85) (0.82) (1.24) (0.54) (0.50)
--------------------------------------------------------------
Total Distributions (2.85) (0.83) (1.32) (0.62) (0.56)
--------------------------------------------------------------
Net Asset Value, End of Year $29.33 $24.35 $17.30 $17.27 $13.10
--------------------------------------------------------------
Total Return 34.31% 46.29% 7.81% 37.47% 12.89%
--------------------------------------------------------------
Net Assets, End of Year
(millions) $2,758 $2,326 $1,793 $1,845 $1,205
--------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.71% 0.68% 0.76% 0.69% 0.83%
Net investment income (loss) (0.15) 0.06 0.16 0.50 0.63
--------------------------------------------------------------
Portfolio Turnover Rate 59% 34% 39% 65% 40%
--------------------------------------------------------------
Large Capitalization Value Equity Investments
-------------------------------------------------------------
<CAPTION>
2000 1999 1998 1997 1996
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year $13.53 $12.28 $14.91 $11.55 $10.42
--------------------------------------------------------------
Income From Operations:
Net investment income 0.17 0.17 0.16 0.23 0.26
Net realized and unrealized
gain 0.31 2.94 0.08 4.09 1.25
--------------------------------------------------------------
Total Income From Operations 0.48 3.11 0.24 4.32 1.51
--------------------------------------------------------------
Less Distributions From:
Net investment income (0.17) (0.18) (0.11) (0.34) (0.24)
Net realized gains (1.91) (1.68) (2.76) (0.62) (0.14)
--------------------------------------------------------------
Total Distributions (2.08) (1.86) (2.87) (0.96) (0.38)
--------------------------------------------------------------
Net Asset Value, End of Year $11.93 $13.53 $12.28 $14.91 $11.55
--------------------------------------------------------------
Total Return 4.00% 26.36% 0.03% 38.98% 14.75%
--------------------------------------------------------------
Net Assets, End of Year
(millions) $1,933 $1,946 $1,712 $1,935 $1,512
--------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.78% 0.75% 0.80% 0.78% 0.80%
Net investment income 1.34 1.10 1.18 1.70 2.31
--------------------------------------------------------------
Portfolio Turnover Rate 78% 54% 57% 70% 24%
--------------------------------------------------------------
</TABLE>
55
Consulting Group Capital Markets Funds
<PAGE>
Financial Highlights, continued
Small Capitalization Growth Investments
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000(1) 1999 1998 1997 1996
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $17.93 $12.83 $18.29 $17.79 $17.19
------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.11) (0.07) (0.07) (0.06) (0.08)
Net realized and unrealized gain (loss) 8.66 5.68 (4.23) 2.87 3.36
------------------------------------------------------------------------------
Total Income (Loss) From Operations 8.55 5.61 (4.30) 2.81 3.28
------------------------------------------------------------------------------
Less Distributions From:
Net realized gains (2.12) (0.51) (1.16) (2.31) (2.68)
------------------------------------------------------------------------------
Total Distributions (2.12) (0.51) (1.16) (2.31) (2.68)
------------------------------------------------------------------------------
Net Asset Value, End of Year $24.36 $17.93 $12.83 $18.29 $17.79
------------------------------------------------------------------------------
Total Return 50.57% 44.32% (25.10)% 17.53% 21.33%
------------------------------------------------------------------------------
Net Assets, End of Year (millions) $1,572 $1,109 $859 $777 $494
------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.98% 0.93% 1.01% 0.90% 1.00%
Net investment loss (0.50) (0.39) (0.43) (0.39) (0.49)
------------------------------------------------------------------------------
Portfolio Turnover Rate 110% 108% 91% 81% 83%
------------------------------------------------------------------------------
</TABLE>
Small Capitalization Value Equity Investments
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998(1) 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.56 $11.11 $14.45 $11.11 $10.01
-----------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.20 0.19 0.17 0.19 0.16
Net realized and unrealized gain (loss) 0.30 1.28 (1.66) 4.22 1.08
-----------------------------------------------------------------------------
Total Income (Loss) From Operations 0.50 1.47 (1.49) 4.41 1.24
-----------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.16) (0.20) (0.13) (0.19) (0.14)
Net realized gains (0.18) (1.82) (1.72) (0.88) --
-----------------------------------------------------------------------------
Total Distributions (0.34) (2.02) (1.85) (1.07) (0.14)
-----------------------------------------------------------------------------
Net Asset Value, End of Year $10.72 $10.56 $11.11 $14.45 $11.11
-----------------------------------------------------------------------------
Total Return 5.09% 13.61% (12.84)% 42.40% 12.48%
-----------------------------------------------------------------------------
Net Assets, End of Year (millions) $852 $744 $740 $622 $479
-----------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.91% 0.96% 0.94% 0.90% 0.95%
Net investment income 2.12 1.70 1.45 1.62 1.52
-----------------------------------------------------------------------------
Portfolio Turnover Rate 72% 53% 59% 53% 39%
-----------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
56
Consulting Group Capital Market Funds
<PAGE>
Financial Highlights (continued)
International Equity Investments
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.43 $10.69 $10.63 $10.49 $10.50
----------------------------------------------------------------------
Income From Operations:
Net investment income 0.14 0.09 0.14 0.09 --
Net realized and unrealized gain 2.19 2.39 0.21 0.87 0.44
----------------------------------------------------------------------
Total Income From Operations 2.33 2.48 0.35 0.96 0.44
----------------------------------------------------------------------
Less Distributions From:
Net investment income (0.11) (0.15) (0.17) (0.12) (0.17)
Net realized gains (1.15) (0.59) (0.12) (0.70) (0.28)
----------------------------------------------------------------------
Total Distributions (1.26) (0.74) (0.29) (0.82) (0.45)
----------------------------------------------------------------------
Net Asset Value, End of Year $13.50 $12.43 $10.69 $10.63 $10.49
----------------------------------------------------------------------
Total Return 19.17% 24.06% 3.53% 9.53% 4.23%
----------------------------------------------------------------------
Net Assets, End of Year (millions) $1,569 $1,385 $1,331 $1,136 $844
----------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(1) 0.94% 0.82% 0.90% 0.97% 1.00%
Net investment income (loss) 0.54 0.90 1.23 0.70 (0.12)
----------------------------------------------------------------------
Portfolio Turnover Rate 75% 45% 45% 32% 50%
----------------------------------------------------------------------
</TABLE>
(1) During the year ended August 31, 1996, the portfolio earned credits from
the custodian which reduced service fees incurred. If the credits are taken
into consideration, the ratio of expenses to average net assets for
International Equity Investments would be 1.00%; prior year numbers have
not been restated to reflect these numbers.
57
Consulting Group Capital Markets Funds
<PAGE>
Financial Highlights, continued
Emerging Markets Equity Investments
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000(1) 1999(1) 1998 1997 1996
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $6.74 $4.37 $9.31 $8.50 $7.85
--------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (loss)(2) (0.02) 0.05 0.06 0.04 0.03
Net realized and unrealized gain
(loss) 0.67 2.36 (4.44) 0.79 0.62
--------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.65 2.41 (4.38) 0.83 0.65
--------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.04) (0.04) (0.10) (0.01) --
Net realized gains -- -- (0.46) (0.01) --
--------------------------------------------------------------------------------
Total Distributions (0.04) (0.04) (0.56) (0.02) --
--------------------------------------------------------------------------------
Net Asset Value, End of Year $7.35 $6.74 $4.37 $9.31 $8.50
--------------------------------------------------------------------------------
Total Return 9.62% 55.37% (49.49)% 9.88% 8.28%
--------------------------------------------------------------------------------
Net Assets, End of Year (000s) $305,066 $317,626 $230,526 $226,280 $97,489
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2)(3) 1.66% 1.72% 1.69% 1.60% 1.84%
Net investment income (loss) (0.24) 0.84 0.80 0.39 0.26
--------------------------------------------------------------------------------
Portfolio Turnover Rate 110% 135% 139% 105% 106%
--------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) Expense ratios and the per share decreases in net investment income before
fee waivers and/or expense reimbursements were as follows:
<TABLE>
<CAPTION>
Expense Ratios
Net Investment Without
Income Per Waivers and/or
Share Decrease Reimbursements
Portfolio 1996 1996
-------------------------------------------------------------------
<S> <C> <C>
Emerging Markets Equity Investments $0.01 1.97%
</TABLE>
(3) During the year ended August 31, 1996, the portfolio earned credits from
the custodian which reduced service fees incurred. If the credits are taken
into consideration, the ratio of expenses to average net assets for
Emerging Markets Equity Investments would be 1.80%; prior year numbers have
not been restated to reflect these numbers.
58
Consulting Group Capital Markets Funds
<PAGE>
Financial Highlights, continued
Balanced Investments
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year $11.41 $10.87 $12.01 $10.00 $9.37
------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(1) 0.30 0.25 0.26 0.27 0.29
Net realized and unrealized gain
(loss) 1.19 1.74 (0.53) 2.27 0.95
------------------------------------------------------------------------------
Total Income (Loss) From
Operations 1.49 1.99 (0.27) 2.54 1.24
------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.24) (0.29) (0.30) (0.27) (0.28)
Net realized gains (1.48) (1.16) (0.57) (0.26) (0.33)
------------------------------------------------------------------------------
Total Distributions (1.72) (1.45) (0.87) (0.53) (0.61)
------------------------------------------------------------------------------
Net Asset Value, End of Year $11.18 $11.41 $10.87 $12.01 $10.00
------------------------------------------------------------------------------
Total Return 14.45% 18.78% (2.85)% 26.05% 13.60%
------------------------------------------------------------------------------
Net Assets, End of Year (000s) $58,810 $74,866 $68,470 $89,789 $50,281
------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(1) 1.00% 0.85% 1.00% 1.00% 1.00%
Net investment income 2.60 1.77 1.92 2.49 2.85
------------------------------------------------------------------------------
Portfolio Turnover Rate 303% 332% 57% 67% 47%
------------------------------------------------------------------------------
Intermediate Fixed Income Investments
------------------------------------------------------------------------------
<CAPTION>
2000 1999 1998 1997 1996
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year $7.83 $8.19 $8.06 $7.92 $8.10
------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.48 0.44 0.48 0.50 0.50
Net realized and unrealized gain
(loss) (0.05) (0.35) 0.15 0.14 (0.17)
------------------------------------------------------------------------------
Total Income From Operations 0.43 0.09 0.63 0.64 0.33
------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.44) (0.45) (0.50) (0.50) (0.51)
------------------------------------------------------------------------------
Total Distributions (0.44) (0.45) (0.50) (0.50) (0.51)
------------------------------------------------------------------------------
Net Asset Value, End of Year $7.82 $7.83 $8.19 $8.06 $7.92
------------------------------------------------------------------------------
Total Return 5.73% 1.07% 8.00% 8.23% 4.08%
------------------------------------------------------------------------------
Net Assets, End of Year (000s) $564,715 $594,666 $574,998 $384,094 $296,053
------------------------------------------------------------------------------
Ratios to Average Net Assets:
Total expenses 0.78% 0.61% 0.73% 0.73% 0.73%
Interest expense 0.03 -- -- -- --
Other expenses 0.75 0.61 0.73 0.73 0.73
Net investment income 6.02 4.53 5.95 6.19 5.78
------------------------------------------------------------------------------
Portfolio Turnover Rate 195% 207% 63% 118% 98%
------------------------------------------------------------------------------
</TABLE>
(1) Expense ratios and the per share decreases in net investment income before
fee waivers and/or expense reimbursements were as follows:
<TABLE>
<CAPTION>
Net Investment Income Expense Ratios Without Waivers
Per Share Decrease and/or Reimbursements
Portfolio 2000 1999 1998 1997 1996 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced Investments $0.02 N/A N/A $0.00* $0.03 1.16% N/A N/A 1.02% 1.26%
</TABLE>
* Amount represents less than $0.01 per share.
59
Consulting Group Capital Markets Funds
<PAGE>
Financial Highlights (continued)
Long-Term Bond Investments
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year $7.70 $9.05 $8.26 $7.87 $8.23
-------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.48 0.49 0.52 0.53 0.51
Net realized and unrealized gain
(loss) 0.21 (1.00) 0.78 0.46 (0.41)
-------------------------------------------------------------------------------
Total Income (Loss) From
Operations 0.69 (0.51) 1.30 0.99 0.10
-------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.48) (0.50) (0.51) (0.59) (0.46)
Net realized gains (0.05) (0.34) -- -- --
Capital (0.01) -- -- (0.01) --
-------------------------------------------------------------------------------
Total Distributions (0.54) (0.84) (0.51) (0.60) (0.46)
-------------------------------------------------------------------------------
Net Asset Value, End of Year $7.85 $7.70 $9.05 $8.26 $7.87
-------------------------------------------------------------------------------
Total Return 9.50% (6.19)% 16.22% 12.93% 1.11%
-------------------------------------------------------------------------------
Net Assets, End of Year (000s) $75,091 $115,355 $157,612 $183,051 $155,910
-------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.92% 0.80% 0.82% 0.78% 0.80%
Net investment income 6.18 5.81 5.96 6.54 6.18
-------------------------------------------------------------------------------
Portfolio Turnover Rate 358% 30% 63% 34% 125%
-------------------------------------------------------------------------------
Mortgage Backed Investments
-------------------------------------------------------------------------------
<CAPTION>
2000 1999 1998 1997 1996(1)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year $7.73 $8.13 $7.96 $7.74 $7.91
-------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(2) 0.49 0.45 0.46 0.48 0.48
Net realized and unrealized gain
(loss) 0.08 (0.34) 0.19 0.25 (0.14)
-------------------------------------------------------------------------------
Total Income From Operations 0.57 0.11 0.65 0.73 0.34
-------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.46) (0.45) (0.48) (0.51) (0.48)
Net realized gains -- (0.05) -- -- --
Capital -- (0.01) -- -- (0.03)
-------------------------------------------------------------------------------
Total Distributions (0.46) (0.51) (0.48) (0.51) (0.51)
-------------------------------------------------------------------------------
Net Asset Value, End of Year $7.84 $7.73 $8.13 $7.96 $7.74
-------------------------------------------------------------------------------
Total Return 7.58% 1.30% 8.37% 9.69% 4.37%
-------------------------------------------------------------------------------
Net Assets, End of Year (000s) $100,342 $131,039 $156,043 $136,586 $120,945
-------------------------------------------------------------------------------
Ratios to Average Net Assets:
Total expenses(2)(3) 0.85 0.80% 0.80% 0.80% 0.80%
Interest expense 0.05 -- -- -- --
Other expenses 0.80 0.80 0.80 0.80 0.80
Net investment income 6.26 5.67 5.69 6.08 6.09
-------------------------------------------------------------------------------
Portfolio Turnover Rate 28% 87% 214% 94% 23%
-------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares
method.
</TABLE>
(2) Expense ratios and the per share decreases in net investment income before
fee waivers and/or expense reimbursements were as follows:
<TABLE>
<CAPTION>
Net Investment Income Expense Ratios Without Waivers
Per Share Decrease and/or Reimbursements
Portfolio 2000 1999 1998 1997 1996 2000 1999 1998 1997 1996
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Backed
Investments $0.01 $0.01 $0.01 $0.01 $0.01 0.97% 0.91% 0.93% 0.93% 0.94%
</TABLE>
(3)As a result of a voluntary expense limitation, expense ratios (excluding
interest expense) will not exceed 0.80%.
60
Consulting Group Capital Markets Funds
<PAGE>
Financial Highlights, continued
High Yield Investments
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000(2) 1999(2) 1998(3)
-----------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $7.33 $7.89 $8.00
-----------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(1) 0.69 0.83 0.05
Net realized and unrealized loss (1.37) (0.54) (0.16)
-----------------------------------------------------------------
Total Income (Loss) From Operations (0.68) 0.29 (0.11)
-----------------------------------------------------------------
Less Distributions From:
Net investment income (0.71) (0.83) --
Net realized gains -- (0.02) --
Capital (0.09) -- --
-----------------------------------------------------------------
Total Distributions (0.80) (0.85) --
-----------------------------------------------------------------
Net Asset Value, End of Year $5.85 $7.33 $7.89
-----------------------------------------------------------------
Total Return (9.37)% 3.67% (1.38)%++
-----------------------------------------------------------------
Net Assets, End of Year (000s) $164,056 $155,057 $76,557
-----------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(1) 1.20% 1.19% 1.20%+
Net investment income 11.30 10.62 7.37+
-----------------------------------------------------------------
Portfolio Turnover Rate 129% 122% 13%
-----------------------------------------------------------------
</TABLE>
(1)Expense ratios and the per share decreases in net investment income before
fee waivers and/or expense reimbursements were as follows:
<TABLE>
<CAPTION>
Expense Ratios
Net Investment Income Without Waivers
Per Share Decrease and Reimbursements
Portfolio 1998 1998
-----------------------------------------------------------------
<S> <C> <C>
High Yield Investments 0.01 2.42+
</TABLE>
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) For the period from July 13, 1998 (commencement of operations) to August
31, 1998.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
61
Consulting Group Capital Markets Funds
<PAGE>
Financial Highlights, continued
International Fixed Income Investments
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000(1) 1999(1) 1998 1997 1996
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $8.10 $8.34 $8.21 $9.11 $9.01
--------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.36 0.42 0.51 0.51 0.55
Net realized and unrealized gain
(loss) (0.84) (0.24) 0.31 (0.62) 0.49
--------------------------------------------------------------------------------
Total Income (Loss) From
Operations (0.48) 0.18 0.82 (0.11) 1.04
--------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.06) (0.42) (0.27) (0.55) (0.94)
Net realized gains -- -- (0.34) (0.24) --
Capital (0.32) (0.00)* (0.08) -- --
--------------------------------------------------------------------------------
Total Distributions (0.38) (0.42) (0.69) (0.79) (0.94)
--------------------------------------------------------------------------------
Net Asset Value, End of Year $7.24 $8.10 $8.34 $8.21 $9.11
--------------------------------------------------------------------------------
Total Return (6.13)% 2.30% 10.45% (1.52)% 12.05%
--------------------------------------------------------------------------------
Net Assets, End of Year (000s) $235,566 $236,254 $192,068 $125,610 $129,410
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 0.98% 0.94% 0.97% 0.99% 1.02%
Net investment income 4.70 4.85 5.39 5.87 6.34
--------------------------------------------------------------------------------
Portfolio Turnover Rate 225% 204% 211% 251% 211%
--------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) During the years ended August 31, 1997 and August 31, 1996, the portfolios
earned credits from the custodian which reduced service fees incurred. If
the credits are taken into consideration, the ratio of expenses to average
net assets for International Fixed Income Investments would be 0.97% and
0.97%, respectively; prior year numbers have not been restated to reflect
these numbers.
* Amount represents less than $0.01 per share.
62
Consulting Group Capital Markets Funds
<PAGE>
Financial Highlights (continued)
Municipal Bond Investments
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year $8.22 $8.92 $8.62 $8.26 $8.27
------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(1) 0.37 0.35 0.36 0.38 0.38
Net realized and unrealized gain
(loss) 0.17 (0.57) 0.32 0.34 --
------------------------------------------------------------------------------
Total Income (Loss) From
Operations 0.54 (0.22) 0.68 0.72 0.38
------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.35) (0.35) (0.38) (0.36) (0.39)
In excess of net investment
income -- -- (0.00)* -- --
Net realized gains (0.01) (0.13) -- -- --
------------------------------------------------------------------------------
Total Distributions (0.36) (0.48) (0.38) (0.36) (0.39)
------------------------------------------------------------------------------
Net Asset Value, End of Year $8.40 $8.22 $8.92 $8.62 $8.26
------------------------------------------------------------------------------
Total Return 6.79% (2.60)% 8.09% 8.88% 4.62%
------------------------------------------------------------------------------
Net Assets, End of Year (000s) $48,789 $61,743 $72,511 $52,024 $46,485
------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(1) 0.79% 0.78% 0.80% 0.80% 0.80%
Net investment income 4.50 4.03 4.20 4.50 4.59
------------------------------------------------------------------------------
Portfolio Turnover Rate 37% 142% 160% 31% 29%
------------------------------------------------------------------------------
Government Money Investments
------------------------------------------------------------------------------
<CAPTION>
2000 1999 1998 1997 1996
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year $1.00 $1.00 $1.00 $1.00 $1.00
------------------------------------------------------------------------------
Net investment income(1) 0.05 0.04 0.05 0.05 0.05
Dividends from net investment
income (0.05) (0.04) (0.05) (0.05) (0.05)
------------------------------------------------------------------------------
Net Asset Value, End of Year $1.00 $1.00 $1.00 $1.00 $1.00
------------------------------------------------------------------------------
Total Return 5.44% 4.53% 5.10% 4.98% 5.02%
------------------------------------------------------------------------------
Net Assets, End of Year (000s) $225,756 $303,160 $375,761 $388,713 $278,162
------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(1)(2) 0.60% 0.60% 0.60% 0.60% 0.60%
Net investment income 5.30 4.46 4.99 4.91 4.93
------------------------------------------------------------------------------
</TABLE>
(1) Expense ratios and the per share decreases in net investment income before
fee waivers and/or expense reimbursements were as follows:
<TABLE>
<CAPTION>
Expense Ratios
Net Investment Income Without Waivers
Per Share Decrease and/or Reimbursements
Portfolio 2000 1999 1998 1997 1996 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Municipal Bond
Investments N/A N/A N/A $0.00* $0.02 N/A N/A N/A 0.83% 1.02%
Government Money
Investments $0.02 $0.00* $0.00* 0.01 0.01 0.78% 0.71% 0.66% 0.64 0.72
</TABLE>
(2) As a result of a voluntary expense limitation, expense ratios will not
exceed 0.60%.
* Amount represents less than $0.01 per share.
63
Consulting Group Capital Markets Funds
<PAGE>
Financial Highlights, continued
Multi-Sector Fixed Income Investments
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000(1)(2)
----------------------------------------------
<S> <C>
Net Asset Value, Beginning of Year $8.00
----------------------------------------------
Income From Operations:
Net investment income(3) 0.45
Net realized and unrealized gain 0.06
----------------------------------------------
Total Income From Operations 0.51
----------------------------------------------
Less Distributions From:
Net investment income (0.28)
----------------------------------------------
Total Distributions (0.28)
----------------------------------------------
Net Asset Value, End of Year $8.23
----------------------------------------------
Total Return++ 6.47%
----------------------------------------------
Net Assets, End of Year (000s) $29,989
----------------------------------------------
Ratios to Average Net Assets+:
Expenses(3)(4) 0.80%
Net investment income 6.13
----------------------------------------------
Portfolio Turnover Rate 249%
----------------------------------------------
</TABLE>
(1) For the period from October 1, 1999 (commencement of operations) to August
31, 2000.
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) Expense ratios and the per share decrease in net investment income before
fee waivers and/or expense reimbursements were as follows:
<TABLE>
<CAPTION>
Net Investment Income Expense Ratio Without Waiver
Per Share Decrease and Reimbursements
Portfolio 2000 2000
------------------------------------------------------------------------------
<S> <C> <C>
Multi-Sector Fixed Income
Investments $0.03 1.17%
</TABLE>
(4) As a result of a voluntary expense limitation, expense ratios will not
exceed 0.80%.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
* Amount represents less than $0.01 per share.
64
Consulting Group Capital Markets Funds
<PAGE>
This page intentionally left blank
<PAGE>
APPENDIX A
Investment Indices
Following are definitions of indices that are utilized in the Client's Recom-
mendation 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 Aggregate Bond Index
Composed of the Lehman Intermediate Government/ Corporate Bond Index and the
Mortgage-Backed Securities Index and also includes treasury issues, agency
issues, corporate bond issues and mortgage-backed securities.
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 Balanced Funds Average
An average of the reinvested performance of funds whose primary objective is to
conserve principal by maintaining at all times a balanced portfolio of both
stocks and bonds. Typically, the stock/bond ratio ranges around 60 percent/40
percent, respectively.
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 Emerging Markets Funds Average
An average of the reinvested performance of funds that investing at least 65%
of total assets in emerging market equity securities, where emerging market is
defined by a country's gross national product per capita or other economic
measures.
Lipper General Municipal Debt 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 their 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 International Income Funds Average
An average of the reinvested performance of funds that invest primarily in U.S.
dollar and non-U.S. dollar debt securities located in at least three countries
excluding the United States, except in periods of market weakness.
Lipper Large-Cap Growth Funds Average
An average of the reinvested performance of funds that normally invest in
companies with long-term earnings expected to grow significantly faster than
the earnings of the stocks represented in a major unmanaged stock index. These
funds will normally have an above-average price-to-earnings ratio, price-to-
book ratio and three-year earnings
A-1
<PAGE>
APPENDIX A
Investment Indices--(Continued)
growth figure, compared to the U.S. diversified large-cap
funds universe average. Large-cap funds will generally invest at least 75% of
their assets in companies with market capitalizations (on a three-year weighted
basis) greater than 300% of the dollar-weighted median market capitalization of
the S&P Mid-Cap 400 Index.
Lipper Multi-Cap Value Funds Average
An average of the reinvested performance of funds that normally invest in
companies considered to be undervalued relative to a major unmanaged stock
index based on price-to-current earnings, book value, asset value or other
factors. These funds will normally have a below-average price-to-earnings
ratio, price-to-book ratio and three-year earnings growth figure, compared to
the U.S. diversified multi-cap funds universe average. Multi-cap funds will
generally have between 25% to 75% of their assets invested in companies with
market capitalizations (on a three-year weighted basis) greater than 300% of
the dollar-weighted median market capitalization of the S&P Mid-Cap 400 Index.
