<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 23, 1996
FILE NO. 33-43133
FILE NO. 811-6422
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 9 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 10 [X]
AON FUNDS
(EXACT NAME OF REGISTRANT)
123 NORTH WACKER DRIVE
CHICAGO, ILLINOIS 60606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER: (312) 701-3300
MICHAEL A. CONWAY
PRESIDENT
AON FUNDS
123 NORTH WACKER DRIVE
CHICAGO, ILLINOIS 60606
(NAME AND ADDRESS OF AGENT FOR SERVICE OF PROCESS)
COPY TO:
ANDREW H. SHAW, ESQ.
SIDLEY & AUSTIN
ONE FIRST NATIONAL PLAZA
CHICAGO, ILLINOIS 60603
------------------------
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
immediately upon filing pursuant to paragraph (b) of Rule 485
----
on Date pursuant to paragraph (b) of Rule 485
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X 60 days after filing pursuant to paragraph (a) of Rule 485
----
on Date pursuant to paragraph (a) of Rule 485
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75 days after filing pursuant to paragraph (a)(ii) of Rule 485
----
on Date pursuant to paragraph (a)(ii) of Rule 485
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
The Registrant hereby amends this Registration Statement as may be necessary
to delay the effective date of Post-Effective Amendment No. 8 to this
Registration Statement filed June 11, 1996 until Post-Effective Amendment No. 9
to this Registration Statement shall become effective in accordance with Rule
485(a) under the Securities Act of 1993 or until Post-Effective Amendment No. 9
to this Registration Statement shall become effective on such date as the
Commission, acting pursuant to Section 8(a) of the Securities Act of 1933 or
otherwise, may determine.
Pursuant to Rule 414 under the Securities Act of 1933, Aon Funds, a business
trust organized under the laws of the State of Delaware pursuant to an Agreement
and Declaration of Trust dated May 15, 1996, hereby adopts as its own the
Registration Statement on Form N-1A (as appropriately modified) filed pursuant
to the Securities Act of 1933 and the Investment Company Act of 1940 (File Nos.
33-43133 and 811-6422) and the Notification of Registration filed pursuant to
the Investment Company Act of 1940 by its predecessor, Aon Asset Management
Fund, Inc., a Virginia corporation.
PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT
ELECTS TO REGISTER AN INDEFINITE AMOUNT OF SECURITIES. THE REGISTRANT FILED A
RULE 24F-2 NOTICE FOR ITS FISCAL YEAR ENDING OCTOBER 31, 1995 ON DECEMBER 29,
1995.
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<PAGE> 2
AON FUNDS
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A)
<TABLE>
<CAPTION>
N-1A
ITEM NO.
AND CAPTION LOCATION
- ----------- -------------------------------------
<C> <S> <C>
PART A
LOCATION
1. Cover Page................................. Cover Page
2. Synopsis................................... Prospectus Summary; Fund Expenses
3. Condensed Financial Information............ Financial Highlights; Performance
Information
4. General Description of Registrant.......... Organization and Classification;
Investment Objectives and Policies;
Investment Practices; Additional
Information
5. Management of the Fund..................... Management of the Trust
5A. Management's Discussion of Fund
Performance.............................. Included in Annual Report
6. Capital Stock and Other Securities......... Organization and Classification;
Additional Information; Dividends,
Distributions and Taxes; Distribution
of Shares
7. Purchase of Securities Being Offered....... Purchase of Shares; Distribution of
Shares; Net Asset Value; Additional
Services to Shareholders
8. Redemption or Repurchase................... Redemption of Shares; Additional
Services to Shareholders
9. Pending Legal Proceedings.................. Not Applicable
PART B
10. Cover Page................................. Cover Page
11. Table of Contents.......................... Table of Contents
12. General Information and History............ General Information; Additional
Information
13. Investment Objectives and Policies......... Money Market Fund Investments;
Investment Practices and
Restrictions; Additional Investment
Practices and Restrictions; General
Information
14. Management of the Fund..................... Management of the Trust
15. Control Persons and Principal Holders
of Securities.............................. Additional Information
16. Investment Advisory and Other Services..... Management of the Trust; Additional
Information
17. Brokerage and other Allocations............ Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities......... Additional Information
19. Purchase, Redemption and Pricing of
Securities Being Offered................. Determination of Net Asset Value;
Retirement Programs
</TABLE>
<PAGE> 3
CROSS REFERENCE SHEET -- CONTINUED
<TABLE>
<CAPTION>
N-1A
ITEM NO.
AND CAPTION LOCATION
- ----------- -------------------------------------
<C> <S> <C>
20. Tax Status................................. Dividends, Distributions and Taxes
(in the prospectus)
21. Underwriters............................... Distribution of Shares (in the
prospectus)
22. Calculation of Performance Data............ Yield Information
23. Financial Statements....................... Financial Statements
</TABLE>
PART C
OTHER INFORMATION
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
<PAGE> 4
PROSPECTUS
AON FUNDS
123 NORTH WACKER DRIVE
CHICAGO, ILLINOIS 60606
(312) 701-3300 OR (800) 266-3637
Aon Funds (the "Trust") is an open-end, management investment company. The
Trust currently issues six separate series of shares of beneficial interest
(each, a "Fund" and collectively, the "Funds"), each representing a separate
portfolio of securities with its own investment objective and policies (commonly
known as a mutual fund). The Funds are the Money Market Fund, the Government
Securities Fund, the Asset Allocation Fund, the S&P 500 Index Fund, the
International Equity Fund and the REIT Index Fund. The Funds are grouped into
three general fund types: Fixed Income (including Money Market), Asset
Allocation and Equity. Each Fund has a fundamental investment objective and
certain investment policies which are set forth herein.
The investment objectives of the respective Funds are as follows:
FIXED INCOME AND MONEY MARKET FUNDS:
The investment objective of the Money Market Fund is to maximize current
income to the extent consistent with the preservation of capital and the
maintenance of liquidity. This Fund invests in high-quality, short-term money
market instruments.
The investment objective of the Government Securities Fund is to seek high
current income with limited credit risk through investments in intermediate and
long-term debt instruments issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
ASSET ALLOCATION FUND:
The investment objective of the Asset Allocation Fund is to maximize total
return on invested capital, to be derived from capital appreciation, dividends
and interest. To achieve this objective, this Fund follows a flexible asset
allocation strategy that shifts among a wide range of investments and markets.
Assets are invested in common stocks, bonds and money market instruments, the
proportion of each being continuously determined by the investment adviser.
EQUITY FUNDS:
The investment objective of the S&P 500 Index Fund is to provide capital
appreciation and accumulation of income that corresponds to the investment
return of the Standard & Poor's 500 Composite Stock Price Index, through
investment in common stocks traded on the New York Stock Exchange and the
American Stock Exchange and, to a limited extent, in the over-the-counter
markets.
The investment objective of the International Equity Fund is to provide
long-term capital appreciation by investing primarily in equity and
equity-related securities of companies that are organized outside of the U.S. or
whose securities are principally traded outside of the U.S.
The investment objective of the REIT Index Fund is to provide capital
appreciation and accumulation of income that corresponds to the investment
return of the Morgan Stanley REIT Index, a benchmark of U.S. real estate
investment trusts ("REITs"). The Fund will not directly invest in real estate.
Shares of the Trust are distributed through Aon Securities Corporation, a
wholly-owned subsidiary of Aon Corporation ("Aon"), a publicly held insurance
holding company the common stock of which is listed on the New York Stock
Exchange and which, through subsidiaries, is a major provider of insurance,
insurance brokerage and related services. Aon Advisors, Inc. ("AAI"), also a
wholly-owned subsidiary of Aon, serves as each Fund's investment adviser. AAI
has engaged Brinson Partners, Inc. ("Brinson Partners") to serve as investment
sub-adviser to provide day-to-day portfolio management for the International
Equity Fund. (As used herein, "Adviser" shall refer to AAI and, where
applicable, Brinson Partners, or both, in their respective roles.) Aon and its
subsidiaries may, by virtue of their interests as shareholders of the Funds at
any
<PAGE> 5
particular date, be considered controlling persons of the Trust and may be able
to cast a deciding vote on all matters submitted to a vote of the shareholders
of the Trust or one or more Funds (or classes thereof).
By this Prospectus, Class C and Class Y shares of each Fund are being
offered. Class C shares of each Fund are offered without a sales charge, but are
subject to a charge imposed pursuant to Rule 12b-1 under the Investment Company
Act of 1940, as described herein. Class Y shares are offered without a sales
charge and are currently sold only to (i) the shareholders of record of
outstanding shares of any Fund immediately prior to the commencement of
distribution under the multiple-class program (including additional investments
by such holders), (ii) investment advisory clients of AAI and (iii) affiliates
of Aon or AAI. Other differences between the classes of shares include the
services offered to and expenses borne by each class and certain voting rights,
as described herein.
This Prospectus sets forth concisely information about the Trust and the
Funds that prospective investors should know before investing. Investors should
retain this Prospectus for future reference. More detailed information about the
Trust and the Funds is contained in a Statement of Additional Information dated
September 3, 1996 that has been filed by the Trust with the Securities and
Exchange Commission and is incorporated by reference into this Prospectus. The
Statement of Additional Information is available free of charge upon request
from the Trust at the address and telephone numbers set forth above.
The Money Market Fund intends to maintain its net asset value at $1.00 per
share. An investment in the Money Market Fund is neither insured nor guaranteed
by the U.S. Government, and there can be no assurance that the Fund will be able
to maintain a stable net asset value of $1.00 per share. See "Net Asset Value."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
SEPTEMBER 3, 1996
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY.................................................................... 1
FUND EXPENSES......................................................................... 4
FINANCIAL HIGHLIGHTS.................................................................. 6
ORGANIZATION AND CLASSIFICATION....................................................... 8
INVESTMENT OBJECTIVES AND POLICIES.................................................... 9
Money Market Fund................................................................... 9
Government Securities Fund.......................................................... 11
Asset Allocation Fund............................................................... 12
S&P 500 Index Fund.................................................................. 13
International Equity Fund........................................................... 14
REIT Index Fund..................................................................... 16
INVESTMENT PRACTICES.................................................................. 19
MANAGEMENT OF THE TRUST............................................................... 27
DISTRIBUTION OF SHARES................................................................ 31
NET ASSET VALUE....................................................................... 31
PURCHASE OF SHARES.................................................................... 32
REDEMPTION OF SHARES.................................................................. 34
ADDITIONAL SERVICES TO INVESTORS...................................................... 36
DIVIDENDS, DISTRIBUTIONS AND TAXES.................................................... 37
PERFORMANCE INFORMATION............................................................... 39
ADDITIONAL INFORMATION................................................................ 40
</TABLE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, in connection with the offer contained in this Prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Trust, the Adviser, or the Distributor. This
Prospectus does not constitute an offering in any state in which such offering
may not lawfully be made.
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. Cross references in this
summary refer to the headings found in the body of the Prospectus.
Aon Funds:................. Aon Funds (the "Trust") is an open-end management
investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act")
and consisting of six diversified mutual funds
(individually, a "Fund" and collectively, the
"Funds"). The Funds collectively offer a range of
investment opportunities. Each Fund represents a
separate and distinct series of the shares of
beneficial interest of the Trust. See
"Organization and Classification" and "Additional
Information."
Investment Objectives:..... Each Fund's investment objective and certain
investment restrictions are "fundamental" and may
be changed only with the approval of the holders
of a majority of the outstanding voting securities
of such Fund, as defined in the 1940 Act. Certain
other investment policies and restrictions reflect
current practices of the respective Funds and may
be changed by the Board of Trustees of the Trust
without the approval of shareholders. See
"Investment Objectives and Policies" and
"Investment Practices."
Investment Adviser:........ Aon Advisors, Inc. ("AAI") serves as the
investment adviser for each of the Funds. Brinson
Partners, Inc. serves as the sub-adviser for the
International Equity Fund. See "Management of the
Trust."
Risk Factors:.............. Each Equity Fund, and to the extent invested in
equity securities the Asset Allocation Fund, is
subject to the risks associated with investing in
equity securities. Equity securities may include
common stocks, preferred stocks, convertible
securities and warrants. Common stocks, the most
familiar type, represent an equity (ownership)
interest in a corporation. Although common stocks
and other equity securities have a history of
long-term growth in value, their prices may
fluctuate dramatically in the short term in
response to changes in market conditions, interest
rates and other company, political and economic
developments.
The International Equity Fund invests primarily in
foreign securities. Foreign securities and foreign
currencies may involve risks in addition to the
risks associated with equity securities generally.
These include currency exchange rate fluctuations,
risks relating to political or economic conditions
in foreign countries and potentially less
stringent investor protection, disclosure
standards and settlement procedures of foreign
markets. These factors could make foreign
investments, especially those in developing
countries, more volatile.
The REIT Index Fund invests primarily in the
common stock of equity REITs. Such securities are
strongly linked to the real estate market and
involve real estate industry risk. In general,
real estate values are affected by a variety of
factors, including supply and demand for
properties; the health of the U.S. economy and
that of different regions; and the strength of
specific industries renting properties.
Ultimately, a REIT's performance depends on the
types and locations of the properties it owns and
on how well the REIT manages its properties. REITs
are also subject to interest rate risk because of
the significant amount of dividend income they
generally provide.
<PAGE> 8
The Government Securities Fund and, to the extent
invested in longer-term debt securities the Asset
Allocation Fund, are subject to the risks
associated with investing in longer-term fixed
income securities such as bonds. Bonds are issued
to evidence loans that investors make to
corporations and governments. Bonds in which these
Funds may invest include those issued by U.S.
corporations and by the U.S. Treasury and its
agencies. Foreign companies and governments also
issue bonds available to U.S. investors.
Over time, the level of interest rates available
in the marketplace changes. As prevailing rates
fall, the prices of bonds and other securities
that trade on a yield basis tend to rise. On the
other hand, when prevailing interest rates rise,
bond prices generally will fall. The longer the
maturity of a fixed-income security, the higher
its yield and the greater its price volatility.
Conversely, the shorter the maturity, the lower
the yield but the greater the price stability.
These factors may have an effect on the volatility
of the share price of each Fund investing in
bonds. A change in the level of interest rates
will tend to cause the net asset value per share
of such Funds to change. If sustained over time,
it would also have the effect of raising or
lowering the yield of the Fund.
Fixed-income securities are also subject to credit
risk. When a security is purchased, its
anticipated yield is dependent on the timely
payment by the borrower of each interest and
principal installment. Credit analysis and
resultant bond ratings take into account the
relative likelihood that such timely payment will
result. Therefore, lower-rated bonds tend to sell
at higher yields than top-rated bonds of similar
maturity. Furthermore, as economic, political and
business developments unfold, lower quality bonds,
which possess lower levels of protection with
respect to timely payment, usually exhibit more
price fluctuation than do higher-quality bonds of
like maturity.
The Funds may engage in certain other investment
techniques to which certain other risks may
pertain. See "Investment Objectives and Policies"
and "Investment Practices."
Share Classes:............. Investors in each Fund may select from two classes
of shares, each with different expense levels.
Class Y shares, however, are available only to
certain eligible purchasers. See "Distribution of
Shares".
Class C:.............. Offered at net asset value and subject to
distribution and service fees at the rate of .25%
of the average daily net assets of the Class C
shares (.10% in the case of the Class C shares of
the Money Market Fund).
Class Y:.............. Offered at net asset value to (i) the shareholders
of record of outstanding shares of any Fund
immediately prior to the commencement of
distribution under the multiple-class program,
including additional investments by such holders,
(ii) investment advisory clients of AAI and (iii)
affiliates of Aon or AAI.
Purchase of Shares:........ Shares may be purchased at the net asset value per
share next determined after receipt and acceptance
of a purchase order. Prospective purchasers should
contact Aon Securities Corporation (the
"Distributor") or the Fund's transfer agent. See
"Purchase of Shares."
2
<PAGE> 9
Initial and Subsequent
Investments:............... $1,000 minimum on initial purchases. See "Purchase
of Shares." Additional investments, including
investments pursuant to the Automatic Investment
Program, can be made at any time for as little as
$100. See "Additional Services to Investors --
Automatic Investment Program." These minimums may
be less for full-time staff employees of Aon and
its subsidiaries.
Exchange Privilege:........ Shares of one Fund may be exchanged for shares of
the corresponding class of shares of any other
Fund at a charge of $5 per exchange. See
"Additional Services to Investors -- Exchange
Privilege."
Redemption of Shares....... Shares may be redeemed directly from a Fund at the
net asset value per share next determined after
receipt of a redemption request in proper order.
Redemptions may be made by mail or telephone.
Shareholders in the Money Market Fund also have a
checkwriting privilege available. See "Redemption
of Shares."
Dividends and
Distributions:............. Dividends are accrued daily and paid monthly on
the Money Market Fund. Dividends are paid monthly
and quarterly, respectively, on the Government
Securities Fund and the Asset Allocation Fund.
Each of the other Funds generally pays dividends
at least annually. Dividends are paid from
available net investment income. Other
distributions, if any, are generally paid annually
from realized net capital gains. See "Dividends,
Distributions and Taxes."
Reinvestment:.............. Unless a shareholder elects to receive income
dividends and capital gains in cash or shares of
the same class of another Fund, distributions on
shares of a Fund will be automatically reinvested
in additional shares of the same class of the
respective distributing Fund. See "Dividends,
Distributions and Taxes."
Net Asset Values:.......... The net asset value per share of each Fund is
calculated at least once on each day the New York
Stock Exchange is open for trading. Each class of
shares of each Fund may be separately quoted in the
financial section of appropriate newspapers. The
net asset values are also available by calling
(800) 266-3637. See "Net Asset Value."
Additional Shareholder
Services:.................. Additional shareholder services available include
purchase by wire and a systematic withdrawal plan.
See "Additional Services to Investors."
Transfer Agent and Dividend
Paying Agent:.............. Firstar Trust Company serves as the Trust's
transfer agent and dividend paying agent and is
located at P.O. Box 701, Milwaukee, Wisconsin
53201-0701.
3
<PAGE> 10
FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are charges investors pay when buying or
selling shares of a Fund.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases.............. None
Maximum Sales Charge Imposed on Reinvested Dividends... None
Maximum Contingent Deferred Sales Charge............... None
Redemption Fees........................................ None
Exchange Fees.......................................... $5 per exchange
</TABLE>
ANNUAL FUND OPERATING EXPENSES (AS PERCENTAGE OF AVERAGE DAILY NET ASSETS)
CLASS C SHARES:
<TABLE>
<CAPTION>
ADVISORY AND OTHER TOTAL
ADMINISTRATION 12B-1 EXPENSES OPERATING
FUND FEES FEES (4) EXPENSES
----------------------------------------------- -------------- ----- -------- ---------
<S> <C> <C> <C> <C>
Money Market Fund (1).......................... .20%(3) .10% .04% .34%(3)
Government Securities Fund (2)................. .50% .25% 1.00% 1.75%
Asset Allocation Fund (1)...................... .70% .25% .26% 1.21%
S&P 500 Index Fund (2)......................... .35% .25% .40% 1.00%
International Equity Fund (2).................. 1.00% .25% .75% 2.00%
REIT Index Fund (2)............................ .65% .25% .85% 1.75%
</TABLE>
- ---------------
(1) Annual Portfolio Operating Expenses are based on amounts incurred during the
Fund's most recent fiscal year ended October 31, 1995, restated to reflect
Rule 12b-1 fees that took effect with respect to Class C shares on September
3, 1996 and, with respect to the Money Market Fund, to reflect the current
fee-waived annual aggregate advisory and administration fee rate of .20% of
average daily net assets (which prior to September 3, 1996 was .10% of
average daily net assets).
(2) Advisory, administration and Rule 12b-1 fees are payable based on
percentages of daily net assets. Other expenses are based on estimated
amounts for approximately three months of the 1996 fiscal year during which
these Funds are expected to operate and are projected at the maximum annual
operating expense limitations as hereinafter described.
(3) After giving effect to expense reimbursements or fee waivers. Without such
expense reimbursements or fee waivers, Advisory and Administration Fees and
Total Operating Expenses would have been .35% and .49%, respectively.
(4) "Other Expenses" includes such expenses as custodial, transfer agent and
accounting agent fees and audit, legal, printing, registration and other
business operating expenses, but excludes extraordinary expenses. For
further details, see "Management of the Trust -- Investment Adviser."
4
<PAGE> 11
CLASS Y SHARES:
<TABLE>
<CAPTION>
ADVISORY AND OTHER TOTAL
ADMINISTRATION 12B-1 EXPENSES OPERATING
FUND FEES FEES (4) EXPENSES
------------------------------------------------ -------------- ----- -------- ---------
<S> <C> <C> <C> <C>
Money Market Fund (1)........................... .20%(3) -- .04% .24%(3)
Government Securities Fund (2).................. .50% -- 1.00% 1.50%
Asset Allocation Fund (1)....................... .70% -- .26% .96%
S&P 500 Index Fund (2).......................... .35% -- .40% .75%
International Equity Fund (2)................... 1.00% -- .75% 1.75%
REIT Index Fund (2)............................. .65% -- .85% 1.50%
</TABLE>
- ---------------
(1) Annual Portfolio Operating Expenses are based on amounts incurred during the
Fund's most recent fiscal year ended October 31, 1995, restated with respect
to the Money Market Fund to reflect the current fee-waived annual aggregate
advisory and administration fee rate of .20% of average daily net assets
(which prior to September 3, 1996 was .10% of average daily net assets).
(2) Advisory and administration fees are payable based on percentages of daily
net assets. Other expenses are based on estimated amounts for the
approximately three months of the 1996 fiscal year during which these Funds
are expected to operate and are projected at the maximum annual operating
expense limitations as hereinafter described.
(3) After giving effect to expense reimbursements or fee waivers. Without such
expense reimbursements or fee waivers, Advisory and Administration Fees and
Total Operating Expenses would have been .35% and .39%, respectively.
(4) "Other Expenses" includes such expenses as custodial, transfer agent and
accounting agent fees and audit, legal, printing, registration and other
business operating expenses, but excludes extraordinary expenses. For
further details, see "Management of the Trust -- Investment Adviser."
EXAMPLE:
An investor would pay the following expenses on a $1,000 investment,
assuming (1) expenses (after giving effect to expense reimbursements or fee
waivers) as shown, (2) a 5% annual return and (3) redemption at the end of each
time period:
<TABLE>
<CAPTION>
CLASS C SHARES CLASS Y SHARES
---------------- -------------------------------------
FUND 1 YEAR 3 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------- ------ ------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund.......................... $ 3 $11 $ 2 $ 8 $14 $ 31
Government Securities Fund................. $ 18 $55 $ 15 $47 -- --
Asset Allocation Fund...................... $ 12 $38 $ 10 $31 $53 $117
S&P 500 Index Fund......................... $ 10 $32 $ 8 $24 -- --
International Equity Fund.................. $ 20 $63 $ 18 $55 -- --
REIT Index Fund............................ $ 18 $55 $ 15 $47 -- --
</TABLE>
The purpose of the above tables is to assist investors in understanding the
various costs and expenses that investors will bear, directly or indirectly, in
acquiring and owning shares of each Fund.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN. MOREOVER, WHILE THE TABLE ASSUMES A 5% ANNUAL RETURN, EACH FUND'S ACTUAL
PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN GREATER OR LESS THAN
5%.
With respect to each Fund, AAI has undertaken that if, in any fiscal year,
certain expenses of the Fund, including the investment advisory fees (but
excluding interest, taxes, brokerage commissions and extraordinary expenses),
exceed the maximum total annual operating expenses noted in the table below for
such Fund,
5
<PAGE> 12
AAI shall reimburse the Fund to the extent of such excess. The maximum total
annual operating expenses, as a percentage of average daily net assets, that a
Fund may incur pursuant to AAI's undertaking are as follows:
<TABLE>
<CAPTION>
MAXIMUM TOTAL
OPERATING EXPENSES
----------------------------------------
CLASS C CLASS Y
----------------- -----------------
<S> <C> <C>
Money Market Fund....................................... 1.10% 1.00%
Government Securities Fund.............................. 1.75% to 1.50% to
$30 million; $30 million;
1.50% thereafter 1.25% thereafter
Asset Allocation Fund................................... 1.50% 1.25%
S&P 500 Index Fund...................................... 1.00% .75%
International Equity Fund............................... 2.00% to 1.75% to
$30 million; $30 million;
1.75% thereafter 1.50% thereafter
REIT Index Fund......................................... 1.75% to 1.50% to
$30 million; $30 million;
1.50% thereafter 1.25% thereafter
</TABLE>
FINANCIAL HIGHLIGHTS
Set forth below are per share data, total investment return, ratios and
other supplemental data for a share of the Flexible Asset Allocation Portfolio
and the Money Market Portfolio, respectively, of Aon Asset Management Fund, Inc.
(the predecessor funds of the Asset Allocation Fund and the Money Market Fund,
respectively, of the Trust) for the periods indicated. This information has been
derived from information provided in Aon Asset Management Fund, Inc.'s financial
statements for its Flexible Asset Allocation Portfolio and its Money Market
Portfolio. As of the date of the financial statements, Class C shares had not
been offered and, accordingly, no financial data are available for such class.
The following information for the periods ended on or prior to October 31,
1995 has been audited by Ernst & Young LLP, independent auditors, whose
unqualified report thereon is included in the Statement of Additional
Information. This information should be read in conjunction with the financial
statements and notes thereto appearing in the Statement of Additional
Information. The Annual Report to Shareholders of Aon Asset Management Fund,
Inc., which may be obtained upon request from the Trust without charge, contains
further information about the performance of each of the Asset Allocation Fund
and the Money Market Fund (including the predecessor of each thereof).
6
<PAGE> 13
MONEY MARKET FUND
Class Y Shares(1):
<TABLE>
<CAPTION>
FOR THE
PERIOD
JANUARY 23,
1992
(COMMENCEMENT
FOR THE OF
SIX MONTHS FOR THE FISCAL YEAR ENDED OCTOBER 31, OPERATIONS)
ENDED -------------------------------------------- TO OCTOBER
APRIL 30, 1996 1995 1994 1993 31, 1992
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Asset Value at beginning of
period........................ $1.00 $1.00 $1.00 $1.00 $1.00
Investment income........... .03 .06 .04 .03 .03
Expenses(2)................. -- -- -- -- --
----- ----- ----- ----- -----
Net investment income....... .03 .06 .04 .03 .03
Net realized gains (losses)
on investments(2)......... -- -- -- -- --
----- ----- ----- ----- -----
Income from operations...... .03 .06 .04 .03 .03
Dividends paid to
shareholders from:
Net investment
income(2)............ (.03) (.06) (.04) (.03) (.03)
Net realized gains..... -- -- -- -- --
Total Dividends............. (.03) (.06) (.04) (.03) (.03)
----- ----- ----- ----- -----
Net Asset Value at end of
period.................... $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== =====
Total Return.................... 2.68% 5.79% 3.73% 3.10% 3.57%
Ratios:
Ratio of expenses to average
net assets(3)............. 0.22%(4) 0.14% 0.15% 0.17% 0.25%(4)
Ratio of net investment
income to average net
assets(3)................. 5.38%(4) 5.79% 3.73% 3.10% 3.57%(4)
Net Assets at end of period..... $321,502,053 $420,093,633 $410,912,278 $412,067,947 $399,075,531
</TABLE>
- ---------------
(1) On September 3, 1996, all of the assets and liabilities of the Money Market
Portfolio of Aon Asset Management Fund, Inc. were transferred to the Trust
in exchange for Class Y shares of the Money Market Portfolio of the Fund.
The financial data provided above is for the Money Market Portfolio of Aon
Asset Management Fund, Inc.
(2) Less than $.01 per share.
(3) AAI has agreed to waive a portion of its advisory fees through at least
September 3, 1997. Absent this waiver, the ratio of expenses to average net
assets and the ratio of the net investment income to average net assets
would have been .47% and 5.13% (annualized) for six months ended April 30,
1996, .39% and 5.54% for fiscal 1995, .40% and 3.48% for fiscal 1994, .42%
and 2.85% for fiscal 1993 and .50% and 3.32% (annualized) for the period
January 23, 1992, to October 31, 1992, respectively.
(4) Determined on an annualized basis.