Lipper Small-Cap Growth Funds Average
An average of the reinvested performance of funds that normally invest in
companies with long-term earnings expected to grow significantly faster than
the earnings of the stocks represented in a major unmanaged stock index. These
funds will normally have an above-average price-to-earnings ratio, price-to-
book ratio and three-year earnings growth figure, compared to the U.S.
diversified small-cap funds universe average. Small-cap funds will generally
invest at least 75% of their assets in companies with market capitalizations
(on a three-year weighted basis) of less than 250% of the dollar-weighted
median market capitalization of the S&P Small-Cap 600 Index.
Lipper Small-Cap Value Funds Average
An average of the reinvested performance of funds that normally invest in
companies considered to be undervalued relative to a major unmanaged stock
index based on price-to-current earnings, book value, asset value or other
factors. These funds will normally have a below-average price-to-earnings
ratio, price-to-book ratio and three-year earnings growth figure, compared to
the U.S. diversified small-cap funds universe average. Small-cap funds will
generally invest at least 75% of their assets in companies with market
capitalizations (on a three-year weighted basis) of less than 250% of the
dollar-weighted median market capitalization of the S&P Small-Cap 600 Index.
Lipper Small Company 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 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. Government Money Market 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 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 $1.6 billion in market capitalization. The average market
capitalization for a company in this index is $14.10 billion.
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 lower forecasted growth values 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 higher forecasted growth values 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 approximately 8.0% of the Russell 3000 Index. The
average market capitalization for a company in this index is $580 million,
with the largest being $1.50 billion.
A-2
<PAGE>
APPENDIX A
Investment Indices--(Continued)
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 lower forecasted growth values 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 higher forecasted growth values than stocks in the Russell
2000 Value Index.
Standard & Poor's 500 Index
As of November 30, 2000, the index tracks the total return of 500 of the
largest stocks (378 industrial, 38 utility, 10 transportation and 74 financial
companies) in the United States, which represent about 86% 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 Smith Barney 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, low price-to-book 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 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 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 index excludes companies that do not rank
favorably on a relative basis because of their high price-to-earnings and
price-to-book ratios, or low yield.
A-3
<PAGE>
This page intentionally left blank
<PAGE>
This page intentionally left blank
<PAGE>
APPENDIX B
The following are copies of the proposed and final exemption and a technical
amendment to the final exemption from the Department of Labor from certain pro-
visions of the Employee Retirement Income Security Act of 1974 relating to the
purchase of shares and participation in TRAK by certain retirement plans and
individual retirement accounts.
--------------------------------------------------------------------------------
PENSION AND WELFARE BENEFITS ADMINISTRATION
[Application Nos. D-10809 and D-10865]
Notice of Proposed Individual Exemption to Amend and Replace Prohibited
Transaction Exemption (PTE) 99-15, Involving Salomon Smith Barney Inc., Located
in New York, NY
AGENCY: Pension and Welfare Benefits Administration, U.S. Department of Labor.
ACTION: Notice of proposed individual exemption to modify and replace PTE 99-
15.
--------------------------------------------------------------------------------
SUMMARY: This document contains a notice of pendency before the Department of
Labor (the Department) of a proposed and replacement individual exemption
which, if granted, would amend PTE 99-15 (64 FR 1648, April 5, 1999), an
exemption granted to Salomon Smith Barney. PTE 99-15 relates to the operation
of the TRAK Personalized Investment Advisory Service product (the TRAK Program)
and the Trust for Consulting Group Capital Markets Funds (the Trust). If
granted, the proposed exemption would affect participants and beneficiaries of
and fiduciaries with respect to employee benefit plans (the Plans)
participating in the TRAK Program.
EFFECTIVE DATE: If granted, the proposed amendment will be effective as of
April 1, 2000.
DATES: Written comments and requests for a public hearing should be received by
the Department on or before July 17, 2000.
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-5649, U.S. Department of Labor, 200
Constitution Avenue, NW, Washington, DC 20210, Attention: Application Nos. D-
10809 and D-10865. 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-5507, 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 amend and replace PTE 99-15. PTE
99-15, 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. Specifically, PTE 99-15 provides exemptive relief from
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, for the purchase or redemption of shares in the Trust
by an employee benefit plan, an individual retirement account (the IRA), a
retirement plan for a self-employed individual (the Keogh Plan), or an
individual account pension plan that is subject to the provisions of Title I of
the Act and established under section 403(b) of the Code (the Section 403(b)
Plan). PTE 99-15 also provides exemptive relief from 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, with respect to the provision, by the Consulting Group of Salomon Smith
Barney (the Consulting Group), of (1) investment advisory services or (2) an
automatic reallocation option 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./1/
-------
/1/ PTE 99-15 also (a) described a series of corporate mergers which changed
the names of the parties identified in two prior TRAK exemptions which it
superseded [i.e., PTE 94-50 (59 FR 32024, June 21, 1994) and PTE 92-77 (55 FR
45833, October 5, 1992)] and which would permit broader distribution of TRAK-
related products; (b) implemented a recordkeeping reimbursement offset
procedure under the TRAK Program; (c) adopted an automated reallocation option
under the TRAK Program that would reduce the asset allocation (or "outside")
fee paid to Salomon Smith Barney by a Plan investor; and (d) expanded the scope
of the exemption to include Section 403(b) Plans. PTE 94-50 permitted Smith,
Barney Inc. (Smith Barney), Salomon Smith Barney's predecessor, to add a daily-
traded collective investment fund (the GIC Fund) to the existing Fund
portfolios and to describe the various entities operating the GIC Fund. PTE 94-
50 also replaced references to Shearson Lehman Brothers, Inc. (Shearson Lehman)
with Smith Barney and amended and replaced PTE 92-77. Finally, PTE 92-77
permitted Shearson Lehman to make the TRAK Program available to Plans that
acquired shares in the former Trust for TRAK Investments and allowed the
Consulting Group to provide investment advisory services to an Independent Plan
Fiduciary which might result in such fiduciary's selection of a Portfolio in
the TRAK Program for the investment of Plan assets.
As of December 31, 1998, the TRAK Program held assets that were in excess of
$9.6 billion. Of those assets, approximately $1.9 billion were held in 407 Plan
accounts having cash or deferred compensation arrangements and approximately
$4.2 billion were held in more than 59,000 employee benefit plan and IRA/Keogh-
type Plan accounts. At present, the Trust consists of 17 Portfolios that are
managed by the Consulting Group and advised by one or more unaffiliated sub-
advisers selected by Salomon Smith Barney.
Salomon Smith Barney requests a modification of PTE 99-15 and a replacement of
that exemption with a new exemption for purposes of uniformity./2/
Specifically, Salomon Smith Barney requests that the term "affiliate," as set
forth in PTE 99-15, in Section II(h) of the General Conditions and in Section
III(b) of the Definitions, be amended and clarified to avoid possible
misinterpretation. In this regard, Salomon Smith Barney also requests that the
term "officer" be defined and incorporated into the proposed exemption, in new
Section III(d), to limit the affiliate definition to persons who have a
significant management role. Further, Salomon Smith Barney requests that
Section II(i) of PTE 99-15 be amended to permit an independent sub-adviser (the
Sub-Adviser), under certain circumstances, to exceed the current one percent
limitation on the acquisition of securities that are issued by Salomon Smith
Barney and/or its affiliates, notably in the Sub-Adviser's replication of a
third-party index. If granted, the proposed exemption would be effective as of
April 1, 2000.
The proposed exemption has been requested in an application filed on behalf of
Salomon Smith Barney pursuant to 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, 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, the
proposed exemption is being issued solely by the Department.
-------
/2/ The Department deems PTE 94-50 as having been effectively superseded by
PTE 99-15. Therefore, the proposed amendments described herein will not apply
to PTE 94-50.
B-1
<PAGE>
I. Proposed Modification of the Term "Affiliate"
Salomon Smith Barney represents that in early December 1999, Citigroup and
State Street Corporation announced an agreement to form a joint venture called
CitiStreet LLC, a Delaware limited liability company (the Joint Venture). The
Joint Venture, which was closed on April 1, 2000, is each 50 percent owned by
Keeper Holdings LLC (Citi), a wholly owned subsidiary of Citigroup, and by
State Street Bank and Trust Company (State Street), a wholly owned subsidiary
of State Street Corporation. Both Citigroup and State Street Corporation are
publicly-held corporations.
Salomon Smith Barney explains that the formation of the Joint Venture may have
resulted in the disqualification of State Street Global Advisers (SSgA), a
division of State Street, from acting as a Sub-Adviser in the TRAK Program due
to certain ambiguities in the meaning of the word "affiliate." Salomon Smith
Barney represents that SSgA is currently a Sub-Adviser with respect to
approximately $800 million in assets in the International Equity Investments
Portfolio and the Emerging Markets Equity Investments Portfolio.
A. Sections II(h) and III(b)
Section II(h) of PTE 99-15 provides that--
Any sub-adviser (the Sub-Adviser) that acts for the Trust to exercise
investment discretion over a Portfolio will be independent of Salomon Smith
Barney and its affiliates.
Although the term "independent" is not defined in the exemption, Salomon Smith
Barney notes that this condition was added to the original Shearson Lehman
exemption request when Shearson Lehman agreed not to use affiliated Sub-
Advisers. Therefore, Salomon Smith Barney presumes that the term "independent"
means "not an affiliate." Salomon Smith Barney represents that Section III(b)
of PTE 99-15 defines the term "affiliate" of Salomon Smith Barney to include:
(1) Any person directly or indirectly through one or more intermediaries,
controlling, controlled by, or under common control with Salomon Smith Barney.
(For purposes of this subparagraph, 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.
Salomon Smith Barney notes that problems of interpretation have arisen because
subparagraphs (2) and (3) of the affiliate definition use the term "such
person" rather than referring directly to Salomon Smith Barney. Salomon Smith
Barney explains that when defining an "affiliate" of Salomon Smith Barney, the
definition may be construed to encompass only relationships with Salomon Smith
Barney that involve shared control, influence or economic interests or it could
be interpreted to cover affiliates of Salomon Smith Barney's affiliates, where
there is no basis for common management or identical economic interests,
because subparagraphs (2) and (3) have no clear antecedents.
Salomon Smith Barney asserts that State Street is not under common corporate
control with either it or any of its corporate affiliates. Instead, State
Street is a subsidiary of an independently-owned and managed public company.
Therefore, there is no control relationship, as contemplated in subparagraph
(1) of Section III(b), between Citigroup and State Street Corporation, the
respective parent companies of Salomon Smith Barney and of State Street.
Salomon Smith Barney also states that the Joint Venture is not necessarily its
affiliate under subparagraph (1) of the definition because Salomon Smith
Barney's indirect 50 percent ownership interest in the Joint Venture is not a
"controlling interest." Therefore, if the Joint Venture is not an affiliate,
Salomon Smith Barney believes that State Street is not a partner of Salomon
Smith Barney, nor an officer or director of Salomon Smith Barney, as
contemplated in subparagraph (2) of Section III(b). Further, Salomon Smith
Barney explains that State Street's exclusive ownership by State
Street Corporation does not trigger the ownership provisions of subparagraph
(3) of Section III(b).
In addition to the above, Salomon Smith Barney states that it will not
exercise control or influence in the operation of the Joint Venture that will
inure to State Street. In addition, Salomon Smith Barney represents that Citi
will not exercise control of the Joint Venture because it has only a 50 percent
interest. Further, since all significant corporate actions of the Joint Venture
will require unanimity, Salomon Smith Barney explains that neither Citi nor
State Street will be able to exercise exclusive control over the Joint Venture.
B. Proposed Amendment
Salomon Smith Barney submits that subparagraph (1) of Section III(b) does not
require any clarification. However, it proposes that subparagraphs (2) and (3)
of the affiliate definition be modified to cover only those persons and
entities that have a significant role in the decisions made by Salomon Smith
Barney or which are managed or influenced by Salomon Smith Barney. These
entities or persons include individual officers, directors and partners in
Salomon Smith Barney and its corporate affiliates, and corporations and
partnerships in which Salomon Smith Barney and its corporate affiliates have a
10 percent or greater interest. Salomon Smith Barney believes that this
tailoring of the affiliate definition will avoid future problems in determining
the independence of the Sub-Advisers, including SSgA.
Thus, on the basis of the foregoing, Section III(b) of PTE 99-15 is hereby
modified in this notice of proposed exemption to read as follows:
(b) An "affiliate" of Salomon Smith Barney includes--
(1) Any person directly or indirectly through one or more intermediaries,
controlling, controlled by, or under common control with Salomon Smith Barney;
(For purposes of this subparagraph, 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 individual who is an officer, director or partner in Salomon Smith
Barney or a person who is described in subparagraph (b)(1);
(3) Any corporation or partnership of which Salomon Smith Barney or an
affiliate described in subparagraph (b)(1), is a 10 percent or more partner or
owner; and
(4) Any corporation or partnership of which any individual which is an officer
or director of Salomon Smith Barney, is a 10 percent or more partner or owner.
In connection with the revised affiliate definition, Salomon Smith Barney
requests that the term "officer" be defined in new subparagraph (d) of Section
III to limit this portion of the affiliate definition to individuals who have a
significant management role. Salomon Smith Barney points out that there are job
titles at fairly modest levels of authority within it as well as in any
company, and it wishes to ensure that future factual inquiries into an
B-2
<PAGE>
individual's status as an affiliate do not require that it contact virtually
every official in its corporate population in a due diligence effort.
Therefore, Salomon Smith Barney proposes that Section III(d) should read as
follows:
The term "officer" means a president, any vice president in charge of a
principal business unit, division or function (such as sales, administration or
finance), or any other officer who performs a policy-making function for the
entity.
Under the foregoing modifications, Salomon Smith Barney believes that Sections
II(h) and III(b) of the proposed exemption will no longer have conflicting
meanings.
II. Proposed Modification of the One Percent Limitation on Stock Issued by
Salomon Smith Barney and/or Its Affiliates
Salomon Smith Barney represents that there are a number of established market
indexes that have been created by parties which are unaffiliated with
Citigroup, its indirect parent. For example, the S&P 500 Index is a widely-used
benchmark index of domestic equity performance. This index consists of 500
stocks that have been selected by the Standard & Poor's Company (S&P) for
market capitalization, liquidity and industry group representation. The index
is market-value weighted so the performance of the larger of the included
companies has a greater impact on the performance of the index as a whole.
Currently, the common stock (the Common Stock) of Citigroup represents 1.57
percent of the S&P 500 Index.
In addition to the S&P 500 Index, Salomon Smith Barney explains that the
Russell 3000 Index is composed of the 3,000 largest United States companies,
based upon total market capitalization. Salomon Smith Barney also points out
that there are a number of Russell Indexes which are based on subsets of the
Russell 3000 Index. These Indexes include (a) the Russell 2000 Index, which
measures the performance of the smallest 2,000 United States companies in the
Russell 3000 Index and therefore, excludes Citigroup; and (b) the Russell 1000
Index, which measures the performance of the 1,000 largest United States
companies in the Russell 3000 Value Index and includes Citigroup. In addition,
Salomon Smith Barney represents that there are further subsets of the Russell
Indexes which are based upon Russell's characterization of stock as either
"Growth" or "Value." For example, Salomon Smith Barney explains that Citigroup
is included within these subsets. As of March 31, 2000, Citigroup Common Stock
represented 3.8981 percent of the Russell 1000 Value Index and 3.6343 percent
of the Russell 3000 Value Index.
A. Section II(i)
Based upon the foregoing descriptions of the stock indexes, Salomon Smith
Barney requests that Section II(i) of PTE 99-15 be modified in order to permit
an independent Sub-Adviser which manages the assets in a Portfolio to exceed
the one percent investment limitation on securities issued by Salomon Smith
Barney and/or its affiliates under certain circumstances. As currently drafted,
Section II(i) states that--
Immediately following the acquisition by a Portfolio of any securities that
are issued by Salomon Smith Barney and/or its affiliates, the percentage of
that Portfolio's net assets invested in such securities will not exceed one
percent.
In other words, the exception will apply to "any higher percentage" which may
result from a Sub-Adviser's management of an index fund (the Index Fund)
Portfolio which includes Citigroup Common Stock. The index will be an
established third party index and the Sub-Adviser will track the index results
using the "passive full replication" trading method./3/
Because the Sub-Adviser will purchase and sell Citigroup Common Stock to
approximate the performance of an index rather than reflect the Sub-Adviser's
evaluation of the Common Stock in its individual merits, Salomon Smith Barney
states that any additional investment by a Portfolio in Citigroup Common Stock
over the one percent threshold will result from the implementation of the
trading method and not from the Sub-Adviser's exercise of investment
discretion.
Due to the one percent limitation of Section II(i), Salomon Smith Barney
states that active Sub-Advisers for the Consulting Group may not own or trade
Citigroup Common Stock and they will continue to be prohibited from trading in
Citigroup Common Stock. However, Salomon Smith Barney proposes that passive or
pure Index Fund Sub-Advisers be permitted to hold Citigroup Common Stock in
their portfolios which exceed the one percent limitation to the extent such
higher percentage is
-------
/3/ According to Salomon Smith Barney, there are two forms of index trading--
passive full replication (wherein each stock in the same weightings as the in-
dex is owned by a mutual fund) and sampling (in which each sector, but not nec-
essarily all stocks in such sector, in the same weightings as the index is also
owned by a mutual fund). Salomon Smith Barney notes that sampling is used most
often when a portfolio is smaller and cannot efficiently replicate the entire
index.
necessary to replicate the underlying index./4/ Salomon Smith Barney points out
that pure index Sub-Advisers that are responsible for investing only a portion
of the assets in the Consulting Group Capital Markets Large Cap Value Fund and
the Large Cap Growth Consulting Group Capital Markets Fund, are currently in
compliance with the one percent limitation. These Portfolios, which consist of
both an actively-managed portion and a distinct, passively-managed portion,
held less than one percent of the their total assets in Citigroup Common Stock.
If an index-based Sub-Adviser were to manage a greater portion or all of
either of the aforementioned Portfolios, Salomon Smith Barney explains that the
total Portfolio may include Citigroup Common Stock which breaches the one
percent threshold. Similarly, Salomon Smith Barney notes that if the entire
Portfolio, such as the Consulting Group Capital Markets S&P 500 Index
Investment Fund Portfolio, has the investment objective of providing results
that correspond to the price and yield performance of the S&P 500 Index, the
Sub-Adviser would be expected to approximate the cited percentage of 1.57
percent for Citigroup Common Stock in the S&P 500 Index. This would also
violate the one percent investment limitation.
Salomon Smith Barney states that the present one percent limitation placed on
Citigroup Common Stock increases the likelihood that the performance of an
Index Fund Portfolio will not replicate the applicable index. Because Citigroup
is among the largest companies on the basis of capitalization in the S&P 500,
Salomon Smith Barney states that Citigroup's performance can have a significant
impact in index performance calculations. However, if Citigroup Common Stock is
not proportionately represented, Salomon Smith Barney explains that Index Fund
performance will deviate from the index whether Citigroup Common Stock does
well or underperforms.
-------
/4/ In its management of a "pure" Index Fund, the Sub-Adviser does not
evaluate individual companies to identify attractive investment candidates or
to eliminate underperforming investments. Instead, the Sub-Adviser attempts to
mirror the composition of the relevant index as closely as possible by
adjusting the Portfolio holdings daily to reflect the companies included in the
index and their relative weightings. Because performance of the Index Fund is
tied to the performance of the index that it tracks, investors are advised that
this investment strategy may mean losses if the applicable index performs
poorly relative to other indexes or individual stocks.
The performance of a pure Index Fund generally does not mirror the index
performance exactly. The index is merely a composite performance figure, based
upon an established selection of companies. It does not represent actual assets
being managed so there are no expenses deducted from its performance results.
In contrast, an Index Fund Portfolio represents actual assets under management
and has liquidity requirements associated with Fund operation. To meet
redemption requests and to pay expenses, the Index Fund must maintain a portion
of its assets in cash and cash equivalents.
B-3
<PAGE>
In any event, Salomon Smith Barney believes that the one percent limitation
has the effect of depriving a Plan of the opportunity to invest in a Fund
(available to non-Plan investors) that might otherwise track the applicable
index more exactly. Because many Plan sponsors are anxious to have an Index
Fund available through the TRAK Program, Salomon Smith Barney wishes to move
quickly to accommodate the Plan market's design preferences.
For these reasons, Salomon Smith Barney requests that the current one percent
restriction be lifted and allowed to be exceeded with respect to Portfolio
investments that are made by passive Sub-Advisers in Citigroup Common Stock in
their replication of third-party indexes. In addition, Salomon Smith Barney
seeks the flexibility to have the Portfolios consist, in whole or in part, of
Index Funds that are managed by passive Sub-Advisers. However, the ownership by
a Portfolio of Citigroup Common Stock which is in excess of the one percent
limitation would result solely from the activities of the passive Sub-Adviser
in replicating an index.
B. Exemptive Safeguards
Section II(i) of the proposed exemption has been further expanded to include a
number of substantive safeguards for the protection of Plans investing under
the TRAK Program. In this regard, Section II(i) requires that the amount held
by the Sub-Adviser in managing an Index Fund Portfolio be held in order to
replicate an established third party index. In addition, Section II(i) states
that the index must represent the investment performance of a specific segment
of the public market for equity securities in the United States and/or foreign
countries. In this regard, the organization creating the index must be (a)
engaged in the business of providing financial information; (b) a publisher of
financial news information; or (c) a public stock exchange or association of
securities dealers. The index must also be created and maintained by an
organization independent of Salomon Smith Barney and its affiliates and must be
a generally-accepted standardized index of securities which is not specifically
tailored for use by Salomon Smith Barney and its affiliates.
Moreover, Section II(i) requires that the acquisition or disposition of
Citigroup Common Stock must not include any agreement, arrangement or
understanding regarding the design or operation of the Portfolio acquiring the
Citigroup Common Stock, which is intended to benefit Salomon Smith Barney or
any party in which Salomon Smith Barney may have an interest.
Finally, Section II(i) requires that an Independent Plan Fiduciary authorize
the investment of a Plan's assets in an Index Fund Portfolio which purchases
and/or holds Citigroup Common Stock while the Sub-Adviser will be responsible
for voting any shares of Citigroup Common Stock that are held by an Index Fund
on any matter in which shareholders of Citigroup Common Stock are required or
permitted to vote.
Notice to Interested Persons
Notice of the proposed exemption will be mailed by first class mail to the
Independent Plan Fiduciary of each Plan currently participating in the TRAK
Program, or, in the case of a Section 404(c) Plan, to the recordholder of Trust
shares. Such notice will be given within 15 days of the publication of the
notice of pendency in the Federal Register. The notice will contain a copy of
the notice of proposed exemption as published in the Federal Register and a
supplemental statement, as required pursuant to 29 CFR 2570.43(b)(2). The
supplemental statement will inform interested persons of their right to comment
on and/or to request a hearing with respect to the pending exemption. Written
comments and hearing requests are due within 45 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) 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) The proposed exemption, if granted, will extend to transactions prohibited
under section 406(b)(3) of the Act and section 4975(c)(1)(F) of the Code;
(3) 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;
(4) This 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; and
(5) This proposed exemption, if granted, is subject to the express condition
that the facts and representations set forth in the notice of proposed
exemption relating to PTE 99-15 and this notice, accurately describe, where
relevant, the material terms of the transactions to be consummated pursuant to
this exemption.
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or requests for
a hearing on the pending exemption to the address above, within the time frame
set forth above, after the publication of this proposed exemption in the
Federal Register. All comments will be made a part of the record. Comments
received will be available for public inspection with the referenced
applications at the address set forth above.
Proposed Exemption
Based on the facts and representations set forth in the application, the
Department is considering granting the requested 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, August 10, 1990).
Section I. Covered Transactions
A. 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) of the Code, shall not apply, to
the purchase or redemption of shares by an employee benefit
B-4
<PAGE>
plan, an individual retirement account (the IRA), a retirement plan for self-
employed individuals (the Keogh Plan), or an individual account pension plan
that is subject to the provisions of Title I of the Act and established under
section 403(b) of the Code (the Section 403(b) Plan; collectively, the Plans)
in the Trust for Consulting Group Capital Market Funds (the Trust), established
by Salomon Smith Barney, in connection with such Plans' participation in the
TRAK Personalized Investment Advisory Service product (the TRAK Program).
B. If the exemption is granted, 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 (1) investment advisory services or (2)
an automatic reallocation option (the Automatic Reallocation Option) 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. This proposed exemption
is subject to the following conditions that are set forth below 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 Salomon Smith Barney 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 Plan Fiduciary, provided, however, that--
(1) If such Independent Plan Fiduciary shall have elected in writing (the
Election), on a form designated by Salomon Smith Barney from time to time for
such purpose, to participate in the Automatic Reallocation Option under the
TRAK Program, the affected Plan or participant account will be automatically
reallocated whenever the Consulting Group modifies the particular asset
allocation recommendation which the Independent Plan Fiduciary has chosen. Such
Election shall continue in effect until revoked or terminated by the
Independent Plan Fiduciary in writing.
(2) Except as set forth below in paragraph II(f)(3), at the time of a change
in the Consulting Group's asset allocation recommendation, each account based
upon the asset allocation model (the Allocation Model) affected by such change
would be adjusted on the business day of the release of the new Allocation
Model by the Consulting Group, except to the extent that market conditions, and
order purchase and redemption procedures may delay such processing through a
series of purchase and redemption transactions to shift assets among the
affected Portfolios.