7
<PAGE> 14
ASSET ALLOCATION FUND
Class Y Shares(1):
<TABLE>
<CAPTION>
FOR THE
PERIOD
MARCH 1,
1994
FOR THE (COMMENCEMENT
SIX MONTHS FOR THE OF
ENDED FISCAL YEAR OPERATIONS)
APRIL 30, ENDED TO OCTOBER
1996 OCTOBER 31, 31,
(UNAUDITED) 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net Asset Value at beginning of period........... $12.04 $ 9.97 $10.00
Investment income........................... .25 .32 .25
Expenses.................................... (.06) (.08) (.08)
------------ ------------ ------------
Net investment income....................... .19 .24 .17
Net realized gains (losses) on
investments............................... .08 .66 (.05)
Net unrealized appreciation (depreciation on
investments).............................. .53 1.75 .06
------------ ------------ ------------
Income from operations...................... .80 2.65 .18
Dividends paid to shareholders from:
Net investment income.................. (.07) (.24) (.16)
------------ ------------ ------------
Net realized gains..................... -- (.34) (.05)
------------ ------------ ------------
Total dividends........................ (.07) (.58) (.21)
Increase (Decrease) in Net Asset Value...... .73 2.07 (.03)
Net Asset Value at end of period................. $12.77 $12.04 $ 9.97
============ ============ ============
Total Return..................................... 6.65% 26.92% 1.84%
Ratios:
Ratio of operating expenses to average net
assets.................................... 0.86% (2) 0.96% 1.25% (3)
Ratio of net investment income to average
net assets................................ 2.86% (2) 2.73% 2.63% (2)
Portfolio turnover.......................... 79.31% 95.17% 64.36%
Average commission rate paid..................... .0607
Net Assets at end of period...................... $91,568,546 $73,775,235 $10,189,125
</TABLE>
- ---------------
(1) On September 3, 1996, all of the assets and liabilities of the Flexible
Asset Allocation Portfolio of Aon Asset Management Fund, Inc. were
transferred to the Trust in exchange for Class Y shares of the Asset
Allocation Fund of the Trust. The financial data provided above is for the
Flexible Asset Allocation Portfolio of Aon Asset Management Fund, Inc.
(2) Determined on an annualized basis.
(3) Determined on an annualized basis. The ratio of operating expenses to
average net assets is after reimbursement of certain fees and expenses by
Aon Advisors, Inc. (see note 4 to the Fund's financial statements). Had the
reimbursements not been made, the ratio would have been 1.39%.
ORGANIZATION AND CLASSIFICATION
The Trust was organized as a business trust under the laws of the State of
Delaware on May 16, 1996, and is registered with the Securities and Exchange
Commission (the "SEC") under the 1940 Act as an open-end management investment
company of the series type. The Trustees of the Trust are responsible for the
overall management and supervision of the Trust's affairs. Prior to September 3,
1996, the Trust conducted business as Aon Asset Management Fund, Inc., a
Virginia corporation. Any reference herein and in the Statement of Additional
Information of the Trust, including any financial information and performance
data, relating to such period reflect the Trust's series as constituted prior to
the commencement of operations of the Trust.
Each Fund is a separate series of the Trust and is treated as a separate
entity for certain purposes under the 1940 Act and for certain other purposes. A
shareholder of one Fund has an interest in the assets only of that Fund and is
not deemed to be a shareholder of any other Fund. As described below, for
certain matters shareholders of the Trust vote together as a group; as to others
they vote separately by Fund (or in certain cases by class). Each Fund bears its
own expenses and other liabilities and also a share of the Trust's general
liabilities. See "Additional Information."
8
<PAGE> 15
By this Prospectus, shares of the Trust's six current Funds are being
offered. All six of the Funds are diversified investment companies within the
meaning of the 1940 Act.
INVESTMENT OBJECTIVES AND POLICIES
Each Fund has an investment objective and related investment policies and
restrictions and uses various investment practices to pursue its objective.
THERE CAN BE NO ASSURANCE THAT ANY OF THE FUNDS WILL ACHIEVE ITS INVESTMENT
OBJECTIVE. Investors should not consider any one Fund alone to be a complete
investment program. All of the Funds are subject to the risk of changing
economic conditions, as well as the risk inherent in the ability of the Adviser
to make changes in the composition of the Funds in anticipation of changes in
economic, business and financial conditions. As with any security, a risk of
loss is inherent in an investment in the shares of any of the Funds.
The different types of securities, investments and investment practices
used by each Fund all have attendant risks of varying degrees. For example, with
respect to equity securities, there can be no assurance of capital appreciation
and there is a substantial risk of decline. With respect to debt securities,
there exists the risk that the issuer of a security may not be able to meet its
obligations on interest or principal payments at the time required by the
instrument. In addition, the value of debt instruments generally rises and falls
inversely with changes in prevailing current interest rates. As described below,
an investment in certain of the Funds entails special additional risks as a
result of their ability to invest a substantial portion of their assets in
foreign investments or real estate securities or in certain other types of
investments.
Certain types of investments and investment practices common to one or more
Funds are described in greater detail, including the risks of each, under
"Investment Practices" in this Prospectus and under "Money Market Fund
Investments, Investment Practices and Restrictions" and "Additional Investment
Practices and Restrictions" in the Statement of Additional Information.
The investment objective of each Fund is fundamental and may not be changed
without the approval of a majority of the outstanding shares of that Fund. In
addition, the Trust has adopted certain fundamental investment restrictions with
respect to each Fund that are enumerated in detail in the Statement of
Additional Information and that may not be changed without approval of a
majority of the outstanding shares of that Fund. A majority of the outstanding
shares of a Fund means the lesser of (1) 67% of the Fund's outstanding shares
present at a meeting of shareholders if more than 50% of the outstanding shares
of the Fund are present in person or by proxy, or (2) more than 50% of the
Fund's outstanding shares. In contrast, certain other investment policies and
restrictions, also described in the Statement of Additional Information, as well
as the investment policies of each Fund described herein, are not fundamental
and may be changed by the Trust's Board of Trustees without shareholder
approval.
MONEY MARKET FUND
The investment objective of the Money Market Fund is to maximize current
income to the extent consistent with the preservation of capital and the
maintenance of liquidity. The Fund seeks to achieve its objective by investing
in a portfolio consisting of money market instruments which include:
(1) U.S. Government securities -- obligations issued or guaranteed as
to interest and principal by the U.S. Government, its agencies or
instrumentalities. These obligations may include instruments that are
supported by the full faith and credit of the United States (such as
Treasury bills, notes and bonds, and obligations issued by the Government
National Mortgage Association); instruments that are supported by the right
of the issuer to borrow from the Treasury (such as securities of the
Federal Home Loan Banks); instruments that are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations (such as securities of the Federal National Mortgage
Association); and instruments that are supported only by the credit of the
instrumentality (such as securities issued by the Federal Farm Credit
Banks, the Student Loan Marketing Association and the Federal Home Loan
Mortgage Corporation).
9
<PAGE> 16
(2) Certificates of deposit and time deposits issued by U.S. banks
which are members of the Federal Deposit Insurance Corporation and have
assets of at least $1 billion.
(3) Repurchase agreements with (i) banks or (ii) government securities
dealers recognized as primary dealers by the Federal Reserve System,
provided that:
A) at the time the repurchase agreement is entered into, and
throughout the duration of the repurchase agreement, the collateral has
a market value at least equal to the value of the repurchase agreement;
B) the collateral consists of U.S. Government securities or
instruments rated in the highest rating category by at least two
nationally recognized statistical rating organizations as defined under
Rule 2a-7, as amended, under the 1940 Act (an "NRSRO"), or by only one
NRSRO if only one NRSRO has issued a rating with respect to the
instrument; and
C) the maturity of the repurchase agreement does not exceed 30
days.
(4) Commercial paper, which consists of unsecured promissory notes
issued by corporations to finance short-term credit needs.
Securities in which the Fund invests may not earn as high a level of
current income as long-term or lower quality securities which generally have
less liquidity, greater market risk and more fluctuation in market value.
The Money Market Fund will only invest in instruments denominated in U.S.
dollars that the Adviser, under the general oversight of the Board of Trustees
of the Trust, determines present minimal credit risks and are, at the time of
acquisition, either:
(1) rated in the highest rating category by at least two NRSROs, or by
only one NRSRO if only one NRSRO has issued a rating with respect to the
instrument; or
(2) in the case of an unrated instrument, determined by the Adviser
under the general oversight of the Board of Trustees of the Trust to be of
comparable quality to the above; or
(3) issued by an issuer that has received a rating of the type
described in (1) above on other securities that are comparable in priority
and security to the instrument.
All of the Fund's money market instruments will mature in 13 months or
less. The average maturity of the Fund's portfolio securities based on their
dollar value will not exceed 90 days at the time of each investment. If the
disposition of a portfolio security results in a dollar-weighted average
portfolio maturity in excess of 90 days, the Fund will invest its available cash
in such a manner as to reduce its dollar-weighted average portfolio maturity to
90 days or less as soon as reasonably practicable. By restricting the maturity
of its investments, the Fund seeks to limit changes in the value of its assets
resulting from market factors in order to maintain a constant net asset value of
$1.00 per share. See "Net Asset Value."
The Money Market Fund should be subject to less market or financial risk
than any other Fund because it invests in high-quality debt obligations that
have a short time period until maturity. The rate of return to shareholders will
vary with the general levels of interest rates applicable to the short-term debt
instruments in which the Money Market Fund invests. The rate will also be
affected by changes in the Money Market Fund's operating expenses.
Although the Money Market Fund usually will hold securities purchased until
maturity, at which time they are redeemable at their full principal value plus
accrued interest, it may, at times, engage in short-term trading to attempt to
take advantage of yield variations in the short-term market. The Money Market
Fund also may sell portfolio securities prior to maturity based on a revised
evaluation of the issuer or to meet redemptions.
Aon, along with its wholly-owned subsidiaries, is expected to own a
substantial percentage of the outstanding shares of the Money Market Fund. Aon
and its subsidiaries may withdraw all or any portion of their investment in the
Fund at any time. A redemption of a significant percentage of the Fund's shares,
either by Aon or its subsidiaries, due to changes in interest rates or
otherwise, could have an adverse impact on the
10
<PAGE> 17
Fund by requiring the Adviser to sell assets of the Fund prematurely or when it
may be disadvantageous to do so, or to hold assets in cash or cash items in
anticipation of a redemption request. However, management of the Money Market
Fund believes that the Fund and its shareholders will benefit from the
substantial investments of Aon and its subsidiaries in shares of the Fund as a
result of the economies of scale available to a larger fund.
GOVERNMENT SECURITIES FUND
The Government Securities Fund has the investment objective of seeking high
current income with limited credit risk through investment in intermediate and
long-term debt instruments issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. The Government Securities Fund may also invest in
U.S. Government debt instruments having maturities of less than one year and in
other high quality money market instruments. The Government Securities Fund will
invest at least 80% of its total assets, valued at the time of purchase, in U.S.
Government securities of various maturities.
U.S. Government securities in which the Government Securities Fund may
invest include: (1) U.S. Treasury bills, notes and bonds; and (2) obligations
issued or guaranteed by U.S. Government agencies and instrumentalities which are
supported by any of the following: (a) the full faith and credit of the U.S.
Government (e.g., Government National Mortgage Association ("GNMA")
Certificates); (b) the right of the issuer to borrow an amount limited to a
specific line of credit from the U.S. Treasury (e.g., debt of each of the
Federal Home Loan Banks); (c) the discretionary authority of the U.S. Government
or GNMA to purchase certain financial obligations of the agency or
instrumentality (e.g., Federal National Mortgage Association); or (d) the credit
of the issuing agency or instrumentality (e.g., Federal Land Banks, Farmers Home
Administration or Student Loan Marketing Association). No assurance can be given
that the U.S. Government will provide support to such U.S. Government sponsored
agencies or instrumentalities in the future, since it is not required to do so
by law.
The Government Securities Fund may invest up to 50% of its net assets in
GNMA securities. Such securities are (along with certain Federal National
Mortgage Association and Federal Home Loan Corporation securities in which the
Government Securities Portfolio may invest) securities whose scheduled monthly
interest and principal payments relating to mortgages in the pool are "passed
through" to investors. GNMA and other similar pass-through securities differ
from conventional bonds in that principal is paid back to the certificate
holders over the life of the loan rather than at maturity. As a result, the
Government Securities Fund will receive scheduled monthly payments of principal
and interest on its GNMA and other similar securities. In addition, the
Government Securities Fund may receive unscheduled principal payments
representing prepayments on the underlying mortgages. All payments and
unscheduled prepayments of principal will be reinvested by the Government
Securities Fund in instruments consistent with the Fund's investment objective
and investment program. GNMA and other similar securities may not be an
effective means of "locking in" long-term interest rates due to the need for the
Government Securities Fund to reinvest scheduled and unscheduled principal
payments. At the time principal payments or prepayments are received by the
Government Securities Fund, prevailing interest rates may be higher or lower
than the current yield of GNMA and other similar pass-through securities held by
the Fund.
The Government Securities Fund may write covered call and put options on
debt securities, including obligations of the U.S. Government, its agencies and
instrumentalities, whether or not listed on a national securities exchange, and
may purchase call and put options on such debt securities whether or not listed
on an exchange. In addition, the Government Securities Fund may purchase and
sell exchange-traded interest rate futures contracts and may write covered call
options and purchase call and put options on interest rate futures contracts
whether or not traded on or subject to the rules of boards of trade which have
been designated as contract markets. See "Investment Practices -- Writing
Covered Call and Put Options and Purchasing Call and Put Options" and
"--Financial Futures Contracts and Options on Such Contracts" in this Prospectus
for more information about these practices and their risks.
The value of U.S. Government securities owned by the Government Securities
Fund will fluctuate in response to various market forces and will generally vary
inversely with prevailing interest rate levels.
11
<PAGE> 18
Therefore, the value of an investment in the Fund also will fluctuate. In this
regard, any government or agency guarantee of securities held in Government
Securities Fund does not guarantee the value of an investment in the Fund.
It is likely that the annual portfolio turnover rate for the Government
Securities Fund generally will not exceed 100%, although under volatile market
conditions for fixed-income securities such rate could be exceeded.
ASSET ALLOCATION FUND
The investment objective of the Asset Allocation Fund is to maximize total
return on invested capital, to be derived from capital appreciation, dividends
and interest. The Fund will seek to achieve this objective by following a
flexible asset allocation strategy that shifts among a wide range of investments
and markets. The Asset Allocation Fund will invest in equity securities,
long-term debt securities and money market instruments, the proportion of each
being continuously determined by the Adviser. Total return consists of current
income, including dividends, interest and discount accruals, and realized and
unrealized capital appreciation and/or realized and unrealized capital
depreciation. The Asset Allocation Fund may invest in equity securities of
domestic and foreign issuers, including common stocks, preferred stocks,
convertible securities and warrants; debt securities of domestic and foreign
issuers, including bonds, debentures, and notes; and short-term money market
securities. The Fund also may write covered call options in an effort to
increase current income.
Depending upon prevailing economic and market conditions, the Asset
Allocation Fund may at any given time be primarily comprised of equity
securities (including debt securities convertible into equity securities),
corporate bonds and other debt securities, short-term money market securities,
or any combination thereof. For example, during periods when the Adviser
believes that the overall return on equity securities will exceed the return on
debt securities, the Asset Allocation Fund may be fully or substantially
invested in equity securities. In contrast, the Fund may be invested primarily
in debt securities during periods when the Adviser believes that the total
return from investing in debt securities will exceed the return on equity
securities. Also, the Portfolio may be primarily invested in short-term money
market securities. These may include, to a limited extent, repurchase agreements
and money market instruments purchased on a "when-issued" or delayed-delivery
basis.
At least 60% of the value of any bonds held by the Asset Allocation Fund
will be rated within the four highest grades by a nationally recognized rating
service such as Moody's Investor Services, Inc. or Standard and Poor's
Corporation. Other bonds held in the Fund may be rated below those four highest
grades, and if these lower-rated bonds were held in the Fund in significant
amounts they would increase financial risk. However, the Fund's investment in
these lower-rated fixed-income debt securities (i.e., rated lower than Baa or
BBB) will be limited to no more than 30% of the Fund's total assets measured at
the time of purchase. The lowest rating for debt securities in which the Fund
may invest is B. Such a rating indicates that a security generally lacks the
characteristics of a desirable investment and is predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal. See the
Statement of Additional Information for a complete description of ratings.
The Asset Allocation Fund will be subject to varying levels of market and
financial risk and fluctuation of current income, and may at times be subject to
high levels of market and financial risk and current income volatility. The
market value of non-convertible fixed-income securities usually reflects yields
generally available on securities of similar quality and type. When such yields
decline, the market value of a portfolio already invested at higher yields can
be expected to rise, if such securities are protected against early call.
Similarly, when such yields increase, the market value of a portfolio already
invested at lower yields can be expected to decline. It is likely that the
portfolio turnover rate for the Asset Allocation Fund will be higher than for
other Funds due to the frequent transactions aimed at maximizing total return.
This higher portfolio turnover rate generates higher transaction expenses;
however, the objective is that the gain in total return will more than offset
the added transaction expense.
12
<PAGE> 19
A shareholder of the Asset Allocation Fund confers substantially more
investment discretion on the Adviser than would be the case for a shareholder
investing in a mutual fund with a more narrowly defined investment objective,
thereby enabling the Adviser to invest in a wide variety of investment
securities.
S&P 500 INDEX FUND
The S&P 500 Index Fund has the investment objective of providing capital
appreciation and accumulation of income that corresponds to the investment
return of the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500
Index"), through investment in common stocks traded on the New York Stock
Exchange and the American Stock Exchange and, to a limited extent, in the
over-the-counter markets.
Standard and Poor's Corporation ("Standard & Poor's" or "S&P"1) chooses the
500 common stocks comprising the S&P 500 Index on the basis of market values,
industry diversification and other factors. Most of the common stocks in the S&P
500 Index are issued by the 500 largest companies, in terms of the aggregate
market value of their outstanding stock, and such companies are generally listed
on the New York Stock Exchange. Additional common stocks that are not among the
500 largest market value stocks are included in the S&P 500 Index for
diversification purposes. S&P may, from time to time, add common stocks to or
delete common stocks from the S&P 500 Index.
The S&P 500 Index Fund will attempt to achieve its objective by replicating
the total return of the S&P 500 Index. To the extent that it can do so
consistent with the pursuit of its investment objective, it will attempt to keep
transaction costs low and minimize portfolio turnover. The Fund's annual
portfolio turnover rate is expected to be less than 50%. To achieve its
investment objective, the Fund purchases equity securities that are expected to
reflect, as a group, the total investment return of the S&P 500 Index. Like the
S&P 500 Index, the Fund will hold both dividend paying and non-dividend paying
common stocks comprising the S&P 500 Index.
Active portfolio management strategies are not used in making investment
decisions for the S&P 500 Index Fund. Rather, the Fund utilizes a passive
investment management approach. The Fund may use statistical selection
techniques to determine which securities to purchase or sell to most efficiently
replicate the investment return of the S&P 500 Index.
The S&P 500 Index Fund may choose not to invest in all the stocks that
comprise the S&P 500 Index, and its holdings may be invested differently by
industry segment than the S&P 500 Index. The Fund may compensate for the
omission from its portfolio of stocks that are included in the S&P 500 Index, or
for purchasing stocks included in the S&P 500 Index in proportions that are
different from their weightings in that Index, by purchasing stocks that may or
may not be included in the S&P 500 Index but which have characteristics similar
to omitted stocks (such as stocks from the same or similar industry groups
having similar market capitalizations and other investment characteristics). In
addition, from time to time adjustments may be made in the Fund's holdings due
to changes in the composition or weighting of issues comprising the S&P 500
Index.
The S&P 500 Index Fund will attempt to achieve a correlation between its
total return and that of the S&P 500 Index of at least 0.95, without taking
expenses into account. A correlation of 1.00 would indicate perfect correlation,
which would be achieved when the Fund's net asset value, including the value of
its dividends and capital gains distributions, increases or decreases in exact
proportion to changes in the S&P 500 Index. Management will monitor the Fund's
correlation to the S&P 500 Index and, to the extent consistent with its goal of
keeping transaction costs low, will attempt to minimize any "tracking error"
(i.e., the statistical measure of the difference between the investment results
of the Fund and that of the S&P 500 Index) in its investment decisions for the
Fund. However, brokerage and other transaction costs, as well as other Fund
expenses, in addition to potential tracking error, will tend to cause the Fund's
return to be lower than the
- ---------------
1 "Standard and Poor's", "S&P", and "S&P 500" are trademarks of Standard and
Poor's Corporation and have been licensed for use. The S&P Index Fund is not
sponsored, endorsed, sold or promoted by S&P, and S&P makes no representation or
warranty, express or implied, to the investors in this Fund or any member of the
public regarding the advisability of investing in this Fund or in securities
generally or the ability of the S&P 500 Index to track general stock market
performance.
13
<PAGE> 20
return of the S&P 500 Index. There can be no assurance as to how closely the
Fund's performance will correspond to the performance of the S&P 500 Index.
The S&P 500 Index Fund will not invest more than 35% of its total assets in
stocks and other securities not included in the S&P 500 Index. In this regard,
the Fund may temporarily invest cash balances, pending withdrawals or
investments, in high quality money market instruments. Nevertheless, the Fund
will not adopt a temporary defensive investment posture in times of generally
declining stock prices, and, therefore, investors will bear the risk of such
general stock market declines.
The S&P 500 Index Fund may write covered call and put options on individual
securities and stock indices which correlate with the Fund's investments and may
purchase call and put options on such securities and stock indices, provided
that such options written or purchased are listed on a national securities
exchange. In addition, the Fund may purchase and sell exchange-traded stock
index futures contracts and may write covered call and put options and purchase
call and put options on stock index futures contracts provided such options
written or purchased are traded on or subject to the rules of boards of trade
which have been designated by the Commodities Futures Trading Commission as
contract markets.
Consistent with its investment objective, the S&P 500 Index Fund will
primarily use call and put options and futures contracts, as described above, to
rapidly adjust exposure to the S&P 500 Index in anticipation of investing cash
balances or expected cash flow into the Fund in appropriate common stocks or in
anticipation of liquidating appropriate common stocks to meet expected
redemption requests. See "Investment Practices -- Writing Covered Call and Put
Options and Purchasing Call and Put Options" and "--Financial Futures Contracts
and Options on Such Contracts" in this Prospectus for more information about
these practices and their risks.
S&P's only relationship to the S&P 500 Index Fund is the licensing of
certain trademarks and trade names of S&P and of the S&P 500 Index, which is
determined, composed and calculated by S&P without regard to the Fund. S&P has
no obligation to take the needs of the Fund or the investors in the Fund 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
or composition of the S&P 500 Index Fund or the timing of the issuance or sale
of the shares of the Fund.
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 S&P 500 Index Fund, or by investors
in the Fund, 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.
INTERNATIONAL EQUITY FUND
The International Equity Fund has the investment objective of providing
long-term capital appreciation by investing primarily in equity and
equity-related securities of companies that are organized outside the United
States or whose securities are principally traded outside the United States
("foreign issuers"). The Fund also may invest in securities (1) of companies
organized in the United States but having their principal activities and
interests outside the United States, (2) denominated or quoted in foreign
currency ("non-dollar securities") and (3) issued by foreign governments or
agencies or instrumentalities of foreign governments (also "foreign issuers").
The International Equity Fund is intended for investors who can accept the
risks involved in investments in equity and equity-related securities of foreign
issuers and in non-dollar securities. See "Investment Practices -- Foreign
Investments and Currency."
14
<PAGE> 21
Under normal market conditions, the International Equity Fund will invest
at least 65% of its total assets in the securities of foreign issuers located
(or, in the case of the securities, traded) in countries other than the United
States.
The equity and equity-related securities in which the International Equity
Fund may invest are common stock, preferred stock, convertible debt obligations,
convertible preferred stock and warrants or other rights to acquire stock. The
Fund also may invest in securities of foreign issuers in the form of sponsored
or unsponsored American depository receipts ("ADRs"), European depository
receipts ("EDRs") and global depository receipts ("GDRs"). ADRs are receipts
typically issued by a U.S. bank or trust company which evidence ownership of
underlying securities of foreign corporate issuers. EDRs and GDRs are receipts
issued by non-U.S. financial institutions evidencing arrangements similar to
ADRs. Generally, ADRs are in registered form and are designed for trading in
U.S. markets while EDRs are in bearer form and are designed for trading in
European securities markets. GDRs are issued in either registered or bearer form
and are designed for trading on a global basis. See "Investment
Practices -- Foreign Investments and Currency."
The Adviser's investment strategy is to invest in the equity securities of
non-U.S. markets and companies which are believed to be undervalued based upon
decisions concerning the relative attractiveness of asset classes, the
individual international equity markets, industries across and within those
markets, other common risk factors within those markets and individual
international companies. The relative performance of foreign currencies is an
important factor in the International Equity Fund's performance. The Adviser may
manage the Fund's exposure to various currencies to take advantage of different
yield, risk and return characteristics.
As a general matter, the Adviser will purchase for the International Equity
Fund only securities contained in the Morgan Stanley Capital International
("MSCI") Non-U.S. Equity (Free) Index (the "MSCI Index"). The MSCI Index is a
market-driven, broad-based index which includes non-U.S. equity markets in terms
of capitalization and performance. The MSCI Index is designed to provide a
representative total return for all major stock exchanges located outside the
United States. From time to time, the Adviser may substitute securities in an
equivalent index when it believes that such securities in the index more
accurately reflect the relevant international market.
The Adviser will attempt to enhance the long-term return and risk
performance of the International Equity Fund relative to the MSCI Index by
deviating from the normal MSCI Index mix of country allocation and currencies in
reaction to discrepancies between current market prices and fundamental values.
Although it may invest anywhere in the world, it is expected that the
International Equity Fund's assets will be primarily invested in the equity
markets included in the MSCI Index which currently are: Japan, the United
Kingdom, Germany, France, Canada, Italy, the Netherlands, Australia,
Switzerland, Spain, Hong Kong, Belgium, Singapore, Malaysia, Sweden, Denmark,
Norway, New Zealand, Austria, Finland and Ireland. The composition of the MSCI
Index may change over time, according to criteria established by Morgan Stanley
& Co. Incorporated.
The normal currency allocation of the International Equity Fund is
identical to the currency mix of the MSCI Index. The Fund expects to maintain
this normal currency exposure when global currency markets are fairly priced
relative to each other and relative to the associated risks. The Fund may
actively deviate from such normal currency allocations to take advantage of or
to protect the Fund from risk and return characteristics of the currencies and
short-term interest rates when those prices deviate significantly from
fundamental value. Deviations from the MSCI Index are determined by the Adviser
based upon its research.
The International Equity Fund may invest in the securities of issuers
located in countries with emerging economies or securities markets. Investment
in such countries involves certain risks that are not present in investments in
more developed countries. See "Investment Practices -- Foreign Investments and
Currency."
Notwithstanding the foregoing, on occasion the International Equity Fund
may, for temporary defensive purposes to preserve capital, hold part or all of
its assets in cash, other money market instruments of the type in which the
Money Market Fund may invest, or, subject to certain tax restrictions, foreign
currencies. The International Equity Fund also may, under normal market
conditions, invest up to 35% of its total assets in dollar denominated and
non-dollar denominated debt securities of foreign issuers and may on occasion,
for
15
<PAGE> 22
temporary purposes to preserve capital, hold part or all of its assets in
foreign currencies or in non-dollar securities evidencing short-term debt.
The International Equity Fund may make investments or engage in investment
practices that involve special risks. These include: convertible securities,
when-issued securities, delayed-delivery securities, options on securities and
securities indices, futures contracts and options thereon, illiquid or
restricted securities, repurchase agreements, lending portfolio securities and
borrowing money for investment purposes. These investment practices and
attendant risks are described under "Investment Practices" in this Prospectus or
under "Additional Investment Practices and Restrictions" in the Statement of
Additional Information.
The International Equity Fund may employ certain currency management
techniques to hedge against currency exchange rate fluctuations and to seek to
increase total return. When used to attempt to increase total return, these
management techniques are speculative. Such currency management techniques
involve risks different from those associated with investing in
dollar-denominated securities of U.S. issuers. These techniques are transactions
in options, futures contracts, options on futures contracts, forward foreign
currency exchange contracts and currency swaps. To the extent that the Fund is
fully invested in securities of foreign issuers or non-dollar securities while
also maintaining currency positions, it may be exposed to greater combined risk.
The Fund's net currency positions may expose it to risks independent of its
securities positions. See "Investment Practices -- Foreign Investments and
Currency."
Portfolio turnover will not necessarily be a limiting factor in making
changes in the portfolio of the International Equity Fund to better achieve its
investment objective. Because the Fund may, if the Adviser believes conditions
affecting various markets or individual issues warrant such action, make
periodic adjustments to the portfolio of the Fund, the Fund will likely have a
higher portfolio turnover rate and pay greater brokerage commissions than other
equity funds. Although it may possibly be lower, the annual portfolio turnover
rate may exceed 100% but, under normal circumstances, is not expected to exceed
200%.
REIT INDEX FUND
The REIT Index Fund has the investment objective of providing capital
appreciation and accumulation of income that corresponds to the investment
return of the Morgan Stanley REIT Index, a benchmark of U.S. REITs. The Fund
seeks to achieve this objective by investing primarily in securities of REITs
comprising the Morgan Stanley REIT Index, which are principally engaged in or
related to the real estate industry, including ownership of significant real
estate assets. The Fund will not invest directly in real estate.