(3) If the change in the Consulting Group's asset allocation recommendation
exceeds an increase or decrease of more than 10 percent in the absolute
percentage allocated to any one investment medium (e.g., a suggested increase
in a 15 percent allocation to greater than 25 percent, or a decrease of such 15
percent allocation to less than 5 percent), Salomon Smith Barney will send out
a written notice (the Notice) to all Independent Plan Fiduciaries whose current
investment allocation would be affected, describing the proposed reallocation
and the date on which such allocation is to be instituted (the Effective Date).
If the Independent Plan Fiduciary notifies Salomon Smith Barney, in writing, at
any time within the period of 30 calendar days prior to the proposed Effective
Date that such fiduciary does not wish to follow such revised asset allocation
recommendation, the Allocation Model will remain at the current level, or at
such other level as the Independent Plan Fiduciary then expressly designates,
in writing. If the Independent Plan Fiduciary does not affirmatively "opt out"
of the new Consulting Group recommendation, in writing, prior to the proposed
Effective Date, such new recommendation will be automatically effected by a
dollar-for-dollar liquidation and purchase of the required amounts in the
respective account.
(4) An Independent Plan Fiduciary will receive a trade confirmation of each
reallocation transaction. In this regard, for all Plan investors other than
Section 404(c) Plan accounts (i.e., 401(k) Plan accounts), Salomon Smith Barney
will mail trade confirmations on the next business day after the reallocation
trades are executed. In the case of Section 404(c) Plan participants,
notification will depend upon the notification provisions agreed to by the Plan
recordkeeper.
(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 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.
(h) Any sub-adviser (the Sub-Adviser) that acts for the Trust to exercise
investment discretion over a Portfolio will be independent of Salomon Smith
Barney and its affiliates.
(i) Immediately following the acquisition by a Portfolio of any securities
that are issued by Salomon Smith Barney and/or its affiliates, such as
Citigroup Inc. common stock (the Citigroup Common Stock), the percentage of
that Portfolio's net assets invested in such securities will not exceed one
percent. However, this percentage limitation may be exceeded if--
(1) The amount held by a Sub-Adviser in managing a Portfolio is held in order
to replicate an established third party index.
(2) The index represents the investment performance of a specific segment of
the public market for equity securities in the United States and/or foreign
countries. The organization creating the index must be--
(i) Engaged in the business of providing financial information;
(ii) A publisher of financial news information; or
(iii) A public stock exchange or association of securities dealers. The index
is created and maintained by an organization independent of Salomon Smith
Barney and its affiliates and is a generally-accepted standardized index of
securities which is not specifically tailored for use by Salomon Smith Barney
and its affiliates.
(3) The acquisition or disposition of Citigroup Common Stock does not include
B-5
<PAGE>
any agreement, arrangement or understanding regarding the design or operation
of the Portfolio acquiring the Citigroup Common Stock, which is intended to
benefit Salomon Smith Barney or any party in which Salomon Smith Barney may
have an interest.
(4) The Independent Plan Fiduciary authorizes the investment of a Plan's
assets in an Index Fund which purchases and/or holds Citigroup Common Stock and
the Sub-Adviser is responsible for voting any shares of Citigroup Common Stock
that are held by an Index Fund on any matter in which shareholders of Citigroup
Common Stock are required or permitted to vote.
(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 the 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, Salomon Smith Barney and its subsidiaries and the
compensation paid to such entities./5/
(B) Upon written or oral request to Salomon Smith Barney, 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.
-------
/5/ 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 the fees and expenses to be paid by the
Plan, including the fees paid directly to Salomon Smith Barney or to other
third parties.
(C) A copy of the investment advisory agreement between the Consulting Group
and such Plan relating to participation in the TRAK Program and, if applicable,
informing Plan investors of the Automatic Reallocation Option.
(D) Upon written request of Salomon Smith Barney, 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 a
Salomon Smith Barney 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) A copy of the proposed exemption and the final exemption, if granted,
pertaining to the exemptive relief described herein.
(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 Salomon Smith Barney that such fiduciary is (a) independent of
Salomon Smith Barney 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 Salomon Smith Barney that
such fiduciary is (a) independent of Salomon Smith Barney 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
Salomon Smith Barney and its affiliates and (b) the average brokerage
commission per share paid by each Portfolio to Salomon Smith Barney and its
affiliates, as compared to the average brokerage commission per share paid by
the Trust to brokers other than Salomon Smith Barney and its affiliates, both
expressed as cents per share.
B-6
<PAGE>
(m) Salomon Smith Barney 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 Salomon Smith Barney
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 Salomon Smith
Barney 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 subparagraphs (a)(2) and (b) of section 504 of the Act, the
records referred to in paragraph (m) of this Section II 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 Salomon Smith
Barney or commercial or financial information which is privileged or
confidential.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term "Salomon Smith Barney" means Salomon Smith Barney Inc. and any
affiliate of Salomon Smith Barney, as defined in paragraph (b) of this Section
III.
(b) An "affiliate" of Salomon Smith Barney includes--
(1) Any person directly or indirectly through one or more intermediaries,
controlling, controlled by, or under common control with Salomon Smith Barney;
(For purposes of this subparagraph, 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 individual who is an officer (as defined in Section III(d) hereof),
director or partner in Salomon Smith Barney or a person described in
subparagraph (b)(1);
(3) Any corporation or partnership of which Salomon Smith Barney or an
affiliate described in subparagraphs(b)(1), is a 10 percent or more partner or
owner; and
(4) Any corporation or partnership of which any individual which is an officer
or director of Salomon Smith Barney, is a 10 percent or more partner or owner.
(c) An "Independent Plan Fiduciary" is a Plan fiduciary which is independent
of Salomon Smith Barney and its affiliates and is either--
(1) A Plan administrator, sponsor, trustee or named fiduciary, as the
recordholder of Trust shares under a Section 404(c) Plan;
(2) A participant in a Keogh Plan;
(3) An individual covered under (i) a self-directed IRA or (ii) a Section
403(b) Plan, 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 Plan, such as a Section 404(c) Plan, who is permitted
under the terms of such Plan to direct, and who elects to direct the investment
of assets of his or her account in such Plan.
(d) The term "officer" means a president, any vice president in charge of a
principal business unit, division or function (such as sales, administration or
finance), or any other officer who performs a policymaking function for the
entity.
Section IV. Effective Dates
If granted, this proposed exemption will be effective as of April 1, 2000,
with respect to the amendments to Section II(i) and Section III(b) and the
inclusion of new Section III(d).
The availability of this proposed exemption is subject to the express
condition that the material facts and representations contained in the
application 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, PTE 94-50 and PTE 99-15, refer to the
proposed exemptions and the grant notices which are cited above.
Signed at Washington, D.C., this 25th day of May, 2000.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 00-13643 Filed 5-31-00; 8:45 am]
B-7
<PAGE>
--------------------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 2000-45; Exemption Application Nos. D-10809
and D-10865]
Grant of Individual Exemption To Amend and Replace Prohibited Transaction
Exemption (PTE) 99-15, Involving Salomon Smith Barney Inc. (Salomon Smith
Barney), Located in New York, NY
AGENCY: Pension and Welfare Benefits Administration, Department of Labor.
ACTION: Grant of individual exemption to modify and replace PTE 99-15.
--------------------------------------------------------------------------------
SUMMARY: This document contains a final exemption (the Final Exemption) by the
Department of Labor (the Department) which amends and replaces PTE 99-15 (64 FR
1648, April 5, 1999), an exemption granted to Salomon Smith Barney. PTE 99-15
relates to the operation of the TRAK Personalized Investment Advisory Service
product (the TRAK Program) and the Trust for Consulting Group Capital Markets
Funds (the Trust). These transactions are described in a notice of pendency
(the Proposed Exemption) that was published in the Federal Register on June 1,
2000 at 65 FR 35138.
EFFECTIVE DATES: This exemption is effective as of April 1, 2000 with respect
to the amendments to Section II(i) and Section III(b) of the grant notice. In
addition, this exemption is effective as of April 1, 2000 with respect to the
inclusion of new Section III(d) in the grant notice.
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 June 1, 2000, the Department published, in the
Federal Register, the above referenced Proposed Exemption which would amend and
replace PTE 99-15. PTE 99-15, 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. Specifically, PTE 99-15
provides exemptive relief from 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, for the purchase or
redemption of shares in the Trust by an employee benefit plan, an individual
retirement account (the IRA), a retirement plan for a self-employed individual,
or an individual account pension plan that is subject to the provisions of
Title I of the Act and established under section 403(b) of the Code (the
Section 403(b) Plan; collectively, the Plans).
PTE 99-15 also provides exemptive relief from 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, with
respect to the provision, by the Consulting Group of Salomon Smith Barney (the
Consulting Group), of (1) investment advisory services or (2) an automatic
reallocation option 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./1/
In the Proposed Exemption, Salomon Smith Barney requested a modification of
PTE 99-15 and a replacement of that exemption with a new exemption for purposes
of uniformity./2/ Specifically, Salomon Smith Barney requested that the term
"affiliate," as set forth in PTE 99-15, in Section II(h) of the General
Conditions and in Section III(b) of the Definitions, be amended and clarified
to avoid possible misinterpretation. In this regard, Salomon Smith Barney also
requested that the term
-------
/1/PTE 99-15 also (a) described a series of corporate mergers which changed
the names of the parties identified in two prior TRAK exemptions which it
superseded [i.e., PTE 94-50 (59 FR 32024, June 21, 1994) and PTE 92-77 (55 FR
45833, October 5, 1992)] and which would permit broader distribution of TRAK-
related products; (b) implemented a recordkeeping reimbursement offset
procedure under the TRAK Program; (c) adopted an automated reallocation option
under the TRAK Program that would reduce the reallocation option under the TRAK
Program that would reduce the Plan-level investment advisory fee (the Outside
Fee) paid to Salomon Smith Barney by a Plan investor; and (d) expanded the
scope of the exemption to include Section 403(b) Plans.
PTE 94-50 permitted Smith, Barney Inc. (Smith Barney), Salomon Smith Barney's
predecessor, to add a daily-traded collective investment fund (the GIC Fund) to
the existing portfolios (the Portfolios) of mutual funds (the Funds) comprising
the Trust, and to describe the various entities operating the GIC Fund. PTE 94-
50 also replaced references to Shearson Lehman Brothers, Inc. (Shearson Lehman)
with Smith Barney and amended and replaced PTE 92-77.
Finally, PTE 92-77 permitted Shearson Lehman to make the TRAK Program
available to Plans that acquired shares in the former Trust for TRAK
Investments and allowed the Consulting Group to provide investment advisory
services to an Independent Plan Fiduciary which might result in such
fiduciary's selection of a Portfolio in the TRAK Program for the investment of
Plan assets.
/2/The Department deems PTE 94-50 as having been effectively superseded by PTE
99-15. Therefore, the amendments described herein do not apply to PTE 94-50.
"officer" be defined and incorporated into the Proposed Exemption, in new
Section III(d), to limit the affiliate definition to persons who have a
significant management role. Further, Salomon Smith Barney requested that
Section II(i) of PTE 99-15 be amended to permit an independent sub-adviser (the
Sub-Adviser), under certain circumstances, to exceed the current one percent
limitation on the acquisition of securities that are issued by Salomon Smith
Barney and/ or its affiliates, notably in the Sub-Adviser's replication of a
third- party index (the Index). The Final Exemption is effective as of April 1,
2000 with respect to the amendments to Sections II(i) and III(b) of the grant
notice, and is effective as of July 10, 2000 with respect to Section III(d) of
the grant notice.
The Proposed Exemption was requested in an application filed on behalf of
SalomonSmith Barney 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 Final Exemption is being issued solely by the
Department.
The Proposed Exemption gave interested persons an opportunity to comment and
to request a hearing. During the comment period, the Department received two
written comments and no requests for a hearing. One of the comments was
submitted by the holder of an IRA which participates in the TRAK Program. The
commenter said he concurred with the modifications proposed by Salomon Smith
Barney to amend and clarify the terms "affiliate" and "officer." The commenter
also stated that he supported the proposed modification of the one percent
limitation on the acquisition, by an independent Sub-Adviser, of securities
that are issued by Salomon Smith Barney and/or its affiliates in the Sub-
Adviser's replication of an Index. The commenter explained that he believed the
requested changes made sense and would be beneficial to all TRAK Program
participants. Therefore, the commenter urged the Department to approve the
Final Exemption.
The second comment was submitted by Salomon Smith Barney. The comment is
intended to clarify and modify the preamble (the Preamble) of the Proposed
Exemption.
B-8
<PAGE>
Following is a discussion of Salomon Smith Barney's comment letter and the
Department's responses with respect thereto.
1. Modifications to the Proposed Exemption. On page 35139 of the Proposed
Exemption, the first paragraph of the Preamble states that "As of December 31,
1998, the TRAK Program held assets that were in excess of $9.6 billion." Also,
in that same paragraph, the last sentence states, in part, that "one or more
unaffiliated [S]ub-advisers [is] selected by Salomon Smith Barney." Salomon
Smith Barney notes that the December 31, 1998 valuation date at the beginning
of the paragraph should be changed to September 30, 1999 and the last words of
the paragraph should be changed from "Salomon Smith Barney" to "the Consulting
Group," which actually chooses the Sub-Advisers.
In addition, on page 35140 of the Proposed Exemption, the last paragraph of
the Preamble states, in part, that--
Due to the one percent limitation of Section II(i), Salomon Smith Barney
states that active Sub-Advisers for the Consulting Group may not own or trade
Citigroup Common Stock and they will continue to be prohibited from trading in
Citigroup Common Stock. Salomon Smith Barney wishes to clarify that active Sub-
Advisers also do not trade in Citigroup Common Stock because of restrictions
that apply under Rule 12d3-1(c) of the Investment Company Act of 1940 (the
ICA)./3/
On page 35141 of the Proposed Exemption, the third sentence of the first
"carry-over" paragraph of the Preamble identifies two Funds which currently
comply with the one percent limitation on investments in Citigroup Common
Stock. These Funds are the "Consulting Group Capital Markets Large Cap Value
Fund" and the "Large Cap Growth Consulting Group Capital Markets Fund."
However, Salomon Smith Barney suggests, for the purpose of clarity, that the
formal names of the subject Funds be specified. Thus, Salomon Smith Barney
explains that the proper names for the Funds are the "Consulting Group Capital
Markets Funds Large Capitalization Value Equity Investments" and the
"Consulting Group Capital Markets Funds Large Capitalization Growth
Investments." Similarly, in the next paragraph of the Proposed Exemption on
page
-------
/3/Rule 12d3-1(c) of the ICA states that an acquiring company, such as a
registered investment company, may not acquire a general partnership interest
or a security issued by the acquiring company's investment adviser, promoter,
or principal underwriter, or by any affiliated person of such investment
adviser, promoter, or principal underwriter.
35141 of the Preamble, Salomon Smith Barney wishes to clarify that the formal
name for the S&P Fund designated as the "Consulting Group Capital Markets S&P
500 Index Investment Fund Portfolio" is the "Consulting Group Capital Markets
S&P Index Investment Fund Portfolio."
In response to these comments, the Department acknowledges the foregoing
clarifications to the names for the Funds identified in the Preamble of the
Proposed Exemption.
2. General Information. As a matter of general information, Salomon Smith
Barney states that beginning with the billing cycle commencing on January 1,
2001, the Outside Fee charged to 401(k) Plan clients will be calculated on the
average daily asset value for the quarter for which the fee is billed rather
than the asset value on the last day of the quarter. Salomon Smith Barney
explains that this change generally conforms to the billing procedure in the
industry generally and is believed to be more equitable since it reflects the
asset value over time rather than on a single day during a calendar quarter
which may not be representative of the account balance during the period.
In response to this comment, the Department notes Salomon Smith Barney's
modification to the billing procedure in the calculation of the Outside Fee for
participants in the TRAK Program that are section 401(k) Plans.
For further information regarding the comments or other matters discussed
herein, interested persons are encouraged to obtain copies of the exemption
application files (Exemption Application Nos. D-10809 and D-10865) the
Department is maintaining in this case. The complete application files, as well
as all supplemental submissions received by the Department, are made available
for public inspection in the Public Documents Room of the Pension and Welfare
Benefits Administration, Room N-5638, U.S. Department of Labor, 200
Constitution Avenue, N.W., Washington, D.C. 20210.
Accordingly, after giving full consideration to the entire record, including
the written comments received, the Department has decided to grant the
exemption subject to the modifications and clarifications described above.
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) The exemption will extend to transactions prohibited under section
406(b)(3) of the Act and section 4975(c)(1)(F) of the Code;
(3) In accordance with section 408(a) of the Act and section 4975(c)(2) of the
Code, and the Procedures cited above, and based upon the entire record, the
Department finds 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;
(4) The exemption 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; and
(5) The exemption is subject to the express condition that the Summary of
Facts and Representations set forth in the notice of proposed exemption
relating to PTE 99-15, as amended by this Final Exemption, accurately describe,
where relevant, the material terms of the transactions to be consummated
pursuant to this exemption.
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 above, the Department
hereby amends PTE 99-15 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
B-9
<PAGE>
reason of section 4975(c)(1)(A) through (D) of the Code, shall not apply, to
the purchase or redemption of shares by an employee benefit plan, an individual
retirement account (the IRA), a retirement plan for self-employed individuals
(the Keogh Plan), or an individual account pension plan that is subject to the
provisions of Title I of the Act and established under section 403(b) of the
Code (the Section 403(b) Plan; collectively, the Plans) in the Trust for
Consulting Group Capital Market Funds (the Trust), established by Salomon Smith
Barney, in connection with such Plans' participation in the TRAK Personalized
Investment Advisory Service product (the TRAK Program).
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 (1) investment advisory services or (2) an automatic
reallocation option (the Automatic Reallocation Option) 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.
This exemption is subject to the following conditions that are set forth below
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 Salomon Smith Barney 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 Plan Fiduciary, provided, however, that--
(1) If such Independent Plan Fiduciary shall have elected in writing (the
Election), on a form designated by Salomon Smith Barney from time to time for
such purpose, to participate in the Automatic Reallocation Option under the
TRAK Program, the affected Plan or participant account will be automatically
reallocated whenever the Consulting Group modifies the particular asset
allocation recommendation which the Independent Plan Fiduciary has chosen. Such
Election shall continue in effect until revoked or terminated by the
Independent Plan Fiduciary in writing.
(2) Except as set forth below in paragraph II(f)(3), at the time of a change
in the Consulting Group's asset allocation recommendation, each account based
upon the asset allocation model (the Allocation Model) affected by such change
would be adjusted on the business day of the release of the new Allocation
Model by the Consulting Group, except to the extent that market conditions, and
order purchase and redemption procedures, may delay such processing through a
series of purchase and redemption transactions to shift assets among the
affected Portfolios.
(3) If the change in the Consulting Group's asset allocation recommendation
exceeds an increase or decrease of more than 10 percent in the absolute
percentage allocated to any one investment medium (e.g., a suggested increase
in a 15 percent allocation to greater than 25 percent, or a decrease of such 15
percent allocation to less than 5 percent), Salomon Smith Barney will send out
a written notice (the Notice) to all Independent Plan Fiduciaries whose current
investment allocation would be affected, describing the proposed reallocation
and the date on which such allocation is to be instituted (the Effective Date).
If the Independent Plan Fiduciary notifies Salomon Smith Barney, in writing, at
any time within the period of 30 calendar days prior to the proposed Effective
Date that such fiduciary does not wish to follow such revised asset allocation
recommendation, the Allocation Model will remain at the current level, or at
such other level as the Independent Plan Fiduciary then expressly designates,
in writing. If the Independent Plan Fiduciary does not affirmatively "opt out"
of the new Consulting Group recommendation, in writing, prior to the proposed
Effective Date, such new recommendation will be automatically effected by a
dollar-for-dollar liquidation and purchase of the required amounts in the
respective account.
(4) An Independent Plan Fiduciary will receive a trade confirmation of each
reallocation transaction. In this regard, for all Plan investors other than
Section 404(c) Plan accounts (i.e., 401(k) Plan accounts), Salomon Smith Barney
will mail trade confirmations on the next business day after the reallocation
trades are executed. In the case of Section 404(c) Plan participants,
notification will depend upon the notification provisions agreed to by the Plan
recordkeeper.
(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 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.
(h) Any sub-adviser (the Sub-Adviser) that acts for the Trust to exercise
investment discretion over a Portfolio will be independent of Salomon Smith
Barney and its affiliates.
(i) Immediately following the acquisition by a Portfolio of any securities
that are issued by Salomon Smith Barney and/or its affiliates, such as
Citigroup Inc. common stock (the Citigroup Common Stock), the percentage of
that Portfolio's net assets invested in such securities will not exceed one
percent. However, this percentage limitation may be exceeded if--
(1) The amount held by a Sub-Adviser in managing a Portfolio is held in order
to replicate an established third party index (the Index).
(2) The Index represents the investment performance of a specific segment of
the public market for equity securities in the United States and/or foreign
countries. The organization creating the Index must be--
(i) Engaged in the business of providing financial information;
(ii) A publisher of financial news information; or
(iii) A public stock exchange or association of securities dealers.
The Index is created and maintained by an organization independent of Salomon
Smith Barney and its affiliates and is a generally-accepted standardized Index
of
B-10
<PAGE>
securities which is not specifically tailored for use by Salomon Smith Barney
and its affiliates.
(3) The acquisition or disposition of Citigroup Common Stock does not include
any agreement, arrangement or understanding regarding the design or operation
of the Portfolio acquiring the Citigroup Common Stock, which is intended to
benefit Salomon Smith Barney or any party in which Salomon Smith Barney may
have an interest.
(4) The Independent Plan Fiduciary authorizes the investment of a Plan's
assets in an Index Fund which purchases and/or holds Citigroup Common Stock and
the Sub-Adviser is responsible for voting any shares of Citigroup Common Stock
that are held by an Index Fund on any matter in which shareholders of Citigroup
Common Stock are required or permitted to vote.
(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 the 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, Salomon Smith Barney and its subsidiaries and the
compensation paid to such entities./4/
(B) Upon written or oral request to Salomon Smith Barney, 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
-------
/4/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 the fees and expenses to be paid by the
Plan, including the fees paid directly to Salomon Smith Barney or to other
third parties.
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 and, if applicable,
informing Plan investors of the Automatic Reallocation Option.
(D) Upon written request of Salomon Smith Barney, 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 a
Salomon Smith Barney 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) A copy of the Proposed Exemption and the Final Exemption pertaining to the
exemptive relief described herein.
(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 Salomon Smith Barney that such fiduciary is (a) independent of
Salomon Smith Barney 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 Salomon Smith Barney that
such fiduciary is (a) independent of Salomon Smith Barney 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
Salomon Smith Barney and its affiliates and (b) the average brokerage
commission per share paid by each Portfolio to Salomon Smith Barney and its
affiliates, as compared to the average brokerage commission per share paid by
the
B-11
<PAGE>
Trust to brokers other than Salomon Smith Barney and its affiliates, both
expressed as cents per share.
(m) Salomon Smith Barney 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 Salomon Smith Barney
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 Salomon Smith
Barney 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 subparagraphs (a)(2) and (b) of section 504 of the Act, the
records referred to in paragraph (m) of this Section II 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 Salomon Smith
Barney or commercial or financial information which is privileged or
confidential.
Section III. Definitions
For purposes of this exemption:
(a) The term "Salomon Smith Barney" means Salomon Smith Barney Inc. and any
affiliate of Salomon Smith Barney, as defined in paragraph (b) of this Section
III.
(b) An "affiliate" of Salomon Smith Barney includes--
(1) Any person directly or indirectly through one or more intermediaries,
controlling, controlled by, or under common control with Salomon Smith Barney
(For purposes of this subparagraph, 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 individual who is an officer (as defined in Section III(d) hereof),
director or partner in Salomon Smith Barney or a person described in
subparagraph (b)(1);
(3) Any corporation or partnership of which Salomon Smith Barney, or an
affiliate described in subparagraphs(b)(1), is a 10 percent or more partner or
owner; and
(4) Any corporation or partnership of which any individual which is an officer
or director of Salomon Smith Barney is a 10 percent or more partner or owner.
(c) An "Independent Plan Fiduciary" is a Plan fiduciary which is independent
of Salomon Smith Barney and its affiliates and is either--
(1) A Plan administrator, sponsor, trustee or named fiduciary, as the
recordholder of Trust shares under a Section 404(c) Plan;
(2) A participant in a Keogh Plan;
(3) An individual covered under (i) a self-directed IRA or (ii) a Section
403(b) Plan, 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 Plan, such as a Section 404(c) Plan, who is permitted
under the terms of such Plan to direct, and who elects to direct, the
investment of assets of his or her account in such Plan.
(d) The term "officer" means a president, any vice president in charge of a
principal business unit, division or function (such as sales, administration or
finance), or any other officer who performs a policymaking function for the
entity.
Section IV. Effective Dates
This exemption is effective as of April 1, 2000 with respect to the amendments
to Section II(i) and Section III(b) of this grant notice. In addition, this
exemption is effective as of April 1, 2000 with respect to the inclusion of new
Section III(d) in the grant notice.
The availability of this exemption is subject to the express condition that
the material facts and representations contained in the application 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, PTE 94-50 and PTE 99-15, refer to the
proposed exemptions and the grant notices which are cited above.
Signed at Washington, D.C., this 31st day of August, 2000.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits Administra-
tion, U.S. Department of Labor.
[FR Doc. 00-22853 Filed 9-6-00; 8:45 am]
B-12
<PAGE>
--------------------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 2000-45; Exemption Application Nos. D-10809
and D-10865]
Grant of Individual Exemption to Amend and Replace Prohibited Transaction
Exemption (PTE) 99-15, Involving Salomon Smith Barney Inc. (Salomon Smith
Barney), Located in New York, NY
AGENCY: Pension and Welfare Benefits Administration, U.S. Department of Labor
(the Department).