The REIT Index Fund is intended for investors who can accept the risks,
described below, entailed by indirect investments in real estate.
REITs are pooled investment vehicles that invest primarily in income
producing real estate or real estate-related loans or interests therein. 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
that they comply with several requirements of the Internal Revenue Code of 1986,
as amended (the "Code").
The Morgan Stanley REIT Index is made up of the stocks of all publicly
traded equity REITs (except health care REITs) that meet certain criteria. For
example, to be included in the Index, a REIT must have a total market
capitalization of at least $75 million and have enough shares and trading volume
to be considered liquid. The REIT Index Fund invests in equity REITs only.
As of May 21, 1996, 94 equity REITs were included in the Index. The Index
is rebalanced every calendar quarter as well as each time that a REIT is removed
from the Index because of corporate activity such as a merger, acquisition,
leveraged buyout, bankruptcy, Internal Revenue Service ("IRS") removal of REIT
status, fundamental change in business or change in shares outstanding.
16
<PAGE> 23
Stocks in the Morgan Stanley REIT Index represent a broadly diversified
range of property types and regions. The Index's makeup, as of May 21, 1996, was
as follows.
<TABLE>
<S> <C>
Retail Stores................................................. 34.7%
Residential................................................... 31.2
Office........................................................ 12.1
Industrial.................................................... 12.6
Hotels........................................................ 5.7
Other......................................................... 3.7
</TABLE>
The Index's ten largest stocks are expected to make up about 30% of its
market value. The Index's largest stocks, as of May 21, 1996, were as follows.
<TABLE>
<C> <S>
1. Security Capital Pacific Trust
2. Simon Property Group
3. Equity Residential Properties Trust
4. Security Capital Industrial Trust
5. New Plan Realty Trust
6. Weingarten Realty
7. Vornado Realty Trust
8. Kimco Realty Corporation
9. DeBartolo Realty Corporation
10. Franchise Financial Corporation
</TABLE>
The REIT Index Fund will attempt to achieve its objective by replicating
the total return of the Morgan Stanley REIT Index. To the extent that it can do
so consistent with the pursuit of its investment objective, it will attempt to
keep transaction costs low and minimize portfolio turnover. The Fund's annual
portfolio turnover rate is expected to be less than 50%. To achieve its
investment objective, the Fund will purchase equity securities that are expected
to reflect, as a group, the total investment return of the Morgan Stanley REIT
Index. The Fund generally will hold dividend paying REIT securities.
Active portfolio management strategies are not used in making investment
decisions for the REIT Index Fund. Rather, the Fund utilizes a passive
investment management approach. The Fund may use statistical selection
techniques to determine which securities to purchase or sell to most efficiently
replicate the investment return of the Morgan Stanley REIT Index.
Although the REIT Index Fund may at times hold each stock in the Morgan
Stanley REIT Index in roughly the same proportions as in the Index itself, it
may alternatively choose at other times not to invest in all the stocks that
comprise the Morgan Stanley REIT Index. The Fund may compensate for the omission
from its portfolio of stocks that are included in the Morgan Stanley REIT Index,
or for purchasing stocks included in the Morgan Stanley REIT Index in
proportions that are different from their weightings in that Index, by
purchasing stocks that may or may not be included in the Morgan Stanley REIT
Index but which have characteristics similar to omitted stocks (such as stocks
representing the same or similar property types or regions or having similar
market capitalizations and other investment characteristics). In addition, from
time to time adjustments may be made in the Fund's holdings due to changes in
the composition or weighting of issues comprising the Morgan Stanley REIT Index.
The REIT Index Fund will attempt to achieve a correlation between its total
return and that of the Morgan Stanley REIT Index of at least 0.95, without
taking expenses into account. A correlation of 1.00 would indicate perfect
correlation, which would be achieved when the Fund's net asset value, including
the value of its dividends and capital gains distributions, increases or
decreases in exact proportion to changes in the Morgan Stanley REIT Index.
Management will monitor the Fund's correlation to the Morgan Stanley REIT Index
and, to the extent consistent with its goal of keeping transaction costs low,
will attempt to minimize any "tracking error" (i.e., the statistical measure of
the difference between the investment results of the Fund and that of the Morgan
Stanley REIT Index) in its investment decisions for the Fund. However,
17
<PAGE> 24
brokerage and other transaction costs, as well as other Fund expenses, in
addition to potential tracking error, will tend to cause the Fund's return to be
lower than the return of the Morgan Stanley REIT Index. There can be no
assurance as to how closely the Fund's performance will correspond to the
performance of the Morgan Stanley REIT Index.
The REIT Index Fund will not invest more than 35% of its total assets in
stocks and other securities not included in the Morgan Stanley REIT Index. In
this regard, the Fund may temporarily invest cash balances, pending withdrawals
or investments, in high quality money market instruments. Nevertheless, the Fund
will not adopt a temporary defensive investment posture in times of generally
declining stock prices or prices of REITs, and, therefore, investors will bear
the risk of such general stock market declines or declines in REIT stock prices.
The REIT Index Fund may write covered call and put options on individual
securities and stock indices which correlate with the Fund's investments and may
purchase call and put options on such securities and stock indices whether or
not listed on an exchange. In addition, the Fund may purchase and sell exchange-
traded stock index futures contracts and may write covered call and put options
and purchase call and put options on stock index futures contracts provided such
options written or purchased are traded on or subject to the rules of boards of
trade which have been designated as contract markets.
Consistent with its investment objective, the REIT Index Fund will
primarily use call and put options, and futures contracts, as described above,
to rapidly adjust exposure to the Morgan Stanley REIT Index in anticipation of
investing cash balances or expected cash flow into the Fund in appropriate
common stocks or in anticipation of liquidating appropriate common stocks to
meet expected redemption requests. See "Investment Practices -- Writing Covered
Call and Put Options and Purchasing Call and Put Options" and "--Financial
Futures Contracts and Options on Such Contracts" in this Prospectus for more
information about these practices and their risks.
The REIT Index Fund is not sponsored, sold, promoted, or endorsed by Morgan
Stanley. The Morgan Stanley REIT Index is the exclusive property of Morgan
Stanley and is a service mark of Morgan Stanley Group Inc. It has been licensed
for use by the Trust.
Although the REIT Index Fund generally seeks to invest for the long term,
it retains the right to sell securities regardless of how long they have been
held. Generally, a passively managed portfolio sells securities only to respond
to redemption requests or to adjust the number of shares held to reflect a
change in the Fund's target index. Because of this, the Fund's turnover rate is
expected to be less than 50%.
There are significant risks inherent in the investment objective and
policies of the REIT Index Fund. REITs in the Morgan Stanley REIT Index tend to
be medium-size and small companies; their market capitalizations generally range
from $75 million to $1.3 billion. Like small-capitalization stocks in general,
REIT stocks can be more volatile than -- and at times will perform differently
from -- the large-capitalization stocks such as those found in the S&P 500
Index. In addition, because small-capitalization stocks are typically less
liquid than large-capitalization stocks, REIT stocks may sometimes experience
greater share-price fluctuations than the stocks of larger companies.
Historically, however, the significant amount of dividend income provided by
REITs has tended to soften the impact of this volatility.
Because of its objective of investing in equity REITs, the REIT Index Fund
is also subject to all of the risks associated with the ownership of real
estate. These risks include: declines in the value of real estate, adverse
changes in the climate for real estate, risks related to general and local
economic conditions, over-building and increased competition, increases in
property taxes and operating expenses, changes in zoning laws, casualty or
condemnation losses, limitations on rents, changes in neighborhood values, the
appeal of properties to tenants, leveraging of interests in real estate,
increases in prevailing interest rates and costs resulting from cleanup of
environmental problems or liability to third parties for damages arising from
environmental problems.
In addition to the risks discussed above, equity REITs may be affected by
changes in the value of the underlying property owned by them, are dependent
upon management skill, may not be diversified and can be subject to the risk of
investing in a single or a limited number of projects. Such REITs are also
subject to
18
<PAGE> 25
heavy cash flow dependency, defaults by borrowers, self liquidation and the
possibility of failing to qualify for special tax treatment under Subchapter M
of the Code and to maintain an exemption under the 1940 Act. Finally, certain
REITs may be self-liquidating in that a specific term of existence is provided
for in the trust document. Such REITs run the risk of liquidating at an
economically inopportune time. See "Investment Practices."
INVESTMENT PRACTICES
In pursuing their respective investment objectives, the Funds may engage in
the following investment practices, where so indicated.
LOANS OF PORTFOLIO SECURITIES
Each Fund may from time to time lend securities it holds to brokers,
dealers and financial institutions, up to a maximum of 20% (5% in the case of
the Money Market Fund) of the total value of that Fund's assets. Such loans will
be secured by collateral in the form of cash or U.S. Treasury securities, which
will be maintained in an amount at least equal to the current market value of
the loaned securities. Each Fund will continue to receive interest and dividends
on the loaned securities during the term of its loans, and, in addition, will
receive either a fee from the borrower or interest earned from the securities in
which cash collateral is invested during the term of the loan. Each Fund also
will receive any gain or loss in the market value of its loaned securities. The
primary risk involved in lending securities is that the borrower will fail
financially and not return the loaned securities at a time when the collateral
is insufficient to replace the full amount of the loaned securities. In order to
minimize this risk, the Funds will make loans of securities only to firms
determined by the Adviser (under the general oversight of the Board of Trustees)
to be creditworthy.
SHORT-TERM MONEY MARKET INSTRUMENTS; REPURCHASE AGREEMENTS
All of the Funds may, to varying degrees, also invest in short-term money
market instruments, including repurchase agreements, and when-issued and
delayed-delivery securities. A repurchase agreement is a transaction in which a
Fund buys a security at one price and simultaneously agrees to sell that same
security back to the original owner at a higher price. The yield to a Fund on a
repurchase agreement is determined by the difference between the Fund's purchase
price of the underlying obligation and the price at which the obligation is
"repurchased" by the other party. The Adviser (under the general oversight of
the Board of Trustees) reviews the creditworthiness of the other party to the
agreement and must find it satisfactory before engaging in a repurchase
agreement. In the event of the default or bankruptcy of the other party, the
Fund could experience delays in recovering its money, may realize only a partial
recovery or even no recovery, and may also incur disposition costs.
Repurchase agreements with maturities of greater than seven days are
generally not negotiable, and therefore are not regarded as liquid investments.
Such repurchase agreements may also be subject to greater risks than repurchase
agreements of shorter maturities in that (i) the seller may experience a
decrease in credit quality during the term of the repurchase agreement and (ii)
the value of the collateral may decline due to higher interest rates.
When-issued and delayed-delivery securities are discussed in "Additional
Investment Practices and Restrictions" in the Statement of Additional
Information.
FOREIGN INVESTMENTS AND CURRENCY
Each of the Money Market Fund, the Government Securities Fund, the Asset
Allocation Fund, the S&P 500 Index Fund and the REIT Index Fund may invest up to
10% of its total assets, taken at market value at the time of acquisition, in
securities of foreign issuers and in non-dollar securities. In addition, each of
these Funds may invest up to 25% of its total assets in securities of foreign
issuers and in non-dollar securities if certain guarantees exist. Foreign
investments will qualify as "guaranteed" if they are either: (1) issued, assumed
or guaranteed by a foreign government or political subdivision or
instrumentality thereof, or a foreign
19
<PAGE> 26
issuer having a class of securities listed for trading on the New York Stock
Exchange; or (2) assumed or guaranteed by domestic issuers.
The International Equity Fund may, as described above, invest all of its
assets in the securities of foreign issuers and in non-dollar securities.
FOREIGN INVESTMENTS GENERALLY. Investments in the securities of foreign
issuers or investments in non-dollar securities may offer potential benefits not
available from investments solely in securities of domestic issuers or U.S.
dollar -- denominated securities. Such benefits may include the opportunity to
invest in foreign issuers that appear to offer better opportunity for long-term
capital appreciation or current earnings than investments in domestic issuers,
the opportunity to invest in foreign countries with economic policies or
business cycles different from those of the United States and the opportunity to
reduce fluctuations in portfolio value by taking advantage of foreign securities
markets that do not necessarily move in a manner parallel to U.S. markets.
Investing in non-dollar securities or in the securities of foreign issuers
involves significant risks that are not typically associated with investing in
U.S. dollar-denominated securities or in securities of domestic issuers. Such
investments may be affected by changes in currency exchange rates, changes in
foreign or U.S. laws or restrictions applicable to such investments and in
exchange control regulations. For example, a decline in the currency exchange
rate might reduce the value of certain portfolio investments. In addition, if
the exchange rate for the currency in which a Fund receives interest payments
declines against the U.S. dollar before such interest is paid as dividends to
shareholders, the Fund may have to sell portfolio securities to obtain
sufficient cash to pay such dividends. As discussed below, the International
Equity Fund may employ certain investment techniques to hedge its foreign
currency exposure; however, such techniques also entail certain risks.
Some foreign stock markets may have substantially less volume than, for
example, the New York Stock Exchange, and securities of some foreign issuers may
be less liquid than securities of comparable domestic issuers. Commissions and
dealer mark-ups or mark-downs on transactions in foreign investments may be
higher than for similar transactions in the United States. In addition,
clearance and settlement procedures may be different in foreign countries and,
in certain markets, on certain occasions, such procedures have been unable to
keep pace with the volume of securities transactions, thus making it difficult
to conduct such transactions. For example, delays in settlement could result in
temporary periods when a portion of the assets of a Fund are uninvested and no
return is earned thereon. The inability of a Fund to make intended investments
due to settlement problems could cause it to miss attractive investment
opportunities. Inability to dispose of portfolio securities or other investments
due to settlement problems could result either in losses to a Fund due to
subsequent declines in the value of the portfolio investment or, if the Fund has
entered into a contract to sell the investment, could result in possible
liability to the purchaser.
Foreign issuers generally are not subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to domestic
companies. There may be less publicly available information about a foreign
issuer than about a domestic one. In addition, there is generally less
government regulation of stock exchanges, brokers, dealers and listed and
unlisted issuers in foreign countries than in the United States. Furthermore,
with respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, imposition of withholding taxes on
dividend or interest payments, limitations on the removal of funds or other
assets of the Funds, or political or social instability or diplomatic
developments which could affect investments in those countries. Individual
foreign economies also may differ favorably or unfavorably from the U.S. economy
in such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency or balance of payments position.
INVESTMENTS IN ADRS, EDRS AND GDRS. Many securities of foreign issuers are
represented by ADRs, EDRs and GDRS. Each of the S&P 500 Index Fund, Government
Securities Fund, Asset Allocation Fund and International Equity Fund may invest
in ADRs, EDRs and GDRS. ADRs are certificates issued by a U.S. bank or trust
company and represent the right to receive securities of foreign issuers
deposited in a domestic bank or a foreign correspondent bank. Prices of ADRs are
quoted in U.S. dollars, and ADRs are traded in the United States on exchanges or
over-the-counter and are issued by domestic banks. ADRs do not eliminate all
20
<PAGE> 27
the risk inherent in investing in the securities of foreign issuers. To the
extent that a Fund acquires ADRs through banks which do not have a contractual
relationship with the foreign issuer of the security underlying the ADR to issue
and service such ADR (i.e., an unsponsored ADR), there may be an increased
possibility that the Fund would not become aware of and be able to respond to
corporate actions such as stock splits or rights offerings involving the foreign
issuer in a timely manner. In addition, the lack of information may result in
inefficiencies in the valuation of such instruments. However, by investing in
ADRs rather than directly in the stock of foreign issuers, a Fund will avoid
currency risks during the settlement period for either purchases or sales. In
general, there is a large, liquid market in the United States for ADRs quoted on
a national securities exchange or the NASD's national market system. The
information available for ADRs is subject to the accounting, auditing and
financial reporting standards of the domestic market or exchange on which they
are traded, which standards are more uniform and more exacting than those to
which many foreign issuers may be subject. The Trust generally considers ADRs to
be securities issued, assumed or guaranteed by a foreign issuer.
EDRs and GDRs are receipts evidencing an arrangement with a non-U.S. bank
similar to that for ADRs and are designed for use in non-U.S. securities
markets. EDRs and GDRs are not necessarily quoted in the same currency as the
underlying security.
INVESTMENTS IN EMERGING MARKETS. The International Equity Fund may invest
in securities of issuers located in countries with emerging economies and/or
securities markets. These countries are located in the Asia-Pacific region,
Eastern Europe, Central and South America and Africa. Political and economic
structures in many of these countries may be undergoing significant evolution
and rapid development, and such countries may lack the social, political and
economic stability characteristic of more developed countries. Certain of these
countries in the past may have failed to recognize private property rights and
have at times nationalized or expropriated the assets of private companies. As a
result, the risks of foreign investment, generally including the risks of
nationalization or expropriation of assets, may be heightened. In addition,
unanticipated political or social developments may affect the values of the
International Equity Fund's investments in those countries and the availability
to the Fund of additional investments in those countries.
The small size and inexperience of the securities markets in certain of
these countries and the limited volume of trading in securities in these
countries may also make the International Equity Fund's investments in such
countries illiquid and more volatile than investments in Japan or most Western
European countries, and the Fund may be required to establish special custody or
other arrangements before making certain investments in these countries. There
may be little financial or accounting information available with respect to
issuers located in certain of such countries, and it may be difficult as a
result to assess the value or prospects of an investment in such issuers. The
laws of some foreign countries may limit the ability of the Fund to invest in
securities of certain issuers located in those countries.
FOREIGN CURRENCY TRANSACTIONS. Because investment in foreign issuers
usually will involve currencies of foreign countries, and because the Government
Securities Fund, the Asset Allocation Fund, the S&P 500 Index Fund, the
International Equity Fund and the REIT Index Fund may have currency exposure
independent of their securities positions, the value of the assets of these
Funds as measured in U.S. dollars may be affected by changes in foreign currency
exchange rates. To the extent that a Fund's assets consist of investments quoted
or denominated in a particular currency, the Fund's exposure to adverse
developments affecting the value of such currency will increase. The
International Equity Fund often will have substantial currency exposure both
from investments quoted or denominated in foreign currencies and from its
currency positions.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, a Fund's net asset value to fluctuate as
well. Such 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, actual or anticipated changes in interest rates and other
complex factors, as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks, or the failure to intervene, or by currency
controls or political developments in the U.S. or abroad. To the extent that a
substantial portion of a Fund's total assets, adjusted
21
<PAGE> 28
to reflect the Fund's net position after giving effect to currency transactions,
is denominated or quoted in the currencies of foreign countries, the Fund will
be more susceptible to the risk of adverse economic and political developments
within those countries.
In addition to investing in securities denominated or quoted in a foreign
currency, the International Equity Fund may engage in a variety of foreign
currency management practices described below. The Fund will also use these
currency exchange techniques to manage exposure to currency risk relative to the
MSCI Index and also in the normal course of business to hedge against adverse
changes in exchange rates in connection with purchases and sales of securities.
It also may hold foreign currency received in connection with investments in
foreign securities when, in the judgment of the Adviser, it would be beneficial
to convert such currency into U.S. dollars at a later date based on anticipated
changes in the relevant exchange rate. The Fund will incur costs in connection
with conversions between various currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The International Equity Fund
may purchase or sell forward foreign currency exchange contracts for hedging
purposes and to seek to increase total return. When purchased or sold for the
purpose of seeking to increase total return, forward foreign currency exchange
contracts are considered speculative. In addition, the Fund may enter into
forward foreign currency exchange contracts in order to protect against
anticipated changes in future foreign currency exchange rates. The International
Equity Fund also may engage in proxy-hedging by using forward contracts in a
currency different from that in which the hedged security is denominated or
quoted if the Adviser determines that there is a pattern of correlation between
the two currencies. The Fund also may purchase and sell forward contracts in
cross hedging when the Adviser anticipates that a foreign currency contained in
the MSCI Index will appreciate or depreciate in value, but securities
denominated or quoted in that currency do not present attractive investment
opportunities and are not held by the Fund.
The International Equity Fund may enter into contracts to purchase foreign
currencies to protect against an anticipated rise in the U.S. dollar price of
securities it intends to purchase. It may enter into contracts to sell foreign
currencies to protect against the decline in value of its foreign currency
denominated or quoted portfolio securities, or a decline in the value of
anticipated dividends from such securities, due to a decline in the value of
foreign currencies against the U.S. dollar. Contracts to sell foreign currency
could limit any potential gain that might be realized by the Fund if the value
of the hedged currency increases. If the International Equity Fund enters into a
forward foreign currency exchange contract for speculative purposes, the Fund
will be required to place cash, U.S. Government securities or high grade liquid
debt securities in a segregated account with the Trust's custodian in an amount
equal to the value of the Fund's total assets committed to the consummation of
the forward contract. If the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in the segregated
account so that the value of the account will equal the amount of the Fund's
commitment with respect to the contract.
Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive the Fund of unrealized profits, transaction costs
or the benefits of a currency hedge or force the Fund to cover its purchase or
sale commitments, if any, at the current market price.
OPTIONS ON CURRENCIES. The International Equity Fund may purchase and sell
(write) put and call options on foreign currencies for the purpose of protecting
against declines in the U.S. dollar value of foreign portfolio securities and
anticipated dividends on such securities and against increases in the U.S.
dollar cost of foreign securities to be acquired. The International Equity Fund
may use options on currencies to proxy-hedge, which involves writing or
purchasing options on one currency to hedge against changes in exchange rates
for a different currency, if the Adviser determines that there is a pattern of
correlation between the two currencies. As with other kinds of option
transactions, however, the writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received, while
exposing the Fund to losses which may be unlimited. The Fund could be required
to purchase or sell foreign currencies at disadvantageous exchange rates,
thereby incurring losses. The purchase of an option on foreign currency may
constitute an effective hedge against exchange rate fluctuations; however, in
the event of exchange rate
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movements adverse to the Fund's position, the Fund may forfeit the entire amount
of the premium plus related transaction costs. In addition, the Fund may
purchase call or put options on currency to seek to increase total return when
the Adviser anticipates that the currency will appreciate or depreciate in
value, but the securities quoted or denominated in that currency do not present
attractive investment opportunities and are not held by the Fund. When purchased
or sold to increase total return, options on currencies are considered
speculative. Options on foreign currencies to be written or purchased by the
Fund will be traded on U.S. and foreign exchanges or over-the-counter. See
"Writing Covered Call and Put Options and Purchasing Call and Put Options" for a
discussion of the liquidity risks associated with options transactions.
CURRENCY SWAPS. The International Equity Fund may enter into currency
swaps for both hedging purposes and to seek to increase total return. Currency
swaps involve the exchange by the Fund with another party of their respective
rights to make or receive payments in specified currencies. Since currency swaps
are individually negotiated, the Fund is expected to achieve an acceptable
degree of correlation between its portfolio investments and its currency swap
positions entered into for hedging purposes. Currency swaps usually involve the
delivery of the entire principal value of one designated currency in exchange
for the other designated currency. Therefore, the entire principal value of a
currency swap is subject to the risk that the other party to the swap will
default on its contractual delivery obligations. The Fund will maintain in a
segregated account with the Trust's custodian cash and liquid high-grade debt
securities equal to the net amount of the excess, if any, of the Fund's
obligations over its entitlement with respect to swap transactions. To the
extent that the net amount of a swap is held in a segregated account consisting
of cash and high-grade liquid debt securities, the Trust believes that swaps do
not constitute senior securities under the 1940 Act and, accordingly, will not
treat them as being subject to the Fund's borrowing restrictions.
The use of currency swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values and currency exchange rates, the investment performance of the
International Equity Fund would be less favorable than it would have been if
swaps were not used.
FOREIGN MONEY MARKET INSTRUMENTS. The Money Market Fund may invest in U.S.
dollar-denominated foreign securities, provided that such instruments meet the
standards set forth above in the third and fourth paragraphs under "Investment
Objectives and Policies -- Money Market Fund". Foreign money market instruments
are subject to risks similar to those affecting domestic money market
instruments. Foreign money market instruments are subject to additional risks,
such as international economic and political developments, foreign governmental
restrictions that may adversely affect the payment of principal or interest,
foreign withholding or other taxes on interest income, difficulties in obtaining
or enforcing a judgment against the issuer, expropriation or nationalization of
foreign issuers, the extent and quality of government regulation of financial
markets and institutions, and the possible impact of interruptions in the flow
of international currency transactions. These factors, along with the liquidity
of proposed foreign investments (including the availability of an active
domestic market) is carefully considered by the Adviser in selecting any foreign
investments for the Fund. For more information, see "Money Market Fund
Investments, Investment Practices and Restrictions -- Foreign Securities" in the
Statement of Additional Information.
WRITING COVERED CALL AND PUT OPTIONS AND PURCHASING CALL AND PUT OPTIONS
The Government Securities Fund, S&P 500 Index Fund, International Equity
Fund and REIT Index Fund may write exchange-traded covered call and put options
on or relating to specific securities in order to earn additional income or, in
the case of a call written, to minimize or hedge against anticipated declines in
the value of its portfolio securities. The Asset Allocation Fund may write
covered call options on its portfolio securities in amounts up to 10% of its
total assets in order to earn additional income or to minimize or hedge against
anticipated declines in the value of those securities, and may also enter into
"closing purchase transactions" in order to terminate its obligation as a writer
of a call option prior to the expiration of the option. All call options written
by these Funds are covered, which means that the Fund will own the securities
subject to the option as long as the option is outstanding. All put options
written by these Funds are covered, which means that the Fund has deposited with
the Trust's custodian cash, U.S. Government securities or other high-grade
liquid debt securities with a value at least equal to the exercise price of the
option. Call and
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put options written by a Fund may also be covered to the extent that the Fund's
liabilities under such options are offset by its rights under call or put
options purchased by the Fund and call options written by a Fund may also be
covered by depositing cash or securities with the Trust's custodian in the same
manner as written puts are covered.
Through the writing of a covered call option, a Fund receives premium
income but obligates itself to sell to the purchaser of such an option the
particular security underlying the option at a specified price at any time prior
to the expiration of the option period, regardless of the market value of the
security during this period. Through the writing of a covered put option, a Fund
receives premium income but obligates itself to purchase a particular security
underlying the option at a specified price at any time prior to the expiration
of the option period, regardless of market value during the option period.
Each of the S&P 500 Index Fund, the International Equity Fund and the REIT
Index Fund may, in accordance with its investment objective and investment
program, also write exchange-traded covered call and put options on stock
indices. These Funds may write such options for the same purposes as each may
engage in such transactions with respect to individual portfolio
securities -- that is, to generate additional income or as a hedging technique
to minimize anticipated declines in the value of the Fund's securities. In
economic effect, a stock index call or put option is similar to an option on a
particular security, except that the value of the option depends on the weighted
value of the group of securities comprising the index, rather than a particular
security, and settlements are made in cash rather than by delivery of a
particular security.
Each of the Government Securities Fund, the S&P 500 Index Fund, the
International Equity Fund and the REIT Index Fund may also purchase
exchange-traded call and put options with respect to securities and, except for
the Government Securities Fund, with respect also to stock indices that
correlate with its particular portfolio securities. All four Funds may purchase
put options for defensive purposes in order to protect against an anticipated
decline in the value of their portfolio securities. As the holder of a put
option with respect to individual securities, each has the right to sell the
securities underlying the option and to receive a cash payment at the exercise
price at any time during the option period. As the holder of a put option on an
index, a Fund has the right to receive, upon exercise of the option, a cash
payment equal to a multiple of any excess of the strike price specified by the
option over the value of the index. Each of the Government Securities Fund, the
S&P 500 Index Fund, the International Equity Fund and the REIT Index Fund may
purchase call options on individual securities and, except for the Government
Securities Fund, on stock indices in order to take advantage of anticipated
increases in the price of those securities by purchasing the right to acquire
the securities underlying the option (or, with respect to options on indices, to
receive income equal to the value of such index over the strike price). As the
holder of a call option with respect to individual securities, the Funds obtain
the right to purchase the underlying securities at the exercise price at any
time during the option period. As the holder of a call option on a stock index,
a Fund obtains the right to receive, upon exercise of the option, a cash payment
equal to the multiple of any excess of the value of the index on the exercise
date over the strike price specified in the option.
Each of the Government Securities Fund, the International Equity Fund and
the REIT Index Fund may also write and purchase unlisted covered call and put
options. Such options are not traded on an exchange and may not be as actively
traded as listed securities, making the valuation of these securities more
difficult. In addition, an unlisted option entails a risk not found in
connection with listed options -- that the party on the other side of the option
transaction will default. This may make it impossible to close out an unlisted
option position in some cases, and profits may be lost thereby. Except as
described below, such unlisted over-the-counter options will generally be
considered illiquid securities. The Government Securities Fund, the
International Equity Fund and the REIT Index Fund will engage in such
transactions only with firms of sufficient credit to minimize these risks. Where
one of these Funds has entered into agreements with primary dealers with respect
to the unlisted options it has written, and such agreements would enable the
Fund to have an absolute right to repurchase, at a pre-established formula
price, the over-the-counter options written by it, the Fund will treat as
illiquid only the amount equal to the formula price described above less the
amount by which the option is "in-the-money."