ACTION: Notice of Technical Correction.
--------------------------------------------------------------------------------
On September 7, 2000, the Department published in the Federal Register (65 FR
54315) a final exemption which amends and replaces PTE 99-15 (64 FR 1648,
April 5,
1999), an exemption granted to Salomon Smith Barney. PTE 99-15 relates to the
operation of the TRAK Personalized Investment Advisory Service product (the
TRAK Program) and the Trust for Consulting Group Capital Markets Funds (the
Consulting Group).
On page 54316 of the grant notice, the last sentence of the third paragraph of
the Supplementary Information, erroneously refers to an effective date of July
10, 2000 with respect to Section III(d) of the grant notice. Thus, the sentence
should be revised to read as follows:
The Final Exemption is effective as of April 1, 2000 with respect to the
amendments to Sections II(i) and III(b) of the grant notice and the inclusion
of new Section III(d) of the grant notice.
Also on page 54316 of the grant notice, clause (c) of Footnote 1, should be
revised as follows to describe more accurately the purpose of the automated
reallocation option:
(c) adopted an automated reallocation option under the TRAK Program which
would afford an Independent Plan Fiduciary the option of having his or her
asset allocation adjusted automatically whenever the Consulting Group changes
an allocation model;
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department at (202)
219-8881. (This is not a toll-free number.)
Signed at Washington, DC, this 18th day of September, 2000.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 00-24388 Filed 9-21-00; 8:45 am]
TK 2088S
B-13
<PAGE>
This page intentionally left blank
<PAGE>
This page intentionally left blank
<PAGE>
For More Information
If you want more information about a Portfolio, the following resources are
available upon request.
Annual and Semiannual Reports
Additional information about the Portfolios' investments will be available
in the
Portfolios' annual and semiannual reports to shareholders. The Portfolios'
annual reports will contain a discussion of the market conditions and investment
strategies that significantly affected the Portfolios' performance during their
last fiscal year.
Statement of Additional Information
The Statement of Additional Information provides more detailed information about
the Portfolios and is incorporated into this prospectus by reference.
Investment Professional
The investor's Financial Consultant is available to answer questions about the
Portfolios or the investor's overall asset allocation program.
Investors can get free copies of reports and SAIs, request other information and
discuss their questions about the Portfolios by contacting their Financial
Consultant, or by writing to the Portfolios' sub-transfer agent, PFPC
Global Fund Services, at:
Consulting Group Capital Markets Funds
c/o PFPC Global Fund Services
P.O. Box 9699
Providence, RI 02940-9699
or by calling the Portfolios' transfer agent at 800-451-2010
Information about the Portfolios (including the SAI) can be reviewed and
copied at
the Securities and Exchange Commission's (the "Commission") Public Reference
Room in Washington, D.C. In addition, information on the operation of the Public
Reference Room may be obtained by calling the Commission at 1-202-942-8090.
Reports and other information about the Portfolio are available on the EDGAR
Database on the Commission's Internet site at http://www.sec.gov. Copies of this
information may be obtained for a duplicating fee by electronic request at the
following E-mail address: [email protected], or by writing the Commission's
Public Reference Section, Washington, D.C. 20549-0102.
If someone makes a statement about the Portfolios that is not in
this prospectus,
you should not rely upon that information. Neither the Portfolios' nor the
distributor is offering to sell shares of the Portfolios' to any person to whom
the Portfolios' may not lawfully sell their shares.
Investment Company Act File No. 811-06318
SALOMON SMITH BARNEY
----------------------------
A member of citigroup [LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
Salomon Smith Barney, Inc, is a wholly-owned subsidiary of Citigroup Inc.
Citigroup businesses produce a broad range of financial services--asset
management, banking and consumer finance, credit and charge cards, insurance,
investments and investment banking and trading--and use diverse channels to make
them available to consumer and corporate customers around the world.
(R)2000 Salomon Smith Barney Inc. TK2088 12/00
STATEMENT OF ADDITIONAL INFORMATION
CONSULTING GROUP CAPITAL MARKETS FUNDS
December 29, 2000
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 December
29, 2000, and should be read in conjunction with the
Prospectus. The Trust is a series company that
consists of eighteen portfolios, fifteen of which are
offered by the Prospectus. These are Government
Money Investments, Intermediate Fixed Income
Investments, Long-Term Bond Investments, Municipal
Bond Investments, Mortgage Backed Investments, High
Yield 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 and
Multi-Sector Fixed Income Investments (individually,
a "Portfolio" and collectively, the "Portfolios").
Three additional portfolios, Multi-Strategy Market
Neutral Investments, S & P 500 Index Investments and
Global Sciences and Technology Investments, are
offered in separate prospectuses. The Prospectus may
be obtained by contacting any Financial Consultant of
Salomon Smith Barney Inc. ("Salomon 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
Trustees and Executive Officers of the Trust
2
Investment Objectives, Management Policies and Risk Factors
of the Portfolios
5
Investment Restrictions
26
Portfolio Transactions
28
Portfolio Turnover
33
Investment Management and Other Services
34
Purchase of Shares
41
Redemption of Shares
42
Redemptions in Kind
42
Net Asset Value
42
Determination of Performance
43
Taxes
48
Distributor
53
Custodians, Transfer Agent and Sub-Transfer Agent
53
Financial Statements
54
Appendix
55
Capitalized terms used but not defined in this
Statement of Additional Information have the meanings
accorded to them in the Prospectus.
TRUSTEES AND EXECUTIVE 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 Investment
Company Act of 1940 (the "1940 Act"), is indicated by
an asterisk.
Walter E. Auch, Trustee (Age 79). Consultant to
companies in the financial services industry;
Director of Brinson Partners; Nicholas-Applegate
(each a registered investment adviser); Legend
Properties, a real estate management company; Banyan
Realty Trust; and Banyan Land Fund II. Director or
trustee of 2 investment companies associated with
Citigroup Inc. ("Citigroup"). His address is 6001 N.
62nd Place, Paradise Valley, Arizona 85253.
Martin Brody, Trustee (Age 79). Private Investor;
Director or trustee of 20 investment companies
associated with Citigroup. His address is c/o HMK
Associates, 30 Columbia Turnpike, Florham Park, N.J.
07932.
H. John Ellis, Trustee (Age 73). Retired. Director or
trustee of 2 investment companies associated with
Citigroup. His address is 858 East Crystal Downs
Drive, Frankfort, Michigan 49635.
Armon E. Kamesar, Trustee (Age 73). Chairman of the
Board of TEC, an international organization of Chief
Executive Officers; Trustee, U.S. Bankruptcy Court.
Director or trustee of 2 investment companies
associated with Citigroup. His address is 7328
Country Club Drive, La Jolla, CA 92037.
Stephen E. Kaufman, Trustee (Age 68). Attorney.
Director or trustee of 13 investment companies
associated with Citigroup. His address is 277 Park
Avenue, New York, New York 10172.
*Heath B. McLendon, Trustee and Chairman of the Board
(Age 67). Managing Director of Salomon Smith Barney
and Chairman of the Board of Salomon Smith Barney
Strategy Advisers Inc. and Director and President of
SSB Citi Fund Management LLC ("SSB Citi") (successor
to SSBC Fund Management Inc.) and Travelers
Investment Adviser, Inc. ("TIA"); Mr. McLendon serves
on the Board of 78 investment companies associated
with Citigroup. His address is 7 World Trade Center,
New York, New York 10048.
Lewis E. Daidone, Senior Vice President and Treasurer
(Age 42). Managing Director of Salomon Smith Barney;
Director and Senior Vice President of SSB Citi and
TIA. Mr. Daidone serves as Senior Vice President and
Treasurer of 61 investment companies associated with
Citigroup. His address is 125 Broad Street, New York,
New York 10004.
Frank L. Campanale, Investment Officer (Age 47).
President and Chief Executive Officer of Salomon
Smith Barney's Consulting Group (the "Manager").
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 41).
First Vice President of Salomon 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 49). Managing
Director of Salomon Smith Barney; General Counsel and
Secretary of SSB Citi and TIA. Ms. Sydor serves as
Secretary of 61 investment companies associated with
Citigroup. Her address is 7 World Trade Center, New
York New York 10048.
Irving David, Controller (Age 39). Director of
Salomon Smith Barney. Controller or Assistant
Treasurer of 43 investment companies associated with
Citigroup; Formerly Assistant Treasurer of First
Investment Management Company; His address is 125
Broad Street, New York, New York 10004.
As of December 15, 2000, the Trustees and officers as
a group owned less than 1% of the outstanding common
stock of the Trust. As of December 15, 2000, 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: Patricia Davis
1690 Russell Road
Paoli, PA 19301
owned 1,330,302.030 shares (23.17%)
SBC Trust Company TTEE
Reihalt Thomas Corporation
Attn: Robert Holman
14631 N. Scottsdale Road
Scottsdale, AZ 85254
owned 600,820.419 shares (10.46%)
SBC Trust Company
Cray Inc.
Attn: Mary Anderson
411 First Avenue South, 600
Seattle, WA 98104
owned 425,596.259 shares (7.41%)
SBC Trust Company TTEE
Oasis Corporation
Attn: Tom Benua
265 N. Hamilton Road
Columbus, OH 43213
owned 311,712.727 shares (5.43%)
Multi-Sector Fixed Income Investments
SB Holdings Inc.
Attn: Barbara Brinn
125 Broad Street
10th Floor
New York, NY 10004
owned 1,333,522.106 shares (35.41%)
SBC Trust Company
Cray Inc.
Attn: Mary Anderson
411 First Avenue South, 600
Seattle, WA 98104
owned 560,023.693 shares (14.87%)
SBC Trust Company TTEE
Galey & Lord
Attn: Brenda Miller
P.O. Box 1400
Columbus, GA 31902
owned 352,140.685 shares (9.35%)
SBC Trust Company TTEE
Oasis Corporation
Attn: Tom Benua
265 N. Hamilton Road
Columbus, OH 43213
owned 312,185.538 shares (8.29%)
SBC Trust Company TTEE
The Barry-Wehmiller Company
Attn: Jim Hertel
8020 Forsyth Blvd.
Clayton, MO 63105
owned 250,746.911 shares (6.66%)
SBC Trust Company TTEE
Galey & Lord
Attn: Brenda Miller
P.O. Box 1400
Columbus, GA 31902
owned 206,821.365 shares (5.49%)
Remuneration. No director, officer or employee of
Salomon Smith Barney, SSB Citi 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 Salomon Smith
Barney, the Manager, any advisor, SSB Citi or any of
their affiliates a fee of $32,000 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, 2000, such fees and expenses totaled
$21,166.
For the fiscal year ended August 31, 2000, 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 Trust Fund Complex* Complex
Heath B. McLendon** None None None 78
Walter Auch $36,300 None $ 50,600 2
Martin Brody 35,100 None 138,000 20
H. John Ellis 37,300 None 50,600 2
Armon E. Kamesar 37,300 None 52,600 2
Stephen E. Kaufman 37,300 None 110,650 13
* For calendar year ended December 31, 1999.
** Designates "interested trustee".
INVESTMENT OBJECTIVES, MANAGEMENT POLICIES AND RISK
FACTORS
Each of the Portfolios is a diversified, open-end
management investment company, except International
Fixed Income Investments, which is a non-diversified
Portfolio. The Prospectus discusses the investment
objectives of the Portfolios, separate series of 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. The
Portfolios may rely upon the independent advice of
their respective investment advisors (separately a
"Subadvisor", collectively, the "Subadvisors") to
evaluate potential investments.
Equity Securities. The equity oriented Portfolios
may invest in all types of equity securities and High
Yield Investments may invest up to 10% of its assets
in equity securities. Common stock is an interest in
a company, limited liability company, or similar
entity that entitles the holder to a share in the
profits of the company, in the form of dividends, and
the proceeds from a sale or liquidation of the
company. The interests of common shareholders are
the most junior in a corporate structure. This means
that in the event of the bankruptcy of the company
its creditors and any holders of a preferred class of
equity securities are paid before the common
stockholders are entitled to receive anything.
However, any assets of the company in excess of the
amount owed to creditors or preferred shareholders
are shared pro-rata among the common stockholders.
Common stockholders normally have voting control of
the company and are entitled to vote on the election
of directors and certain fundamental corporate
actions.
Preferred stocks are equity securities, but they have
many characteristics of fixed income securities.
Their similarities to fixed income securities
generally cause preferred stocks to trade more like
debt instruments than common stocks. Thus, the value
of preferred stocks reflects the credit risk of the
company and the dividend yield on the preferred
stocks compared to prevailing interest rates.
Preferred shares are entitled to receive dividends
before any dividend is paid to the holders of common
stock. The dividend may be at a fixed or variable
dividend payment rate, may be payable on fixed dates
or at times determined by the company and may be
payable in cash, additional shares of preferred stock
or other securities. Many preferred stocks are
redeemable at the option of the company after a
certain date. Holders of preferred stock are also
entitled to receive a payment upon the sale or
liquidation of a company before any payment is made
to the company's common stockholders. However,
preferred stock is an equity security and, therefore,
is junior in priority of payment to the company's
creditors in the event of a bankruptcy, including
holders of the company's debt securities. This
junior ranking to creditors makes preferred stock
riskier in some respects than fixed income
securities.
Convertible securities are preferred stocks or fixed
income securities that are convertible at the option
of the holder, or in some circumstances at the option
of the issuing company, at a stated exchange rate or
formula into the company's common stock or other
equity securities. At the time a company sells the
convertible securities, the conversion price is
normally higher than the market price of the common
stock. A holder of convertible securities will
generally receive interest or dividends at a rate
lower than comparable debt securities, but the holder
has the potential for additional gain if the market
value of the common stock exceeds the conversion
price. When the market price of the common stock is
below the conversion price, convertible securities
tend to trade like fixed income securities. If the
market price of the common stock is higher than the
conversion price, convertible securities tend to
trade like the common stock. Convertible securities
rank senior to common stocks in an issuer's capital
structure and consequently may be of higher quality
and entail less risk than the issuer's common stock.
Warrants and stock purchase rights are securities
permitting, but not obligating, their holder to
purchase other securities, normally the issuer's
common stock. Stock purchase rights are frequently
issued as a dividend to a company's stockholders and
represent the right to purchase a fixed number of
shares at a fixed or formula price. The price may
reflect a discount to the market price. Warrants are
generally sold by a company or issuer together with
fixed income securities and represent the right to a
fixed number of shares of common stock or other
securities at a fixed or formula price. The exercise
price is normally higher than the market price at the
time the company sells the warrant.
Warrants and stock purchase rights do not carry with
them the right to receive dividends on or to vote the
securities that they entitle their holders to
purchase. They also do not entitle the holder to
share in the assets of the company in a liquidation.
The rights to purchase common stock or other
securities conferred by a warrant or stock purchase
right can only be exercised on specific dates or for
a specific period. Trading in these instruments is
affected both by the relationship of the exercise
price to the current market price of the common stock
or other securities and also by the period remaining
until the right or warrant expires. An investment in
warrants and stock purchase rights may be considered
more speculative than other types of equity
investments. A warrant or stock purchase right
expires worthless if it is not exercised on or prior
to its expiration date.
Real Estate Investment Trusts ("REITs"). Each
Portfolio may invest in REITs. REITs are pooled
investment vehicles which invest primarily in income
producing real estate or real estate related loans or
interests. REITs are generally classified as equity
REITs, mortgage REITs or a combination of equity and
mortgage REITs. Equity REITs invest the majority of
their assets directly in real property and derive
income primarily from the collection of rents. Equity
REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real
estate mortgages and derive income from the
collection of interest payments. REITs are not taxed
on income distributed to shareholders provided they
comply with the applicable requirements of the
Internal Revenue Code of 1986, as amended (the
"Code"). Debt securities issued by REITs, for the
most part, are general and unsecured obligations and
are subject to risks associated with REITs.
Investing in REITs involves certain unique risks in
addition to those risks associated with investing in
the real estate industry in general. An equity REIT
may be affected by changes in the value of the
underlying properties owned by the REIT. A mortgage
REIT may be affected by changes in interest rates and
the ability of the issuers of its portfolio mortgages
to repay their obligations. REITs are dependent upon
the skills of their managers and are not diversified.
REITs are generally dependent upon maintaining cash
flows to repay borrowings and to make distributions
to shareholders and are subject to the risk of
default by lessees or borrowers. REITs whose
underlying assets are concentrated in properties used
by a particular industry, such as health care, are
also subject to risks associated with such industry.
REITs (especially mortgage REITs) are also subject to
interest rate risks. When interest rates decline, the
value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when
interest rates rise, the value of a REIT's investment
in fixed rate obligations can be expected to decline.
If the REIT invests in adjustable rate mortgage loans
the interest rates on which are reset periodically,
yields on a REIT's investments in such loans will
gradually align themselves to reflect changes in
market interest rates. This causes the value of such
investments to fluctuate less dramatically in
response to interest rate fluctuations than would
investments in fixed rate obligations.
REITs may have limited financial resources, may trade
less frequently and in a limited volume and may be
subject to more abrupt or erratic price movements
than larger company securities. Historically REITs
have been more volatile in price than the larger
capitalization stocks included in Standard & Poor's
500 Stock Index (the "S&P 500").
Other Investment Companies. The Portfolios may
invest in the securities of other investment
companies to the extent such investments are
consistent with the Portfolios' investment objectives
and policies and permissible under the Investment
Company Act of 1940, as amended (the "1940 Act").
Under the 1940 Act, a Portfolio may not acquire the
securities of other domestic or foreign investment
companies if, as a result, (i) more than 10% of the
Portfolio's total assets would be invested in
securities of other investment companies, (ii) such
purchase would result in more than 3% of the total
outstanding voting securities of any one investment
company being held by the Portfolio, or (iii) more
than 5% of the Portfolio's total assets would be
invested in any one investment company. These
limitations do not apply to the purchase of shares of
any investment company in connection with a merger,
consolidation, reorganization or acquisition of
substantially all the assets of another investment
company. A Portfolio will not invest in other
investment companies for which the Subadvisors or any
of their affiliates act as an investment advisor or
distributor.
A Portfolio, as a holder of the securities of other
investment companies, will bear its pro rata portion
of the other investment companies' expenses,
including advisory fees. These expenses are in
addition to the direct expenses of the Portfolio's
own operations.
Investing in Small and Medium Capitalization
Companies. Investing in the equity securities of
small and medium capitalization companies involves
additional risks compared to investing in large
capitalization companies. Compared to large
companies, these companies may have more limited
product lines and capital resources; have less
established markets for their products; have earnings
that are more sensitive to changes in the economy,
competition and technology and be more dependent upon
key members of management.
The market value of the common stock of small and
medium capitalization companies may be more volatile,
particularly in response to company announcements or
industry events; have less active trading markets and
be harder to sell at the time and prices that a
Subadvisor considers appropriate.
Fixed Income Securities. The market value of the
obligations held by the Portfolios can be expected to
vary inversely to changes in prevailing interest
rates. Investors also should recognize that, in
periods of declining interest rates, the Portfolios'
yield will tend to be somewhat higher than prevailing
market rates and, in periods of rising interest
rates, the Portfolios' yield will tend to be somewhat
lower. Also, when interest rates are falling, the
inflow of net new money to the Portfolios from the
continuous sale of their shares will tend to be
invested in instruments producing lower yields than
the balance of their portfolios, thereby reducing the
Portfolios' current yield. In periods of rising
interest rates, the opposite can be expected to
occur. In addition, securities in which the
Portfolios 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.
The Portfolios invest in U.S. Government securities,
corporate bonds, debentures, non-convertible fixed
income preferred stocks, mortgage related securities,
asset-backed securities ("ABS"), Eurodollar
certificates of deposit, Eurodollar bonds and Yankee
bonds.
Debt Securities Rating Criteria. Investment grade
debt securities are those rated "BBB" or higher by
Standard & Poor's Ratings Group ("S & P"), the
equivalent rating of other nationally recognized
statistical rating organizations ("NRSROs") or
determined to be of equivalent credit quality by the
Subadvisor. Debt securities rated BBB are considered
medium grade obligations with speculative
characteristics, and adverse economic conditions or
changing circumstances may weaken the issuer's
ability to pay interest and repay principal.
Below investment grade debt securities are those
rated "BB" and below by S & P or the equivalent
rating of other NRSROs. Below investment grade debt
securities or comparable unrated securities are
commonly referred to as "junk bonds" and are
considered predominantly speculative and may be
questionable as to principal and interest payments.
Changes in economic conditions are more likely to
lead to a weakened capacity to make principal
payments and interest payments. The amount of junk
bond securities outstanding has proliferated as an
increasing number of issuers have used junk bonds for
corporate financing. An economic downturn could
severely affect the ability of highly leveraged
issuers to service their debt obligations or to repay
their obligations upon maturity. Factors having an
adverse impact on the market value of lower quality
securities will have an adverse effect on a
Portfolio's net asset value to the extent it invests
in such securities. In addition, the Portfolios may
incur additional expenses to the extent they are
required to seek recovery upon a default in payment
of principal or interest on their portfolio holdings.
The secondary market for junk bond securities, which
is concentrated in relatively few market makers, may
not be as liquid as the secondary market for more
highly rated securities, a factor which may have an
adverse effect on a Portfolio's ability to dispose of
a particular security when necessary to meet its
liquidity needs. Under adverse market or economic
conditions, the secondary market for junk bond
securities could contract further, independent of any
specific adverse changes in the condition of a
particular issuer. As a result, a Portfolio could
find it more difficult to sell these securities or
may be able to sell the securities only at prices
lower than if such securities were widely traded.
Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be
less than the prices used in calculating the
Portfolio's net asset value.
Since investors generally perceive that there are
greater risks associated with lower quality debt
securities of the type in which a Portfolio may
invest a portion of its assets, the yields and prices
of such securities may tend to fluctuate more than
those for higher rated securities. In the lower
quality segments of the debt securities market,
changes in perceptions of issuers' creditworthiness
tend to occur more frequently and in a more
pronounced manner than do changes in higher quality
segments of the debt securities market, resulting in
greater yield and price volatility.
Lower rated and comparable unrated debt securities
tend to offer higher yields than higher rated
securities with the same maturities because the
historical financial condition of the issuers of such
securities may not have been as strong as that of
other issuers. However, lower rated securities
generally involve greater risks of loss of income and
principal than higher rated securities. The
Subadvisors will attempt to reduce these risks
through portfolio diversification and by analysis of
each issuer and its ability to make timely payments
of income and principal, as well as broad economic
trends and corporate developments.
The definitions of the ratings of debt obligations
may be found in the Appendix following this Statement
of Additional Information.
Ratings as Investment Criteria. In general, the
ratings of an NRSRO such as Moody's Investors
Service, Inc. ("Moody's") and 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 Subadvisors 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 that Portfolio. Neither event will
require the sale of the debt obligation by the
Portfolio, but the Portfolio's Subadvisors will
consider the event in their 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 an NRSRO, a Portfolio will attempt to use
comparable ratings as standards for its investments
in accordance with its investment objectives and
policies.
Municipal Obligations. Municipal Bond Investments
invests in municipal obligations. These are
obligations 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 the
interest on which, in the opinion of bond counsel to
the issuer, is exempt from federal income tax.
Municipal obligations are issued to obtain funds for
various public purposes, including the construction
of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation,
schools, streets, water and sewer works, gas, and
electric utilities. They may also be issued to
refund outstanding obligations, to obtain funds for
general operating expenses, to obtain funds to loan
to other public institutions and facilities or to
obtain funds in anticipation of the receipt of
revenue or the issuance of other obligations.
Municipal obligations consist of municipal bonds,
municipal notes and municipal commercial paper as
well as variable or floating rate obligations and
participation interests.
Municipal obligations are subject to the provisions
of bankruptcy, insolvency and other laws, such as the
federal Bankruptcy Code, affecting the rights and
remedies of creditors. In addition, Congress or
state legislatures may enact laws extending the time
for payment of principal or interest, or both, or
imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to
levy taxes. There is also the possibility that, as a
result of litigation or other conditions, the power
or ability of any issuer to pay when due the
principal of and interest on its obligations may be
materially affected.
The yields on municipal obligations are dependent on
a variety of factors, including general market
conditions, supply and demand, general conditions of
the municipal market, size of a particular offering,
the maturity of the obligation and the rating of the
issue.
For purposes of applying the Portfolio's
diversification, concentration and other
restrictions, the identification of the issuer of
municipal obligations depends on the terms and
conditions of the obligation. The "issuer" of
municipal obligations is generally deemed to be the
person expected to be the source of principal and
interest payments on the obligations and may be:
? the governmental agency, authority,
instrumentality or other political subdivision
that issued the security;
? the non-governmental user of a revenue bond-
financed facility, the assets and revenues of
which will be used to meet the payment obligations
on the municipal security; or
? the guarantor of payment obligations on the
municipal obligations.
Municipal bonds, which generally have maturities of
more than one year when issued, are designed to meet
longer-term capital needs. Municipal bonds have two
principal classifications: general obligation bonds
and revenue bonds. General obligation bonds are
backed by the issuer's pledge of its full faith and
credit based on its ability to levy taxes for the
payment of principal and interest. These levies may
be constitutionally or statutorily limited as to rate
or amount. Revenue bonds are not backed by an
issuer's taxing authority but are payable only from
the revenue derived from a particular facility or
class of facilities. The issuer may repay these
bonds from the proceeds of a special excise tax or
other specific revenue source, but not the issuer's
general taxing power.