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Option-related investment practices involve certain risks that are
different in some respects from investment risks associated with similar funds
which do not engage in such activities. These risks include incurrence of higher
brokerage costs, as well as the following: writing covered call options -- the
inability to effect closing transactions at a particular time or at favorable
prices and the inability to participate in the appreciation of the underlying
securities above an amount equal to the exercise price plus the premium; writing
covered put options -- the inability to effect closing transactions at a
particular time or at favorable prices and the obligation to purchase the
specified securities or to make a cash settlement on a stock index at prices
that may not reflect current market values; and purchasing put and call
options -- possible loss of the entire premium paid.
In addition, the effectiveness of hedging activities of the S&P 500 Index
Fund, the International Equity Fund and the REIT Index Fund through the purchase
or sale (writing) of stock index options will depend upon the extent to which
price movements in the Fund's holdings being hedged correlate with price
movements in the selected stock index. Perfect correlation may not be possible
because the securities held or to be acquired by the Fund may not exactly match
the composition of the stock index on which options are purchased or written.
As to all options, if the Adviser's forecasts regarding movements in
securities prices or interest rates are incorrect, a Fund's investment results
might have been more favorable had a transaction not been effected. Because of
these risks, the use of "options" related investment practices requires special
skills in addition to those needed to select portfolio securities. A more
detailed description of these investment practices and their associated risks is
contained in the Statement of Additional Information.
FINANCIAL FUTURES CONTRACTS AND OPTIONS ON SUCH CONTRACTS
To the extent described below, each of the Government Securities Fund, the
S&P 500 Index Fund, the International Equity Fund and the REIT Index Fund may
purchase and sell exchange-traded financial futures contracts and may write
covered call options and purchase put and call options on financial futures
contracts as a hedge to protect against anticipated changes in prevailing
interest rates, currency exchange rates or overall prices of securities in which
each may invest, or to earn additional income. The S&P 500 Index Fund and the
REIT Index Fund may write covered put options on financial futures contracts for
the same purposes.
Financial futures contracts consist of interest rate futures contracts,
stock index futures contracts and currency futures contracts. An interest rate
futures contract is a contract to buy or sell specified debt securities at a
future time for a fixed price. Some interest rate futures contracts are based on
a particular interest rate or rate index and are cash settled at expiration by
applying the rate or rate index to a prescribed notional principal amount. A
stock index futures contract is based on a specified index of stocks and not the
stocks themselves. A currency futures contract is a contract to purchase or sell
a specific amount of foreign currency at a future time at a fixed price.
To hedge against the possibility that increases in interest rates or other
factors may result in a general decline in prices of securities owned by it, the
Government Securities Fund and the REIT Index Fund may sell interest rate
futures contracts. To hedge against the possibility of a general decline in the
prices of securities owned by it, the S&P 500 Index Fund, the International
Equity Fund and the REIT Index Fund may sell stock index futures contracts. To
hedge against the possibility of an adverse change in currency exchange rates,
the International Equity Fund may sell currency futures contracts. Assuming that
any decline in the securities or currency being hedged is accompanied by a
decline in the debt instrument, interest rate, stock index or currency chosen as
a hedge, the sale of a futures contract on that debt instrument, interest rate,
stock index or currency may generate gains that can wholly or partially offset
any decline in the value of the Fund's securities or currency exposure which
have been hedged.
To hedge against the possibility of lower long-term interest rates and
likely concomitant increase in prices of securities to be purchased by it, the
Government Securities Fund and the REIT Index Fund may purchase interest rate
futures contracts. Likewise, to hedge against increases in equity prices, the
S&P 500 Index Fund, the International Equity Fund and the REIT Index Fund may
purchase stock index futures contracts. To hedge against the possibility of an
adverse change in currency exchange rates, the International Equity Fund
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<PAGE> 32
may purchase currency futures contracts. For these Funds, such a strategy is
intended to secure a position in the futures market intended to approximate the
economic equivalent of a position in the securities market. When used as hedges,
the Funds will purchase appropriate financial futures contracts only when each
intends to purchase the underlying securities that may be affected by such
decreases in interest rates or increases in equity prices or decline in value of
the dollar versus the currency in which the security to be purchased is
denominated (as the case may be) and will purchase such financial futures
contracts in approximately the amount being hedged. When used as hedges, the
Adviser expects that purchases of the underlying securities will, in fact, be
made a substantial majority of the time.
Each of the Government Securities Fund, the S&P 500 Index Fund, the
International Equity Fund and the REIT Index Fund may purchase and sell
exchange-traded financial futures contracts for non-hedging purposes such as
seeking additional income or otherwise seeking to increase total return.
Each of the Government Securities Fund, the S&P 500 Index Fund, the
International Equity Fund and the REIT Index Fund may write covered call options
and may purchase put and call options on futures contracts of the types which
that Fund is permitted to purchase and sell in accordance with its investment
objective and investment program, and may enter into closing transactions with
respect to such options on futures contracts. The S&P 500 Index Fund and the
REIT Index Fund also may write covered put options on stock index futures
contracts. An option to acquire a financial futures contract gives the purchaser
thereof the right to assume a position in the underlying futures contract, and
therefore, can serve the same hedging function as owning the futures contract
directly.
The S&P 500 Index Fund and the REIT Index Fund may seek to close out (at
its market price in the secondary market) such put option before the option has
expired. If the secondary market is not liquid for that option, however, the
Fund must continue to be prepared to pay the strike price while the option
remains outstanding, regardless of price changes, and must continue to set aside
liquid assets to cover this position.
None of the Funds will enter into any speculative financial futures
contract or purchase any option thereon if, immediately thereafter, the total
amount of its assets required to be on deposit as initial margin to secure its
obligations under such open futures contracts, plus the amount of premiums paid
by the Fund for outstanding options to purchase such futures contracts (less any
in-the-money amount at the time of purchase) would exceed 5% of the market value
of the Fund's total assets (after taking into account unrealized profits and
losses on any such futures contracts or options it has entered into).
The use of futures contracts and options thereon by these Funds entails
certain risks, including but not limited to the following: no assurance that
futures contract transactions can be offset at favorable prices; possible
reduction of a Fund's income due to the use of hedging; possible reduction in
value of both the securities hedged and the hedging instrument; possible lack of
liquidity due to daily limits on price fluctuations; imperfect correlation
between the futures contract and the securities being hedged; and potential
losses in excess of the amount initially invested in the futures contracts
themselves. If expectations regarding movements in securities prices or interest
rates are incorrect, a Fund might have experienced better investment results
without hedging. The use of futures contracts and options on futures contracts
requires special skills in addition to those needed to select portfolio
securities. A further discussion of futures contracts and their associated risks
is contained in the Statement of Additional Information.
RESTRICTED SECURITIES AND OTHER ILLIQUID INVESTMENTS
The Adviser is responsible for determining the value and liquidity of
investments held by each Fund. Investments may be illiquid because of the
absence of a trading market, making it difficult to value them or dispose of
them promptly at an acceptable price. Each of the Money Market Fund, the
Government Securities Fund and the S&P 500 Index Fund will not purchase or
otherwise acquire any investment if, as a result, more than 10% of its net
assets (taken at current value) would be invested in instruments that are
illiquid by virtue of the absence of a readily available market. Each of the
Asset Allocation Fund, the International Equity Fund and the REIT Index Fund
will not purchase or otherwise acquire any investment if, as a result, more than
15% of its net assets (taken at current value) would be invested in instruments
that are illiquid by virtue of the absence of a readily available market.
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<PAGE> 33
Illiquid investments include most repurchase agreements maturing in more
than seven days, currency swaps, time deposits with a notice or demand period of
more than seven days, certain over-the-counter option contracts (and segregated
assets used to cover such options), participation interests in loans, and
restricted securities. A restricted security is one that has a contractual
restriction on resale or cannot be resold publicly until it is registered under
the Securities Act of 1933.
The foregoing illiquid investment restrictions do not apply to purchases of
restricted securities eligible for sale to qualified institutional purchasers in
reliance upon Rule 144A under the Securities Act of 1933 that are determined to
be liquid by the Trust's Board of Trustees or by the Adviser under the general
oversight of the Trustees. Such determination would take into account trading
activity for such securities and the availability of reliable pricing
information, among other factors. To the extent that qualified institutional
buyers become for a time uninterested in purchasing these restricted securities,
a Fund's holdings of those securities may become illiquid. The foregoing
investment restrictions also do not apply to purchases of securities of foreign
issuers offered and sold outside the United States in reliance upon the
exemption from registration provided by Regulation S under the Securities Act of
1933.
LOWER-RATED SECURITIES
The Asset Allocation Fund may invest in debt securities with lower ratings
which generally carry greater risk of default and are generally subject to
greater market value fluctuations. If held by the Asset Allocation Fund in
significant amounts, such securities would increase financial risk and income
fluctuation. Lower-rated debt and convertible securities have speculative
characteristics, and changes in economic conditions and other circumstances are
more likely to weaken the capacity of issuers of such securities to make
principal and interest payments than would be the case as to issuers of
higher-rated (i.e., investment grade) debt securities. In some cases,
lower-rated debt and convertible securities may be highly speculative, have poor
prospects of reaching investment grade standing or even be in default. See the
Statement of Additional Information for a description of securities ratings and
of lower-rated securities, including further discussion of the risks of
investing in such instruments.
BORROWING
From time to time, the International Equity Fund may increase its ownership
of investments by borrowing from banks and investing the borrowed funds (on
which the Fund pays interest). The Fund may borrow only up to 10% of the value
of its total assets, subject to the 300% asset coverage requirement under the
1940 Act. Purchasing investments with borrowed funds is a speculative investment
method known as "leverage," that may subject the Fund to relatively greater
risks and costs (which may include commitment fees and/or the cost of
maintaining minimum average balances with the lender) than would otherwise be
the case, including possible reduction of income and increased fluctuation of
net asset value per share. A further discussion of borrowing is contained in the
Statement of Additional Information.
MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The Trust has a Board of Trustees, the members of which are generally
elected by the shareholders. A majority of the Trustees are not affiliated with
AAI or Aon or their affiliates. The Board of Trustees is responsible for the
overall management of the Trust, including reviewing the results of the
investment portfolios, monitoring investment activities and practices, and
receiving and acting upon future plans for the Trust.
INVESTMENT ADVISER
Aon Advisors, Inc. ("AAI"), 123 North Wacker Drive, Chicago, Illinois
60606, a wholly-owned subsidiary of Aon Corporation ("Aon"), is the investment
adviser for the Fund. AAI is registered as an investment adviser under the
Investment Advisers Act of 1940. As of February 28, 1996, Mr. Patrick G. Ryan,
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<PAGE> 34
President and Chief Executive Officer of Aon, owned directly and beneficially
13,463,051 shares (12.4%) of the outstanding common stock of Aon.
In addition to the Trust, AAI provides investment advice and management to
other investment companies, pension plans, corporations and other organizations.
Assets under management include equity securities, fixed income securities and
real estate. As of May 1, 1996, the aggregate assets under AAI's management were
approximately $5 billion.
AAI has entered into investment advisory agreements (collectively, the
"Advisory Agreements") with the Trust on behalf of each of the Funds. With
respect to the Money Market Fund, the Government Securities Fund, the Asset
Allocation Fund, the S&P 500 Index Fund and the REIT Index Fund, AAI provides
day-to-day portfolio management, determining which securities to buy and sell
for each, selecting the brokers and dealers to effect the transactions and
negotiating commissions. In placing orders for securities transactions, AAI's
policy is to attempt to obtain the most favorable price and efficient execution
available. Subject to this policy, AAI may also allocate brokerage to
broker-dealers based upon their sale of shares of the Trust. AAI has engaged an
investment sub-adviser to provide the day-to-day portfolio management of the
International Equity Fund.
Effective September 3, 1996, pursuant to a separate administration
agreement (the "Administration Agreement") between the Trust and Aon Securities
Corporation ("ASC"), a wholly owned subsidiary of Aon, ASC has agreed, at its
own expense, to:
(a) supply internal auditing and internal legal services; (b) supply
stationery and office supplies; (c) prepare reports to shareholders and the
Board of Trustees; (d) prepare tax returns; (e) prepare reports to and
filings with the SEC and State Blue Sky authorities; (f) at the Trust's
request, furnish office space, in such place as may be agreed upon from
time to time, and all necessary office facilities; (g) supply clerical,
accounting, bookkeeping, administrative and other similar services
(exclusive of those services relating to and to be performed under any
contract for custodial, transfer, dividend and accounting services entered
into by the Trust with a third party); and (h) furnish persons satisfactory
to the Trust to respond during normal business hours to in-person, written
and telephone requests for assistance and information from shareholders of
the Trust, and provide such facilities and equipment as may be necessary
for such persons to carry out their duties, including, without limitation,
office space and facilities, telephones and CRT terminals and equipment
(including telephone lines) necessary for access to the Trust shareholder
records.
The Trust is responsible for all other expenses, including:
(a) taxes and fees payable by the Trust to federal, state, or other
government agencies; (b) brokerage fees and commissions, and issue and
transfer taxes; (c) interest; (d) Board of Trustees meeting attendance and
annual retainer fees and expenses of trustees of the Trust who are not
directors, officers or employees of AAI, or of any affiliated person (other
than a registered investment company) of AAI; (e) registration,
qualification, filing and other fees in connection with securities
registration requirements of federal and state regulatory authorities; (f)
the charges and expenses for custodial, paying agent, transfer agent,
dividend agent and accounting agent services; (g) outside legal fees and
expenses in connection with the affairs of the Trust including, but not
limited to, registering and qualifying its shares with federal and state
regulatory authorities; (h) charges and expenses of independent auditors;
(i) costs of meetings of shareholders and trustees of the Trust; (j) costs
of maintenance of corporate existence; (k) insurance premiums; (l)
investment advisory fees; (m) costs and fees associated with printing and
delivering registration statements, shareholders' reports and proxy
statements; (n) costs and fees associated with delivering reports to and
filings with the SEC and State Blue Sky authorities; (o) costs relating to
administration of the Trust's general operations; (p) costs relating to the
Trust's own employees, if any; and (q) costs of preparing, printing, and
delivering the Trust's Prospectus and Statement of Additional Information
to existing shareholders.
AAI has agreed to reimburse the Trust for any amount by which the total
expenses of (i) the Class C or Class Y shares of the Money Market Fund in any
fiscal year exceed 1.10% or 1.00%, respectively, of the
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aggregate average daily net assets of those classes of that Fund; (ii) the Class
C or Class Y shares of the Government Securities Fund in any fiscal year exceed
1.75% or 1.50%, respectively, of the first $30 million of aggregate average
daily net assets of such classes of that Fund and 1.50% or 1.25%, respectively,
of average daily net assets of such classes of that Fund in excess of $30
million; (iii) the Class C or Class Y shares of the Asset Allocation Fund in any
fiscal year exceed 1.50% or 1.25%, respectively, of the aggregate average daily
net assets of such classes of that Fund; (iv) the Class C or Class Y shares of
the S&P 500 Index Fund in any fiscal year exceed 1.00% or .75%, respectively, of
the aggregate average daily net assets of such classes of that Fund; (v) the
Class C or Class Y shares of the International Equity Fund in any fiscal year
exceed 2.00% or 1.75%, respectively, of the first $30 million of aggregate
average daily net assets of such classes of that Fund and 1.75% or 1.50%,
respectively, of average daily net assets of such classes of that Fund in excess
of $30 million; and (vi) the Class C or Class Y shares of the REIT Index Fund in
any fiscal year exceed 1.75% or 1.50%, respectively, of the first $30 million of
aggregate average daily net assets of such classes of that Fund and 1.50% or
1.25%, respectively, of average daily net assets of such classes of that Fund in
excess of $30 million. For purposes of this reimbursement formula, "expenses" do
not include interest, taxes, brokerage commissions or extraordinary expenses.
Reimbursement of excess expenses, as described above, cannot be changed without
shareholder approval.
During the fiscal year ended October 31, 1995, the total operating expenses
incurred by the Funds (including the advisory fee paid to AAI), before
reimbursement or fee waivers, represented .39% of the average net assets of the
Class Y shares of the Money Market Fund and .96% of the average net assets of
the Class Y shares of the Asset Allocation Fund. The remaining classes and Funds
did not commence operations until after the end of such fiscal year. During the
fiscal year ended October 31, 1995, AAI was not required to reimburse the Trust
for expenses under the provisions described in the preceding paragraph.
The Trust pays AAI compensation in the form of investment advisory fees.
The fees are accrued daily but paid to AAI monthly. Effective September 3, 1996,
the investment advisory fee for each Fund is based upon the average daily net
assets of such Fund (see "Net Asset Value"), at the following annual rates:
Money Market Fund: .30%.
Government Securities Fund: .45% of the first $100,000,000; .40% of the
next $100,000,000; .35% of the next $100 million; .30% of the next $100,000,000;
and .25% of amounts in excess of $400,000,000.
Asset Allocation Fund: .65% of the first $250 million; .55% of the
next $250 million; and .45% of amounts in excess of $500 million.
S&P 500 Index Fund: .30%.
International Equity Fund: .95% of the first $100,000,000; .90% of the
next $100,000,000; and .85% of amounts in excess of $200,000,000.
REIT Index Fund: .60% of the first $100,000,000; .55% of the next
$100,000,000; and .50% of amounts in excess of $200,000,000.
Since the Money Market Fund began operations, AAI has waived collection of
.25% of its annual investment advisory fee (which fee, prior to September 3,
1996, was at an annual rate of .35% and included fees payable under the
Administration Agreement which are now borne directly by the Trust). AAI has
agreed to continue waiving half of its .30% annual investment advisory fee until
at least September 3, 1997.
During the fiscal year ended October 31, 1995, the Trust paid AAI
investment advisory fees in an amount representing .10% of the average net
assets of the Money Market Fund and .70% of the average net assets of the Asset
Allocation Fund. The remaining Funds did not commence operations until after the
end of such fiscal year.
Effective as of September 3, 1996, the Trust also pays ASC an annual fee of
.05% of the Fund's average daily net assets under the Administration Agreement.
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INVESTMENT SUB-ADVISER
Brinson Partners, Inc. ("Brinson Partners") is the investment sub-adviser
for the International Equity Fund. Brinson Partners is located at 209 South
LaSalle Street, Chicago, Illinois 60604. Gary P. Brinson is President and
Managing Partner of Brinson Partners. Brinson Partners is a subsidiary of Swiss
Bank Corporation ("Swiss Bank"). Swiss Bank, with headquarters in Basel,
Switzerland, is an internationally diversified organization with operations in
many aspects of the financial services industry. Brinson Partners, a registered
investment adviser under the Investment Advisers Act of 1940, manages
approximately $58 billion of global stocks and bonds as of June 30, 1996, and it
and its predecessor entities have been managing non-US securities since 1974.
Brinson Partners manages the investments of the International Equity Fund,
determining which securities or other investments to buy and sell for each,
selecting the brokers and dealers to effect the transactions, and negotiating
commissions. In placing orders for securities transactions, Brinson Partners
follows AAI's policy of seeking to obtain the most favorable price and efficient
execution available.
For its services, AAI pays Brinson Partners monthly compensation in the
form of an investment sub-advisory fee. The fee is based upon the average daily
net assets of the International Equity Fund at the rate of .50% of the first
$100,000,000; .475% of the next $100,000,000; and .45% of amounts in excess of
$200,000,000 of such average daily net assets.
FUND MANAGERS
Michael A. Conway has been President of AAI since 1990. In that capacity he
oversees the investment management of all portfolios of the Trust. From 1985 to
1990, Mr. Conway was president of Manhattan National Corporation. Mr. Conway
holds a B.A. degree from the University of Illinois. He is a Chartered Financial
Analyst and a charter member of the International Society of Financial Analysts.
Keith C. Lemmer, portfolio manager of the Money Market Fund since its
inception in 1992, has been employed as Senior Portfolio Manager of AAI since
1992. Prior to 1992, Mr. Lemmer was employed by AAI as a Portfolio Manager (from
1991 to 1992) and a Fixed Income Analyst (from 1987 to 1991). Mr. Lemmer holds a
B.A. degree from Western Illinois University and an M.B.A. degree from DePaul
University. He is a Certified Public Accountant and a Chartered Financial
Analyst. He is a member of the Association for Investment Management and
Research and the Investment Analysts Society of Chicago.
Janet S. Henry, portfolio manager of the Government Securities Fund, has
been employed by AAI since 1987. She is currently a Senior Portfolio Manager
responsible for managing over $1.5 billion in taxable fixed income investments
for Aon and its subsidiaries and other insurance company clients of AAI. Ms.
Henry received her B.A. in History from DePauw University in 1974 and is a
Chartered Financial Analyst. Ms. Henry is a member of the Financial Analysts
Federation and the Investment Analysts Society of Chicago.
John G. Lagedrost, portfolio manager of the Asset Allocation Fund since
December 1995, has been employed as Senior Portfolio Manager of AAI since 1995.
From 1991 to 1995, Mr. Lagedrost was Vice President in the Asset Management
Group of The First National Bank of Chicago, and from 1987 to 1990, he was Vice
President in the Mezzanine Finance Group of such bank. Mr. Lagedrost holds a
B.S. degree from Marquette University and M.M. degree from Northwestern
University.
John C. DeCaro, II, portfolio manager of the S&P 500 Index Fund, joined AAI
in 1995 as an Investment Analyst. He is a member of the Financial Risk
Management Group, and also serves as assistant portfolio manager for the Life of
Virginia Series Fund Common Stock Index Portfolio. Prior to joining AAI, Mr.
DeCaro was employed as a Quantitative Analyst for Morningstar, Inc. (1992-1995).
Mr. DeCaro was awarded his B.S. in Finance from the University of South Carolina
in 1991. He received his M.S. in Financial Markets and Trading from the Illinois
Institute of Technology in 1995. Mr. DeCaro is a Chartered Financial Analyst
candidate and has passed the Level I examination.
Robert E. Dunn, portfolio manager of the REIT Index Fund, joined AAI in
August 1994 as Senior Portfolio Manager, concentrating on exchange-traded and
over-the-counter derivative hedges for Aon and its
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subsidiary companies. Prior to joining AAI, Mr. Dunn was a Derivative Product
Sales Associate for National Westminster Bank, Plc. (1993-1994) and a Capital
Markets Research Analyst for Continental Bank (1989-1993). He was awarded his
B.A. in Economics from the University of Notre Dame in 1986. He received his
M.B.A. in Finance from the University of Chicago in 1993.
No single person or persons acts as portfolio manager(s) for the
International Equity Fund. All investment decisions for the International Equity
Fund are made by an investment committee of Brinson Partners.
DISTRIBUTION OF SHARES
The Trust has entered into a Distribution Agreement with Aon Securities
Corporation (the "Distributor"), 123 North Wacker Drive, Chicago, Illinois
60606, a wholly-owned subsidiary of Aon, under which ASC will act as principal
underwriter and distributor of the shares of each Fund.
The Distributor is paid a distribution fee and service fee with respect to
Class C shares of the Funds at the annual rate of 0.25% (.10% in the case of the
Money Market Fund) of the value of the average daily net assets attributable to
that class of shares of each Fund. The fees are authorized pursuant to a Plan of
Distribution for Class C shares (the "Plan") adopted by the Funds pursuant to
Rule 12b-1 under the 1940 Act and are used by the Distributor to pay third
parties for maintaining or servicing shareholder accounts and also to cover
expenses primarily intended to result in the sale of those shares of the Funds
or the provision of services to holders of those shares. These expenses may
include costs of printing and distributing the Trust's Prospectus, Statement of
Additional Information and sales literature to prospective investors in Class C
shares; and payments to and expenses of registered representatives and other
persons who provide distribution or support services in connection with the
distribution or servicing of the Class C shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred, and the payments may exceed
distribution or service expenses actually incurred. The Trust's Board of
Trustees will evaluate the appropriateness of the Plan and its payment terms on
a continuing basis and in doing so will consider all relevant factors, including
expenses and the amounts paid under the Plan.
NET ASSET VALUE
The net asset value per share of each Fund is determined by subtracting the
liabilities of such Fund from the value of its assets and dividing the remainder
by the number of outstanding shares of such Fund. Net asset value is calculated
separately for each class of shares of each Fund once each day that the Trust is
open for business at the close of regular trading on the New York Stock Exchange
(currently 3:00 p.m., Central Time) on each such day, except that, in the case
of the Money Market Fund, such net asset value is calculated twice each such
day, once at 12:30 p.m., Central Time, and again at the close of regular trading
on the New York Stock Exchange, on each such day.
The Trust is open for business on each day that the New York Stock Exchange
is open for trading, except that shares of the Trust may not be purchased or
redeemed, and shares of the Fund will not be priced, on the following days: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day,
and Christmas Day.
With the exception of the Money Market Fund, securities of each Fund are
valued based upon market quotations or, if not readily available, at fair value
as determined in good faith under procedures established by the Trust's Board of
Trustees. See "Net Asset Value" in the Statement of Additional Information.
The Trust intends to use its best efforts to maintain the net asset value
of the Money Market Fund at $1.00 per share although it cannot assure that it
will be able to do so on a continuous basis. The Money Market Fund's net asset
value is computed using the amortized cost method to value its portfolio
securities. This method involves valuing an instrument at 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
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value, as determined by amortized cost, is higher or lower than the price the
Money Market Fund would receive if it sold the instrument. During these periods,
the yield to an existing shareholder may differ somewhat from that which could
be obtained from a similar portfolio which marks its portfolio securities to
market each day. A more detailed description of net asset value computation and
amortized cost method is contained in the Statement of Additional Information.
Although the legal rights of holders of Class C and Class Y shares are
substantially identical, the different expenses borne by each class will result
in different net asset values and dividends. The net asset value of Class C
shares will generally be lower than that of Class Y shares as a result of the
distribution and service fees charged. It is expected, however, that the net
asset value per share of each of the classes will tend to converge immediately
after the recording of dividends since the dividends will differ by
approximately the amount of the distribution expense accrual differential
between the classes.
PURCHASE OF SHARES
Shares of the Trust are offered and sold on a continuous basis at the net
asset value per share next calculated after a purchase order is received and
accepted. Initial investments may only be made by submitting a completed Account
Application as described below. If you did not receive a proper Account
Application with this Prospectus, please contact the transfer agent at (800)
266-3637. Subsequent purchase orders may be placed by submitting orders to the
Trust's transfer agent (Firstar Trust Company). The minimum initial investment
for shares of each Fund is $1,000, and subsequent investments must be at least
$100. Investors in Class Y shares must meet other purchase requirements. The
minimum purchase requirements do not apply to reinvested dividends. The minimum
initial investment and subsequent investment amounts may be less than the
foregoing for full time staff employees of Aon and its affiliates.
The Trust makes available a retirement plan for self-employed individuals
(Keogh Plan) and individual retirement accounts (IRAs) for all individuals.
Additional information concerning these plans and accounts may be obtained from
the transfer agent, telephone (800) 266-3637.
Investors may purchase shares of a Fund at net asset value through a
broker, who may charge a transaction fee for this service, no part of which is
paid by or received by the Fund, the Adviser or the Distributor.
CLASSES OF SHARES
The Trust offers two classes of shares for each of its Funds:
Class C shares are not subject to an initial or deferred sales charge,
but are subject to an annual distribution fee under the Plan of .25% (.10%
in the case of the Money Market Fund) of the average daily net asset value
of the Class C shares.
Class Y shares are not subject to an initial or deferred sales charge,
or annual distribution or service fees. Class Y shares are available only
to (i) the shareholders of record of outstanding shares of a Fund
immediately prior to the commencement of distribution under the
multiple-class program, including additional investments by such holders,
(ii) investment advisory clients of AAI and (iii) affiliates of Aon or AAI.
The two classes of shares with respect to a particular Fund represent an
interest in the same portfolio of investments and have the same rights, except
that each class bears the separate expenses of its Rule 12b-1 distribution and
service plan, if any, and has exclusive voting rights with respect to such plan.
The two classes also have separate exchange privileges. The net income
attributable to each class and the dividends payable on the shares of each class
will be reduced by the amount of the distribution and service fees of each
class. Class C shares bear the expense of a higher distribution and service fee
that are expected to cause the Class C shares to have a higher expense ratio and
pay lower dividends than the Class Y shares.
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PURCHASE BY CHECK
Investors desiring to purchase shares of any Fund may obtain an Account
Application from the transfer agent. The Application should be completed
(indicating the Fund and class of shares) and mailed, together with a check or
money order (payable to Aon Funds), to the Trust, at Firstar Trust Company, P.O.