Private activity bonds include certain types of
industrial development bonds ("IDBs") issued by
public authorities to finance various privately-
operated facilities for business and manufacturing,
housing, sports, convention or trade show facilities,
airport, mass transit, port and parking facilities,
air or water pollution control facilities, and
certain facilities for water supply, gas, electricity
or sewage or solid waste disposal. Private activity
bonds are, in most cases, revenue bonds and are
generally secured by the revenues derived from
payments by the private user. The payment of the
principal and interest on private activity bonds is
dependent solely on the ability of the user of the
facilities financed by the bonds to meet its
financial obligations and the pledge, if any, of real
and personal property so financed as security for
such payment.
Private activity bonds that are issued by or on
behalf of public authorities to finance privately
operated facilities are considered to be municipal
obligations if the interest paid on them qualifies as
excluded from gross income (but not necessarily from
alternative minimum taxable income) for federal
income tax purposes in the opinion of bond counsel to
the issuer. Dividends derived from interest income
on municipal obligations are a "current earnings"
adjustment for purposes of the federal corporate
alternative minimum tax.
Interest income on certain types of private activity
bonds issued after August 7, 1986 to finance non-
governmental activities is a specific tax preference
item for purposes of the federal individual and
corporate alternative minimum taxes. Individual and
corporate shareholders may be subject to a federal
alternative minimum tax to the extent that the fund's
dividends are derived from interest on those bonds.
Municipal notes are short-term obligations of issuing
municipalities or agencies, generally having
maturities of less than three years, such as tax
anticipation notes, revenue anticipation notes and
bond anticipation notes. These instruments are sold
in anticipation of the collection of taxes, receipt
of other revenues or a bond sale. State and local
governments or governmental entities issue these
notes to provide short-term capital or to meet cash
flow needs.
Mortgage Backed Securities. Mortgage Backed
Investments, Intermediate Fixed Income Investments,
Long-Term Bond Investments, Balanced Investments and
Multi-Sector Fixed Income Investments may invest in
mortgage related 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. Government National Mortgage
Association ("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 the Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("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
Portfolios' investment objectives and policies, will
consider making investments in those new types of
securities on behalf of the Portfolios. A Portfolio
will not invest more than 25% of its assets in
privately issued mortgage related securities.
Mortgage Backed Investments, Intermediate Fixed
Income Investments, Long-Term Bond Investments,
Multi-Sector Fixed Income Investments and Balanced
Investments may invest in government stripped
mortgage related securities, collateralized mortgage
obligations ("CMOs") collateralized by mortgage loans
or mortgage pass-through certificates and zero coupon
securities, which, because of changes in interest
rates, may be more speculative and subject to greater
fluctuations in value than securities that pay
interest currently. 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.
The Portfolios 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 Portfolios 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 1940 Act.
Asset-Backed Securities ("ABS"). Intermediate Fixed
Income Investments, Long-Term Bond Investments and
Balanced Investments may each invest up to 5% of
their assets and Multi-Sector Fixed Income
Investments may invest up to 10% of its assets in
ABS. ABS may enhance a Portfolio's performance,
however their use involves certain risks that may not
be found in other mutual fund investments. The
Portfolios will only invest in ABS that have received
a AAA rating from both Moody's and S&P or an
equivalent rating from another nationally recognized
statistical rating organization.
Mortgage Dollar Roll Transactions. In order to
enhance current income, Mortgage Backed Investments,
Balanced Investments and Multi-Sector Fixed Income
Investments may enter into mortgage dollar rolls with
respect to mortgage related securities issued by
GNMA, FNMA and FHLMC. In a mortgage dollar roll
transaction, a Portfolio sells a mortgage related
security to a financial institution, such as a bank
or a 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, a
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 a Portfolio exceeding
the yield on the securities sold. Mortgage dollar
roll transactions involve the risk that the market
value of the securities sold by a Portfolio may
decline below the repurchase price of those
securities. At the time a Portfolio enters into a
mortgage dollar roll transaction, it will place in a
segregated custodial account liquid securities 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. Mortgage dollar roll transactions are
considered to be borrowings by a Portfolio.
High Yield Securities. High Yield Investments and
Multi-Sector Fixed Income Investments may invest in
medium or lower rated securities and unrated
securities of comparable quality, sometimes referred
to as "junk bonds." Generally, such securities 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 obligations.
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 because of default by these issuers
is significantly greater because medium and lower
rated securities generally are unsecured and
frequently subordinated to the prior payment of
senior indebtedness. In light of these risks, the
Board of Trustees has instructed the Subadvisors, 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 securities are traded are more
limited that those in which higher rated securities
are traded. The existence of limited markets may
make it more difficult for the Portfolio to obtain
accurate market quotations for purposes of valuing
its securities and calculating its net asset value.
Moreover, the lack of a liquid trading market may
restrict the availability of securities for the
Portfolio to purchase and may also have the effect of
limiting the ability of the 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, the Portfolio may have to
replace the security with a lower yielding security,
resulting in a decreased return for investors. Also,
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
the Portfolio may decline proportionately more than a
portfolio consisting of higher rated securities. If
the 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 because of changes in
interest rates than bonds that pay interest
currently.
Subsequent to its purchase by the Portfolio, an issue
of securities may cease to be rated or its rating may
be reduced below the minimum required for purchase by
the Portfolio. Neither event will require sale of
these securities by the Portfolio, but the Subadvisor
will consider the event in determining whether the
Portfolio should continue to hold the security.
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 a Portfolio. 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.
Supranational Entities. International Fixed Income
Investments, subject to the diversification
requirements of the tax 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 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.
ADRs, EDRs and GDRs. The Portfolios may also
purchase American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs") and Global
Depository Receipts ("GDRs") or other securities
representing underlying shares of foreign companies.
ADRs are publicly traded on exchanges or over-the-
counter in the United States and are issued through
"sponsored" or "unsponsored" arrangements. In a
sponsored ADR arrangement, the foreign issuer assumes
the obligation to pay some or all of the depository's
transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligation
and the depository's transaction fees are paid by the
ADR holders. In addition, less information is
available in the United States about an unsponsored
ADR than about a sponsored ADR, and the financial
information about a company may not be as reliable
for an unsponsored ADR as it is for a sponsored ADR.
A Portfolio may invest in ADRs through both sponsored
and unsponsored arrangements.
Eurodollar Instruments and Yankee Bonds.
Intermediate Fixed Income Investments, Long-Term Bond
Investments and Multi-Sector Fixed Income Investments
may invest in Eurodollar certificates of deposit
("ECDs"), Eurodollar bonds and Yankee bonds.
Eurodollar instruments are bonds of corporate and
government issuers that pay interest and principal in
U.S. dollars but are issued in markets outside the
United States, primarily in Europe. Yankee bonds are
bonds of foreign governments and their agencies and
foreign banks and corporations that pay interest in
U.S. dollars and are typically issued in the U.S.
ECDs are U.S. dollar-denominated certificates of
deposit issued by foreign branches of domestic banks.
Long-Term Bond Investments may invest up to 15% of
its assets in Yankee bonds.
Risks of Non-U.S. Investments. To the extent a
Portfolio invests in the securities of non-U.S.
issuers, those investments involve considerations and
risks not typically associated with investing in the
securities of issuers in the U.S. These risks are
heightened with respect to investments in countries
with emerging markets and economies. The risks of
investing in securities of non-U.S. issuers or
issuers with significant exposure to non-U.S. markets
may be related, among other things, to (i)
differences in size, liquidity and volatility of, and
the degree and manner of regulation of, the
securities markets of certain non-U.S. markets
compared to the securities markets in the U.S.; (ii)
economic, political and social factors; and (iii)
foreign exchange matters, such as restrictions on the
repatriation of capital, fluctuations in exchange
rates between the U.S. dollar and the currencies in
which a Portfolio's portfolio securities are quoted
or denominated, exchange control regulations and
costs associated with currency exchange. The
political and economic structures in certain non-U.S.
countries, particularly emerging markets, are
expected to undergo significant evolution and rapid
development, and such countries may lack the social,
political and economic stability characteristic of
more developed countries. Unanticipated political or
social developments may affect the values of a
Portfolio's investments in such countries. The
economies and securities and currency markets of many
emerging markets have experienced significant
disruption and declines. There can be no assurances
that these economic and market disruptions will not
continue.
Foreign Securities Markets and Regulations. There
may be less publicly available information about non-
U.S. markets and issuers than is available with
respect to U.S. securities and issuers. Non-U.S.
companies generally are not subject to accounting,
auditing and financial reporting standards, practices
and requirements comparable to those applicable to
U.S. companies. The trading markets for most non-U.S.
securities are generally less liquid and subject to
greater price volatility than the markets for
comparable securities in the U.S. The markets for
securities in certain emerging markets are in the
earliest stages of their development. Even the
markets for relatively widely traded securities in
certain non-U.S. markets, including emerging
countries, may not be able to absorb, without price
disruptions, a significant increase in trading volume
or trades of a size customarily undertaken by
institutional investors in the U.S. Additionally,
market making and arbitrage activities are generally
less extensive in such markets, which may contribute
to increased volatility and reduced liquidity. The
less liquid a market, the more difficult it may be
for a Portfolio to accurately price its portfolio
securities or to dispose of such securities at the
times determined by the Subadvisor to be appropriate.
The risks associated with reduced liquidity may be
particularly acute in situations in which a
Portfolio's operations require cash, such as in order
to meet redemptions and to pay its expenses.
Economic, Political and Social Factors. Certain non-
U.S. countries, including emerging markets, may be
subject to a greater degree of economic, political
and social instability than is the case in the U.S.
and Western European countries. Such instability may
result from, among other things: (i) authoritarian
governments or military involvement in political and
economic decision making; (ii) popular unrest
associated with demands for improved economic,
political and social conditions; (iii) internal
insurgencies; (iv) hostile relations with neighboring
countries; and (v) ethnic, religious and racial
disaffection and conflict. Such economic, political
and social instability could significantly disrupt
the financial markets in such countries and the
ability of the issuers in such countries to repay
their obligations. Investing in emerging countries
also involves the risk of expropriation,
nationalization, confiscation of assets and property
or the imposition of restrictions on foreign
investments and on repatriation of capital invested.
In the event of such expropriation, nationalization
or other confiscation in any emerging country, a
Portfolio could lose its entire investment in that
country.
Certain emerging market countries restrict or control
foreign investment in their securities markets to
varying degrees. These restrictions may limit a
Portfolio's investment in those markets and may
increase the expenses of the Portfolio. In addition,
the repatriation of both investment income and
capital from certain markets in the region is subject
to restrictions such as the need for certain
governmental consents. Even where there is no
outright restriction on repatriation of capital, the
mechanics of repatriation may affect certain aspects
of a Portfolio's operation.
Economies in individual non-U.S. countries may differ
favorably or unfavorably from the U.S. economy in
such respects as growth of gross domestic product,
rates of inflation, currency valuation, capital
reinvestment, resource self-sufficiency and balance
of payments positions. Many non-U.S. countries have
experienced substantial, and in some cases extremely
high, rates of inflation for many years. Inflation
and rapid fluctuations in inflation rates have had,
and may continue to have, very negative effects on
the economies and securities markets of certain
emerging countries.
Economies in emerging countries generally are
dependent heavily upon international trade and,
accordingly, have been and may continue to be
affected adversely by trade barriers, exchange
controls, managed adjustments in relative currency
values and other protectionist measures imposed or
negotiated by the countries with which they trade.
These economies also have been, and may continue to
be, affected adversely by economic conditions in the
countries with which they trade.
Currency Risks. The value of the securities quoted
or denominated in international currencies may be
adversely affected by fluctuations in the relative
currency exchange rates and by exchange control
regulations. A Portfolio's investment performance may
be negatively affected by a devaluation of a currency
in which the Portfolio's investments are quoted or
denominated. Further, a Portfolio's investment
performance may be significantly affected, either
positively or negatively, by currency exchange rates
because the U.S. dollar value of securities quoted or
denominated in another currency will increase or
decrease in response to changes in the value of such
currency in relation to the U.S. dollar.
Custodian Services and Related Investment Costs.
Custodian services and other costs relating to
investment in international securities markets
generally are more expensive than in the U.S. Such
markets have settlement and clearance procedures that
differ from those in the U.S. In certain markets
there have been times when settlements have been
unable to keep pace with the volume of securities
transactions, making it difficult to conduct such
transactions. The inability of a Portfolio to make
intended securities purchases because of settlement
problems could cause the Portfolio to miss attractive
investment opportunities. Inability to dispose of a
portfolio security caused by settlement problems
could result either in losses to the Portfolio
because of a subsequent decline in value of the
portfolio security or could result in possible
liability to the Portfolio. In addition, security
settlement and clearance procedures in some emerging
countries may not fully protect a Portfolio against
loss or theft of its assets.
Withholding and Other Taxes. The Portfolios will be
subject to taxes, including withholding taxes, on
income (possibly including, in some cases, capital
gains) that are or may be imposed by certain non-U.S.
countries with respect to a Portfolio's investments
in such countries. These taxes will reduce the return
achieved by a Portfolio. Treaties between the U.S.
and such countries may not be available to reduce the
otherwise applicable tax rates.
Currency Exchange Rates. A Portfolio's share value
may change significantly when the currencies, other
than the U.S. dollar, in which that Portfolio's
investments are quoted or 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. The Portfolios may
invest in securities quoted or denominated in foreign
currencies, 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 a
Portfolio's securities are or may be quoted or
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 with a currency
trader and fixed for the term of the contract at the
time a 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.
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. The Portfolios, however, may enter into
forward currency contracts containing either or both
deposit requirements and commissions.
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 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.
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 Subadvisor. 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 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 the Portfolio holds a substantial quantity of
securities and are unrelated to the qualitative
rating that may be assigned to any particular
security. 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, a 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
Subadvisor 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
adverse market movements could continue with respect
to those contracts to an unlimited extent over a
period of time.
Options on Securities and Securities Indices. Each
Portfolio, except Government Money Investments, may
purchase put and call options on any security in
which it may invest or options on any securities
index based on securities in which it may invest. A
Portfolio would also be able to enter into closing
sale transactions in order to realize gains or
minimize losses on options it has purchased.
Writing Covered Call and Put Options on Securities
Indices. Each Portfolio, except Government Money
Investments, may also write (sell) covered call and
put options on any securities index composed of
securities in which it may invest. Options on
securities indices are similar to options on
securities, except that the exercise of securities
index options requires cash payments and does not
involve the actual purchase or sale of securities. In
addition, securities index options are designed to
reflect price fluctuations in a group of securities
or segments of the securities market rather than
price fluctuations in a single security.
A Portfolio may cover call options on a securities
index by owning securities whose price changes are
expected to be similar to those of the underlying
index, or by having an absolute and immediate right
to acquire such securities without additional cash
consideration (or for additional consideration if
cash in such amount is segregated) upon conversion or
exchange of other securities in its portfolio. A
Portfolio may cover call and put options on a
securities index by segregating assets with a value
equal to the exercise price.
Purchasing Call and Put Options. The Portfolios,
except Government Money Investments, will normally
purchase call options in anticipation of an increase
in the market value of securities of the type in
which they may invest. The purchase of a call option
will entitle a Portfolio, in return for the premium
paid, to purchase specified securities at a specified
price during the option period. A Portfolio will
ordinarily realize a gain if, during the option
period, the value of such securities exceeded the sum
of the exercise price, the premium paid and
transaction costs; otherwise the Portfolio will
realize either no gain or a loss on the purchase of
the call option.
A Portfolio will normally purchase put options in
anticipation of a decline in the market value of
securities in its portfolio ("protective puts") or in
securities in which it may invest. The purchase of a
put option will entitle the Portfolio, in exchange
for the premium paid, to sell specified securities at
a specified price during the option period. The
purchase of protective puts is designed to offset or
hedge against a decline in the market value of the
Portfolio's securities. Put options may also be
purchased by a Portfolio for the purpose of
affirmatively benefiting from a decline in the price
of securities which it does not own. The Portfolio
will ordinarily realize a gain if, during the option
period, the value of the underlying securities
decreased below the exercise price sufficiently to
more than cover the premium and transaction costs;
otherwise the Portfolio will realize either no gain
or a loss on the purchase of the put option. Gains
and losses on the purchase of protective put options
would tend to be offset by countervailing changes in
the value of the underlying portfolio securities.
Risks of Trading Options. There is no assurance that
a liquid secondary market on an options exchange will
exist for any particular exchange-traded option, or
at any particular time. If a Portfolio is unable to
effect a closing purchase transaction with respect to
covered options it has written, the Portfolio will
not be able to sell the underlying securities or
dispose of its segregated assets until the options
expire or are exercised. Similarly, if a Portfolio is
unable to effect a closing sale transaction with
respect to options it has purchased, it will have to
exercise the options in order to realize any profit
and will incur transaction costs upon the purchase or
sale of underlying securities.
Reasons for the absence of a liquid secondary market
on an exchange include the following: (i) there may
be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on
opening or closing transactions or both;
(iii) trading halts, suspensions or other
restrictions may be imposed with respect to
particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an
exchange or the Options Clearing Corporation (the
"OCC") may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges
could, for economic or other reasons, decide or be
compelled at some future date to discontinue the
trading of options (or a particular class or series
of options), in which event the secondary market on
that exchange (or in that class or series of options)
would cease to exist, although outstanding options on
that exchange, if any, that had been issued by the
OCC as a result of trades on that exchange would
continue to be exercisable in accordance with their
terms.
A Portfolio may terminate its obligations under an
exchange-traded call or put option by purchasing an
option identical to the one it has written.
Obligations under over-the-counter options may be
terminated only by entering into an offsetting
transaction with the counterparty to such option.
Such purchases are referred to as "closing purchase
transactions."
A Portfolio may purchase and sell both options that
are traded on U.S. and foreign exchanges and options
traded over the counter with broker-dealers who make
markets in these options. The ability to terminate
over-the-counter options is more limited than with
exchange-traded options and may involve the risk that
broker-dealers participating in such transactions
will not fulfill their obligations. Until such time
as the staff of the Securities and Exchange
Commission (the "SEC") changes its position, a
Portfolio will treat purchased over-the-counter
options and all assets used to cover written
over-the-counter options as illiquid securities,
except that with respect to options written with
primary dealers in U.S. Government securities
pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of
illiquid securities may be calculated with reference
to the formula.
Transactions by a Portfolio in options on securities
and indices will be subject to limitations
established by each of the exchanges, boards of trade
or other trading facilities governing the maximum
number of options in each class which may be written
or purchased by a single investor or group of
investors acting in concert. Thus, the number of
options that a Portfolio may write or purchase may be
affected by options written or purchased by other
investment advisory clients. An exchange, board of
trade or other trading facility may order the
liquidations of positions found to be in excess of
these limits, and it may impose certain other
sanctions.
The writing and purchase of options is a highly
specialized activity which involves investment
techniques and risks different from those associated
with ordinary portfolio securities transactions. The
successful use of protective puts for hedging
purposes depends in part on a Subadvisor's ability to
predict future price fluctuations and the degree of
correlation between the options and securities
markets.
The hours of trading for options may not conform to
the hours during which the underlying securities are
traded. To the extent the options markets close
before the markets for the underlying securities,
significant price movements can take place in the
underlying markets that cannot be reflected in the
options markets.
In addition to the risks of imperfect correlation
between a Portfolio's portfolio and the index
underlying the option, the purchase of securities
index options involves the risk that the premium and
transaction costs paid by the Portfolio in purchasing
an option will be lost. This could occur as a result
of unanticipated movements in the price of the
securities comprising the securities index on which
the option is based.
Futures Contracts and Related Options. Each
Portfolio, except Government Money 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
Subadvisor that such contracts are necessary or
appropriate in the management of a 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 that 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 securities or
commodities move in an unanticipated manner. In
addition, changes in the value of a 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 a
Subadvisor'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 the
Portfolio may not be able to close a futures or
options position without incurring a loss in the
event of adverse price movements.
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 a 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 a Portfolio.
Swaps. Emerging Markets Equity Investments, with
respect to 15% of the total assets allocated to State
Street Global Advisors, may enter into index swaps.
Index swaps involve the exchange by the Portfolio
with another party of the respective amounts payable
with respect to a notional principal amount related
to one or more indices. The Portfolio may enter into
these transactions to preserve a return or spread on
a particular investment or portion of its assets, as
a duration management technique or to protect against
any increase in the price of securities the Portfolio
anticipates purchasing at a later date. The
Portfolio may also use these transactions for
speculative purposes, such as to obtain the price
performance of a security without actually purchasing
the security in circumstances where, for example, the
subject security is illiquid, is unavailable for
direct investment or available only on less
attractive terms. Swaps have risks associated with
them, including possible default by the counterparty
to the transaction, illiquidity and, where swaps are
used as hedges, the risk that the use of a swap could
result in losses greater that if the swap had not
been employed.
The Portfolio will usually enter into swaps on a net
basis, i.e., the two payment streams are netted out
in a cash settlement on the payment date or dates
specified in the agreement, with the Portfolio
receiving or paying, as the case may be, only the net
amount of the two payments. Swaps do not involve the
delivery of securities, other underlying assets or
principal. Accordingly, the risk of loss with
respect to swaps is limited to the net amount of
payments that the Portfolio is contractually
obligated to make. If the counterparty to a swap
defaults, the Portfolio's risk of loss consists of
the net amount of payments that the Portfolio is
contractually entitled to receive. Where swaps are
entered into for good faith hedging purposes, the
Portfolio believes such obligations do not constitute
senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to
the Portfolio's borrowing restrictions. Where swaps
are entered into for other than hedging purposes, the
Portfolio will segregate an amount of cash or liquid
securities having a value equal to the accrued excess
of its obligations over its entitlements with respect
to each swap on a daily basis.
U.S. Government Securities. The 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). 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 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.
Exchange Rate-Related U.S. Government Securities.
Each Portfolio, except Government Money Investments,
may invest up to 5% of its 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 Subadvisor 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
because of 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.
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
payments 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, if 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.
When-Issued and Delayed Delivery Securities. Each
Portfolio may purchase securities, including U.S.
government securities, on a when-issued basis or may
purchase or sell securities for delayed delivery. In
such transactions, delivery of the securities occurs
beyond the normal settlement period, but no payment
or delivery is made by a Portfolio prior to the
actual delivery or payment by the other party to the
transaction. The purchase of securities on a when-
issued or delayed delivery basis involves the risk
that the value of the securities purchased will
decline prior to the settlement date. The sale of
securities for delayed delivery involves the risk
that the prices available in the market on the
delivery date may be greater than those obtained in
the sale transaction. When-issued and delayed
delivery transactions will be fully collateralized by
segregated liquid assets.
Repurchase Agreements. Each Portfolio may enter into
repurchase agreements. 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. A
Portfolio's Subadvisor, acting under the supervision
of the Board of Trustees, reviews on an ongoing basis
the value of the collateral and the 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 that Portfolio, exceeds
10% of the Portfolio's total assets (or 15% of the
assets of Multi-Sector Fixed Income Investments ).
In entering into a repurchase agreement, a Portfolio
bears a risk of loss in the event 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.
Reverse Repurchase Agreements. 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, a Portfolio sells
securities to a financial institution and agrees 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 a 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 a 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 a Portfolio's shares will
decrease faster than otherwise would be the case.
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 Salomon Smith Barney unless the
Portfolio has applied for and received specific
authority to do so from the SEC. A Portfolio's loan
of securities will be collateralized by cash, letters
of credit or U.S. Government Securities. A Portfolio
will maintain the collateral 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.
Short Sales "Against the Box". Each Portfolio,
except Government Money Investments, may from time to
time make short sales against the box. In a short
sale, a Portfolio borrows from a broker or bank
securities identical to those being sold and delivers
the borrowed securities to the buying party. The
Portfolio is said to have a short position in the
securities sold until it replaces the borrowed
securities, at which time it receives the proceeds of
the sale. A short sale is ''against the box'' if the
Portfolio owns or has the right to acquire at no
added cost securities identical to those sold short.
Illiquid Securities. Each Portfolio will not invest
more than 10% of its net assets (except that Multi-
Sector Fixed Income Investments will not invest more
than 15% of its net assets) in illiquid and other
securities that are not readily marketable.
Repurchase agreements maturing in more than seven
days will be included for purposes of the foregoing
limit. Securities subject to restrictions on resale
under the Securities Act of 1933, as amended (the
"1933 Act") are considered illiquid unless they are
eligible for resale pursuant to Rule 144A or another
exemption from the registration requirements of the
1933 Act and are determined to be liquid by the
Subadvisor. The Subadvisors determine the liquidity
of Rule 144A and other restricted securities
according to procedures adopted by the Board of
Trustees. The Board of Trustees monitors the
Subadvisors' application of these guidelines and
procedures. The inability of a Portfolio to dispose
of illiquid investments readily or at reasonable
prices could impair the Portfolio's ability to raise
cash for redemptions or other purposes.
Temporary Investments. For temporary defensive
purposes, during periods when a Subadvisor of a
Portfolio, in consultation with the Manager, believes
that pursuing a Portfolio's basic investment strategy
may be inconsistent with the best interests of its
shareholders, that 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 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. A Portfolio's U.S.
dollar-denominated temporary investments are managed
by SSB Citi. A 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.
For the same purposes, 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 an
NRSRO, or if unrated, are determined by the
Subadvisor to be of equivalent quality. Emerging
Markets Equity Investments may also invest in
obligations of 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 the 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 Subadvisor.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 8
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 9 through 12 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 issue "senior
securities" as defined in the 1940 Act, and the
rules, regulations and orders thereunder, except as
permitted under the 1940 Act and the rules,
regulations and orders thereunder.
4. A Portfolio will not borrow money, except
that (a) a 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) 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.
5. 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.
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 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.