Box 701, Milwaukee, Wisconsin 53261-0701. All checks must be drawn on a bank
located within the United States and must be payable in U.S. dollars. Subsequent
investments in an existing account in the Trust may be made at any time by
sending to Firstar Trust Company, P.O. Box 701, Milwaukee, Wisconsin 53261-0701,
a check or money order payable to the Trust as shown above, along with either
(1) the detachable form that regularly accompanies the confirmation of a prior
transaction, or (2) a letter stating the amount of the investment, the name of
the Fund in which the investor wants to invest, the class alternative (Class C
or Class Y shares) and the account number in which the investment is to be made.
A $20 fee will be imposed by the transfer agent if any check deposited on behalf
of the Trust does not clear, and the investor involved will be responsible for
any loss incurred by the Trust.
PURCHASE BY WIRE
An investor may also purchase shares by directing his or her bank to
transmit immediately available funds by wire in the amount of the purchase price
to:
Firstar Bank, Milwaukee, N.A.
Account of Firstar Trust Company
ABA #0750-00022
For credit to Account # 1 12-952-137
777 E. Wisconsin Avenue
Milwaukee, Wisconsin 53202
Aon Funds -- [Name of Fund]
[Class alternative (Class C shares or Class Y shares)]
[investor's account number and the title of the account]
When making an initial wire purchase, please call the transfer agent at
(800) 266-3637 with the appropriate account information prior to sending the
wire. Investors should be sure to specify the name of the Fund in which they
want to invest and whether they are purchasing Class C or Class Y shares.
Investors making initial investments by wire must promptly complete an Account
Application and forward it to the transfer agent. Amounts redeemed pursuant to
redemption requests received before the completed Application has been received
and accepted by the transfer agent will not be paid until the completed
Application has been received and accepted by the Trust.
Subsequent purchase orders are accepted by the transfer agent at its
Milwaukee office. The Trust may allow certain securities dealers or financial
institutions with which it and the Distributor have entered into agreements to
purchase shares of the Funds for next day settlement. Otherwise, the transfer
agent will not accept an order from securities dealers or financial institutions
unless the dealer or institution undertakes to pay for the order in immediately
available funds wired to the transfer agent by the close of business the same
day. The transfer agent will not accept an order from other investors unless
they, at the time they place an order, have a creditworthy financial institution
guarantee payment in immediately available funds wired to the transfer agent by
the close of business the same day.
Purchase orders that are received and accepted before the close of trading
on the New York Stock Exchange (currently 3:00 p.m., Central Time) (12:30 p.m.
or 3:00 p.m., Central Time, in the case of the Money Market Fund) on a business
day will be executed at the price per share next calculated as of such time.
Purchase orders received and accepted after such time will be executed at the
price per share next calculated following receipt and acceptance of the purchase
order by the transfer agent.
The Trust will not accept payment in cash for the purchase of shares.
Federal regulations require that each investor provide a certified Taxpayer
Identification Number upon opening or reopening an account.
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Applications without a Taxpayer Identification Number or an indication that a
Taxpayer Identification Number has been applied for will not be accepted. If a
Taxpayer Identification Number has been applied for, the number must be provided
and certified within 60 days of the date of the Application. See the Account
Application for further information about this requirement.
In the case of the Money Market Fund, if the transfer agent receives and
accepts a purchase order by 12:30 p.m. (Central Time) on a business day, the
investor will receive the portfolio dividend declared that day. If an order is
received and accepted by the transfer agent after 12:30 p.m. (Central Time), an
investor's shares will begin to accrue dividends on the following business day.
The Trust reserves the right to reject any purchase order for any reason.
REDEMPTION OF SHARES
REGULAR REDEMPTION
An investor may redeem shares in any amount at their next determined net
asset value after receipt of a written redemption request by Aon Funds, P.O. Box
701, Milwaukee, WI 53201-0701.
The Trust does not consider the U.S. Postal Service or other independent
delivery services to be its agents. Therefore, deposit in the mail or with such
services, or receipt at the transfer agent's post office box, of purchase
applications or redemption requests does not constitute receipt by the transfer
agent or the Trust. Do not send letters by overnight courier to the post office
box address. Except as described below under "Telephone Redemption," redemption
requests and correspondence sent to the Trust by overnight courier must be
delivered to the offices of the transfer agent at 615 E. Michigan Street, Third
Floor, Milwaukee, WI 53202.
Redemption requests must be signed by each owner of the shares to be
redeemed, including each joint owner on redemption requests for joint accounts,
in the exact manner as the share account is registered, and must state the
amount of redemption and identify the shareholder account number and Taxpayer
Identification Number. If the amount of the redemption request exceeds $10,000,
or if the proceeds are to be sent elsewhere than the address of record, each
signature must be guaranteed by an eligible signature guarantee institution,
such as a commercial bank that is a member of the FDIC, a trust company, or a
member firm of a national securities exchange. The transfer agent will not
accept guarantees from notaries public. Guarantees must be signed by an
authorized signatory of the bank, trust company or member firm and "Signature
Guaranteed" must appear with the signature. The Trust may require additional
supporting documents for redemptions made by corporations, executors,
administrators, trustees and guardians. A redemption request will not be deemed
to be properly received until the transfer agent receives all required documents
in proper form.
TELEPHONE REDEMPTION
Currently, shareholders may redeem shares of the Trust by telephone. To
redeem shares by telephone, an investor must check the appropriate box on the
Account Application. Once this feature has been requested, shares may be
redeemed by calling Investor Services at (800) 266-3637, and providing the
account name, account number, Fund name, class of shares to be redeemed and
amount of redemption. Proceeds of shares redeemed by telephone will be mailed or
wired only to an investor's address or bank of record as shown on the records of
the transfer agent.
If an investor redeems shares by telephone and requests wire payment,
payment of the redemption proceeds will normally be made in federal funds on the
next business day (the same business day in the case of redemptions as of 12:30
p.m., Central Time, from the Money Market Fund), provided the redemption order
is received by the transfer agent before the close of regular trading on the New
York Stock Exchange (currently 3:00 p.m., Central Time) (or before 12:30 p.m.,
Central Time, in the case of same-day redemption from the Money Market Fund). If
a redemption order is received by the transfer agent after the close of regular
trading on the New York Stock Exchange (currently 3:00 p.m., Central Time)
(after 12:30 p.m., Central Time, in the
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case of the Money Market Fund), or on a non-business day, payment for the
redeemed shares will, at the investor's request, normally be wired in federal
funds one business day later.
As stated above, the transfer agent will wire redemption proceeds only to
the bank and account designated on the Account Application or in written
instructions subsequently received by the transfer agent, and only if the
investor's bank is a commercial bank located within the United States. The
transfer agent currently charges a $10.00 fee for each payment of redemption
proceeds made by wire. The Trust imposes the wire transfer fee directly upon
redeeming shareholders requesting wire transfers.
In order to arrange for telephone redemptions after an account has been
opened or to change the bank account or address designated to receive redemption
proceeds, a written request must be sent to Aon Funds at P.O. Box 701,
Milwaukee, WI 53201-0701. The request must be signed by each shareholder of the
account with the signatures guaranteed as described above. Further documentation
may be requested from corporations, executors, administrators, trustees and
guardians.
The Trust reserves the right to refuse a telephone redemption if it
believes it is advisable to do so. Procedures for redeeming shares by telephone
may be modified or terminated by the Trust at any time. In addition, neither the
Trust nor its transfer agent will be responsible for the authenticity of
redemption instructions received by telephone. Nevertheless, the transfer agent
has established certain reasonable procedures to confirm that instructions
communicated by telephone are genuine (in the absence of such procedures the
Trust or the transfer agent may be liable for any unauthorized or fraudulent
instructions). Such procedures may include, among others, requiring forms of
personal identification prior to acting upon instructions received by telephone,
providing written confirmation of such instructions or transactions and/or tape
recording telephone instructions. Thus, a shareholder would bear any losses
resulting from unauthorized telephone redemption instructions with respect to
the shareholder's account.
During periods of substantial economic or market change, telephone
redemptions may be difficult to implement. If an investor is unable to contact
the transfer agent by telephone, shares may also be redeemed by delivering the
redemption request to the transfer agent in person or by mail as described above
under "Regular Redemption."
CHECK REDEMPTION FOR MONEY MARKET FUND
An investor may request on the Account Application or by later written
request that the Money Market Fund provide to the investor Redemption Checks
("Checks") which may be drawn on the Fund. Checks will be sent only to the
registered owner(s) of shares of the Money Market Fund and only to the address
of record. Checks may be made payable to the order of any person in the amount
of $500 or more. Dividends are earned on amounts drawn until the Check clears
the transfer agent. When a Check is presented to the transfer agent for payment,
the transfer agent, as the investor's agent, will cause the Fund to redeem a
sufficient number of the investor's shares to cover the amount of the Check.
Checks will not be returned to shareholders after clearance. There is no charge
to the investor for the use of the Checks; however, the transfer agent will
impose a $20 charge for stopping payment of a Check upon the request of the
investor, or if the transfer agent cannot honor a Check due to insufficient
funds or other valid reason. Because dividends on the Money Market Fund accrue
daily, Checks may not be used to close an account, as a small balance is likely
to result.
OTHER REDEMPTION INFORMATION
Share redemption requests are effected at the net asset value next
determined after receipt of a request in proper form by the transfer agent.
Shares for which redemption requests are received by the Trust's transfer agent
in proper form before the close of regular trading on the New York Stock
Exchange (currently 3:00 p.m., Central Time) (before 12:30 p.m., Central Time,
in the case of the Money Market Fund) on a business day will not receive any
Fund dividend declared that day. If the request is received in proper form after
the close of regular trading on the New York Stock Exchange (currently 3:00
p.m., Central Time) (after 12:30 p.m., Central Time, in the case of the Money
Market Fund), the shares to be redeemed will be credited with that day's
dividend.
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Each Fund ordinarily will make payment for redeemed shares within seven
days after receipt by the transfer agent of a request in proper form, except as
may otherwise be permitted by the SEC. Payment may be delayed (1) for any period
during which the New York Stock Exchange is closed (other than customary weekend
or holiday closings) or trading on the New York Stock Exchange is restricted;
(2) for any period during which an emergency exists, as determined by the SEC,
and it is not reasonably practicable for such Fund to dispose of its securities,
or to determine the value of its net assets; or (3) for other periods as
permitted by the SEC for the protection of the Fund's shareholders.
Shares purchased by check will not be redeemed until the check has cleared,
which may take up to fifteen days. During the period prior to the time the
shares are redeemed, dividends on such shares will accrue and be payable, and an
investor will be entitled to exercise all other rights of beneficial ownership.
An investor purchasing shares by wire must file an Account Application before
payment is made on any redemption requests for shares purchased by wire.
Each Fund reserves the right to redeem involuntarily, upon not less than 30
days' notice, any shareholder account which is reduced as a result of a
redemption by an investor to a value of less than $500.
ADDITIONAL SERVICES TO INVESTORS
AUTOMATIC INVESTMENT PROGRAM
When opening an account, a shareholder may authorize deductions to be made
from his or her personal bank checking account for investment each month or
quarter in shares of a Fund in a minimum amount of $100. (This minimum may be
less for full-time staff employees of Aon and its subsidiaries). There is no
obligation to continue automatic investment program purchases, and the program
may be terminated at any time by the shareholder, the Trust or Firstar Trust
Company. To initiate this program, please complete the Supplemental Application,
which is attached to the Application. For information on obtaining an
application, see "Purchase of Shares."
EXCHANGE PRIVILEGE
Shares of any Fund of the Trust which have been registered in the
shareholder's name for at least 15 days may be exchanged for shares of the same
class of any other Fund of the Trust, provided that the shares acquired in the
exchange are qualified for sale in the jurisdiction of residence of the
shareholder at the time of the exchange. Before initiating an exchange, the
shareholder should obtain and carefully read this Prospectus as it relates to
the Fund the shares of which are being acquired.
Under the exchange privilege, each Fund offers to exchange its shares for
shares of the same class as another Fund on the basis of relative net asset
values per share. In order to exercise an exchange without further approval of
the Trust, the shares being exchanged must have a net asset value of at least
$1,000 but not more than $500,000.
To elect the exchange privilege, the shareholder must check the appropriate
box on the Account Application. To exercise the exchange privilege, the
shareholder must contact the transfer agent in writing, or telephone the
transfer agent at (800) 266-3637 and request the exchange. The shareholder will
be charged $5.00 for each exchange resulting in a redemption out of any Fund.
This charge will be deducted from the amount being exchanged.
An exchange of shares is treated as a sale for federal income tax purposes
and, depending upon the circumstances, a short or long-term capital gain or loss
may be realized. If you have questions as to the tax consequences of an
exchange, you should consult your tax adviser.
The exchange privilege may be modified or terminated at any time upon 60
days' prior written notice. Although an investor may make up to four exchanges
in any one calendar year, the Trust reserves the right to limit the number of
exchanges in excess of four per year.
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SYSTEMATIC WITHDRAWAL PLAN
A shareholder who owns shares having a value of $7,500 or more may receive
regular monthly, quarterly or annual payments by arranging to redeem shares of a
Fund on a regular basis under a Systematic Withdrawal Plan (the "Withdrawal
Plan"). Under the Withdrawal Plan, a shareholder can elect fixed dollar monthly,
quarterly or annual payments of at least $100 each.
Under the Withdrawal Plan, shareholders must elect to reinvest dividends
and other distributions in additional Fund shares. All payments are made by
redeeming shares, and when all the shares under the Withdrawal Plan have been
redeemed, no more payments are made. Withdrawal Plan participation may be
terminated at any time by the shareholder or the Trust. To initiate the
Withdrawal Plan, please complete the Supplemental Application, which is attached
to the Application. For information on obtaining an Application, see "Purchase
of Shares."
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Money Market Fund accrues dividends from net investment income and
usually distributes such accrued dividends to shareholders monthly. The
Government Securities Fund and the Asset Allocation Fund generally declare and
distribute to shareholders dividends from net investment income monthly or
quarterly, respectively. The S&P 500 Index Fund, the International Equity Fund
and the REIT Index Fund declare and distribute to shareholders dividends from
net investment income at least annually. All capital gains, if any, are
distributed at least annually, usually in December. When a dividend or
distribution is declared, the net asset value per share is reduced by the amount
thereof. Investors considering buying shares of one of the Funds just prior to a
record date for a taxable dividend or capital gain distribution should be aware
that the amount of the forthcoming dividend or distribution payment will be a
taxable dividend or distribution payment. Unless a shareholder otherwise
directs, dividends and distributions are reinvested in additional full and
fractional shares of the same class of the Fund with respect to which they were
paid based on the net asset value of such shares on the payment date. A
shareholder may instead elect (1) to receive all dividends and distributions in
cash, (2) to reinvest capital gains distributions and receive net investment
income dividends in cash, or (3) to invest all dividends and distributions in
full and fractional shares of the same class of another Fund at the net asset
value next determined after the time of payment. Elections may be made by
notifying the transfer agent in writing of the election at least 30 days prior
to the day on which the election is to be effective, and will remain in effect
until revoked by similar notice to the transfer agent.
Each Fund intends to qualify and to continue to qualify as a regulated
investment company ("RIC") under the Code. As a RIC, a Fund is not subject to
federal income taxes on its income and gains distributed to shareholders,
provided that the Fund distributes to its shareholders at least 90% of its net
investment income (i.e., net income and gains, exclusive of net long-term
capital gains) each year. Each Fund intends to distribute annually to its
shareholders substantially all of its net investment income and net long-term
capital gains, if any.
Shareholders (except those who are not subject to tax on their income) are
subject to federal income tax on distributions of net investment income and net
long-term capital gains, regardless of whether such distributions are paid in
cash or reinvested in additional shares of the distributing Fund or another
Fund. The per share dividends and distributions on Class Y shares will generally
be higher than the per share dividends and distributions on Class C shares as a
result of distribution and service fees being inapplicable to Class Y shares.
Distributions by a Fund of its net investment income will be taxable to
shareholders as ordinary income, and will qualify for the 70% dividends received
deduction available to corporations only to the extent the Fund's net investment
income consists of qualifying dividend income from U.S. corporations.
Distributions by a Fund of its net long-term capital gains will be taxable to
shareholders as long-term capital gain, regardless of the length of time a
shareholder has owned shares of the Fund. Distributions in excess of a Fund's
current and accumulated earnings and profits will be treated first as a return
of capital to the extent of a shareholder's tax basis in his shares and
thereafter as gain from the sale of such shares. Distributions may be subject to
state and local tax. Shareholders will be advised of the amount and nature of
any income or gains distributed to shareholders.
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Any gain or loss realized upon the sale or exchange of shares of a Fund
(including an exchange of shares of one Fund for shares of a different Fund) by
a shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year, and
otherwise as short-term capital gain or loss. Any loss realized by a shareholder
upon the sale of shares held for six months or less will be treated as long-term
capital loss, however, to the extent of any distributions of net long-term
capital gains received on such shares. Additionally, any loss realized on the
sale or exchange of shares of a Fund will be disallowed to the extent the shares
disposed of are replaced, through the reinvestment of dividends or otherwise,
during the 61-day period beginning 30 days before and ending 30 days after the
shares are sold or exchanged.
FOREIGN INVESTMENTS
Each Fund investing in foreign securities, currencies or other investments
may be required to pay withholding or other taxes to foreign governments.
Foreign tax withholding from dividends and interest, if any, is generally at a
rate between 10% and 35%. The investment yield of any Fund that invests in
foreign securities, currencies or other investments will be reduced by these
foreign taxes and, in general, shareholders of such a Fund will bear the cost of
any such foreign taxes.
If, however, more than 50% of the value of a Fund's total assets as the
close of its taxable year consists of stocks or securities of foreign
corporations, such Fund will be eligible to make an election to "pass through"
to such Fund's shareholder's the amount of foreign taxes paid by such Fund. It
is not expected that any of the Funds other than the International Equity Fund
will be eligible to make such an election. To the extent the International
Equity Fund is eligible to make such an election, it may elect to do so. If such
an election is made, a shareholder will be required to: (1) include in gross
income (in addition to taxable dividends actually received) his or her pro rata
share of the foreign taxes paid by the electing Fund; (2) treat his or her pro
rata share of such foreign taxes as having been paid by him or her; and (3)
either deduct his or her pro rata share of foreign taxes in computing his or her
taxable income or, subject to numerous limitations, use it as a foreign tax
credit against U.S. income taxes. No deduction for foreign taxes may be claimed
by a shareholder who does not itemize deductions. Generally, no deduction or
credit will be available to a shareholder who is exempt from federal income tax.
Each shareholder of a Fund eligible to make an election for a taxable year will
be notified within 60 days after the close of the Fund's taxable year whether
the foreign taxes paid by the Fund will "pass through" for that year and, if so,
such notification will designate (a) the shareholder's portion of the foreign
taxes paid to each country and (b) the portion of dividends that represents
income derived from sources within each such country.
The amount of foreign taxes for which a shareholder may claim a credit in
any year will be subject to an overall limitation which is applied separately to
"passive income", which includes, among other types of income, dividends and
interest. The foregoing is only a general description of the foreign tax credit
under current law. Because application of the credit depends on the particular
circumstances of each shareholder, shareholders are advised to consult their own
tax advisers.
INFORMATION REPORTING AND BACKUP WITHHOLDING
If an investor has not furnished a certified correct Taxpayer
Identification Number (generally a Social Security number) and has not certified
that withholding does not apply, or if the IRS has notified the Trust that the
Taxpayer Identification Number listed on the investor's account is incorrect
according to their records or that the investor is subject to backup
withholding, federal law generally requires the Trust to withhold 31% from any
dividends and/or redemptions (including exchange redemptions). Amounts withheld
are applied to the investor's federal tax liability; a refund may be obtained
from the IRS if withholding results in overpayment of taxes.
REITs do not provide complete information about the taxability of their
distributions until after the calendar year end. As a result, the Trust may not
be able to determine how much of the REIT Index Fund's annual distributions is
taxable to shareholders until after the traditional January 31 deadline for
issuing Form 1099-DIV ("1099"). Therefore, the Trust may request permission each
year from the IRS for an extension. If
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<PAGE> 45
the Trust's request is approved, it will mail Form 1099-DIVs to REIT Index Fund
shareholders with non-retirement accounts in February.
THE FOREGOING IS ONLY A SUMMARY OF SOME OF THE IMPORTANT TAX CONSIDERATIONS
GENERALLY AFFECTING EACH FUND AND ITS SHAREHOLDERS. INVESTORS ARE URGED TO
CONSULT THEIR TAX ADVISERS REGARDING FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAXATION OF INVESTMENTS IN ANY FUND. IN PARTICULAR, INVESTORS THAT ARE NOT U.S.
PERSONS FOR U.S. FEDERAL INCOME TAX PURPOSES, AND OTHER INVESTORS SUBJECT TO
SPECIAL RULES UNDER THE CODE, SHOULD CONSULT THEIR TAX ADVISERS.
PERFORMANCE INFORMATION
MONEY MARKET FUND
From time to time, the Money Market Fund may advertise its yield and
effective yield. Both yield figures are based on historical earnings and are not
intended to indicate future performance. It can be expected that these yields
will fluctuate substantially. The yield of the Fund refers to the income
generated by an investment in the Fund over a seven-day period (which period
will be stated in the advertisement). This income is then annualized. That is,
the amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of the
investment. The effective yield is calculated similarly but, when annualized,
the income earned by an investment in the Fund is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment.
GOVERNMENT SECURITIES FUND AND ASSET ALLOCATION FUND
For purposes of advertising, performance of each class of the Government
Securities Fund and Asset Allocation Fund may be calculated on several bases,
including current yield, average annual total return and/or total return.
Current yield refers to the Fund's annualized net investment income per share
over a 30-day period, expressed as a percentage of the net asset value per share
at the end of the period. For purposes of calculating current yield, the amount
of net investment income per share during that 30-day period, computed in
accordance with regulatory requirements, is compounded by assuming that it is
reinvested at a constant rate over a six-month period. An identical result is
then assumed to have occurred during a second six-month period which, when added
to the result for the first six months, provides an "annualized" yield for an
entire one-year period.
S&P 500 INDEX FUND, INTERNATIONAL EQUITY FUND AND REIT INDEX FUND
For purposes of advertising, performance of each class of the S&P 500 Index
Fund, the International Equity Fund and the REIT Index Fund may be calculated on
the basis of average annual total return and/or total return. Average annual
total return is calculated pursuant to a standardized formula which assumes that
an investment in such class was purchased with an initial payment of $1,000 and
that the investment was redeemed at the end of a stated period of time, after
giving effect to the reinvestment of dividends and distributions during the
period. The return is expressed as a percentage rate which, if applied on a
compounded annual basis, would result in the redeemable value of the investment
at the end of the period. Advertisements of the performance of a class of these
Funds will include the average annual total return for such class for one, five
and ten year periods, or for shorter time periods, depending upon the length of
time during which the class has operated. Computations of average annual total
return for periods of less than one year represent an annualization of actual
total return for the applicable period.
Total return is computed on a per share basis and assumes the reinvestment
of dividends and distributions. Total return generally is expressed as a
percentage rate which is calculated by combining the income and principal
changes for a specified period and dividing by the maximum offering price per
share at the beginning of the period. Advertisements may include the percentage
rate of total return or may include the
39
<PAGE> 46
value of a hypothetical investment at the end of the period which assumes the
application of the percentage rate of total return.
Average annual total return and total return will be calculated as
described above.
INFORMATION APPLICABLE TO ALL FUNDS
Performance will vary from time to time and past results are not
necessarily representative of future results. Investors should remember that
performance is a function of the type and quality of portfolio securities held
by a Fund and is affected by operating expenses. No adjustment is made in
reporting performance for taxes payable by shareholders on reinvested dividends
and distributions. Yield and performance information, such as that described
above, may not provide a basis for comparison with other investments or other
investment companies using a different method of calculating performance.
Performance for each class will be calculated separately.
Comparative performance information may be used from time to time in
reports or other communications to shareholders or in advertising or marketing a
Fund's shares, including data from Lipper Analytical Services, Inc., and other
industry or financial publications. The performance of the Funds may be compared
to that of other mutual funds with similar investment objectives and to relevant
equity, debt or other indices. From time to time, articles about the Trust or
the Funds regarding their performance or ranking may appear in various
publications. Some of these publications may publish their own rankings or
performance reviews of mutual funds, including the Trust or the Funds. Reference
to or reprints of such articles may be used in promotional literature.
ADDITIONAL INFORMATION
To date, the Trust's Board of Trustees has authorized the creation of six
separate series of shares for the Trust. All consideration received by the Trust
for shares of one of the series and all assets in which such consideration is
invested will belong to that series and will be subjected to the liabilities
related thereto. The income attributable to, and the expenses of, one series
(and classes within a series) are treated separately from those of the other
series (and classes). The Trust has the ability to create, from time to time,
new series without shareholder approval which may be sold pursuant to other
offering documents.
As of May 31, 1996, Aon, itself and through its subsidiaries, owned
beneficially and of record 95.72% and 98.81% of the outstanding shares of
beneficial interest of the Money Market Fund and the Asset Allocation Fund,
respectively. Aon, along with its subsidiaries, is also expected to own a
substantial percentage of the outstanding shares of each other Fund. These
shareholders will be affiliated persons of such Fund. Aon and its subsidiaries
may be able to cast a deciding vote on matters submitted to a vote of
shareholders, which may include proposed changes in any Fund's investment
objective and fundamental investment restrictions and in the terms of its
investment advisory agreement.
It is possible that a Fund might become liable for any misstatement in this
Prospectus about another Fund. The Trust's Board of Trustees has considered this
factor in approving the use of this single combined Prospectus.
SHAREHOLDER MEETINGS AND VOTING
The Trust will not hold annual shareholder meetings. Shareholders under
certain circumstances have the right to call a meeting of shareholders for the
purpose of voting to remove Board members. In addition, shareholders of the
respective Funds will have the power to vote at special meetings with respect
to, among other things, changes in fundamental investment policies and
restrictions of such Funds, approval of changes to investment advisory
agreements and such additional matters relating to the Trust or such Funds (or
classes of shares thereof) as might be required by the 1940 Act. As to any
matter on which shareholders of the Trust are entitled to vote, they shall be
entitled to one noncumulative vote for each full share and to a proportionate
fractional vote for each fractional share, irrespective of class, standing in
the shareholder's name on the books of the Trust. In no event shall holders of
shares of a series or class be entitled to vote such shares with respect
40
<PAGE> 47
to any matter that does not affect any interest of such series or class, as the
case may be, unless otherwise required by the 1940 Act. All shares then issued
and outstanding and entitled to be voted shall be voted on a series by series
basis, except that (1) shares shall be voted in the aggregate without
differentiation among the separate series and classes in the case of the
election or removal of Trustees and where otherwise required by the 1940 Act or
the Trust's Agreement and Declaration of Trust, (2) shares shall be voted by
class where required by the 1940 Act, and (3) the Trustees in their sole
discretion may determine that, in situations where the shares of more than one
series or class are entitled to be voted with respect to a matter, such shares
shall be voted as a single class with respect to such matter if and to the
extent permitted under the 1940 Act. Shares do not have preemptive or
subscription rights.
CUSTODIAN
Firstar Trust Company acts as Custodian of the assets of the Fund and also
acts as its transfer and dividend paying agent. The principal office of Firstar
Trust Company is located at 777 E. Wisconsin Avenue, Milwaukee, Wisconsin 53202.
Pursuant to a sub-custody agreement with Firstar Trust Company, Chase Manhattan
Bank, N.A., 1211 6th Avenue, New York, NY 10036, serves as custodian for the
foreign assets of the International Equity Fund.
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<PAGE> 48
INVESTMENT ADVISOR
Aon Advisors, Inc.
123 North Wacker Drive
Chicago, Illinois 60606
ADMINISTRATOR
Aon Securities Corporation
123 North Wacker Drive
Chicago, Illinois 60606
DISTRIBUTOR
Aon Securities Corporation
123 North Wacker Drive
Chicago, Illinois 60606
CUSTODIAN, TRANSFER AGENT, AND ACCOUNTING AGENT
Firstar Trust Company
615 E. Michigan Street, Third Floor
Milwaukee, Wisconsin 53202
INDEPENDENT AUDITORS
Ernst & Young LLP
Sears Tower
233 South Wacker Drive
Chicago, Illinois 60606
LEGAL COUNSEL
Sidley & Austin
One First National Plaza
Chicago, IL 60603
<PAGE> 49
AON FUNDS
123 NORTH WACKER DRIVE
CHICAGO, ILLINOIS 60606
DISTRIBUTOR -- AON SECURITIES CORPORATION
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 3, 1996
This Statement of Additional Information is not a Prospectus. Much of the
information contained in this Statement of Additional Information expands upon
matters discussed in the Prospectus of Aon Funds and should, therefore, be read
in conjunction with the Prospectus. To obtain a copy of the Prospectus with the
same date as this Statement of Additional Information, send a written request to
the Trust at 123 North Wacker Drive, Chicago, Illinois 60606, or call (800)
266-3637.
<PAGE> 50
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information................................................................... 4
Prior History....................................................................... 4
Portfolio Turnover.................................................................. 4
Money Market Fund Investments, Investment Practices and Restrictions.................. 5
General Standards................................................................... 5
U.S. Government Securities.......................................................... 5
Certificates of Deposit and Time Deposits........................................... 5
Commercial Paper.................................................................... 5
Repurchase Agreements............................................................... 6
Foreign Securities.................................................................. 6
Lending Portfolio Securities........................................................ 7
Investment Restrictions............................................................. 7
Additional Investment Practices and Restrictions...................................... 8
When-Issued and Delayed Delivery Securities......................................... 9
Loans of Portfolio Securities....................................................... 9
Convertible Securities.............................................................. 9
Warrants............................................................................ 10
Risks of Foreign Investments........................................................ 10
Forward Foreign Currency Exchange Contracts......................................... 11
Writing and Purchasing Currency Call and Put Options................................ 12
Special Risks Associated With Options on Currency................................... 13
Currency Swaps...................................................................... 13
Options on Securities and Securities Indices........................................ 14
Financial Futures Contracts......................................................... 15
Options on Financial Futures Contracts.............................................. 17
Certain Additional Risks of Options and Financial Futures Contracts................. 17
Borrowing........................................................................... 18
Lower-Rated, Lower Quality Debt Instruments......................................... 19
Risks of Lower-Rated, Lower Quality Debt Instruments................................ 19
Covered Call Options................................................................ 20
GNMA Certificates................................................................... 20
Investment Restrictions............................................................. 21
Management of the Trust............................................................... 24
Trustees and Officers............................................................... 24
Investment Advisers................................................................. 25
Investment Advisory and Administration Fees......................................... 26
Investment Sub-Adviser.............................................................. 26
Investment Sub-Advisory Agreement................................................... 26
Investment Sub-Advisory Fees........................................................ 27
Reimbursement of Excess Operating Expenses.......................................... 27
Securities Activities of the Adviser................................................ 27
Control Persons and Principal Holders of Securities................................... 28
Portfolio Transactions and Brokerage.................................................. 29
Determination of Net Asset Value...................................................... 29
General............................................................................. 29
Money Market Fund................................................................... 30
Non-Money Market Funds.............................................................. 30
Retirement Programs................................................................... 31
</TABLE>
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<PAGE> 51
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Yield and Performance Information..................................................... 32
Taxes................................................................................. 32
Additional Information................................................................ 34
Custodian, Transfer Agent and Accounting Agent...................................... 34
Independent Auditors................................................................ 34
Legal Counsel....................................................................... 35
Shares of Beneficial Interest....................................................... 35
Reports............................................................................. 35
Other Information................................................................... 35
Appendix A............................................................................ 36
</TABLE>
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GENERAL INFORMATION
Aon Funds (the "Trust") is an open-end management investment company formed
as a Delaware business trust on May 16, 1996 and registered under the Investment
Company Act of 1940 (the "1940 Act"). The Trust currently issues six separate
series of shares (each, a "Fund" and collectively, the "Funds"), each
representing a separate portfolio of securities with its own investment
objective and policies (commonly known as a mutual fund). The Funds which are
currently offered are the Money Market Fund, the Government Securities Fund, the
Asset Allocation Fund, the S&P 500 Index Fund, the International Equity Fund and
the REIT Index Fund. The Trust issues a separate series of shares for each Fund
representing undivided beneficial interests in that Fund. An investor, by
investing in a Fund, becomes entitled to a pro rata share of all dividends and
distributions arising from the net income and capital gains on the investments
of that Fund, subject to any special expenses associated with a particular class
of shares within such Fund. Likewise, an investor shares pro rata in any losses
of that Fund.
Trust shares are distributed through Aon Securities Corporation ("ASC"), a
wholly-owned subsidiary of Aon Corporation, a publicly held insurance holding
company the common stock of which is listed on the New York Stock Exchange and
which, through subsidiaries, is a major provider of insurance, insurance
brokerage and related services. Aon Advisors, Inc. ("AAI"), also a wholly-owned
subsidiary of Aon Corporation, serves as investment adviser to each Fund. AAI
has engaged Brinson Partners, Inc. ("Brinson Partners") as the investment
sub-adviser to provide day-to-day portfolio management for the International
Equity Fund. (As used herein, "Adviser" shall refer to AAI and, where
applicable, Brinson Partners, or both, in their respective roles.) Aon
Corporation and its subsidiary companies may, by virtue of their shareholder
interests in any Fund at any particular date, be considered to be controlling
persons of the Trust and such Fund and may be able to cast a deciding vote on
all matters submitted to a vote of the Trust's or such Fund's shareholders.
PRIOR HISTORY
Prior to September 3, 1996, the Trust conducted business as Aon Asset
Management Fund, Inc., a Virginia corporation. Any reference herein to the
Trust, including any financial information and performance data, relating to
such period reflects the Trust's portfolios as constituted prior to the
commencement of operations of the Trust.
PORTFOLIO TURNOVER
The turnover rate for any Fund is calculated by dividing the lesser of
purchases or sales of Fund securities during the fiscal year by the monthly
average of the value of such Fund's securities (excluding from the computation
all securities, including options, with maturities at the time of acquisition of
one year or less). For example, a portfolio turnover rate of 100% would mean
that all of a Fund's securities (except those excluded from the calculation)
were replaced once in a period of one year. A high rate of portfolio turnover
generally involves correspondingly greater transaction expenses. Turnover rates
may vary greatly from year to year as well as within a particular year and may
also be affected by cash requirements for redemptions of a Fund's shares and by
certain requirements which the Trust must satisfy to receive certain favorable
tax treatment. Because the rate of portfolio turnover is not a limiting factor,
however, particular holdings may be sold at any time, if investment judgment or
Fund operations make a sale advisable. As a result, the annual portfolio
turnover rates in future years may exceed the percentages shown below. Since
short term instruments are excluded from the calculation of a portfolio turnover
rate, no meaningful portfolio turnover rate can be estimated or calculated for
the Money Market Fund, and none of the Government Securities Fund, S&P 500 Index
Fund, International Equity Fund or REIT Index Fund was in existence prior to
October 31, 1995.
The annual turnover rate for the Asset Allocation Fund for the period from
March 31, 1994 (commencement of operations) through October 31, 1994 and the
fiscal year ended October 31, 1995 was 64.36% and 95.17% respectively. Stocks in
the Fund had a turnover rate of 64.05% and bonds in the Fund had a turnover rate
of 21.36% for the period from March 31, 1994 (commencement of operations)
through October 31, 1994. Stocks in the Fund had a turnover rate of 141.09% and
bonds in the Fund had a turnover rate of 15.60% for the fiscal year ended
October 31, 1995.
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<PAGE> 53
The Government Securities, Asset Allocation, S&P Index, REIT Index
International Equity and International Equity Funds generally do not trade in
securities with the goal of obtaining short-term profits, but when circumstances
warrant, securities will be sold without regard to the length of time the
security has been held.
MONEY MARKET FUND INVESTMENTS,
INVESTMENT PRACTICES AND RESTRICTIONS
The investment objective of the Money Market Fund and the policies by which
it pursues that objective are set forth in the Prospectus. This section
describes in more detail certain securities in which the Fund may invest and
certain investment practices that it may use and augments the explanation found
in the Prospectus.
GENERAL STANDARDS
The Money Market Fund may invest only in U.S. dollar-denominated
instruments maturing in 13 months or less which the Adviser, under the general
oversight of the Board of Trustees of the Trust, determines present minimal
credit risks and are, at the time of acquisition, either:
1. rated in the highest rating category by at least two nationally
recognized statistical rating organizations (an "NRSRO") as defined under
Rule 2a-7, as amended, under the 1940 Act, or by only one NRSRO if only one
NRSRO has issued a rating with respect to the instrument; or
2. in the case of an unrated instrument, determined by the Adviser
under the general oversight of the Board of Trustees to be of comparable
quality to the above; or
3. issued by an issuer that has received a rating of the type
described in (1) above on other securities that are comparable in priority
and security to the instrument.
The types of securities in which the Money Market Fund may invest are more
fully described below:
U.S. GOVERNMENT SECURITIES
U.S. Government securities are obligations issued or guaranteed by the U.S.
Government, its agencies, or instrumentalities. Some U.S. Government securities,
such as Treasury bills, notes, and 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, such as obligations issued or guaranteed by
U.S. Government agencies or instrumentalities, are supported either by (a) the
full faith and credit of the U.S. Government (such as securities of the
Government National Mortgage Association ("GNMA")), (b) the right of the issuer
to borrow from the Treasury (such as securities of the Federal Home Loan Banks),
(c) the discretionary authority of the U.S. Government to purchase the agency's
obligations (such as securities of the Federal National Mortgage Association),
or (d) only the credit of the issuer. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government agencies or
instrumentalities in the future.
CERTIFICATES OF DEPOSIT AND TIME DEPOSITS
Certificates of deposit include time deposits and negotiable certificates
of deposit. Time deposits are nonnegotiable deposits maintained in a banking
institution for a specified period of time (in no event longer than seven days)
at a stated interest rate. Certificates of deposit are certificates issued
against funds deposited in a bank for a specified period of time. Bank
obligations may be purchased only if (i) the issuing bank is a U.S. bank with
total assets of at least $1 billion, and (ii) the bank is a member of the
Federal Deposit Insurance Corporation.
COMMERCIAL PAPER
Commercial paper consists of unsecured promissory notes issued by
corporations to finance short-term credit needs. Commercial paper is issued in
bearer form with maturities generally not exceeding nine months.
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<PAGE> 54
Commercial paper obligations may include variable amount master demand
notes. Variable amount master demand notes are obligations that permit the
investment of fluctuating amounts at varying interest rates pursuant to
arrangements between the issuer and a commercial bank acting as agent for the
payees of such notes. The Money Market Fund has the right to increase the amount
under the note at any time up to the full amount provided by the note agreement,
or to decrease the amount, and the borrower may prepay up to the full amount of
the note without penalty. Because variable amount master demand notes are direct
lending arrangements between the lender and borrower, it is not generally
contemplated that such instruments will be traded, and there is no secondary
market for these notes, although they are redeemable (and thus immediately
repayable by the borrower) at face value, plus accrued interest, at any time. In
connection with the master demand note arrangements, the Adviser will monitor on
an ongoing basis the earning power, cash flow and other liquidity ratios of the
issuer and the borrower's ability to pay principal and interest on demand. While
the master demand notes, as such, are not typically rated by credit rating
agencies, if not so rated the Money Market Fund may invest in them only if at
the time of an investment the issuer meets the criteria set forth above and in
the Prospectus for all other issuers of instruments that the Money Market Fund
may purchase. Because master demand notes are immediately repayable by the
borrower on demand, they are considered by the Money Market Fund to have a
maturity of one business day.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements involving the purchase of money
market instruments which the Money Market Fund is qualified to purchase, and the
Fund's simultaneous agreement to sell the same instruments back to their
original seller on demand or at a specified future date at an agreed upon price.
A repurchase agreement can be viewed as a loan made by the Fund to the seller of
the instrument, with such instrument serving as collateral for the seller's
agreement to repay the amount borrowed with interest. In effect, the repurchase
price reflects an agreed upon interest rate unrelated to the stated rate on the
purchased instrument. Such transactions afford an opportunity for the Fund to
earn a return on cash which is only temporarily available.
The Money Market Fund will only enter into repurchase agreements when the
Adviser, under the general oversight of the Board of Trustees of the Trust,
determines that such agreements present minimal credit risks. For repurchase
agreements, minimal credit risk determination relates to both the quality of the
instrument serving as collateral as well as the creditworthiness of the original
seller during the time frame contemplated by the repurchase agreement.
Accordingly, as explained in the Prospectus, the Fund will only enter into
repurchase agreements with banks and primary government securities dealers whom
the Adviser (under the general oversight of the Trust's Board of Trustees and
using the same criteria used to evaluate the credit risk of all instruments
considered for purchase by the Fund) determines do not present a serious risk of
becoming involved in bankruptcy proceedings within the time frame contemplated
by the agreement.
FOREIGN SECURITIES
The Money Market Fund may invest in U.S. dollar-denominated money market
instruments (including commercial paper) that are issued or guaranteed by
foreign issuers, including foreign corporations or other business organizations,
foreign governments and foreign government agencies or instrumentalities, and
foreign financial institutions. The Money Market Fund will only invest in
foreign securities that meet its general standards described above. Investments
by the Fund in foreign securities entail certain risks not shared by domestic
securities of the same type.
Securities of foreign issuers, particularly nongovernmental issuers,
involve risks which are not ordinarily associated with investing in domestic
issuers. These risks include political or economic instability in the country
involved, the difficulty of predicting international trade patterns and the
possibility of imposition of exchange controls. Foreign securities may also be
subject to greater fluctuations in price than similar securities of domestic
issuers. In addition, there may be less publicly available information about a
foreign issuer than about a domestic issuer. Foreign issuers generally are not
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic issuers. In many countries, there is
less government regulation of stock exchanges, brokers and listed companies than
in the United States.
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With respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, or diplomatic developments which could
affect investment certain foreign issuers; in those situations, it may be
difficult for the Fund to obtain or to enforce a judgment against the issuer.
LENDING PORTFOLIO SECURITIES
In order to further the Money Market Fund's investment objective of seeking
a high level of current income, it may lend its portfolio securities to brokers,
dealers, and financial institutions. The amount of loaned securities will not
exceed 5% of the value of the Fund's assets. Securities lending activities, if
and when engaged in by the Money Market Fund, will be carried out in the manner
described and subject to the conditions described in the caption "Lending
Portfolio Securities" in the next section dealing with the Non-Money Market
Funds.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS . The Money Market Fund has adopted a
number of fundamental policies restricting the investment of its assets, which
may not be changed without the affirmative vote of the holders of a majority of
the Fund's outstanding voting securities. The "affirmative vote of the holders
of a majority of a Fund's outstanding voting securities" means the vote of: (1)
67% or more of the shares of the Fund present or represented by proxy at a
meeting of the Fund's shareholders, if more than 50% of the outstanding shares
of such Fund are present in person or by proxy at such meeting, or (2) more than
50% of the outstanding shares of such Fund, whichever is less. Pursuant to the
Money Market Fund's fundamental investment restrictions, it may not:
(a) issue senior securities (except to the extent that borrowings
under paragraph (h) below exceeding 5% of the value of the Money Market
Fund's total assets are deemed to constitute senior securities under the
1940 Act);
(b) purchase real estate or any interest therein, except through the
purchase of corporate or certain government securities (including
securities secured by a mortgage or a leasehold interest or other interest
in real estate); a security issued by a real estate or mortgage investment
trust is not treated as an interest in real estate;
(c) purchase any securities on margin (except that, subject to the
borrowing limitation in (h), the Money Market Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities), or make short sales of securities or
maintain a short position;
(d) underwrite securities of other issuers (except insofar as the
Money Market Fund or the Trust might be deemed an underwriter under the
Securities Act of 1933 in certain resales of portfolio securities held by
the Fund);
(e) invest more than 25% of the value of its total assets in the
securities of issuers having their principal activity in any particular
industry, other than U.S. Government Securities, as defined in Section
2(a)(16) of the 1940 Act;
(f) invest more than 5% of the value of the Money Market Fund's total
assets in, or invest in more than 10% of the outstanding voting securities
of, any one issuer, except that this restriction does not apply to
investments in U.S. Government Securities;
(g) make loans, except that the Money Market Fund may enter into
repurchase agreements as described above or in the Prospectus, and the Fund
may lend its portfolio securities, but not in amounts in excess of the 5%
of the value of its assets;
(h) borrow money, except from banks for temporary or emergency
purposes, including the meeting of redemption requests which might
otherwise require the untimely disposition of securities. Borrowing in the
aggregate may not exceed 10% of the value of the Money Market Fund's total
assets at the time the borrowing is made, and the Fund will not make
additional investments during any period that borrowings exceed 5% of the
value of its total assets;
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<PAGE> 56
(i) pledge, hypothecate, mortgage or transfer as security for
indebtedness any securities held by the Money Market Fund, except in an
amount of not more than 10% of the value of its total net assets, and then
only to secure borrowings permitted by (c) and (h);
(j) enter into repurchase agreements maturing in more than seven days
if, as a result thereof, more than 10% of the value of the Money Market
Fund's total assets would be invested in such repurchase agreements and any
other assets which are either illiquid or are not readily marketable;
(k) invest in time deposits maturing in more than seven days; in
addition, time deposits maturing in two business days to seven calendar
days may not exceed 10% of the value of the Fund's total assets; and
(1) purchase or sell interests in oil, gas, or other mineral
explorations or development programs, commodities, or commodity contracts,
except that the Money Market Fund may purchase securities of issuers which
invest or deal in any of the above, provided such securities are money
market instruments in which the Fund is otherwise permitted to invest.
NON-FUNDAMENTAL RESTRICTIONS. In addition to the fundamental investment
restrictions set forth above, the Money Market Fund is subject to the following
restrictions in implementing its investment policy. These additional
restrictions are not fundamental and may be changed by the Trustees without
shareholder approval. The Fund may not:
(a) write, purchase or sell puts, calls (other than covered call
options) or combinations thereof;
(b) invest in securities of foreign issuers if at the time of
acquisition more than 10% of its total assets, taken at market value at the
time of the investment, would be invested in such securities. However, up
to 25% of the total assets of the Money Market Fund may be invested in
securities (i) issued, assumed or guaranteed by foreign governments, or
political subdivisions or instrumentalities thereof, (ii) assumed or
guaranteed by domestic issuers, including Eurodollar securities, or (iii)
issued, assumed or guaranteed by foreign issuers having a class of
securities listed for trading on the New York Stock Exchange ("NYSE");
(c) participate on a joint (or a joint and several) basis in any
trading account in securities (but this does not include the "bunching" of
orders for the sale or purchase of portfolio securities with other Funds,
with individually managed accounts, or with registered investment companies
advised or sponsored by the Money Market Fund's investment adviser or any
of its affiliates to reduce brokerage commissions or otherwise to achieve
best overall execution);
(d) alone, or together with any other Fund or Funds, make investments
for the purpose of exercising control over, or management of, any issuer;
and
(e) purchase securities of other investment companies.
COMPUTATION RULE. If a percentage restriction is adhered to at the time of
an investment, a later increase or decrease in the investment's percentage of
the value of the Money Market Fund's total assets will not constitute a
violation of the percentage restriction.
ADDITIONAL INVESTMENT PRACTICES AND RESTRICTIONS
The respective investment objectives of the Asset Allocation Fund, S&P 500
Index Fund, Government Securities Fund, International Equity Fund and REIT Index
Fund (the "Non-Money Market Funds") and the policies by which such Funds will
pursue their objectives are generally set forth in the Prospectus. This section
describes in more detail certain securities in which such Funds (and in certain
cases the Money Market Fund) may invest and certain investment practices they
may use and is intended to augment the description found in the Prospectus.
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WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, each Fund may
purchase securities on a when-issued basis or delayed-delivery basis, i.e.,
delivery and payment can take place a month or more after the date of the
transaction. The securities so purchased are subject to market fluctuation, and
no interest accrues to the purchaser during this period. At the time a Fund
makes the commitment to purchase securities on a when-issued or delayed delivery
basis, it will record the transaction and thereafter reflect the value, each
day, of such security in determining its net asset value. At the time of
delivery of the securities, the value may be more or less than the purchase
price. Each Fund will also establish a segregated account with the Trust's
custodian bank in which it will maintain cash or cash equivalents or other
liquid Fund securities equal in value, marked to market on a daily basis, to
commitments for such when-issued or delayed-delivery securities. As a general
matter each Fund will hold less than 5% of its assets in commitments to purchase
securities on a delayed-delivery or when-issued basis and will not, under any
circumstances, purchase securities on a when-issued basis or delayed-delivery
basis if, as a result, more than 10% of its net assets would be so invested.
LOANS OF PORTFOLIO SECURITIES
Each Non-Money Market Fund may from time to time lend securities it holds
to brokers, dealers and financial institutions, up to a maximum of 20% of its
total assets, and the Money Market Fund may so lend securities up to a maximum
of 5% of the value of its assets. This percentage may not be increased without
approval of a majority of the outstanding voting securities of the respective
Funds. Such loans will be secured by the collateral in the form of cash or U.S.
Treasury securities, which at all times during which the loan is outstanding
will be maintained in an amount at least equal to the current market value of
the loaned securities. Each Fund will continue to receive interest and dividends
on the loaned securities during the term of its loans and, in addition, will
receive either a fee from the borrower or interest earned from the securities in
which cash collateral is invested during the term of the loan.
The right to terminate a loan of securities, subject to appropriate notice,
will be given to either party. When a loan is terminated, the borrower will
return the loaned securities to the appropriate Fund. A Fund will not have the
right to vote securities on loan, but would terminate the loan and regain the
right to vote if that were important with respect to the investment.
Each Fund intends to limit the amount of securities lending so that the
aggregate amount of interest received attributed to securities loaned, if
considered "other income" for federal tax purposes, will not cause it to lose
its tax status as a regulated investment company.
The primary risk involved in lending securities is that the borrower will
fail financially and not return the loaned securities at a time when collateral
is insufficient to replace the full amount of the loaned securities. The
borrower would be liable for the shortage, but a Fund would be an unsecured
creditor with respect to such shortage and might not be able to recover all or
any of it. In order to minimize this risk, the Funds will make loans of
securities only to firms that the Adviser (under the general oversight of the
Board of Trustees of the Trust) deems creditworthy.
CONVERTIBLE SECURITIES
The Asset Allocation Fund and International Equity Fund may each invest in
convertible securities. Convertible securities may include corporate notes or
preferred stock but are ordinarily a long-term debt obligation of the issuer
convertible at a stated exchange rate into common stock of the issuer. As with
all debt securities, the market value of convertible securities tends to decline
as interest rates increase and, conversely, to increase as interest rates
decline. Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality. However, when the
market price of the common stock underlying a convertible security exceeds the
conversion price, the price of the convertible security tends to reflect the
value of the underlying common stock. As the market price of the underlying
common stock declines, the convertible security tends to trade increasingly on a
yield basis, and thus may not depreciate to the same extent as the underlying
common stock. Convertible securities generally rank senior to common stock in an
issuer's capital structure and are consequently of higher quality and entail
less risk of declines in market value than the
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issuer's common stock. However, the extent to which such risk is reduced depends
in large measure upon the degree to which the convertible security sells above
its value as a fixed-income security. In evaluating a convertible security, the
Adviser usually gives primary emphasis to the attractiveness of the underlying
common stock. The convertible debt securities in which these Funds may invest
are subject to the same rating criteria as each Fund's investment in
non-convertible debt securities.
WARRANTS
The Asset Allocation Fund and the International Equity Fund may each invest
up to 5% of its total assets, calculated at the time of purchase, in warrants or
rights (other than those acquired in units or attached to other securities)
which entitle the holder to buy equity securities at a specific price for a
specific period of time. These Funds will not invest more than 2% of their total
assets, calculated at the time of purchase, in warrants or rights which are not
listed on the NYSE or American Stock Exchange. Warrants and rights have no
voting rights, receive no dividends and have no rights with respect to the
assets of the issuer.
RISKS OF FOREIGN INVESTMENTS
Investing in the securities of companies that are organized outside the
United States or whose securities are principally traded outside the United
States ("foreign issuers") or investing in securities denominated or quoted in a
foreign currency ("non-dollar securities") involves certain special
considerations, including those set forth below, which are not typically
associated with investing in securities of domestic issuers or U.S. dollar
denominated securities.
Since investments in foreign issuers may involve currencies of foreign
countries and since a Non-Money Market Fund may temporarily hold funds in bank
deposits in foreign currencies during completion of investment programs and
since a Fund may be subject to currency exposure as a result of or independent
of its securities positions, the Fund may be affected favorably or unfavorably
by changes in currency exchange rates and in exchange control regulations and
may incur costs in connection with conversions between various currencies.
Since foreign issuers are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. issuers, there may be less publicly available information
about a foreign issuer than about a domestic issuer. Volume and liquidity in
most foreign securities markets are less than in the United States and
securities of many foreign issuers are less liquid and more volatile than
securities of comparable domestic issuers. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although a Non-Money Market Fund may endeavor to achieve the most
favorable net results on its portfolio transactions. There is generally less
government supervision and regulation of securities exchanges, brokers, dealers
and listed and unlisted issuers than in the United States. Mail service between
the United States and foreign countries may be slower or less reliable than
within the United States, thus increasing the risk of delayed settlements of
portfolio transactions or loss of certificates for portfolio securities.
Foreign investment markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of a Non-Money Market Fund are uninvested
and no return is earned on such assets. The inability of a Fund to make intended
securities purchases due to settlement problems could cause such Fund to miss
attractive investment opportunities. Inability to dispose of Fund investments
due to settlement problems could result either in losses to a Fund due to
subsequent declines in value of the portfolio securities or, if the Fund has
entered into a contract to sell the securities, could result in possible
liability to the purchaser. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect a
Fund's investments in those countries. Moreover, individual foreign economies
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency or balance of payments position.
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FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The International Equity Fund may enter into forward foreign currency
exchange contracts. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are generally charged at any stage for
trades. At the maturity of a forward contract, the Fund may either accept or
make delivery of the currency specified in the contract or, at or prior to
maturity, enter into a closing purchase transaction involving the purchase or
sale of an offsetting contract. Closing purchase transactions with respect to
forward contracts are usually effected with the currency trader who is a party
to the original forward contract.
The International Equity Fund may enter into forward foreign currency
exchange contracts in several circumstances. First, when it purchases or enters
into a fixed price contract for the purchase or sale of a security denominated
or quoted in a foreign currency, or when it anticipates the receipt in a foreign
currency of dividend or interest payments on such a security which it holds, the
Fund may desire to "lock in" the U.S. dollar price or value of the security or
the U.S. dollar equivalent of such dividend or interest payment, as the case may
be. By entering into a forward contract for the purchase or sale, for a fixed
amount of dollars, of the amount of foreign currency involved in the underlying
transactions, the Fund will attempt to protect itself against an adverse change
in the relationship between the U.S. dollar and the subject foreign currency
during the period between the date on which the security is proposed to be
purchased and the date on which the security is actually purchased, or the
period during which the security is held (including the period after sale but
prior to the conversion of the proceeds into dollars), or the period between the
declaration of the dividend or interest payment and the date on which such
payments are made or received (and converted into dollars).
When the Adviser believes that the currency of a particular foreign country
may suffer a substantial decline against the U.S. dollar, it may enter into a
forward contract to sell, for a fixed amount of dollars, the amount of foreign
currency approximating the value of some or all of the International Equity
Fund's portfolio securities denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of the Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which the Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the dollar value of only a portion of the Fund's foreign assets.
The International Equity Fund may engage in proxy-hedging by using forward
contracts in one currency to hedge against fluctuations in the value of
securities quoted or denominated in a different currency if the Adviser
determines that there is a pattern of correlation between the two currencies.
The Fund also may purchase and sell forward contracts in cross-hedging when the
Adviser anticipates that a foreign currency contained in the MSCI Index will
appreciate or depreciate in value, but securities denominated or quoted in that
currency do not present attractive investment opportunities and are not held by
the Fund. The Fund may also purchase and sell forward contracts to seek to
increase total return.
The Trust's custodian will place cash or high grade liquid debt securities
(i.e., securities rated in one of the top three ratings categories by Standard &
Poor's Corporation ("S&P") or by Moody's Investors Service, Inc. ("Moody's") or,
if unrated, deemed by the Adviser to be of comparable credit quality) into a
segregated account of the International Equity Fund in an amount equal to the
value of the Fund's total assets committed to the consummation of speculative
forward foreign currency exchange contracts. If the value of the securities
placed in the segregated account declines, additional cash or securities will be
placed in the account on a daily basis so that the value of the account will
equal the amount of the Fund's commitments with respect to such contracts. The
segregated account will be marked-to-market on a daily basis. Although the
contracts are not
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presently regulated by the Commodity Futures Trading Commission ("CFTC"), the
CFTC may in the future assert authority to regulate these contracts. In such
event, the Fund's ability to utilize forward foreign currency exchange contracts
may be restricted.
While the International Equity Fund will enter into forward contracts to
reduce currency exchange rate risks, transactions in such contracts involve
certain other risks. Therefore, while the Fund may benefit from such
transactions, unanticipated changes in currency prices may result in a poorer
overall performance for the Fund than if it had not engaged in any such
transactions. Moreover, there may be imperfect correlation between the Fund's
portfolio holdings of securities quoted or denominated in a particular currency
and forward contracts entered into by the Fund. Such imperfect correlation may
cause the Fund to sustain losses that will prevent the Fund from achieving a
complete hedge or expose the Fund to risk of foreign exchange loss.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS
The International Equity Fund may write covered put and call options and
purchase put and call options on foreign currencies for the purpose of
protecting against declines in the U.S. dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. The Fund also
may use options on currency to proxy-hedge, which involves writing or purchasing
options on one currency to hedge against changes in exchange rates for a
different currency if the Adviser determines that there is a pattern of
correlation between the values of the currencies. In addition, the Fund may
purchase call or put options on a currency when the Adviser anticipates that the
foreign currency will appreciate or depreciate in value, but securities
denominated or quoted in that currency do not present attractive opportunities
and are not held by the Fund.