9. A Portfolio will not invest in oil, gas or
other mineral leases or exploration or development
programs.
10. 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.
11. A Portfolio will not make investments for
the purpose of exercising control or management.
12. 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 more than
3% of any registered investment company's outstanding
voting stock; or more than 5% of the value of the
Portfolio's total assets would be invested in
securities of any one registered investment company
or more than 10% of the Portfolio's total assets
would be invested in registered investment companies
in general.
The percentage limitations contained in the
restrictions listed above (other than with respect to
Number 4 above) apply at the time of purchase of
securities.
Department of Labor ("DOL") Exemption. The Trust may
offer shares of its Portfolios to certain employee
benefit plans, individual retirement accounts
("IRAs"), or retirement plans for a self-employed
individual ("Keogh Plans"). Because the Trust may
offer shares of its Portfolios to these plans, it is
subject to regulation by the DOL and the provisions
of the Employee Retirement Income Security Act of
1974 ("ERISA"). Salomon Smith Barney has received a
DOL exemption covering certain transactions in shares
of the Portfolios. The full text of the DOL exemption
may be found in Annex B of the Prospectus. The DOL
exemption includes, among other things, a limitation
on investments in the securities of affiliates of
Salomon Smith Barney, including Citigroup, of one
percent of a Portfolio's net assets. However, this
percentage limitation may be exceeded where the
amount held by the subadvisor is used to replicate an
established third party index such as the S&P 500
Index.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for a Portfolio
are made by the Subadvisor(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 a Subadvisor, 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 a Subadvisor 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
Subadvisor 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 Subadvisor
seeks the best overall terms available. In assessing
the best overall terms available for any transaction,
the Subadvisor 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 Subadvisor authorizes the
Subadvisor, 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 Subadvisor 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 Subadvisor receiving brokerage and
research services. The Board of Trustees 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 Salomon Smith Barney and other
affiliated broker-dealers if, in the judgment of its
Subadvisor, 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 Salomon Smith Barney
is a member, except to the extent permitted by the
SEC.
The Portfolios may use Salomon 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 Subadvisor, 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. Salomon Smith Barney has agreed
to charge the Portfolios commodity commissions at
rates comparable to those charged by Salomon Smith
Barney to its most favored clients for comparable
trades in comparable accounts.
BROKERAGE COMMISSIONS PAID TO SALOMON SMITH BARNEY
The following table sets forth certain information
regarding each Portfolio's payment
of brokerage commissions for the fiscal year ended
August 31, 2000:
Portfolio
Total
Brokerage
Commissions
Commissions
paid to
Salomon
Smith
Barney and
Affiliates
% of Total
Brokerage
Commissions
paid to
Salomon
Smith
Barney and
Affiliates
% of Total
Dollar
Amount of
Transaction
s Involving
Commissions
Paid to
Salomon
Smith
Barney and
Affiliates
Balanced Investments
$48,616
$2,550
5.25%
1.05%
Large Capitalization
Value Equity
Investments
2,619,944
58,133
2.22
1.88
Large Capitalization
Growth Investments
1,547,137
3,240
0.21
0.15
Small Capitalization
Value Equity
Investments
736,866
5,964
0.81
0.42
Small Capitalization
Growth Investments
1,959,457
12,474*
0.64
0.17
International Equity
Investments
3,990,924
24,707
0.62
0.94
Emerging Markets
Equity Investments
1,861,903
13,190**
0.71
0.18
*Includes $4,488 for execution, research and
statistical services.
*Includes $377 for execution, research and
statistical services.
Government Money Investments, Intermediate Fixed
Income Investments, Long-Term Bond Investments,
Municipal Bond Investments, Mortgage Backed
Investments, International Fixed Income Investments,
Multi-Sector Fixed Income Investments and High Yield
Investments did not pay brokerage commissions during
the year ended August 31, 2000.
The following table sets forth certain information
regarding each Portfolio's payment
of brokerage commissions for the fiscal year ended
August 31, 1999:
Portfolio
Total
Brokerage
Commissions
Commissions
paid to
Salomon
Smith
Barney
% of Total
Brokerage
Commissions
paid to
Salomon
Smith
Barney
% of Total
Dollar
Amount of
Transaction
s Involving
Commissions
Paid to
Salomon
Smith
Barney
Balanced Investments
$144,938
$3,636
2.51%
0.45%
Large Capitalization
Value Equity
Investments
2,358,891
91,291*
3.87
4.36
Large Capitalization
Growth Investments
930,284
0
0.00
0.00
Small Capitalization
Value Equity
Investments
1,604,130
17,682
1.10
0.51
Small Capitalization
Growth Investments
1,633,318
0
0.00
0.00
International Equity
Investments
2,541,653
9,755
0.38
0.64
Emerging Markets
Equity Investments
1,585,052
1,261
0.08
0.08
*Includes $8,906 for execution, research and
statistical services.
Government Money Investments, Intermediate Fixed
Income Investments, Long-Term Bond Investments,
Municipal Bond Investments, Mortgage Backed
Investments, International Fixed Income Investments
and High Yield Investments did not pay brokerage
commissions during the year ended August 31, 1999.
There is no information present for Multi-Sector
Fixed Income Investments because it commenced
operations on October 1, 1999.
The following table sets forth certain information
regarding each Portfolio's payment of brokerage
commissions for the fiscal year ended August 31,
1998:
Portfolio
Total
Brokerage
Commissions
Commissions
paid to
Salomon
Smith
Barney
% of Total
Brokerage
Commissions
paid to
Salomon
Smith
Barney
% of Total
Dollar
Amount of
Transaction
s Involving
Commissions
Paid to
Salomon
Smith
Barney
Balanced Investments
$108, 343
$27,565
25.44%
14.34%
Large Capitalization
Value Equity
Investments
2,783,192
152,635
5.48
4.44
Large Capitalization
Growth Investments
737,579
9
0.001
0.00
Small Capitalization
Value Equity
Investments
1,470,232
24,868
1.69
0.78
Small Capitalization
Growth Investments
1,550,679
6,218
0.40
0.14
International Equity
Investments
3,180,676
70,525
2.22
0.43
Emerging Markets
Equity Investments
2,550,496
0
0.00
0.00
Government Money Investments, Intermediate Fixed
Income Investments, Long-Term Bond Investments,
Municipal Bond Investments, Mortgage Backed
Investments, International Fixed Income Investments
and High Yield Investments did not pay brokerage
commissions during the year ended August 31, 1998.
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. Municipal
Bond Investments, Mortgage Backed Investments,
International Fixed Income and Emerging Markets
Equity Investments 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. 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. Because the Portfolios are authorized to
engage in transactions in options, they may
experience increased portfolio turnover under certain
market conditions as a result of their investment
strategies. For instance, the exercise of a
substantial number of options written by a Portfolio
(because of 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.
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 a Subadvisor 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 a Portfolio to
receive favorable tax treatment.
The Portfolios' portfolio turnover rates for the last
two fiscal years were as follows:
Portfolio
Year Ended
August 31,
2000
Year Ended
August 31,
1999
Government Money Investments
N/A
N/A
Intermediate Fixed Income
Investments
195%
207%
Long-Term Bond Investments
358%*
30%
Municipal Bond Investments
37%+
142%
Mortgage Backed Investments
28%
87%
High Yield Investments
129%
122%
Balanced Investments
303%
332%
Large Capitalization Value Equity
Investments
78%
54%
Large Capitalization Growth
Investments
59%
34%
Small Capitalization Value Equity
Investments
72%
53%
Small Capitalization Growth
Investments
110%
108%
International Equity Investments
75%
45%
International Fixed Income
Investments
225%
204%
Emerging Markets Equity Investments
110%
135%
Multi-Sector Fixed Income
Investments
249%
N/A
*Long-Term Bond Investments had increased its
portfolio turnover on account
of the subadvisor reacting to fixed income market
conditions which initiated
increased investments in U.S. Treasury securities
and short term fixed income
securities in order to adjust the duration and
maturity of the Portfolio.
+Municipal Bond Investments had decreased its
portfolio turnover because its subadvisor
was satisfied with its positions held in the
Portfolio and did not believe it was necessary
to significantly change the composition of the
Portfolio.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Manager; Subadvisors; Administrator. The Manager
serves as investment manager to the Trust pursuant to
an investment management agreement ("Management
Agreement"). Each Subadvisor serves as investment
advisor to a Portfolio pursuant to separate written
agreements with the Portfolios ("Advisory
Agreements"). SSB Citi serves as administrator to the
Portfolio pursuant to a written agreement
("Administration Agreement").
The Portfolios bear their own expenses, which
generally include all costs not specifically borne by
the Manager, the Subadvisors, and SSB Citi. Included
among the Portfolios' expenses are costs incurred in
connection with a 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.
As administrator, SSB Citi generally oversees all
aspects of the Trust's administration and operations
including furnishing 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.
Under the Management Agreement, each Portfolio pays
SSB Citi a fee, calculated daily and paid monthly,
based on the rates applied to the value of each
Portfolio's average daily net assets. In addition,
SSB Citi pays each Subadvisor, based on the rates
applied to each respective Portfolio's average daily
net assets on a monthly basis. The Subadvisor for
each Portfolio, as well as the maximum allowable
annual management fee and advisory fee paid by SSB
Citi to each Subadvisor are indicated below:
Maximum
Allowable
A
n
n
u
a
l
Subad
visor
Manag
ement
Portfolio
Subadvisors Fee Fee
Government Money Investments
Standish, Ayer & Wood, Inc.
on the
first $100 million 0.15% 0.15%
on the
amount over $100 million 0.10 0.15
High Yield Investments
Alliance Capital Management L.P.
0.45 0.70
Intermediate Fixed Income Investments
Metropolitan West Asset Management
Co. 0.20 0.40
Pacific
Investment Management Co. 0.25 0.40
BlackRock Financial Management,
Inc.
on the first $500 million
0.20 0.40
on the
amount over $500 million 0.15 0.40
Long-Term Bond Investments
Western Asset Management Co.
0.20 0.40
Municipal Bond Investments
Smith Affiliated Capital Corp.
0.20 0.40
Mortgage Backed Investments
Utendahl Capital Management CFI
0.25 0.50
Balanced Investments
Laurel Capital Advisors, LLP
0.30 0.60
Seix
Investment Advisors, Inc. 0.25 0.60
A
n
n
u
a
l
Subad
visor
Manag
ement
Portfolio
Subadvisors Fee Fee
Large Capitalization Value Equity Investments
Barclays Global Fund Advisors
0.02% 0.32%
The Boston Co.
Asset Management, Inc.:
on
the first $350 million 0.30 0.60
on
the amount over $350 million 0.25 0.60
Parametric
Portfolio Associates:
on
the first $300 million 0.20 0.50
on
the amount over $300 million 0.15 0.45
Chartwell Investment Partners
0.30 0.60
Large Capitalization Growth Investments
Turner Investment Partners, Inc.:
on
the first $300 million 0.35 0.60
on
the amount over $300 million 0.30 0.60
Barclays
Global Fund Advisors 0.02 0.32
TCW Investment Management Co.:
on
the first $500 million 0.40 0.60
on
the amount over $500 million 0.35 0.60
Small Capitalization Value Equity Investments
NFJ Investment Group
on the first $450 million 0.50
0.80
on
the amount over $450 million 0.45 0.75
Rutabaga
Capital Management LLC 0.50 0.80
Mellon Capital
Management Corp. 0.06 0.36
Small Capitalization Growth Investments
Wall Street Associates
0.50 0.80
Mellon Capital
Management Corp. 0.06 0.36
Westpeak
Investment Advisors, L.P. 0.50 0.80
Kern Capital
Management LLC 0.50 0.80
Westfield Capital Management Co.,
Inc. 0.50 0.80
A
n
n
u
a
l
Subad
visor
Manag
ement
Portfolio
Subadvisors Fee Fee
International Equity Investments
Oechsle International
Advisors, LLC 0.40% 0.70%
Scudder Kemper
Investments, Inc.
on the first $300 million
0.45 0.70
on
the amount over $300 million 0.40 0.70
State Street
Global Advisors 0.06 0.36
International Fixed Income Investments
Julius Baer Investments Management
Inc. 0.25 0.50
Emerging Markets Equity Investments
Foreign & Colonial Emerging
Markets Ltd. 0.60 0.90
State Street
Global Advisors 0.60 0.90
Baring Asset
Management, Inc. 0.60 0.90
Multi-Sector Fixed Income Investments
Metropolitan West Asset Management
Co.0.20 0.45
Western Asset Management Co.
0.20 0.45
Alliance Capital Management L.P.
0.45 0.45
Utendahl Capital Management CFI
0.25 0.45
For the year ended August 31, 2000, the
Portfolios accrued investment management and
administration fees as follows:
Portfolio
Management Fee
Administration
Fee
Government Money Investments
$353,955
$542,112
High Yield Investments
797,658
227,902
Intermediate Fixed Income
Investments
2,652,133
1,280,232
Long-Term Bond Investments
356,034
178,017
Municipal Bond Investments
225,438
112,719
Mortgage Backed Investments
550,030
220,012
Balanced Investments
400,180
137,760
Large Capitalization Value Equity
Investments
8,722,993
3,753,593
Large Capitalization Growth
Investments
10,060,076
5,084,520
Small Capitalization Value Equity
Investments
4,199,206
1,513,068
Small Capitalization Growth
Investments
8,804,328
2,862,089
International Equity Investments
9,305,764
3,299,702
International Fixed Income
Investments
1,219,508
485,469
Emerging Markets Equity Investments
2,491,540
553,676
Multi-Sector Fixed Income
Investments
98,644
50,248
For the fiscal year ended August 31, 2000,
management, administration and custody fees, in the
aggregate, were waived as follows: Government Money
Investments - $413,632; Multi-Sector Fixed Income
Investments - $94,359; Mortgage Backed Investments -
$179,068; and Balanced Investments - $106,924.
For the fiscal years ended August 31, 1999 and 1998
the Portfolios accrued investment management and
administration fees as follows:
1999
1998
Portfolio
Management
Fee
Administrati
on Fee
Management
Fee
Administrati
on Fee
Government Money Investments
$497,007
$662,677
$624,357
$832,477
High Yield Investments
923,581
263,880
47,537
13,582
Intermediate Fixed Income
Investments
2,448,152
1,224,478
1,862,860
934,088
Long-Term Bond Investments
559,894
279,947
703,985
351,993
Municipal Bond Investments
284,311
142,156
255,992
127,996
Mortgage Backed Investments
732,616
293,046
766,937
306,775
Balanced Investments
436,950
148,790
506,736
168,912
Large Capitalization Value
Equity Investments
9,718,618
3,901,989
9,677,020
3,922,176
Large Capitalization Growth
Investments
8,640,613
4,546,476
8,517,286
3,867,159
Small Capitalization Value
Equity Investments
4,638,188
1,530,784
4,705,182
1,721,750
Small Capitalization Growth
Investments
6,456,592
2,077,503
6,308,016
2,167,276
International Equity
Investments
6,938,953
2,706,824
7,088,985
2,704,967
International Fixed Income
Investments
1,165,291
475,963
718,551
287,421
Emerging Markets Equity
Investments
2,444,974
536,702
2,430,735
540,163
Multi-Sector Fixed Income
Investments
N/A
N/A
N/A
N/A
For the fiscal year ended August 31, 1999,
management, administration and custody fees, in the
aggregate, were waived as follows: Government Money
Investments - $364,437 and Mortgage Backed
Investments - $163,318.
For the fiscal year ended August 31, 1998,
management, administration and custody fees, in the
aggregate, were waived as follows: Government Money
Investments - $250,798; Mortgage Backed Investments -
$185,737; and High Yield Investments - $85,979.
The Manager has agreed to waive a portion of the fees
otherwise payable to it by certain of the Trust's
Portfolios 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.
SSB Citi, through its predecessors, was incorporated
on March 12, 1968 under the laws of Delaware and is a
registered investment adviser. SSB Citi renders
investment advice to investment companies that had
aggregate assets under management as of October 31,
2000 in excess of $140 billion. The Consulting
Group, a division of SSB Citi, 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 annually conducts over 300
on-sight evaluation visits to advisors. As of August
31, 2000, the Consulting Group provided services with
respect to over $226 billion in client assets
representing more than 588,000 separate accounts
under a variety of programs designed for individual
and institutional investors.
The Manager and the Subadvisors each pay the salaries
of all officers and employees who are employed by
them and the Trust, and the Manager maintains office
facilities for the Trust. The Manager and the
Subadvisors 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 Subadvisor
manages the securities held by the Portfolio it
serves in accordance with that 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.
Subject to the supervision and direction of the Board
of Trustees, the Manager provides to the Trust
investment management evaluation services principally
by performing initial due diligence on prospective
Subadvisors for the Portfolios and thereafter
monitoring each Subadvisor's performance through
quantitative and qualitative analysis as well as
periodic in-person, telephonic and written
consultations with Subadvisors. In evaluating
prospective Subadvisors, the Manager considers, among
other factors, each Subadvisor'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, financial strength and quality
of service and client communications. The Manager
has responsibility for communicating performance
expectations and evaluations to Subadvisors and
ultimately recommending to the Board of Trustees
whether Subadvisors' contracts should be renewed,
modified or terminated. The Manager provides written
reports to the Board of Trustees regarding the
results of its evaluations and monitoring functions.
The Manager is also responsible for conducting all
operations of the Trust except those operations
contracted to the Subadvisor, custodian, transfer
agent or administrator.
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 Subadvisors. However, the Manager's
decisions, including the identity of a Subadvisor and
the specific amount of the Manager's compensation to
be paid to a Subadvisor, 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.
Investors should also 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 of the Trust
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 Subadvisor and receives a fee from each
Portfolio of the Trust. 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 of the trust 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.
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 Subadvisors.
The Exemption is based on among other things: (1)
the Manager will select, monitor, evaluate and
allocate assets to the Subadvisors and ensure that
the Subadvisors comply with a Portfolio's investment
objective, policies and restrictions; (2) shares of a
Portfolio 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 Subadvisor and its investment advisory
contract within 90 days of the engagement of new
Subadvisor; (4) the Trust will disclose in its
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.
Code of Ethics
Pursuant to Rule 17j-1 of the 1940 Act, each of, the
Trust, its investment adviser and principal
underwriter has adopted a code of ethics that permits
personnel to invest in securities for their own
accounts, including securities that may be purchased
or held by a Portfolio of the Trust. All personnel
must place the interests of clients first and avoid
activities, interests and relationships that might
interfere with the duty to make decisions in the best
interests of the clients. All personal securities
transactions by employees must adhere to the
requirements of the code and must be conducted in
such a manner as to avoid any actual or potential
conflict of interest, the appearance of such a
conflict, or the abuse of an employee's position of
trust and responsibility.
A copy of the Trust's code of ethics is on file with
the Securities and Exchange Commission.
Auditors
KPMG LLP, 757 Third Avenue, New York, New York 10017,
currently serves 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 SHARES
Purchases of shares of a Portfolio through an
Advisory Service must be made through a brokerage
account maintained with Salomon Smith Barney.
Payment for Portfolio shares must be made by check
directly to Salomon Smith Barney or to a broker that
clears securities transactions through Salomon 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 certain asset
based fee programs 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 Trust's
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 Salomon 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 a Portfolio normally utilizes is restricted,
or an emergency, as defined by the rules and
regulations of the SEC, exists making disposal of a
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 a 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
Each Portfolio's net asset value per share is
calculated by SSB Citi on each day, Monday through
Friday, except days on which the NYSE is closed. The
NYSE is currently scheduled to be closed on New
Year's Day, Martin Luther King Jr. 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. On those days,
securities held by a Portfolio may nevertheless be
actively traded and the value of that Portfolio's
shares could be significantly affected.
Net asset value per share is determined 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. 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 as
reported to a Portfolio or, if no sales occurred
during the day, these investments are quoted at the
mean between the current bid and ask prices. A
security that is listed or traded on more than one
exchange is valued for purposes of calculating a
Portfolio's net asset value at the quotation on the
exchange determined to be the primary market for the
security. Debt securities of U.S. issuers (other than
U.S. Government Securities and short-term
investments) are valued by SSB Citi after
consultation with an independent 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. An
option 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
purchased by a 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 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, SSB Citi may consult with an
independent pricing service retained by the Trust.
The valuation of the securities held by a Portfolio
in U.S. dollar-denominated securities with less than
60 days to maturity are 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 the
Portfolio would receive if it sold the instrument.
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 a 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 the 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 Municipal Bond Investments for the 30-
day period ended August 31, 2000 was 4.99%. The
equivalent taxable yield for that same period was
7.80%, assuming the payment of Federal income taxes
at a rate of 36%.
The yields for the thirty-day period ended August 31,
2000 for the following funds were:
Portfolio
Long-Term Bond Investments
6.12%
Intermediate Fixed Income
Investments
6.22
International Fixed Income
Investments
3.66
Mortgage-Backed Investments
6.24
High Yield Investments
13.10
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, 2000, the
yield for the Government Money Investments portfolio
was 5.96% (the effective yield was 6.14%) with an
average dollar-weighted portfolio maturity of 33
days.
Average Annual Total Return
From time to time, the Trust may advertise a
Portfolio's "average annual total return" over
various periods of time. This total return figure
shows the average percentage change in value of an
investment in that Portfolio from the beginning date
of the measuring period to the ending date of the
measuring period and is reduced by the maximum
Salomon Smith Barney Advisory Service fee during the
measuring period. The figure reflects changes in the
price of a Portfolio's shares and assumes that any
income, dividends and/or capital gains distributions
made by a Portfolio during the period are reinvested
in shares of that 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 Portfolios'
operations or on a year-by-year basis). Aggregate
total returns also 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).
In reports or other communications to shareholders or
in advertising material, a Portfolio may quote total
return figures that do not reflect Salomon 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. The performance information also may
include evaluations of a Portfolio 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.
A Portfolio's average annual total return figures 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. Consequently, the given
performance quotations should not be considered as
representative of a Portfolio's performance for any
specified period in the future.
A Portfolio's net investment income changes in
response to fluctuations in interest rates and the
expenses of the Portfolio. 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 a 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.
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, 1999
through
August 31,
2000
From
September
1, 1995
through
August 31,
2000
From
Inception**
** through
August 31,
2000
Government Money Investments
5.44%
5.01%
4.42%
High Yield Investments*
(9.37)%
N/A
(3.50)%
Intermediate Fixed Income
Investments
5.73%
5.39%
5.95%
Long-Term Bond Investments
9.50%
6.39%
6.43%
Municipal Bond Investments
6.79%
5.07%
5.54%
Mortgage Backed Investments
7.58%
6.22%
6.24%
Multi-Sector Fixed Income
Investments+
N/A
N/A
6.47%
Balanced Investments**
14.45%
13.59%
12.12%
Large Capitalization Value Equity
Investments
4.00%
15.96%
13.21%
Large Capitalization Growth
Investments
34.31%
26.87%
20.17%
Small Capitalization Value Equity
Investments
5.09%
10.76%
9.81%
Small Capitalization Growth
Investments
50.57%
18.34%
20.33%
International Equity Investments
19.17%
11.81%
10.70%
International Fixed Income
Investments
(6.13)%
3.15%
6.35%
Emerging Markets Equity
Investments***
9.62%
0.50%
0.50%
* High Yield Investments commenced operations on
July 13, 1998.
** Balanced Investments commenced operations on
February 16, 1993.
*** Emerging Market Equity Investments commenced
operations on April 21, 1994.
**** The remaining Portfolios commenced operations
on November 18, 1991.
+ Multi-Sector Fixed Income Investments commenced
operations on October 1, 1999.
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,
1999 through
August 31,
2000
From
September
1, 1995
through
August 31,
2000
From
Inception**
** through
August 31,
2000
Government Money Investments
3.88%
3.45%
2.87%
High Yield Investments*
(10.71)%
N/A
(4.93)%
Intermediate Fixed Income
Investments
4.16%
3.82%
4.38%
Long-Term Bond Investments
7.88%
4.81%
4.85%
Municipal Bond Investments
5.21%
3.51%
3.98%
Mortgage Backed Investments
5.98%
4.64%
4.66%
Multi-Sector Fixed Income
Investments+
N/A
N/A
5.02%
Balanced Investments**
12.76%
11.91%
10.46%
Large Capitalization Value Equity
Investments
2.47%
14.24%
11.53%
Large Capitalization Growth
Investments
32.32%
24.99%
18.38%
Small Capitalization Value Equity
Investments
3.53%
9.12%
8.18%
Small Capitalization Growth
Investments
48.34%
16.59%
18.54%
International Equity Investments
17.41%
10.15%
9.06%
International Fixed Income
Investments
(7.53)%
1.62%
4.77%
Emerging Markets Equity
Investments***
7.99%
(1.00)%
(1.00)%
_________________
* High Yield Investments commenced operations on
July 13, 1998.
** Balanced Investments commenced operations on
February 16, 1993.
*** Emerging Market Equity Investments commenced
operations on April 21, 1994.
**** The remaining Portfolios commenced operations
on November 18, 1991.
+ Multi-Sector Fixed Income Investments commenced
operations on October 1, 1999.
TAXES
The following is a summary of certain federal income
tax considerations that may affect the Portfolios and
their shareholders. In addition to the
considerations described below, there may be other
federal, state, local or foreign tax applications to
consider. The summary does not address all of the
potential federal income tax consequences that may be
applicable to a Portfolio or to all categories of
investors, some of which may be subject to special
tax rules. The summary is not intended as a
substitute for individual tax advice and investors
are urged to consult their own tax advisors as to the
tax consequences of an investment in a Portfolio.
The summary is based on the laws in effect on the
date of this SAI, which are subject to change.