A call option written by the International Equity Fund obligates the Fund
to sell specified currency to the holder of the option at a specified price at
any time before the expiration date. A put option written by the Fund would
obligate the Fund to purchase specified currency from the option holder at a
specified price at any time before the expiration date. The writing of currency
options involves a risk that the Fund will, upon exercise of the option, be
required to sell currency subject to a call at a price that is less than the
currency's market value or be required to purchase currency subject to a put at
a price that exceeds the currency's market value.
The International Equity Fund may terminate its obligations under a call or
put option by purchasing an option identical to the one it has written. Such
purchases are referred to as "closing purchase transactions." The Fund would
also be able to enter into closing sale transactions in order to realize gains
or minimize losses on options purchased by it.
The International Equity Fund would normally purchase call options in
anticipation of an increase in the U.S. dollar value of currency in which
securities to be acquired by the Fund are quoted or denominated. The purchase of
a call option would entitle the Fund, in return for the premium paid, to
purchase specified currency at a specified price during the option period. The
Fund would ordinarily realize a gain if, during the option period, the value of
such currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise, the Fund would realize either no gain or a loss on
the purchase of the call option.
The International Equity Fund would normally purchase put options in
anticipation of a decline in the dollar value of currency in which securities in
its portfolio are quoted or denominated ("protective puts"). The purchase of a
put option would entitle the Fund, in exchange for the premium paid, to sell
specified currency at a specified price during the option period. The purchase
of protective puts is designed merely to offset or hedge against a decline in
the dollar value of the Fund's portfolio securities due to currency exchange
rate fluctuations. The Fund would ordinarily realize a gain if, during the
option period, the value of the underlying currency decreased below the exercise
price sufficiently to more than cover the premium and transaction costs;
otherwise, the Fund would 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 underlying currency.
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In addition to using options for the hedging purposes described above, the
International Equity Fund may use options on currency to seek to increase total
return. It may write (sell) covered put and call options on any currency in
order to realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, the Fund may forgo the opportunity to profit from an increase in the
market value of the underlying currency. Also, when writing put options, the
Fund accepts, in return for the option premium, the risk that it may be required
to purchase the underlying currency at a price in excess of the currency's
market value at the time of purchase.
The International Equity Fund would normally purchase call options to seek
to increase total return in anticipation of an increase in the market value of a
currency. It would ordinarily realize a gain if, during the option period, the
value of such currency exceeded the sum of the exercise price, the premium paid
and transaction costs. Otherwise, the Fund would realize either no gain or a
loss on the purchase of the call option. Put options may be purchased by the
Fund for the purpose of benefiting from a decline in the value of currencies
which it does not own. It would ordinarily realize a gain if, during the option
period, the value of the underlying currency decreased below the exercise price
sufficiently to more than cover the premium and transaction costs. Otherwise, it
would realize either no gain or a loss on the purchase of the put option.
SPECIAL RISKS ASSOCIATED WITH OPTIONS ON CURRENCY
An exchange traded options position may be closed out only on an options
exchange which provides a secondary market for an option of the same series.
Although the International Equity Fund will generally purchase or write only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time. For some options no secondary
market on an exchange may exist. In such event, it might not be possible to
effect closing transactions in particular options, with the result that a Fund
would have to exercise its options in order to realize any profit and would
incur transaction costs upon the sale of underlying securities pursuant to the
exercise of put options. If the Fund as a covered call option writer is unable
to effect a closing purchase transaction in a secondary market, it may not be
able to sell the underlying currency (or security quoted or denominated in that
currency) until the option expires or it delivers the underlying currency upon
exercise.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders.
The International Equity Fund may purchase and write over-the-counter
options to the extent consistent with its limitation on investments in illiquid
investments. Trading in over-the-counter options is subject to the risk that the
other party will be unable or unwilling to perform under or close out options
purchased or written by the Fund.
CURRENCY SWAPS
The International Equity Fund may enter into currency swaps for both
hedging purposes and to seek to increase total return. To the extent that swaps
are entered into for good faith hedging purposes (or are offset by a segregated
account as described below), the Trust and the Adviser believe that swaps do not
constitute senior securities as defined in the 1940 Act and, accordingly, will
not treat them as being subject to the Fund's borrowing restrictions. The net
amount of the excess, if any, of the Fund's obligations over its entitlement
with respect to each currency swap will be accrued on a daily basis and an
amount of cash or liquid high grade debt securities (i.e., securities rated in
one of the top three ratings categories by Moody's or S&P, or, if unrated,
deemed by the Adviser to be of comparable credit quality) having an aggregate
net asset value at least equal to such accrued excess will be maintained in a
segregated account by the Trust's custodian. The Fund will not enter into any
currency swap unless the credit quality of the unsecured senior debt or the
claims-paying ability of the other party thereto is considered to be investment
grade by the Adviser. If there is a default by the other party to such a
transaction, the Trust will have contractual remedies pursuant to the agreement
applicable to the transaction. The swap market has grown substantially in recent
years with a large number of banks and
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investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with the markets for other similar instruments
which are traded in the interbank market. Nevertheless, the staff of the
Securities and Exchange Commission ("SEC") takes the position that currency
swaps are illiquid investments subject to the Fund's limitation on such
investments.
OPTIONS ON SECURITIES AND SECURITIES INDICES
The Government Securities, S&P 500 Index, International Equity and REIT
Index Funds may write exchange-traded covered call and put options on or
relating to specific securities in order to earn additional income or, in the
case of a call written, to minimize or hedge against anticipated declines in the
value of its portfolio securities. The Asset Allocation Fund may write covered
call options on its portfolio securities in amounts up to 10% of its total
assets in order to earn additional income or to minimize or hedge against
anticipated declines in the value of those securities. All call options written
by these Funds are covered, which means that the Fund will own the securities
subject to the option as long as the option is outstanding. All put options
written by these Funds are covered, which means that the Fund has deposited with
the Trust's custodian cash, U.S. Government securities or other high-grade
liquid debt securities with a value at least equal to the exercise price of the
option. Call and put options written by a Fund may also be covered to the extent
that the Fund's liabilities under such options are offset by its rights under
call or put options purchased by the Fund and call options written by a Fund may
also be covered by depositing cash or securities with the Trust's custodian in
the same manner as written puts are covered.
Through the writing of a covered call option, a Fund receives premium
income but obligates itself to sell to the purchaser of such an option the
particular security underlying the option at a specified price at any time prior
to the expiration of the option period, regardless of the market value of the
security during this period. Through the writing of a covered put option, a Fund
receives premium income but obligates itself to purchase a particular security
underlying the option at a specified price at any time prior to the expiration
of the option period, regardless of market value during the option period.
The S&P 500 Index, International Equity and REIT Index Funds may each, in
accordance with its investment objective and investment program, also write
exchange-traded covered call and put options on stock indices. These Funds may
write such options for the same purposes as each may engage in such transactions
with respect to individual portfolio securities -- that is, to generate
additional income or as a hedging technique to minimize anticipated declines in
the value of the Fund's securities. In economic effect, a stock index call or
put option is similar to an option on a particular security, except that the
value of the option depends on the weighted value of the group of securities
comprising the index, rather than a particular security, and settlements are
made in cash rather than by delivery of a particular security.
If a Fund writes an option which expires unexercised or is closed out by
such Fund at a profit, it will retain the premium received for the option, which
will represent a capital gain to the Fund. If the price of the underlying
security moves adversely to the Fund's position, the option may be exercised and
the Fund, as the writer of the option, will be required to sell or purchase the
underlying security at a disadvantageous price, which may only be partially
offset by the amount of premium received.
When a Fund writes an option on an index, and the underlying index moves
adversely to its position, the option may be exercised. Upon such exercise, the
Fund, as the writer of the option, will be required to pay in cash an amount
equal to the difference between the exercise settlement value of the underlying
index and the exercise price of the option, multiplied by a specified index
"multiplier."
Call or put options on a stock index may be written at an exercise or
"strike" price which is either below or above the current value of the index. If
the exercise price at the time of writing the option is below the current value
of the index for a call option or above the current value of the index for a put
option, the option is considered to be "in the money." In such a case, a Fund
will cover such options written by segregating with its custodian or pledging to
its futures commission merchant ("FCM") as collateral cash, U.S. Government or
other high-grade, short-term debt obligations equal in value to the amount by
which the option written is in the money, times the multiplier, times the number
of contracts.
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Stock indices for which options are currently traded include the S&P 500
Index, Value Line Index, National OTC Index, Major Market Index, and NYSE Beta
Index. The Funds may also use options on such other indices as may now or in the
future be available.
The S&P 500 Index, International Equity and REIT Index Funds may also
purchase put or call options on securities indices in order to (i) hedge against
anticipated changes in stock prices generally that may adversely affect the
prices of securities that they intend to purchase at a later date, (ii) hedge
their investments against an anticipated decline in value, or (iii) attempt to
reduce the risk of missing a general market advance. In the event that the
anticipated changes in stock prices occur, these Funds may be able to offset the
resulting adverse effect, in whole or in part, through the options purchased.
The premium paid for a put or call option plus any transaction costs will
reduce the benefit, if any, realized by a Fund upon exercise or liquidation of
the option, and, unless the price of the underlying securities index changes
sufficiently, the option may expire without value to the Fund. To close option
positions purchased by it, the S&P 500 Index, International Equity and REIT
Index Funds may sell put or call options identical to options previously
purchased, which could result in a net gain or loss depending on whether the
amount received on the sale, less all transaction costs, is more or less than
the premium paid on the put or call option purchased.
All the Non-Money Market Funds may use options traded on a national
securities exchange. Only the Government Securities Fund, the International
Equity Fund and the REIT Index Fund, however, may use over-the-counter (i.e.,
unlisted) options. Options traded in the over-the-counter market may not be as
actively traded as those on an exchange. Accordingly, it may be more difficult
to value such options. In addition, it may be more difficult to enter into
closing transactions with respect to options traded over-the-counter. In this
regard, each of the Government Securities Fund, the International Equity Fund
and the REIT Index Fund may enter into contracts with the primary dealers with
which it writes over-the-counter options. The contracts will provide that each
such Fund has the absolute right to repurchase an option it writes at any time
at a repurchase price which represents the fair market value of such option, as
determined in good faith through negotiations between the parties, but which in
no event will exceed a price determined pursuant to a formula contained in the
contract. Although the specific details of the formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by the Fund, plus the amount, if any, of the
option's intrinsic value (i.e., the amount the option is "in-the-money"). The
formula will also include a factor to account for the difference between the
price of the security and the strike price of the option if the option is
written "out-of-the-money." Although the specific details of the formula may
vary with different primary dealers, each contract will provide a formula to
determine the maximum price at which the Fund can repurchase the option at any
time. The Adviser has established standards of creditworthiness for these
primary dealers.
FINANCIAL FUTURES CONTRACTS
The Government Securities, S&P 500 Index, International Equity and REIT
Index Funds, each in accordance with its investment objective, investment
program, policies, and restrictions, may purchase and sell exchange-traded
financial futures contracts as a hedge to protect against anticipated changes in
prevailing interest rates or overall stock prices, or to efficiently and in a
less costly manner implement either increases or decreases in exposure to the
equity or government bond markets. Likewise, the International Equity Fund may
purchase and sell exchange-traded currency futures contracts as a hedge to
protect against anticipated adverse changes in currency exchange rates. All of
these Funds also may purchase and sell exchange-traded financial futures
contracts to earn additional income or otherwise seek to increase total return.
Financial futures contracts consist of interest rate futures contracts,
stock index futures contracts and currency futures contracts. An interest rate
futures contract is a contract to buy or sell specified debt securities at a
future time for a fixed price. Some interest rate futures contracts are based on
a particular interest rate or rate index and are cash settled at expiration by
applying the rate or rate index to a prescribed notional principal amount. A
stock index futures contract is based on a specified index of stocks and not the
stocks themselves. A
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currency futures contract is a contract to purchase or sell a specific amount of
foreign currency at a future time at a fixed price.
An interest rate futures contract binds the seller either to deliver to the
purchaser on a specified future date a specified quantity on one of several
listed financial instruments, against payment of a settlement price specified in
the contract, or the parties to settle in cash based upon the interest rate or
rate index at the expiration of the contract. A public market currently exists
for futures contracts the prices of which are related to interest rates on,
among other instruments, long-term U.S. Treasury Bonds, three-month U.S.
Treasury Bills, short-term U.S. Treasury Notes and bank certificates of deposit.
Stock index futures contracts bind purchaser and seller to deliver, at a
future date specified in the contract, a cash amount equal to a multiple of the
difference between the value of a specified stock index on that date and the
settlement price specified by the contract. That is, the seller of the futures
contract must pay and the purchaser would receive a multiple of any excess of
the value of the index over the settlement price, and conversely, the purchaser
must pay and the seller would receive a multiple of any excess of the settlement
price over the value of the index. A public market currently exists for stock
index futures contracts based on, among other indices, the S&P 500 Index, the
New York Stock Exchange Composite Index, the Value Line Stock Index and the
Major Market Index. It is expected that financial instruments related to
broad-based indices, in addition to those for which futures contracts are
currently traded, will in the future be the subject of publicly-traded futures
contracts. Each Non-Money Market Fund (except the Asset Allocation Fund) may use
those indices which are appropriate to its hedging strategies.
A financial futures contract is an agreement to buy or sell a security or
currency (or deliver a final cash settlement price, in the case of a contract
relating to an index or otherwise not calling for physical delivery of a
specified security) for a set price in the future. Exchange-traded futures
contracts are traded on or subject to the rules of boards of trade which have
been designated "contracts markets" by the CFTC.
Positions taken in the futures markets are not normally held until delivery
or cash settlement is required, but instead are liquidated through offsetting
transactions which may result in a gain or a loss. While futures positions taken
by a Non-Money Market Fund (except the Asset Allocation Fund) are usually
liquidated in this manner, a Fund may instead make or take deliver of underlying
securities whenever it appears economically advantageous to do so. A clearing
organization associated with the relevant exchange assumes responsibility for
closing out transactions and guarantees that, as between the clearing members of
the exchange, the sale and purchase obligations will be performed with regard to
all positions that remain open at the termination of the contract.
When financial futures contracts are entered into by a Non-Money Market
Fund (except the Asset Allocation Fund), either as the purchaser or the seller
of such contracts, the Fund is required to deposit with its custodian in a
segregated account in the name of the FCM an initial margin of cash or U.S.
Treasury bills equal to as much as 5% to 10% or more of the contract settlement
price. The nature of initial margin requirements in futures transactions differs
from traditional margin payments made in securities transactions in that initial
margins for financial futures contracts do not involve the borrowing of funds by
the customer to finance the transaction. Instead, a customer's initial margin on
a financial futures contract represents a good faith deposit securing the
customer's contractual obligations under the financial futures contract. The
initial margin deposit is returned, assuming these obligations have been met,
when the financial futures contract is terminated. In addition, subsequent
payments to and from the FCM, called "variation margin," are made on a daily
basis as the price of the underlying security or stock index fluctuates
reflecting the change in value in the long (purchase) or short (sale) positions
in the financial futures contract, a process known as "marking to market."
Financial future contracts generally are not entered into to acquire the
underlying asset and generally are not held to term. Prior to the contract
settlement date, a Non-Money Market Fund will normally close all futures
positions by entering into an off-setting transaction which operates to cancel
the position held, and which usually results in a profit or loss.
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OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Government Securities, S&P 500 Index, International Equity and REIT
Index Funds may also purchase call and put options on financial futures
contracts and write covered call options on financial futures contracts of the
types which the particular Fund is authorized to enter into. The S&P 500 Index
and REIT Index Funds also may write covered put options on stock index futures
contracts. Covered put and call options on futures contracts will be covered in
the same manner as covered options on securities and securities indices. The
Funds may invest in such options for the same hedging purposes as they may each
purchase or sell financial futures contracts or in order to earn additional
income or otherwise seek to increase total return.
Options on financial futures contracts are traded on contract markets that
are licensed and regulated by the CFTC. A call option on a financial futures
contract gives the purchaser the right, in return for the premium paid, to
purchase a financial futures contract (similar to a "long" position) at a
specified exercise price at any time before the option expires. A put option
gives the purchaser the right, in return for the premium paid, to sell a
financial futures contract (similar to a "short" position), for a specified
exercise price, at any time before the option expires.
Unlike entering into a financial futures contract itself, purchasing
options on financial futures contracts allows a buyer to decline to exercise the
option, thereby avoiding any loss beyond foregoing the purchase price (or
"premium") paid for the options and transaction costs. Therefore, the purchase
of options on financial futures contracts may be a preferable hedging strategy
when a Fund desires maximum flexibility. Whether, in order to achieve a
particular objective, a Fund enters into a financial futures contract, on the
one hand, or an option contract on a financial futures contract, on the other,
will depend on all the circumstances, including the relative costs, liquidity,
availability and capital requirements of such financial futures and options
contracts. Each Fund will consider the relative risks involved, which may be
quite different. These factors, among others, will be considered in light of
market conditions and the particular objective to be achieved.
CERTAIN ADDITIONAL RISKS OF OPTIONS AND FINANCIAL FUTURES CONTRACTS
In addition to the risks described in the Prospectus, the use of options
and financial futures contracts may entail the following risks. First, although
such instruments when used by a Fund are intended to correlate with the Fund's
portfolio securities, in many cases the options or financial futures contracts
used may be based on securities or currencies which, or stock indices the
components of which, are not identical to the portfolio securities owned or
intended to be acquired by the Fund. Second, due to supply and demand imbalances
and other market factors, the price movements of financial futures contracts,
options thereon, and stock index options may not necessarily correspond exactly
to the price movements of the securities, currencies or stock indices on which
such instruments are based. Accordingly, there is a risk that a Fund's
transactions in those instruments will not in fact offset the impact on the Fund
of adverse market developments in the manner or to the extent contemplated or
that such transactions will result in losses to the Fund which are not offset by
gains with respect to corresponding portfolio securities owned or to be
purchased by that Fund.
To some extent, these risks can be minimized by careful management of
hedging activities. For example, where price movements in a financial futures or
option contract are expected to be less volatile than price movements in the
related portfolio securities owned or intended to be acquired by a Fund, it may,
in order to compensate for this difference, use an amount of financial futures
or option contracts which is greater than the amount of such portfolio
securities. Similarly, where the price movement of a financial futures or option
contract is anticipated to be more volatile, a Fund may use an amount of such
contract which is smaller than the amount of portfolio securities to which such
contracts relate.
The risk that the hedging technique used will not actually or entirely
offset an adverse change in the value of a Fund's securities is particularly
relevant to financial futures contracts and options written on stock indices. A
Fund entering into a futures purchase contract potentially could lose any or all
of an amount equal to the contract's settlement price multiplied by the
contract's multiplier. In entering into a futures sale contract, a Fund could
potentially lose an amount equal to the excess of the contract's value (marked
to market daily) over the contract's settlement price multiplied by the
contract's multiplier. In writing options on stock indices, a Fund could
potentially lose a sum equal to the excess of the value of the index (marked to
market daily)
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over the exercise price or the excess of the exercise price over the value of
the index. In addition, because financial futures contracts require delivery at
a future date of either a specified security or an amount of cash equal to a
multiple of the difference between the value of a specified stock index on that
date and the settlement price, an algebraic relationship exists between any
price movement in the underlying security or index and the potential cost of
settlement to a Fund. A small increase or decrease in the value of the
underlying security or stock index can, therefore, result in a much greater loss
to the Fund.
Stock index call options written also pose another risk as hedging tools.
Because exercises of stock index options are settled in cash, there is an
inherent timing risk that the value of a Fund's securities "covering" a stock
index call option written by it may decline during the time between exercise of
the option by the option holder and notice to the Fund of such exercise (usually
one day or more), thereby requiring the Fund to use additional assets to settle
the transaction. This risk is not present in the case of covered call options on
individual securities, which are settled by delivery of the actual securities.
Although the Funds intend to establish positions in these instruments only
when there appears to be an active market, there is no assurance that a liquid
market for such instruments will exist when they seek to "close out" (i.e.
terminate) a particular financial futures contract or option position. This is
particularly relevant for over-the-counter options. Trading in such instruments
could be interrupted, for example, because of a lack of either buyers or
sellers. In addition, the futures and options exchanges may suspend trading
after the price of such instruments has risen or fallen more than the maximum
amount specified by the exchange. Exercise of options could also be restricted
or delayed because of regulatory restrictions or other factors. A Fund may be
able, by adjusting investment strategy in the cash or other contract markets, to
offset to some extent any adverse effects of being unable to liquidate a hedge
position. Nevertheless, in some cases, a Fund may experience losses as a result
of such inability. Therefore it may have to liquidate other more advantageous
investments to meet its cash needs.
In addition, FCMs or brokers in certain circumstances will have access to
each Fund's assets posted as margin in connection with these transactions as
permitted under the 1940 Act. The Funds will use only FCMs or brokers in whose
reliability and financial soundness they have full confidence and have adopted
certain other procedures and limitations to reduce the risk of loss with respect
to any assets which brokers hold or to which they may have access. Nevertheless,
in the event of a broker's insolvency or bankruptcy, it is possible that a Fund
could experience a delay or incur costs in recovering such assets or might
recover less than the full amount due. Also, the value of such assets could
decline by the time the Fund could effect such recovery.
The success of any Fund in using hedging techniques depends, among other
things, on the Adviser's ability to predict the direction and volatility of
price movements in both the futures and options markets as well as the
securities markets and on its ability to select the proper type, time and
duration of hedges. There can be no assurance that these techniques will produce
their intended results. In any event, the Adviser will use financial futures
contracts, options thereon and stock index options only when it believes the
overall effect is to reduce, rather than increase, the risks to which a Fund is
exposed. Hedging transactions also, of course, may be more, rather than less,
favorable to a Fund than originally anticipated.
BORROWING
From time to time the International Equity Fund may increase its ownership
of investments by borrowing from banks on an unsecured basis and investing the
borrowed funds, subject to the restrictions stated in the Prospectus. The Fund
may not borrow more than 10% of the value of its assets for this purpose and may
not borrow unless the value of its assets, less its liabilities other than
borrowing, is equal to at least 300% of all borrowings, including any additional
proposed borrowings. If the value of the Fund's assets so computed should fail
to meet the 300% asset coverage requirement, the Fund must, within three days,
reduce its borrowing to the extent necessary to meet the coverage requirement
and may have to sell a portion of its investments at an inopportune time.
Borrowing for investment increases both investment opportunity and risk.
Interest on borrowed money is an expense that the Fund would not otherwise
incur, so that it may have little or no net investment income during periods of
borrowing. Since substantially all of the Fund's assets fluctuate in value
whereas borrowing obligations are fixed, when the Fund has outstanding
borrowings, its net asset
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value tends to increase and decrease more when portfolio investments increase
and decrease, respectively, than would otherwise be the case.
LOWER-RATED, LOWER QUALITY DEBT INSTRUMENTS
Up to 30% of the total assets of the Asset Allocation Fund may be invested
in debt instruments that are unrated or are rated lower than the four highest
rating categories assigned by Moody's or S&P. Furthermore, debt instruments that
are rated in the four highest categories assigned by Moody's or S&P (i.e.,
investment grade debt instruments), and especially those which are investment
grade but are not high quality (i.e., rated Baa by Moody's or BBB by S&P) may,
after purchase by the Fund, have their ratings lowered due to the deterioration
of the issuer's financial position.
RISKS OF LOWER-RATED, LOWER QUALITY DEBT INSTRUMENTS
Lower-rated fixed income securities (i.e., those rated Ba or lower by
Moody's or BB or lower by S&P) are considered, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation and will generally involve more
credit risk than securities in the higher rated categories. Reliance on credit
ratings entails greater risks with regard to lower-rated securities than it does
with regard to higher-rated securities and the Adviser's success is more
dependent upon its own credit analysis with regard to lower-rated securities
than is the case with regard to higher-rated securities. The market values of
such securities tend to reflect individual corporate developments to a greater
extent than do higher-rated securities, which react primarily to fluctuations in
the general level of interest rates. Such lower-rated securities also tend to be
more sensitive to economic conditions than are higher-rated securities. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, regarding lower-rated bonds may depress prices and liquidity for such
securities. To the extent the Asset Allocation Fund invests in these securities,
factors adversely affecting the market value of high-yielding securities will
adversely affect the Fund's net asset value. In addition, the Asset Allocation
Fund may incur additional expenses to the extent it is required to seek recovery
upon a default in the payment of principal or interest on its portfolio
holdings. Although some risk is inherent in all securities ownership, holders of
fixed-income securities have a claim on the assets of the issuer prior to the
holders of common stock. Therefore, an investment in fixed-income securities
generally entails less risk than an investment in common stock of the same
issuer.
High yielding securities may be issued by corporations in the growth stage
of their development. They may also be issued in connection with corporate
reorganization or as a part of a corporate takeover. Companies that issue such
high-yielding securities are often highly leveraged and may not have available
to them more traditional methods of financing. Therefore, the risk associated
with acquiring the securities of such issuers generally is greater than is the
case with higher rated securities. For example, during an economic downturn or a
sustained period of rising interest rates, highly leveraged issuers of
high-yielding securities may experience financial stress. During such periods,
such issuers may not have sufficient revenues to meet their interest payment
obligations. The issuer's ability to service its debt obligations may also be
adversely affected by specific corporate developments or the issuer's inability
to meet specific projected business forecasts, or the unavailability of
additional financing. The risk of loss due to default by the issuer is
significantly greater for the holders of high-yielding securities because such
securities are generally unsecured and are often subordinated to other creditors
of the issuer.
High yielding securities frequently have call or buy-back features that
would permit an issuer to call or repurchase the security from the Fund. If a
call were exercised by the issuer during a period of declining interest rates,
the Fund would likely have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund.
The Asset Allocation Fund may have difficulty disposing of certain
high-yielding securities for which there is a thin trading market. Because not
all dealers maintain markets in all high-yielding securities, there is no
established retail secondary market for many of these securities, and the Trust
anticipates that they could be sold only to a limited number of dealers or
institutional investors. To the extent there is a secondary trading
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market for high-yielding securities, it is generally not as liquid as that for
higher-rated securities. The lack of a liquid secondary market for certain
securities may make it more difficult for the Trust to obtain accurate market
quotations for purposes of valuing the Fund's assets. Market quotations are
generally available on many high-yield issues only from a limited number of
dealers and may not necessarily represent firm bids of such dealers or prices
for actual sales. When market quotations are not readily available, lower-rated
securities must be valued by (or under the direction of) the Board of Trustees
of the Trust. This valuation is more difficult and judgment plays a greater role
in such valuation when there is less reliable objective data available.
The Asset Allocation Fund may acquire high-yielding securities that are
sold without registration under the federal securities laws and therefore carry
restrictions on resale. This Fund may incur special costs in disposing of such
securities, but will generally incur no costs when the issuer is responsible for
registering the securities. The Fund also may acquire high-yielding securities
during an initial underwriting. Such securities involve special risks because
they are new issues. The Trust has no arrangement with any person concerning the
acquisition of such securities, and the Adviser will carefully review the credit
and other characteristics pertinent to such new issues.
From time to time, there have been proposals for legislation designed to
limit the use of certain high-yielding securities in connection with leveraged
buy-outs, mergers and acquisitions, or to limit the deductibility of interest
payments on such securities. Such proposals if enacted into law could reduce the
market for such securities generally, could negatively affect the financial
condition of issuers of high-yield securities by removing or reducing a source
of future financing, and could negatively affect the value of specific
high-yield issues. However, the likelihood of any such legislation or the effect
thereof is uncertain.
COVERED CALL OPTIONS
The Asset Allocation Fund may write covered call options that are traded on
a national securities exchange with respect to securities in the Fund (ensuring
that at all times the Fund will have the securities which it may be obligated to
deliver if the option is exercised). The Fund may write call options on its
securities in an attempt to realize a greater current return than would be
realized on the securities alone or to provide greater flexibility in disposing
of such securities. As the writer of a call option, the Fund receives a premium
for undertaking the obligation to sell the underlying security at a fixed price
during the option period if the option is exercised. So long as the Fund remains
obligated as a writer of a call, it forgoes the opportunity to profit from
increases in the market price of the underlying security above the call price of
the option, except insofar as the premium represents such a profit.