Each Portfolio intends to continue to qualify in each
year as a separate "regulated investment company"
under the Internal Revenue Code of 1986, as amended
(the "Code"), by complying with certain requirements
regarding the sources and distribution of its income
and the diversification of its assets. 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, any excess of its net short-term
capital gain over its net long-term capital loss) for
a taxable year and 90% of its tax-exempt interest
income (reduced by certain expenses for that year),
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 in
compliance with the Code's timing and other
requirements.
If, in any taxable year, a Portfolio fails to qualify
as a regulated investment company under the Code or
fails to meet the distribution requirement, it would
be taxed in the same manner as an ordinary
corporation and distributions to its shareholders
would not be deductible by the Portfolio in computing
its taxable income. In addition, in the event of a
failure to qualify, a Portfolio's distributions, to
the extent derived from its current or accumulated
earnings and profits would constitute dividends
(eligible for the corporate dividends-received
deduction) which are taxable to shareholders as
ordinary income, even though those distributions
might otherwise (at least in part) have been treated
in the shareholders' hands as a long-term capital
gain or as tax-exempt interest. If a Portfolio fails
to qualify as a regulated investment company in any
year, it must pay out its earnings and profits
accumulated in that year in order to qualify again as
a regulated investment company. In addition, if a
Portfolio failed to qualify as a regulated investment
company for a period greater than one taxable year,
the Portfolio may be required to recognize any net
built-in gains with respect to certain of its assets
(the excess of the aggregate gains, including items
of income, over aggregate losses that would have been
realized if it had been liquidated) in order to
qualify as a regulated investment company in a
subsequent year.
In order to avoid the application of a 4%
nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gains, a
Portfolio may make an additional distribution shortly
before or shortly after December 31 in each year of
any undistributed ordinary income or capital gains.
Each Portfolio generally will seek to pay any
additional dividends and distributions necessary to
avoid the application of this tax.
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 the 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, a Portfolio may invest in certain
types of warrants, foreign currencies, forward
contracts, options and futures contracts. The
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 that
Portfolio (i.e., may affect whether gains or losses
are ordinary or capital and, if capital, the extent
to which they are long-term or short-term),
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 positions in its portfolio (i.e.,
treat them as if they were closed out), and (ii) may
cause the 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 referred to above. Each
Portfolio will monitor its transactions, will make
the appropriate tax elections, if any, 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 seek
to 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. Gains or losses on
the sale of debt securities denominated in a foreign
currency may be recharacterized as ordinary income or
losses, as described below.
The Portfolios, other than Government Money
Investments, Intermediate Fixed Income Investments,
Municipal Bond Investments, Mortgage Backed
Investments and Multi-Sector Fixed Income
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.
Dividends or other income (including, in some cases,
capital gains) received by a Portfolio from
investments in foreign securities may be subject to
withholding and other taxes imposed by such
countries. Tax conventions between certain countries
and the United States may reduce or eliminate such
taxes in some cases. A Portfolio will not be
eligible to elect to treat any foreign taxes paid by
it as paid by its shareholders, who therefore will
not be entitled to deductions or credits for such
taxes on their own tax returns.
A Portfolio may be required to treat amounts as
taxable income or gain, subject to the distribution
requirements referred to above, even though no
corresponding amounts of cash are received
concurrently, as a result of (1) mark to market,
constructive sale or other rules applicable to
passive foreign investment companies or partnerships
or trusts in which the Portfolio invests or to
certain options, futures or forward contracts, or
"appreciated financial positions" or (2) the
inability to obtain cash distributions or other
amounts due to currency controls or restrictions on
repatriation imposed by a foreign country with
respect to a Portfolio's investments (including
through depositary receipts) in issuers in such
country or (3) tax rules applicable to debt
obligations acquired with "original issue discount,"
including zero-coupon or deferred payment bonds and
pay-in-kind debt obligations, or to market discount
if an election is made with respect to such market
discount. A Portfolio may therefore be required to
obtain cash to be used to satisfy these distribution
requirements by selling securities at times that it
might not otherwise be desirable to do so or
borrowing the necessary cash, thereby incurring
interest expenses.
Under Section 988 of the Code, gains or losses
attributable to fluctuations in exchange rates
between the time a Portfolio accrues income or
receivables or expenses or other liabilities
denominated in a foreign currency and the time the
Portfolio actually collects such income or pays such
liabilities are generally treated as ordinary income
or ordinary loss. Similarly, gains or losses on
foreign currency, foreign currency forward contracts,
certain foreign currency options or futures contracts
and the disposition of debt securities denominated in
foreign currency, to the extent attributable to
fluctuations in exchange rates between the
acquisition and disposition dates, are also treated
as ordinary income or loss.
A Portfolio is permitted to carry forward any unused
capital losses to be utilized to offset its capital
gains realized during the eight-year period following
the year in which the losses arose, which will reduce
the net realized capital gains (if any) required to
be distributed to shareholders for those years.
On August 31, 2000, the unused capital loss
carryovers, by Portfolio, were approximately as
follows: Government Money Investments, $30,000,
Intermediate Fixed Income Investments, $13,922,000,
Long-Term Bond Investments, $780,000, Municipal Bonds
Investments, $733,000, Mortgage-Backed Investments,
$589,000, High Yield Investments, $4,320,000, Multi-
Sector Fixed Income Investments, $13,000,
International Fixed Income Investments, $1,461,000
and Emerging Markets Equity Investments, $83,792,000.
For federal income tax purposes, these amounts are
available to be applied against future capital gains
of the Portfolio that has the carryovers, if any,
that are realized prior to the expiration of the
applicable carryover. The carryovers expire as
follows:
PORTFOLIO
August
31,
(in thousands)
2003
2004
2005
2006
2007
2008
Government Money
$12
$8
--
--
--
$10
Intermediate Fixed
Income
387
$1,46
2
$773
--
--
11,300
Long-Term Bond
--
--
--
--
--
780
Municipal Bonds
--
--
--
--
--
733
Mortgage Backed
--
--
--
--
--
589
High Yield
--
--
--
--
--
4,320
Multi-Sector Fixed
Income
--
--
--
--
--
13
International Fixed
Income
--
--
--
--
--
1,461
Emerging Markets
Equity
--
--
--
--
$83,792
--
Dividends and Distributions
For federal income tax purposes, dividends declared
by a Portfolio in October, November or December as of
a record date in such a month and which are actually
paid in January of the following year will be taxable
to shareholders as if they were paid on December 31
of the year in which they are declared rather than in
the year in which shareholders actually receive the
dividends.
As a general rule, a shareholder's gain or loss on a
redemption or other disposition of Portfolio shares
that is treated as a sale under the Code 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.
A Portfolio may realize net long-term capital gains.
Distributions of the excess of net long-term capital
gain over net short-term capital loss ("capital gain
dividends" if any) will be taxable to shareholders as
long-term capital gains, regardless of whether
received in cash or reinvested in additional shares
and how long a shareholder has held Portfolio shares.
If a shareholder receives a capital gain dividend
with respect to any share and redeems, sells or
otherwise disposes of the share before it has been
held for more than six months, then any loss, to the
extent of the capital gain dividend, will be treated
as a long-term capital loss. Additionally, any loss
realized on a redemption, exchange or other
disposition of Portfolio shares generally will be
disallowed to the extent the shares disposed of are
replaced, including replacement through the
reinvesting of dividends and capital gains
distributions in the Portfolio, within a 61-day
period beginning 30 days before and ending 30 days
after the disposition of the shares.
Dividends paid from net investment income and
distributions of any excess of net short-term capital
gain over net long-term capital loss are taxable to
shareholders as ordinary income, regardless of how
long shareholders have held their Portfolio shares
and whether such dividends and distributions are
received in cash or reinvested in additional
Portfolio shares. Dividends paid by a Portfolio that
are declared from net investment income and are
attributable to qualifying dividends received by the
Portfolio from domestic corporations may qualify for
the federal dividends-received deduction for
corporations.
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. 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 the 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 and the possible availability of an
exemption for dividends paid by a Portfolio
attributable to interest the Portfolio earns from
U.S. Government obligations.
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 will 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 even if the net asset value of the Portfolio's
shares is reduced below the investor's cost as a
result of the distribution, the amount of the
forthcoming dividend or distribution payment will be
a taxable dividend or distribution payment even
though it may represent a return of invested capital.
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)
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 federal income tax liability.
Distributions to nonresident aliens and foreign
entities may be subject to different tax rules,
including other possible withholding taxes.
The foregoing is only a summary of certain tax
considerations generally affecting the Portfolios and
their 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
their state and local tax liabilities.
DISTRIBUTOR
Effective June 5, 2000, Salomon Smith Barney, located
at 388 Greenwich Street, New York, New York 10013
replaced CFBDS, Inc. as the Portfolio's distributor.
Prior to June 5, 2000, CFBDS, Inc., located at 20
Milk Street, Boston, Massachusetts 02109-5408 served
as the Portfolio's distributor. Salomon Smith Barney
serves as the Portfolio's distributor on a best
efforts basis pursuant to a written agreement, which
was approved by the Trustees of the Trust.
CUSTODIANS, TRANSFER AGENT AND SUB-TRANSFER AGENT
PFPC Trust Company (successor as assigned by PNC
bank, National Association) is located at 8800
Tinicum Blvd., Philadelphia, Pennsylvania 19153 and
The Chase Manhattan Bank ("Chase") located at Chase
MetroTech Center, Brooklyn, NY 11245, serve as the
custodians for the Trust. Under their respective
custodian agreements with the respective funds, each
custodian is authorized to establish separate
accounts for foreign securities owned by the
appropriate fund to be held with foreign branches of
other U.S. banks as well as with certain foreign
banks and securities depositories. For its custody
services to the Trust, each custodian receives
monthly fees based upon the month-end aggregate net
asset value of the appropriate Portfolio, plus
certain charges for securities transactions including
out-of-pocket expenses, and costs of any foreign and
domestic sub-custodians. The assets of the Trust are
held under bank custodianship in compliance with the
1940 Act.
Citi Fiduciary Trust Company, located at 125 Broad
Street, New York, New York 10004, serves as each
Portfolio's transfer and dividend-paying agent.
Under the transfer agency agreement, the transfer
agent maintains the shareholder account records for
each Portfolio, handles certain communications
between shareholders and a Portfolio, distributes
dividends and distributions payable by a Portfolio
and produces statements with respect to account
activity for a Portfolio and its shareholders. For
these services, the transfer agent receives fees from
each Portfolio computed on the basis of the number of
shareholder accounts that the transfer agent
maintains for each Portfolio during the month and is
reimbursed for out-of-pocket expenses.
PFPC Global Fund Services, located at P.O. Box 9699,
Providence, RI 02940-9699, serves as each Portfolio's
sub-transfer agent. Under the transfer agency
agreement, the sub-transfer agent maintains the
shareholder account records for the Portfolio, handles
certain communications between shareholders and the
Portfolio and distributes dividends and distributions
payable by the Portfolio. For these services, the
sub-transfer agent receives a monthly fee computed on
the basis of the number of shareholder accounts it
maintains for the Portfolio during the month, and is
reimbursed for out-of-pocket expenses.
FINANCIAL STATEMENTS
The Trust's Annual Reports for the fiscal year ended
August 31, 2000 is incorporated herein by reference in
their entirety. The Annual Reports were filed on
November 9, 2000, Accession Number 950130-00-5889.
APPENDIX - RATINGS OF DEBT OBLIGATIONS
BOND AND NOTE RATINGS
Moody's Investors Services, Inc.
Aaa - Bonds that are rated "Aaa" are judged to be of
the best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or
by an exceptionally stable margin and principal is
secure. While the various protective elements are
likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds that are rated "Aa" are judged to be of
high quality by all standards. Together with the
"Aaa" group they comprise what are generally known as
high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as
large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or
there may be other elements present that make the long
term risks appear somewhat larger than in "Aaa"
securities.
A - Bonds that are rated "A" possess many favorable
investment attributes and are to be considered as
upper medium grade obligations. Factors giving
security to principal and interest are considered
adequate but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds that are rated "Baa" are considered as
medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest
payments and principal security appear adequate for
the present but certain protective elements may be
lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding
investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds which are rated "Ba" are judged to have
speculative elements; their future cannot be
considered as well assured. Often the protection of
interest and principal payments may be very moderate
and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated "B" generally lack
characteristics of the desirable investment.
Assurance of interest and principal payments or of
maintenance of other terms of the contract over any
long period of time may be small.
Caa - Bonds which are rated "Caa" are of poor
standing. Such issues may be in default or there may
be present elements of danger with respect to
principal or interest
Ca - Bonds which are rated "Ca" represent obligations
which are speculative in a high degree. Such issues
are often in default or have other marked
shortcomings.
C - Bonds which are rated "C" are the lowest class of
bonds and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
Con (..)- Bonds for which the security depends upon
the completion of some act or the fulfillment of some
condition are rated conditionally. These are bonds
secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in
operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical
rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: The modifier 1 indicates that the security
ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue
ranks in the lower end of its generic rating category.
Standard & Poor's Ratings Group
AAA - Debt rated "AAA" has the highest rating assigned
by Standard & Poor's Ratings Group ("S&P"). Capacity
to pay interest and repay principal is extremely
strong.
AA - Debt rated "AA" has a very strong capacity to pay
interest and repay principal and differs from the
highest rated issues only in small degree.
A - Debt rated "A" has a strong capacity to pay
interest and repay principal although it is somewhat
more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in
higher rated categories.
BBB - Debt rated "BBB" is regarded as having an
adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt
in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated "BB", "B", "CCC", "CC"
and "C" is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of
the obligation. "BB" indicates the lowest degree of
speculation and "C" the highest degree of speculation.
While such debt will likely have some quality and
protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.
Plus (+) or Minus (-): The ratings from "AA" to "B"
may be modified by the addition of a plus or minus to
show relative standing within the major rating
categories.
Provisional Ratings: The letter "p" indicates that the
rating is provisional. A provisional rating assumes
the successful completion of the project being
financed by the debt being rated and indicates that
payment of debt service requirements is largely or
entirely dependent upon the successful and timely
completion of the project. This rating, however,
while addressing credit quality subsequent to
completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of,
such completion. The investor should exercise
judgment with respect to such likelihood and risk.
L - The letter "L" indicates that the rating pertains
to the principal amount of those bonds where the
underlying deposit collateral is fully insured by the
Federal Savings & Loan Insurance Corp. or the Federal
Deposit Insurance Corp.
+ Continuance of the rating is contingent upon S&P's
receipt of closing documentation confirming
investments and cash flow.
* Continuance of the rating is contingent upon S&P's
receipt of an executed copy of the escrow agreement.
NR- Indicates no rating has been requested, that there
is insufficient information on which to base a rating,
or that S&P does not rate a particular type of
obligation as a matter of policy.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Issuers rated "Prime-l" (or related supporting
institutions) have a superior capacity for repayment
of short-term promissory obligations. Prime-1
repayment will normally be evidenced by the following
characteristics: leading market positions in well-
established industries; high rates of return on funds
employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection;
broad margins in earnings coverage of fixed financial
charges and high internal cash generation; well-
established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated "Prime-2" (or related supporting
institutions) have strong capacity for repayment of
short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while
still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Standard & Poor's Ratings Group
A-1 - This designation indicates that the degree of
safety regarding timely payment is either overwhelming
or very strong. Those issuers determined to possess
overwhelming safety characteristics will be noted with
a plus (+) sign designation.
A-2 - Capacity for timely payment on issues with this
designation is strong. However, the relative degree
of safety is not as high as for issues designated A-1.
STATEMENT OF ADDITIONAL INFORMATION
CONSULTING GROUP CAPITAL MARKETS FUNDS
S&P 500 INDEX INVESTMENTS
DECEMBER 29, 2000
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 S&P 500 Index Investments (the
"Portfolio"), a separate series of Consulting Group
Capital Markets Funds (the "Trust"), dated December
29, 2000, and should be read in conjunction with the
Prospectus. The Trust is a series company that
consists of the Portfolio and seventeen other
portfolios offered in separate prospectuses. The
Prospectus for the Portfolio may be obtained by
contacting any Financial Consultant of Salomon Smith
Barney Inc. ("Salomon 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
Trustees and Executive Officers of the Trust
1
Investment Objectives, Management Policies and Risk Factors
3
Investment Restrictions
7
Portfolio Transactions
9
Portfolio Turnover
10
Investment Management and Other Services
10
Purchase of Shares
14
Redemption of Shares
14
Redemptions in Kind
15
Net Asset Value
15
Determination of Performance
15
Taxes
17
Distributor
21
Custodians, Transfer Agent and Sub-Transfer Agent
21
Financial Statements
21
Capitalized terms used but not defined in this
Statement of Additional Information have the meanings
accorded to them in the Prospectus.
TRUSTEES AND EXECUTIVE 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 Investment
Company Act of 1940, as amended (the "1940 Act"), is
indicated by an asterisk.
Walter E. Auch, Trustee (Age 79). 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; and Banyan Land Fund
II. Director or trustee of 2 investment companies
associated with Citigroup Inc. ("Citigroup"). His
address is 6001 N. 62nd Place, Paradise Valley,
Arizona 85253.
Martin Brody, Trustee (Age 79). Private
Investor; Director or trustee of 20 investment
companies associated with Citigroup. His address is
c/o HMK Associates, 30 Columbia Turnpike, Florham
Park, N.J. 07932.
H. John Ellis, Trustee (Age 73). Retired.
Director or trustee of 2 investment companies
associated with Citigroup. His address is 858 East
Crystal Downs Drive, Frankfort, Michigan 49635.
Armon E. Kamesar, Trustee (Age 73). Chairman of
the Board of TEC, an international organization of
Chief Executive Officers; Trustee, U.S. Bankruptcy
Court. Director or trustee of 2 investment companies
associated with Citigroup. His address is 7328
Country Club Drive, La Jolla, CA 92037.
Stephen E. Kaufman, Trustee (Age 68). Attorney.
Director or trustee of 13 investment companies
associated with Citigroup. His address is 277 Park
Avenue, New York, New York 10172.
*Heath B. McLendon, Trustee and Chairman of the
Board (Age 67). Managing Director of Salomon Smith
Barney and Chairman of the Board of Salomon Smith
Barney Strategy Advisers Inc. and Director and
President of SSB Citi Fund Management LLC ("SSB Citi"
or the "Manager") and Travelers Investment Adviser,
Inc. ("TIA"); Mr. McLendon serves on the Board of 78
investment companies associated with Citigroup. His
address is 7 World Trade Center, New York, New York
10048.
Lewis E. Daidone, Senior Vice President and
Treasurer (Age 42). Managing Director of Salomon
Smith Barney; Director and Senior Vice President of
SSB Citi and TIA. Mr. Daidone serves as Senior Vice
President and Treasurer of 61 investment companies
associated with Citigroup. His address is 125 Broad
Street, New York, New York 10004.
Frank L. Campanale, Investment Officer (Age
47). President and Chief Executive Officer of Salomon
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
41). First Vice President of Salomon 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 49).
Managing Director of Salomon Smith Barney; General
Counsel and Secretary of SSB Citi and TIA. Ms. Sydor
serves as Secretary of 61 investment companies
associated with Citigroup. Her address is 7 World
Trade Center, New York, New York 10048.
Irving David, Controller (Age 39). Director of
Salomon Smith Barney. Controller or Assistant
Treasurer of 43 investment companies associated with
Citigroup; Formerly Assistant Treasurer of First
Investment Management Company. His address is 125
Broad Street, New York, New York 10004.
As of December 15, 2000, the Trustees and officers as
a group owned less than 1% of the outstanding common
stock of the Trust. As of December 15, 2000, the
following shareholders own of record or beneficially
5% or more of shares of the Portfolio:
SBC Trust Company
Cray Inc.
Attn: Mary Anderson
411 First Avenue South, 600
Seattle, WA 98104
owned 1,273,923.378 shares (15.59%)
Remuneration. No director, officer or employee of
Salomon Smith Barney, SSB Citi 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 Salomon Smith
Barney, the Manager, any advisor, SSB Citi or any of
their affiliates a fee of $32,000 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, 2000, such fees and expenses totaled
$21,166.
For the fiscal year ended August 31, 2000, the
Trustees of the Trust were paid the following
compensation:
Total
Pension or Total Number
Aggregate Retirement Benefits Compensation of Funds
Compensation Aggregate Accrued as
Expense From Served in
Name From Portfolio Compensation of Trust Fund Complex+ Complex
Heath B. McLendon* None None None None 78
Walter Auch $283 $36,300 None $50,600 2
Martin Brody 212 35,100 None 138,000 20
H. John Ellis 342 37,300 None 50,600 2
Armon E. Kamesar 342 37,300 None 52,600 2
Stephen E. Kaufman 336 37,300 None 110,650 13
* Designates "interested trustee".
+ For the calendar year ended December 31, 1999.
INVESTMENT OBJECTIVES, MANAGEMENT POLICIES AND RISK
FACTORS
The Portfolio is a diversified, open-end management
investment company. The Prospectus discusses the
investment objectives of the Portfolio, a separate
series of 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
Portfolio may invest, the investment policies and
strategies the Portfolio may utilize and certain
risks attendant to those investments, policies and
strategies.
The Portfolio seeks to achieve its objective by
investing, under normal circumstances, at least 80%
of its total assets in common stocks included in the
S&P 500 Index in approximately the same weightings as
the S&P 500 Index. The Portfolio intends to invest in
substantially all of the stocks that comprise the S&P
500 Index. The Portfolio operates as a "pure" index
fund and will not be actively managed; as such,
adverse performance of a security will ordinarily not
result in the elimination of the security from its
portfolio. The Portfolio will be reviewed daily and
adjusted, when necessary, to maintain security
weightings as close to those of the S&P 500 Index as
possible, given the amount of assets in the Portfolio
at that time.
Foreign Securities. The Portfolio may purchase
common stocks of foreign corporations represented in
the S&P 500 Index (such securities are publicly
traded on securities exchanges or over-the-counter in
the United States). The Portfolio's investment in
common stock of foreign corporations represented in
the S&P 500 Index may also be in the form of American
Depository Receipts (ADRs). ADRs are receipts
typically issued by a United States bank or trust
company evidencing ownership of the underlying
securities and are designated for use in the U.S.
Securities markets.
Investing in the securities of foreign companies
involves special risks and considerations not
typically associated with investing in U.S.
companies. These include differences in accounting,
auditing and financial reporting standards, the
possibility of expropriation or confiscatory
taxation, adverse changes in investment or exchange
control regulations, political instability which
could affect U.S. investments in foreign countries,
and potential restrictions on the flow of
international capital. Investments in foreign
securities may be affected by changes in governmental
administration or economic policy (in the United
Stated and abroad) or changed circumstances in
dealings between nations. Foreign companies may be
subject to less governmental regulation than U.S.
companies. Securities of foreign companies may be
more volatile than securities of U.S. companies.
Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in
such respects as growth of gross domestic product,
rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payment positions.
Futures Contracts and Related Options. The Portfolio
may enter into futures contracts and purchase and
write (sell) options on these contracts. These
contracts will be used for the following reasons: to
simulate full investment in the S&P 500 Index while
retaining a cash balance for fund management
purposes, to facilitate trading, to reduce
transactions costs or to seek higher investment
returns when a futures contract is priced more
attractively than stocks comprising the S&P 500
Index. 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 the Portfolio
intends to purchase. The Portfolio will not use
futures for speculative purposes.
The 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.
The 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 the Subadviser'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, the 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 the
Portfolio may not be able to close a futures or
options position without incurring a loss in the
event of adverse price movements.
The 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 Indices. The Portfolio may
purchase put and call options on the S&P 500 Index.
The Portfolio may also enter into closing sale
transactions in order to realize gains or minimize
losses on options it has purchased. The Portfolio
will not use options for speculative purposes. The
Portfolio may terminate its obligations under an
exchange-traded call or put option by purchasing an
option identical to the one it has written.
Transactions by the Portfolio in options on
securities indices will be subject to limitations
established by each of the exchanges, boards of trade
or other trading facilities governing the maximum
number of options in each class which may be written
or purchased by a single investor or group of
investors acting in concert. Thus, the number of
options which the Portfolio may write or purchase may
be affected by options written or purchased by other
investment advisory clients. An exchange, board of
trade or other trading facility may order the
liquidation of positions found to be in excess of
these limits, and it may impose certain other
sanctions.
The hours of trading for options may not conform to
the hours during which the underlying securities are
traded. To the extent the options markets close
before the markets for the underlying securities,
significant price movements can take place in the
underlying markets that cannot be reflected in the
options markets.
In addition to the risks of imperfect correlation
between the Portfolio's holdings and the index
underlying the option, the purchase of securities
index options involves the risk that the premium and
transaction costs paid by the Portfolio in purchasing
an option will be lost. This could occur as a result
of unanticipated movements in the price of the
securities comprising the securities index on which
the option is based.
Money Market Instruments. The Portfolio may invest up
to 10% of its assets in corporate and government
bonds and notes and money market instruments. Money
market instruments include: obligations issued or
guaranteed by the United States government, its
agencies or instrumentalities ("U.S. government
securities"); certificates of deposit, time deposits
and bankers' acceptances issued by domestic banks
(including their branches located outside the United
States and subsidiaries located in Canada), domestic
branches of foreign banks, savings and loan
associations and similar institutions; high grade
commercial paper; and repurchase agreements with
respect to the foregoing types of instruments.
Certificates of deposit ("CDs") are short-term,
negotiable obligations of commercial banks. Time
deposits ("TDs") are non-negotiable deposits
maintained in banking institutions for specified
periods of time at stated interest rates. Bankers'
acceptances are time drafts drawn on commercial banks
by borrowers, usually in connection with
international transactions.
Repurchase Agreements. The Portfolio may enter into
repurchase agreements. Under the terms of a typical
repurchase agreement, the Portfolio would acquire an
underlying debt obligation for a relatively short
period (usually not more than one week) subject to an
obligation of the seller to repurchase, and the
Portfolio to resell, the obligation at an agreed upon
price and time, thereby determining the yield during
the Portfolio's holding period. This arrangement
results in a fixed rate of return that is not subject
to market fluctuations during the Portfolio's holding
period. The 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 Subadviser, acting under the supervision
of the board of trustees, reviews on an ongoing basis
the value of the collateral and the creditworthiness
of those non-bank dealers with whom the Portfolio
enters into repurchase agreements. The 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
15% of the Portfolio's total assets. In entering
into a repurchase agreement, the Portfolio bears a
risk of loss if 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.
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.
Lending Portfolio Securities. Consistent with
applicable regulatory requirements, the Portfolio may
lend portfolio securities to brokers, dealers and
other financial organizations. The Portfolio will not
lend securities to Salomon Smith Barney unless the
Portfolio has applied for and received specific
authority to do so from the Securities and Exchange
Commission (the "SEC"). The Portfolio's loan of
securities will be collateralized by cash, letters of
credit or U.S. Government Securities. The Portfolio
will maintain the collateral in an amount at least
equal to the current market value of the loaned
securities. From time to time, the 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." The
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.
Temporary Investments. For temporary defensive
purposes, during periods when the Subadviser of the
Portfolio, in consultation with the Manager, believes
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 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. The Portfolio's U.S.
dollar-denominated temporary investments are managed
by SSB Citi. The 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.
The 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.
Department of Labor ("DOL") Exemption. The Trust may
offer shares of its portfolios to certain employee
benefit plans, individual retirement accounts
("IRAs"), or retirement plans for a self-employed
individual ("Keogh Plans"). Because the Trust may
offer shares of its portfolios to these plans, it is
subject to regulation by the DOL and the provisions
of the Employee Retirement Income Security Act of
1974 ("ERISA"). Salomon Smith Barney has received a
DOL exemption covering certain transactions in shares
of the Portfolio. The full text of the DOL exemption
may be found in Exhibit A of the Prospectus. The DOL
exemption includes, among other things, a limitation
on investments in the securities of affiliates of
Salomon Smith Barney, including Citigroup, of one
percent of the Portfolio's net assets. Since the
Portfolio will be managed to comply with this
limitation, this may result in differences in
performance between the Portfolio and other funds
that fully replicate the S&P 500 Index.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 8
below have been adopted by the Trust as fundamental
policies of the Portfolio. 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 9 through 12 may
be changed by a vote of a majority of the Board of
Trustees at any time.
Under the investment restrictions adopted by the
Portfolio:
1. The Portfolio will not deviate from the
definition of a "diversified company" as defined in
the 1940 Act and rules thereunder.
2. The Portfolio 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. Issue "senior securities" as defined in the
1940 Act, and the rules, regulations and orders
thereunder, except as permitted under the 1940 Act
and the rules, regulations and orders thereunder.
4. The 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) 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.
5. The 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.
6. The 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.
7. The 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.
8. The 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.
9. The Portfolio will not invest in oil, gas or
other mineral leases or exploration or development
programs.
10. The 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.
11. The Portfolio will not make investments for
the purpose of exercising control of management.
12. Purchase or otherwise acquire any
security if, as a result, more than 15% of its net
assets would be invested in securities that are
illiquid.
The percentage limitations contained in the
restrictions listed above (other than with respect to
Number 4 above) apply at the time of purchase of
securities.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for the
Portfolio are made by the Subadviser, subject to the
overall review of the manager and the Board of
Trustees. Although investment decisions for the
Portfolio are made independently from those of the
other accounts managed by the Subadviser, investments
of the type that the Portfolio may make also may be
made by those other accounts. When the Portfolio and
one or more other accounts managed by the Subadviser
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 Subadviser to be equitable to each.
In some cases, this procedure may adversely affect
the price paid or received by the Portfolio or the
size of the position obtained or disposed of by the
Portfolio.
Transactions on U.S. stock exchanges and some foreign
stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which
commissions are negotiated, the cost of transactions
may vary among different brokers. 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 the Portfolio, its
Subadviser seeks the best overall terms available. In
assessing the best overall terms available for any
transaction, the Subadviser 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, the Advisory
Agreement between the Trust and the Subadviser
authorizes the Subadviser, 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
Subadviser or its affiliates exercise investment
discretion. The fees under the Management Agreement
and the Advisory Agreement, respectively, are not
reduced by reason of the Portfolio's Subadviser
receiving brokerage and research services. The Board
of Trustees of the Trust will periodically review the
commissions paid by the 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 the 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 the Portfolio
may be executed through Salomon Smith Barney and
other affiliated broker-dealers if, in the judgment
of the Subadviser, 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 Portfolio 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 Salomon Smith Barney
is a member, except to the extent permitted by the
SEC.
The Portfolio may use Salomon 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 Subadviser, 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. Salomon Smith Barney has agreed
to charge the Portfolio commodity commissions at
rates comparable to those charged by Salomon Smith
Barney to its most favored clients for comparable
trades in comparable accounts.
Brokerage Commissions Paid To Salomon Smith Barney
The following table sets forth certain information
regarding the Portfolio's payment
of brokerage commissions for the fiscal year ended
August 31, 2000:
Portfolio
Total
Brokerage
Commissions
Commissions
paid to
Salomon
Smith
Barney
% of Total
Brokerage
Commissions
paid to
Salomon
Smith
Barney
% of Total
Dollar
Amount of
Transaction
s Involving
Commissions
Paid to
Salomon
Smith
Barney
S&P 500 Index
Investments
$31,840
$0
0%
0%
PORTFOLIO TURNOVER
Although the Portfolio generally seeks to invest for
the long term, it retains the right to sell
securities irrespective of how long they have been
held. However, because of the "passive" investment
management approach of the Portfolio, the turnover
rate is expected to be under 50%, a generally lower
turnover rate than for most other investment
companies. A portfolio turnover rate of 50% would
occur if one-half of the Portfolio's securities were
sold within one year. Ordinarily, securities will be
sold from the Portfolio only to reflect certain
administrative changes in the S&P 500 Index
(including mergers or changes in the composition of
the Index) or to accommodate cash flows into and out
of the Portfolio while maintaining the similarity of
the Portfolio to the index.
The Portfolio's portfolio turnover rate for the
fiscal period ended August 31, 2000 was 54%.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Manager; Subadvisers; Administrator. The Manager
serves as investment manager to the Trust pursuant to
an investment management agreement ("Management
Agreement"). The Subadviser serves as investment
advisor to the Portfolio pursuant to a separate
written agreement with the SSB Citi ("Advisory
Agreement"), SSB Citi serves as administrator to the
Portfolio pursuant to a written agreement
("Administration Agreement").
The Portfolio bears its own expenses, which generally
include all costs not specifically borne by the
Manager, the Subadvisers, and SSB Citi. Included
among the 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.
As administrator, SSB Citi generally oversees all
aspects of the Trust's administration and operations
including furnishing 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. The Portfolio
pays SSB Citi a fee for these services that is
computed daily and paid monthly at the annual rate of
0.10% of the value of the Portfolio's average daily
net assets. For the fiscal period ended August 31,
2000, the Portfolio accrued and waived administration
fees of $26,570.
SSB Citi, through its predecessors, was incorporated
on March 12, 1968 under the laws of Delaware and is a
registered investment adviser. SSB Citi renders
investment advice to investment companies that had
aggregate assets under management as of October 31,
2000 in excess of $140 billion. The Consulting Group,
a division of SSB Citi, 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. They screen
more than 3,000 registered investment advisory firms
and track the performance of more than 700 firms on
the Manager's comprehensive database. In addition,
the Manager conducts over 300 on-sight evaluations of
advisors annually. As of August 31, 2000, the
Consulting Group provided services with respect to
over $226 billion in client assets representing more
than 588,000 separate accounts under a variety of
programs designed for individual and institutional
investors.
Under the Management Agreement, the Portfolio pays
SSB Citi a fee, calculated daily and paid monthly,
based on the rate applied to the value of the
Portfolio's average daily net assets. In addition,
SSB Citi pays the Subadviser, based on the rates
applied to the Portfolio's average daily net assets
on a monthly basis. The applicable management fee,
advisory fee paid by
SSB Citi to each Subadviser, and the Subadviser for
the Portfolio is indicated below:
A
n
n
u
a
l
Subad
viser
Manag
ement
Portfolio
Subadvisers Fee Fee
S&P 500 Index Investments
Barclays Global Fund Advisors
0.02% 0.02%
For the fiscal year ended August 31, 2000, the
Portfolio accrued investment management fees of
$5,314.
The Manager and the Subadviser pay 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
Subadviser bear all expenses in connection with the
performance of their respective services under the
Management Agreement, the Advisory Agreement, and the
Administration Agreement.
As noted in the Prospectus, subject to the
supervision and direction of the Manager and,
ultimately, the Board of Trustees, the Subadviser
manages the securities held by the Portfolio 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.
Subject to the supervision and direction of the Board
of Trustees, the Manager provides to the Trust
investment management evaluation services principally
by performing initial due diligence on prospective
Subadvisers for the Portfolio and thereafter
monitoring the Subadviser's performance through
quantitative and qualitative analysis as well as
periodic in-person, telephonic and written
consultations with Subadvisers. In evaluating
prospective Subadvisers, the Manager considers, among
other factors, each Subadviser'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, financial strength and quality
of service and client communications. The Manager
has responsibility for communicating performance
expectations and evaluations to the Subadviser and
ultimately recommending to the Board of Trustees
whether the Subadviser's contract should be renewed,
modified or terminated. The Manager provides written
reports to the Board of Trustees regarding the
results of its evaluations and monitoring functions.
The Manager is also responsible for conducting all
operations of the Trust except those operations
contracted to the Subadviser, custodian, transfer
agent or administrator.
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 Subadvisers. However, the Manager's
decisions, including the identity of the Subadviser
and the specific amount of the Manager's compensation
to be paid to the Subadviser, 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.
Investors should also 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 of the Trust
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 Subadviser and receives a fee from each
Portfolio of the Trust. 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 of the trust 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.
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 Subadvisers.
The Exemption is based on among other things: (1)
the Manager will select, monitor, evaluate and
allocate assets to, the Subadvisers and ensure that
the Subadvisers comply with a Portfolio's investment
objective, policies and restrictions; (2) shares of a
Portfolio 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 Subadviser and its investment advisory
contract within 90 days of the engagement of a new
Subadviser; (4) the Trust will disclose in its
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.
Code of Ethics
Pursuant to Rule 17j-1 of the 1940 Act, each of, the
Trust, its investment adviser and principal
underwriter has adopted a code of ethics that permits
personnel to invest in securities for their own
accounts, including securities that may be purchased
or held by the Portfolio of the Trust. All personnel
must place the interests of clients first and avoid
activities, interests and relationships that might
interfere with the duty to make decisions in the best
interests of the clients. All personal securities
transactions by employees must adhere to the
requirements of the code of ethics and must be
conducted in such a manner as to avoid any actual or
potential conflict of interest, the appearance of
such a conflict, or the abuse of an employee's
position of trust and responsibility.
A copy of the Trust's code of ethics is on file with
the Securities and Exchange Commission.
Auditors
KPMG LLP, 757 Third Avenue, New York, New York 10017,
currently serves 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. PFPC Trust Company (successor by
assignment from 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 Agreement, 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 SHARES
Purchases of shares of the Portfolio through an
Advisory Service must be made through a brokerage
account maintained with Salomon Smith Barney.
Payment for Portfolio shares must be made by check
directly to Salomon Smith Barney or to a broker that
clears securities transactions through Salomon 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 Portfolio 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 Trust's 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 Salomon 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. If 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, such
investors 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 the
Portfolio is included in the Prospectus. The right of
redemption of shares of the 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
The Portfolio's net asset value per share is
calculated by SSB Citi on each day, Monday through
Friday, except days on which the NYSE is closed. The
NYSE is currently scheduled to be closed on New
Year's Day, Martin Luther King Jr. 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. On those days,
securities held by the Portfolio may nevertheless be
actively traded and the value of the Portfolio's
shares could be significantly affected.
Securities listed on a national securities exchange
will be valued on the basis of the last sale on the
date on which the valuation is made or, in the
absence of sales, at the mean between the closing bid
and asked prices. Over-the-counter securities will
be valued at the mean between the closing bid and
asked prices on each day, or, if market quotations
for those securities are not readily available, at
fair value, as determined in good faith by the
Portfolio's Board of Trustees. Short-term obligations
with maturities of 60 days or less are valued at
amortized cost, which constitutes fair value as
determined by the Portfolio's Board of Trustees.
Amortized cost involves valuing an instrument at its
original cost to the Portfolio 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
instrument. All other securities and other assets of
the Portfolio will be valued at fair value as
determined in good faith by the Portfolio's Board of
Trustees.
DETERMINATION OF PERFORMANCE
Average Annual Total Return
From time to time, the Trust may advertise the
Portfolio's "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
Salomon 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). Aggregate
total returns also 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).
In reports or other communications to shareholders or
in advertising material, the Portfolio may quote
total return figures that do not reflect Salomon
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. The performance information
also may include evaluations of the Portfolio
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.
The Portfolio's average annual total return figures
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. 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.
The Portfolio's average annual total return without
the effect of the maximum annual fee for
participation in TRAK and with the effect of fee
waivers were as follows:
From
October 1
1999
through
August 31,
2000
18.24%
The Portfolio's average annual total return with the
effect of the maximum annual fee for participation in
TRAK and with the effect of fee waivers were as
follows:
From
October 1,
1999
through
August 31,
2000
16.62%
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 and
other industry publications.
TAXES
The following is a summary of certain federal income
tax considerations that may affect the Portfolio and
its shareholders. In addition to the considerations
described below, there may be other federal, state,
local or foreign tax applications to consider. The
summary does not address all of the potential federal
income tax consequences that may be applicable to the
Portfolio or to all categories of investors, some of
which may be subject to special tax rules. The
summary is not intended as a substitute for
individual tax advice and investors are urged to
consult their own tax advisors as to the tax
consequences of an investment in the Portfolio. The
summary is based on the laws in effect on the date of
this SAI, which are subject to change.
The Portfolio intends to qualify in each year as a
separate "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the
"Code"), by complying with certain requirements
regarding the sources and distribution of its income
and the diversification of its assets. Provided that
the 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, any excess of its net short-term
capital gain over its net long-term capital loss) for
a taxable year and 90% of its tax-exempt interest
income (reduced by certain expenses for that year),
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 in
compliance with the Code's timing and other
requirements.
If, in any taxable year, the Portfolio fails to
qualify as a regulated investment company under the
Code or fails to meet the distribution requirement,
it would be taxed in the same manner as an ordinary
corporation and distributions to its shareholders
would not be deductible by the Portfolio in computing
its taxable income. In addition, in the event of a
failure to qualify, the Portfolio's distributions, to
the extent derived from the Portfolio's current or
accumulated earnings and profits, would constitute
dividends (eligible for the corporate dividends-
received deduction) which are taxable to shareholders
as ordinary income, even though those distributions
would otherwise (at least in part) be treated as
long-term capital gains. If the Portfolio fails to
qualify as a regulated investment company in any
year, it must pay out its earnings and profits
accumulated in that year in order to qualify again as
a regulated investment company. In addition, if the
Portfolio failed to qualify as a regulated investment
company for a period greater than one taxable year,
the Portfolio may be required to recognize any net
built-in gains with respect to certain of its assets
(the excess of the aggregate gains, including items
of income, over aggregate losses that would have been
realized if it had been liquidated) in order to
qualify as a regulated investment company in a
subsequent year.
In order to avoid the application of a 4%
nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gains, the
Portfolio may make an additional distribution shortly
before or shortly after December 31 in each year of
any undistributed ordinary income or capital gains.
The Portfolio generally will seek to pay any
additional dividends and distributions necessary to
avoid the application of this tax.
The 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 and, if capital, the extent
to which they are long-term or short-term),
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 the Portfolio to mark-to-market
certain types of positions in its portfolio (i.e.,
treat them as if they were closed out), and (ii) may
cause the 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 referred to above. The
Portfolio will monitor its transactions, will make
the appropriate tax elections, if any, 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 seek
to prevent disqualification of the Portfolio as a
regulated investment company.
As a general rule, the 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. Gains or losses on
the sale of debt securities denominated in a foreign
currency may be recharacterized as ordinary income or
losses, as described below.
Dividends or other income (including, in some cases,
capital gains) received by the Portfolio from
investments in foreign securities may be subject to
withholding and other taxes imposed by such
countries. Tax conventions between certain countries
and the United States may reduce or eliminate such
taxes in some cases. The Portfolio will not be
eligible to elect to treat any foreign taxes paid by
it as paid by its shareholders, who therefore will
not be entitled to deductions or credits for such
taxes on their own tax returns.
The Portfolio may be required to treat amounts as
taxable income or gain, subject to the distribution
requirements referred to above, even though no
corresponding amounts of cash are received
concurrently, as a result of (1) mark to market,
constructive sale or other rules applicable to
passive foreign investment companies or partnerships
or trusts in which the Portfolio invests or to
certain options, futures or forward contracts, or
"appreciated financial positions" or (2) the
inability to obtain cash distributions or other
amounts due to currency controls or restrictions on
repatriation imposed by a foreign country with
respect to the Portfolio's investments (including
through depositary receipts) in issuers in such
country or (3) tax rules applicable to debt
obligations acquired with "original issue discount,"
including zero-coupon or deferred payment bonds and
pay-in-kind debt obligations, or to market discount
if an election is made with respect to such market
discount. The Portfolio may therefore be required to
obtain cash to be used to satisfy these distribution
requirements by selling securities at times that it
might not otherwise be desirable to do so or
borrowing the necessary cash, thereby incurring
interest expenses.
Under Section 988 of the Code, gains or losses
attributable to fluctuations in exchange rates
between the time the Portfolio accrues income or
receivables or expenses or other liabilities
denominated in a foreign currency and the time the
Portfolio actually collects such income or pays such
liabilities are generally treated as ordinary income
or ordinary loss. Similarly, gains or losses on
foreign currency, foreign currency forward contracts,
certain foreign currency options or futures contracts
and the disposition of debt securities denominated in
foreign currency, to the extent attributable to
fluctuations in exchange rates between the
acquisition and disposition dates, are also treated
as ordinary income or loss.
The Portfolio is permitted to carry forward any
unused capital losses to be utilized to offset its
capital gains realized during the eight-year period
following the year in which the losses arose, which
will reduce the net realized capital gains (if any)
required to be distributed to shareholders for those
years.
Dividends and Distributions
For federal income tax purposes, dividends declared
by the Portfolio in October, November or December as
of a record date in such a month and which are
actually paid in January of the following year will
be taxable to shareholders as if they were paid on
December 31 of the year in which they are declared
rather than in the year in which shareholders
actually receive the dividends.
As a general rule, a shareholder's gain or loss on a
redemption or other disposition of Portfolio shares
that is treated as a sale under the Code 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.
The Portfolio may realize net long-term capital
gains. Distributions of the excess, if any, of net
long-term capital gain over net short-term capital
loss ("capital gain dividends") will be taxable to
shareholders as long-term capital gains, regardless
of whether received in cash or reinvested in
additional shares and how long a shareholder has held
Portfolio shares. If a shareholder receives a capital
gain dividend with respect to any share and redeems,
sells or otherwise disposes of the share before it
has been held for more than six months, then any
loss, to the extent of the capital gain dividend,
will be treated as a long-term capital loss.
Additionally, any loss realized on a redemption,
exchange or other disposition of Portfolio shares
generally will be disallowed to the extent the shares
disposed of are replaced, including replacement
through the reinvesting of dividends and capital
gains distributions in the Portfolio, within a 61-day
period beginning 30 days before and ending 30 days
after the disposition of the shares.
Dividends paid from net investment income and
distributions of any excess of net short-term capital
gain over net long-term capital loss are taxable to
shareholders as ordinary income, regardless of how
long shareholders have held their Portfolio shares
and whether such dividends and distributions are
received in cash or reinvested in additional
Portfolio shares. Dividends paid by the Portfolio
that are declared from net investment income and are
attributable to qualifying dividends received by the
Portfolio from domestic corporations may qualify for
the federal dividends-received deduction for
corporations.
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. Each
shareholder will also receive, if appropriate,
various written notices after the close of the
Portfolio's prior taxable year as to the federal
income tax status of the 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 and the possible availability of an
exemption for dividends paid by a Portfolio
attributable to interest the Portfolio earns from
U.S. Government obligations.
If the Portfolio is the holder of record of any stock
on the record date for any dividends payable with
respect to the stock, these dividends will 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, the 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 the Portfolio
on or just prior to the record date for a taxable
dividend or capital gain distribution should be aware
that even if the net asset value of the Portfolio's
shares is reduced below the investor's cost as a
result of the distribution, the amount of the
forthcoming dividend or distribution payment will be
a taxable dividend or distribution payment even
though it may represent a return of invested capital.
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)
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 federal income tax liability.
Distributions to nonresident aliens and foreign
entities may be subject to different tax rules,
including other possible withholding taxes.
The foregoing is only a summary of certain tax
considerations generally affecting the 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 their state and
local tax liabilities.
DISTRIBUTOR
Effective June 5, 2000, Salomon Smith Barney, located
at 388 Greenwich Street, New York, New York 10013
replaced CFBDS, Inc. as the Portfolio's distributor.
Prior to June 5, 2000, CFBDS, Inc., located at 20
Milk Street, Boston, Massachusetts 02109-5408 served
as the Portfolio's distributor. Salomon Smith Barney
serves as the Portfolio's distributor on a best
efforts basis pursuant to a written agreement, which
was approved by the Trustees of the Trust.
CUSTODIANS, TRANSFER AGENT AND SUB-TRANSFER AGENT
PFPC Trust Company (successor as assigned by PNC
Bank, National Association) is located at 8800
Tinicum Blvd., Philadelphia, Pennsylvania 19153 and
The Chase Manhattan Bank ("Chase") located at Chase
MetroTech Center, Brooklyn, NY 11245, serve as the
custodians for the Trust. Under their respective
custodian agreements with the respective funds, each
custodian is authorized to establish separate
accounts for foreign securities owned by the
appropriate fund to be held with foreign branches of
other U.S. banks as well as with certain foreign
banks and securities depositories. For its custody
services to the Trust, each custodian receives
monthly fees based upon the month-end aggregate net
asset value of the appropriate Portfolio, plus
certain charges for securities transactions including
out-of-pocket expenses, and costs of any foreign and
domestic sub-custodians. The assets of the Trust are
held under bank custodianship in compliance with the
1940 Act.
Citi Fiduciary Trust Company, located at 125 Broad
Street, New York, New York 10004, serves as the
Portfolio's transfer and dividend-paying agent.
Under the transfer agency agreement, the transfer
agent maintains the shareholder account records for
the Portfolio, handles certain communications between
shareholders and the Portfolio, distributes dividends
and distributions payable by the Portfolio and
produces statements with respect to account activity
for the Portfolio and its shareholders. For these
services, the transfer agent receives fees from the
Portfolio computed on the basis of the number of
shareholder accounts that the transfer agent
maintains for the Portfolio during the month and is
reimbursed for out-of-pocket expenses.
PFPC Global Fund Services, located at P.O. Box 9699,
Providence, RI 02940-9699, serves as the Portfolio's
sub-transfer agent. Under the transfer agency
agreement, the sub-transfer agent maintains the
shareholder account records for the Portfolio, handles
certain communications between shareholders and the
Portfolio and distributes dividends and distributions
payable by the Portfolio. For these services, the
sub-transfer agent receives a monthly fee computed on
the basis of the number of shareholder accounts it
maintains for the Portfolio during the month, and is
reimbursed for out-of-pocket expenses.
FINANCIAL STATEMENTS
The Portfolio's Annual Report for the fiscal year
ended August 31, 2000 is incorporated herein by
reference in its entirety. The Annual Report was
filed on November 9, 2000, Accession Number 950130-
00-5889.
"S&P 500(r)" is a trademark of The McGraw-Hill
Companies, Inc. and has been licensed for use by SSB
Citi Fund Management LLC. The Portfolio is not
sponsored, endorsed, sold or promoted by Standard &
Poor's (S&P), a division of The McGraw-Hill
Companies, Inc. S&P makes no representation or
warranty, express or implied, to the shareholders of
the Portfolio or any member of the public regarding
the advisability of investing in securities generally
or in the Portfolio particularly or the ability of
the S&P 500 Index to track general stock market
performance. S&P's only relationship to SSB Citi
Fund Management LLC. is the licensing of certain
trademarks and trade names of S&P and the S&P 500
Index which is determined, composed and calculated by
S&P without regard to SSB Citi Fund Management LLC or
the Portfolio. S&P has no obligation to take the
needs of SSB Citi Fund Management LLC or the
shareholders of the Portfolio into consideration in
determining, composing or calculating the S&P 500
Index. S&P is not responsible for and has not
participated in the determination of the prices and
amount of the Portfolio's shares or the timing of the
issuance or sale of the Portfolio's shares or in the
determination or calculation of the equation by which
Portfolio shares are to be converted into cash. S&P
has no obligation or liability in connection with the
administration, marketing or trading of Portfolio
shares.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE
S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN.
S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE
OBTAINED BY THE PORTFOLIO, OWNERS OF THE PORTFOLIO, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY
DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE
ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED
OF THE POSSIBILITY OF SUCH DAMAGES.