The Asset Allocation Fund may also enter into "closing purchase
transactions" in order to terminate its obligation as a writer of a call option
prior to the expiration of the option. Although writing only those call options
that are traded on a national securities exchange increases the likelihood of
being able to make closing purchase transactions, there is no assurance that the
Fund will be able to effect such transactions at any particular time or at any
acceptable price. The writing of call options could result in increases in the
turnover rate of the Fund, especially during periods when market prices of the
underlying securities appreciate, which could affect brokerage costs.
GNMA CERTIFICATES
The Asset Allocation and Government Securities Funds may each invest up to
50% of its net assets in GNMA Certificates. GNMA Certificates are securities
representing part ownership of a pool of mortgage loans. These loans, issued by
lenders such as mortgage bankers, commercial banks and savings and loan
associations, are insured either by the Federal Housing Administration or by the
Veterans Administration. Each pool of mortgage loans is assembled and, after
being approved by GNMA, is sold to investors through broker-dealers in a form of
certificates representing participation in the pool. GNMA guarantees the timely
payment of principal and interest of each mortgage in the pool and its guarantee
is backed by the full faith and credit of the U.S. Government. GNMA Certificates
differ from bonds in that a borrower pays the principal over the term of the
loan rather than in a lump sum at maturity. GNMA Certificates are called "pass-
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through" certificates because both principal and interest payments on the
mortgages (including prepayments) are passed through to the holder of the
certificate.
The average life of GNMA Certificates varies with the maturities of the
underlying mortgages. The Asset Allocation and the Government Securities Funds
may each use principal payments it receives to purchase additional GNMA
Certificates or other permitted investments. Prepayments of any mortgages in the
pool will usually result in the return of the greatest part of principal
invested well before the maturity of the mortgages in the pool. The volume of
such prepayments of principal in a given pool of mortgages will influence the
actual yield of the GNMA Certificate. Also, the Asset Allocation and the
Government Securities Funds may each reinvest principal repaid to it in
instruments whose yield may be higher or lower than that of the GNMA Certificate
had such prepayments not been made.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS. Each Non-Money Market Fund has
adopted a number of fundamental policies restricting the investment of its
assets, which may not be changed without the affirmative vote of the holders of
a majority of such Fund's outstanding voting securities. The "affirmative vote
of the holders of a majority of such Fund's outstanding securities" has the
meaning set forth under "Money Market Fund Investments, Investment Policies and
Restrictions -- Investment Restrictions" above. Pursuant to the fundamental
investment restrictions of each Non-Money Market Fund other than the Asset
Allocation Fund, except where otherwise noted, each such Fund may not:
(a) issue senior securities except: (i) to the extent that borrowing
under paragraph (h) below exceeding 5% may be deemed to be senior
securities under the 1940 Act, or (ii) in connection with investments of
certain Funds in options, futures and swap contracts;
(b) as to 75% of its total assets, invest more than 5% of its total
assets in the securities of any one issuer (other than U.S. Government
securities, as defined in Section 2(a)(16) of the 1940 Act) or invest in
more than 10% of the outstanding voting securities of any one issuer;
(c) invest more than 25% of its total assets in the securities of
issuers primarily engaged in the same industry, other than U.S. Government
securities; utilities will be divided according to their services; for
example, gas, gas transmission, electric and telephone each will be
considered a separate industry for purposes of this restriction. This
restriction does not apply to the REIT Index Fund;
(d) purchase real estate or any interest therein, except through the
purchase of corporate or certain government securities (including
securities secured by a mortgage or a leasehold interest or other interest
in real estate). A security issued by a real estate or mortgage investment
trust is not treated as an interest in real estate;
(e) purchase any securities on margin except: (i) that a Fund may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities, and (ii) in connection with
investments in options, futures and swap contracts;
(f) make loans, except as provided in (g) below and except through the
purchase of obligations in private placements (the purchase of
publicly-traded obligations not being considered the making of a loan);
(g) lend its portfolio securities in excess of 20% of its total
assets, taken at market value at the time of the loan; and
(h) borrow amounts in excess of 10% (20% in the case of the S&P 500
Index Fund and the REIT Index Fund) of its total assets, taken at market
value at the time of the borrowing, and then only from banks as a temporary
measure for extraordinary or emergency purposes or to meet redemption
requests that might otherwise require the untimely disposition of
securities, and not for investment or leveraging. The International Equity
Fund, however, may borrow amounts up to an additional 10% of its net asset
value from banks to increase its holdings of portfolio investments;
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(i) mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by such Fund
except: (i) as may be necessary in connection with borrowing mentioned in
(h) above, and then such mortgaging, pledging or hypothecating may not
exceed 10% of the Fund's total assets, taken at market value at the time
thereof, or (ii) in connection with investment of certain Funds in options,
futures and swap contracts;
(j) underwrite securities of other issuers except insofar as the Trust
may be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities;
(k) invest more than 10% of its net assets (15% for the International
Equity Fund and REIT Index Fund) in repurchase agreements maturing in more
than seven days and other illiquid investments; and
(l) purchase or sell interests in oil, gas or other mineral
exploration or development programs, commodities, or commodity contracts,
except that such Funds may invest in financial futures contracts and
related options;
Pursuant to the fundamental investment restrictions of the Asset Allocation
Fund, such Fund may not:
(a) issue senior securities (except to the extent that borrowings
under paragraph (h) below exceeding 5% of the value of the Fund's total
assets may be deemed to constitute senior securities under the 1940 Act);
however, this prohibition shall not limit the Fund's ability to write
covered call options;
(b) purchase real estate or any interest therein, except through the
purchase of corporate or certain government securities (including
securities secured by a mortgage or a leasehold interest or other interest
in real estate). A security issued by a real estate or mortgage investment
trust is not treated as an interest in real estate;
(c) purchase any securities on margin (except that, subject to the
borrowing limitation in (h), the Fund may obtain such short-term credit as
may be necessary for the clearance of purchases and sales of portfolio
securities), or make short sales of securities or maintain a short
position. However, this prohibition shall not limit the Fund ability to
write covered call options;
(d) underwrite securities of other issuers (except insofar as the Fund
or the Trust might be deemed an underwriter under the Securities Act of
1933 in certain resales of portfolio securities held by the Fund;
(e) invest more than 25% of the value of its total assets in the
securities of issuers having their principal activity in any particular
industry, other than U.S. Government securities, as defined in Section 2(a)
(16) of the 1940 Act. For the purpose of defining the term "particular
industry," utilities will be divided according to their services. For
example, gas, gas transmission, electric and telephone each will be
considered a separate industry;
(f) as to 75% of its total assets, invest more than 5% of its total
assets in the securities of any one issuer (except that this restriction
shall not apply to U.S. Government securities) or invest in more than 10%
of the outstanding voting securities of any one issuer;
(g) make loans, except that the Fund may enter into repurchase
agreements as described above or in the Prospectus, and the Fund may lend
its portfolio securities in amounts up to 20% of the value of its total
assets;
(h) borrow money, except from banks for temporary or emergency
purposes, including the meeting of redemption requests which might
otherwise require the untimely disposition of securities. Borrowing in the
aggregate may not exceed 10% of the value of the Fund's total assets at the
time the borrowing is made, and the Fund will not make additional
investments during any period that borrowings exceed 5% of the value of its
total assets. This limitation on borrowing money shall not limit the Fund's
ability to write covered call options;
(i) pledge, hypothecate, mortgage or transfer as security for
indebtedness any securities held by the Fund, except in an amount of not
more than 10% of the value of its total net assets, and then only to secure
borrowings permitted by (c) and (h);
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(j) invest in illiquid securities, including repurchase agreements
maturing in more than seven days, if, as a result thereof, more than 15% of
the value of the Fund's total assets would be invested in such illiquid
securities;
(k) invest in time deposits maturing in more than seven days. In
addition, time deposits maturing in two business days to seven calendar
days may not exceed 10% of the value of the Fund's total assets; and
(l) purchase or sell interests in oil, gas, or other mineral
exploration or development programs, commodities, or commodity contracts,
except that the Fund may purchase securities of issuers which invest or
deal in any of the above, provided that such securities meet the Fund other
investment criteria.
With respect to fundamental investment restriction (j) of the Asset
Allocation Fund set forth above, the Trust has been advised by the SEC that,
under the SEC's guidelines, the Asset Allocation Fund may not invest more than
15% of the value of such Fund's net assets in illiquid securities. Accordingly,
in order to comply with the SEC's guidelines, as a matter of non-fundamental
policy such Fund will not invest in illiquid securities, including repurchase
agreements maturing in more than seven days, if, as a result thereof, more than
15% of the value of such Fund's net assets would be invested in such illiquid
securities. The Trust has undertaken to the SEC that it will comply with this
non-fundamental policy until such time as the shareholders of the Asset
Allocation Fund approve an amendment to the fundamental policies of such Fund
incorporating into such fundamental policies this non-fundamental policy.
NON-FUNDAMENTAL RESTRICTIONS. In addition to the fundamental investment
restrictions set forth above, each Non-Money Market Fund is subject to the
following additional restrictions in implementing its investment policy. These
additional restrictions are not fundamental and may be changed by the Trustees
without shareholder approval. These Funds are subject to the same
non-fundamental investment restrictions as apply to the Money Market Fund
(described above) except as modified below.
(a) each Non-Money Market Fund will not purchase securities of other
investment companies if, as a result thereof, the Fund would own more than
3% of the total outstanding voting stock of any one investment company, or
more than 5% of the Fund's assets would be invested in any one investment
company, or more than 10% of the Fund's total assets would be invested in
securities of investment companies. These limitations do not apply to
securities acquired in connection with a merger, consolidation, acquisition
or reorganization, or by purchase in the open market of securities of
closed-end investment companies where no underwriter or dealer's commission
or profit, other than customary broker's commission, is involved, and so
long as immediately thereafter not more than 10% of such Fund's total
assets, taken at market value, would be invested in such securities;
(b) each Non-Money Market Fund will not invest more than 30% of its
total assets, measured at the time of investment, in debt securities (other
than U.S. Government securities) that are rated lower than the four highest
rating categories by Moody's or S&P or are unrated. This restriction shall
apply to such unrated securities as the Adviser may determine, pursuant to
procedures adopted by the Trustees to be of comparable quality to those
securities assigned a rating in one of the four highest categories;
(c) each Non-Money Market Fund (other than the S&P 500 Index Fund and
the REIT Index Fund) will not purchase or retain the securities of any
issuer if any officer or Trustee of the Trust, the Adviser or any
affiliated person of the Trust or the Adviser beneficially own more than
0.5% of the securities of such issuer or together in the aggregate own more
than 5% of the securities of such issuer;
(d) the S&P 500 Index Fund, Government Securities Fund, International
Equity Fund and REIT Index Fund will not enter into a speculative financial
futures contract (by exercise of any option or otherwise) or acquire any
options thereon, if, immediately thereafter, the total of the initial
margin deposits required with respect to all open speculative futures
positions, plus the sum of the premiums paid for all unexpired options on
futures contracts (less any in-the-money amount at the time of purchase)
would exceed 5% of the market value of its total assets (after taking into
account unrealized profits and losses on any such futures contracts or
options it has entered into);
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<PAGE> 72
(e) Non-fundamental investment restriction (a) of the Money Market
Fund is not applicable to the Government Securities, S&P 500 Index, REIT
Index or International Equity Fund; and
(f) Non-fundamental investment restriction (b) of the Money Market
Fund is not applicable to the International Equity Fund.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust, their addresses, ages as of June 1,
1996, and their principal occupations for the last five years are set forth
below. Those individuals designated with an asterisk are "interested persons" of
the Trust, as the term is defined in Section 2 (a)(19) of the 1940 Act.
<TABLE>
<CAPTION>
NAME POSITION AGE BUSINESS EXPERIENCE
- -------------------------------- -------------- --- -----------------------------------------------
<S> <C> <C> <C>
Michael A. Cavataio............. Trustee 52 Director and Vice-Chairman and Adviser, Pioneer
1750 East Golf Road Financial Services. President, Rockford
Schaumburg, IL 60173 Lillian's Inc., 1984 to 1995. Real estate
developer. Director, Today's Bancorp. Director,
Today's Bank East.
Michael A. Conway*.............. President and 49 President, Aon Advisors, Inc., Senior Vice
123 North Wacker Drive Trustee President and Senior Investment Officer, Aon
29th Floor Corporation
Chicago, IL 60606
Carleton D. Pearl............... Trustee 52 Senior Vice President & Treasurer, McDonald's
McDonald's Corporation Corporation
McDonald's Plaza
Oak Brook, IL 60521
Richard J. Peters............... Trustee 48 Vice President, Treasurer and Director, Penske
13400 W. Outer Drive Corporation. President and Director, Penske
Detroit, MI 48239 Motorsports, Inc.
Donald W. Phillips.............. Trustee 47 Chairman, Equity Institutional Investors, Inc.
2 North Riverside Plaza and Executive Vice President, Equity Group
Chicago, IL 60606 Investments, Inc. Director, Capsure, Inc.
Director, Sit Mutual Funds
Paul Rabin*..................... Treasurer 57 Treasurer, Aon Advisors, Inc., Combined
123 North Wacker Drive Insurance Company of America, and Assistant
29th Floor Treasurer of Aon Corporation
Chicago, IL 60606
Karl W. Krause*................. Secretary 45 Counsel, Aon Corporation, Secretary, Aon
123 North Wacker Drive Securities Corporation and Aon Management
29th Floor Funds, Inc.
Chicago, IL 60606
Andrew Kubeck*.................. Controller 43 Assistant Vice President -- Finance, Project
123 North Wacker Drive Manager, Aon Corporation in 1987 and 1995,
29th Floor Manager, Investment Accounting Department, Aon
Chicago, IL 60606 Corporation, since 1992
</TABLE>
Trustees or officers who are interested persons of the Trust do not receive
any compensation from the Trust for their services to the Trust. Effective as of
April 26, 1996, Trustees who are not interested persons of the Trust receive
compensation at a rate of $10,000 annually, plus $500 per board or committee
meeting attended. In addition, Trustees who are not interested persons of the
Trust also are reimbursed for any out-of-
24
<PAGE> 73
pocket expenses incurred in connection with affairs of the Trust. Prior to such
date, members of the Trust's prior board of directors (the "Directors") who were
not interested persons of the Trust received a fee of $4,000 annually plus $250
per Board or committee meeting attended. In addition, Trustees who are
compensated by the Trust are also reimbursed for any out-of-pocket expenses
incurred in connection with attendance at such meetings or otherwise in
connection with the affairs of the Trust.
Set forth below is a compensation table listing, for each prior Director of
the Trust entitled to receive compensation, the aggregate compensation received
from the Trust for the fiscal year ended October 31, 1995, and the total
compensation received from the Trust and its Fund complex.
TABLE OF DIRECTORS' COMPENSATION
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE COMPENSATION FROM TRUST AND
NAME OF DIRECTOR FROM THE TRUST FUND COMPLEX(1)
- --------------------------------------------------------- ---------------------- ------------------
<S> <C> <C>
Wallace L. Chandler...................................... $4,700 $7,500
John E. Leard............................................ $5,000 $8,000
Robert P. Martin......................................... $5,000 $8,000
J. Clifford Miller....................................... $5,000 $8,000
Lee A. Putney............................................ $5,000 $8,000
</TABLE>
- ---------------
(1) In addition to the Trust, "Fund Complex" includes the Life of Virginia
Series Fund, an open-end investment company for which AAI services as
investment adviser.
INVESTMENT ADVISERS
Aon Advisors, Inc., 123 North Wacker Drive, Chicago, Illinois, serves as an
investment adviser to the Trust pursuant to separate investment advisory
agreements relating to each Fund ("Advisory Agreements") each dated September 3,
1996. Information concerning AAI and the basic provisions of the Advisory
Agreements are described in the Prospectus under the caption "Investment
Adviser."
The duties and responsibilities of AAI are specified in the Advisory
Agreements. Each of the Advisory Agreements was approved by the Trustees of the
Trust (including a majority of trustees who are not parties to the Advisory
Agreement or interested persons, as defined by the 1940 Act, of any such party)
at a meeting held on May 22, 1996. The Advisory Agreements are not assignable
and may be terminated without penalty upon 60 days written notice at the option
of either the Trust or AAI or by a vote of shareholders of each Fund. Each
provides that it can be continued year to year thereafter so long as such
continuance is specifically approved annually (a) by the Trustees of the Trust
or by a majority of the outstanding shares of the Fund and (b) by a majority
vote of the Trustees who are not parties to the Advisory Agreements or
interested persons of any such party to cast in person at a meeting.
AAI (under the general oversight of the Trustees) continuously furnishes an
investment program for each Fund, is responsible for the actual managing of the
investments of each Fund and has responsibility for making decisions governing
whether to buy, sell or hold any particular security. In carrying out its
obligations to manage the investment and reinvestment of the assets of each
Fund, AAI performs research and obtains and evaluates pertinent economic,
statistical and financial data relevant to the investment policies of each Fund.
The Advisory Agreements provide that AAI shall not be liable to the Trust
or to any shareholder for any error of judgment or mistake of law or for any
loss suffered by the Trust or by any shareholder in connection with matters to
which the Advisory Agreements relate, except for a breach of fiduciary duty or a
loss resulting from willful misfeasance, bad faith, gross negligence, or
reckless disregard on the part of AAI in the performance of its duties
thereunder.
As described below, AAI has engaged Perpetual at the investment sub-adviser
provide day-to-day portfolio management for the International Equity Fund.
25
<PAGE> 74
Effective September 3, 1996, pursuant to a separate administration
agreement between the Trust and Aon Securities Corporation ("ASC"), a wholly
owned subsidiary of Aon (the "Administration Agreement"), ASC has agreed, at its
own expense, to:
(a) supply internal auditing and internal legal services; (b) supply
stationery and office supplies; (c) prepare reports to shareholders and the
Board of Trustees; (d) prepare tax returns; (e) prepare reports to and
filings with the SEC and State Blue Sky authorities; (f) at the Trust's
request, furnish office space, in such place as may be agreed upon from
time to time, and all necessary office facilities; (g) supply clerical,
accounting, bookkeeping, administrative and other similar services
(exclusive of those services relating to and to be performed under any
contract for custodial, transfer, dividend and accounting services entered
into by the Trust with a third party); and (h) furnish persons satisfactory
to the Trust to respond during normal business hours to in-person, written
and telephone requests for assistance and information from shareholders of
the Trust, and provide such facilities and equipment as may be necessary
for such persons to carry out their duties, including, without limitation,
office space and facilities, telephones and CRT terminals and equipment
(including telephone lines) necessary for access to the Trust shareholder
records.
INVESTMENT ADVISORY AND ADMINISTRATION FEES
The Money Market Fund paid the following in investment advisory fees,
inclusive of administration fees (net of reimbursements) during the last three
fiscal years: 1995, $487,553; 1994, $410,817; and 1993, $420,563. The Asset
Allocation Fund paid the following in investment advisory fees (net of
reimbursements) during the last fiscal year and previous fiscal period (from
March 31, 1994 to October 31, 1994): 1995, $218,580 and 1994, $49,839. The
Government Securities, S&P 500 Index, International Equity and REIT Index Funds
were not in existence during these periods.
INVESTMENT SUB-ADVISER
Pursuant to a separate sub-advisory agreement described below, AAI has
engaged Brinson Partners as the investment subadviser to provide day-to-day
portfolio management for the International Equity Fund. Brinson Partners is
located at 209 South LaSalle Street, Chicago, Illinois 60604. Gary P. Brinson is
President and Managing Partner of Brinson Partners. Brinson Partners is a
subsidiary of Swiss Bank Corporation ("Swiss Bank"). Swiss Bank, with
headquarters in Basel, Switzerland, is an internationally diversified
organization with operations in many aspects of the financial services industry.
Brinson Partners, a registered investment adviser under the Investment Advisers
Act of 1940, manages approximately $58 billion of global stocks and bonds as of
June 30, 1996, and it and its predecessor entities have been managing non-US
securities since 1974.
INVESTMENT SUB-ADVISORY AGREEMENT
AAI has entered into a separate sub-advisory agreement (the "Sub-Advisory
Agreement") with Brinson Partners for the day-to-day portfolio management of the
International Equity Fund. The Sub-Advisory Agreement was approved by a vote of
the majority of the Trustees of the Trust (including a majority of trustees who
are not parties to such Agreement or interested persons, as defined by the 1940
Act, or any such party) at a meeting held for that purpose on August 28, 1996.
The Sub-Advisory Agreement was also approved by the initial shareholder of the
International Equity Fund on September 3, 1996. The Sub-Advisory Agreement is
not assignable and may be terminated without penalty upon 60 days' written
notice at the option of AAI or Brinson Partners, by a vote of the majority of
the Trustees of the Trust or by a vote of a majority of the outstanding shares
of the International Equity Fund. The Sub-Advisory Agreement provides that it
shall continue in effect for two years and can than thereafter be continued from
year to year so long as such continuance is specifically approved annually (a)
by the Trustees of the Trust or by a majority of the outstanding shares of the
International Equity Fund and (b) by a majority vote of the Trustees who are not
parties to the Agreement, or interested persons of any such party, cast in
person at a meeting held for that purpose.
26
<PAGE> 75
INVESTMENT SUB-ADVISORY FEES
Brinson Partners manages the investments of the International Equity Fund,
determining which securities or other investments to buy and sell, selecting the
brokers and dealers to effect the transactions, and negotiating commissions. In
placing orders for securities transactions, Brinson Partners follows AAI's
policy of seeking to obtain the most favorable price and efficient execution
available.
For its services, AAI pays Brinson Partners monthly compensation in the
form of an investment sub-advisory fee. The fee is paid by AAI monthly and is
based upon the average daily net assets of the Fund that Brinson Partners
manages, at the following annual rates:
International Equity Fund: .50% of the first $100,000,000; .475% of
the next $100,000,000; and .45% of amounts in excess of $200,000,000.
REIMBURSEMENT OF EXCESS OPERATING EXPENSES
AAI has agreed to reimburse the Trust for any amount by which the total
expenses of (i) the Class C or Class Y shares of the Money Market Fund in any
fiscal year exceed 1.25% or 1.00%, respectively, of the aggregate average daily
net assets of those classes of that Fund; (ii) the Class C or Class Y shares of
the Asset Allocation Fund in any fiscal year exceed 1.50% or 1.25%,
respectively, of the aggregate average daily net assets of such classes of that
Fund; (iii) the Class C or Class Y shares of the Government Securities Fund in
any fiscal year exceed 1.75% or 1.50%, respectively, of the first $30 million of
aggregate average daily net assets of such classes of that Fund and 1.50% or
1.25% , respectively, of average daily net assets of such classes of that Fund
in excess of $30 million; (iv) the Class C or Class Y shares of the S&P 500
Index Fund in any fiscal year exceed 1.00% or .75%, respectively of the
aggregate average daily net assets of such classes of that Fund; (v) the Class C
or Class Y shares of the International Equity Fund in any fiscal year exceed
2.00% or 1.75%, respectively, of the first 30 million of aggregate average daily
net assets of such classes of that Fund and 1.75% or 1.50%, respectively, of
average daily net assets of such classes of that Fund in excess of $30 million;
and (vi) the Class C or Class Y shares of the REIT Index Fund in any fiscal year
exceed 1.75% or 1.50%, respectively, of the first $30 million of aggregate daily
net assets of such classes of that Fund in excess of $30 million. For purposes
of this reimbursement formula, "expenses" do not include interest, taxes,
brokerage commissions or extraordinary expenses. Reimbursement of excess
expenses, as described above, cannot be changed without shareholder approval.
During the fiscal year ended October 31, 1995, the total operating expenses
incurred by the Funds (including the advisory fee paid to AAI), before
reimbursement or fee waivers, represented .39% of the average net assets of the
Class Y shares of the Money Market Fund and .96% of the average net assets of
the Class Y shares of the Asset Allocation Fund. The remaining classes and Funds
did not commence operations until after the end of such fiscal year. During the
fiscal year ended October 31, 1995, AAI was not required to reimburse the Trust
for expenses under the provisions described in the preceding paragraph.
SECURITIES ACTIVITIES OF THE ADVISER
Securities held by the Trust may also be held by Aon Corporation, or by
accounts or mutual funds for which AAI acts as an adviser. Because of different
investment objectives or other factors, a particular security may be bought by
Aon Corporation or by AAI or for one or more of its clients, when one or more
other clients are selling the same security. If purchases or sales of securities
for a Fund or other client of AAI or Aon Corporation arise for consideration at
or about the same time, transactions in such securities will be made, insofar as
feasible, for the Trust, Aon Corporation, and other clients in a manner deemed
equitable to all. To the extent that transactions on behalf of more than one
client of AAI during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there may be an adverse
effect on price.
27
<PAGE> 76
On occasions when AAI (under the general oversight of the Trustees of the
Trust) deems the purchase or sale of a security to be in the best interests of
the Trust as well as other accounts or companies, it may, to the extent
permitted by applicable laws and regulations, but will not be obligated to,
aggregate the securities to be sold or purchased for the Trust with those to be
sold or purchased for other accounts or companies in order to obtain favorable
execution and low brokerage commissions. In that event, allocation of the
securities purchased or sold, as well as the expenses incurred in the
transaction, will be made by AAI in the manner it considers to be most equitable
and consistent with its fiduciary obligations to the Trust and to such other
accounts or companies. In some cases this procedure may adversely affect the
size of the position obtainable for a Fund. Likewise, Brinson Partners may, to
the extent permitted by applicable laws and regulations, but will not be
obligated to, aggregate the securities to be sold or purchased for the Trust
with those to be sold or purchased for other accounts or companies in order to
obtain favorable execution and low brokerage commissions. Like AAI, Brinson
Partners allocates the securities purchased or sold, as well as the expenses
incurred in the transaction, in the manner that it considers to be most
equitable and consistent with its fiduciary obligations to the Trust and to such
other accounts or companies.
In performing their functions, AAI and Brinson Partners will not execute
private sales of securities among the Funds or between a Fund and any other
investment account it manages.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The table below sets forth certain information as to all persons known to
the Fund who, as of May 31, 1996, owned of record or beneficially 5% or more of
either Portfolio's outstanding shares. Money Market Portfolio:
<TABLE>
<CAPTION>
(1) (2) (3) (4)
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF CLASS
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (%)
- ------------------------- ------------------------------- ---------------------- ----------------
<S> <C> <C> <C>
Money Market Fund Aon Risk Services 113,256,000 38.77
(Class Y shares) Controller, 7th Floor directly owned shares
123 N. Wacker Dr.
Chicago, IL 60606
Money Market Fund Rollins Hudig Hall Co. 104,352,000 35.72
(Class Y shares) Controller, 22nd Floor directly owned shares
123 N. Wacker Dr.
Chicago, IL 60606
Money Market Fund Virginia Surety Company, Inc. 20,344,987 6.96
(Class Y shares) 123 N. Wacker Dr. directly owned shares
Chicago, IL 60606
Money Market Fund Rollins Hudig Hall-NY 16,355,000 5.60
(Class Y shares) Suite 22 directly owned shares
123 N. Wacker Dr.
Chicago, IL 60606
Asset Allocation Fund Combined Insurance Company of 5,443,722 75.35
(Class Y shares) America directly owned shares
Investment Accounting Mgr.
27th Floor
123 N. Wacker Dr.
Chicago, IL 60606
Asset Allocation Fund Virginia Surety Company Inc. 1,692,190 23.42
(Class Y shares) Investment Accounting Mgr. directly owned shares
123 N. Wacker Dr.
Chicago, IL 60606
</TABLE>
Aon Corporation and its wholly-owned subsidiaries may, by virtue of their
interests as shareholders of the Trust at any particular site, be considered
controlling persons of the Trust and may be able to cast a deciding vote on all
matters submitted to a vote of the shareholders of the Trust or one or more of
the Fund's (or classes thereof). As of May 31, 1996, Aon and its subsidiaries
owned in excess of 95.79% of the outstanding securities
28
<PAGE> 77
in each of the Funds. On that date, the Trustees and officers of the Trust owned
less than 1% of the outstanding shares of each of the Funds.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser determines which securities to buy and sell for each Fund,
selects brokers and dealers to effect the transactions, and negotiates
commissions. Transactions in equity securities will usually be executed through
brokers who will receive a commission paid by such Fund. Fixed income securities
are generally traded with dealers acting as principal for their own accounts
without a stated commission. The dealer's margin is reflected in the price of
the security. Money market instruments may be traded directly with the issuer.
Underwritten offerings of stock or fixed-income securities may be purchased at a
price that includes compensation to the underwriter.
Decisions with respect to the purchase and sale of Fund portfolio,
including allocation of portfolio business and the negotiation of the price of
the securities and commissions, if any, are made by the Adviser. Neither the
Adviser nor any company affiliated with it will act as a broker or dealer for
the purposes of executing portfolio transactions for the Funds.
The primary consideration in allocating transactions to brokers or dealers
is prompt and effective execution of orders at the most favorable security
prices obtainable ("best execution"). When this primary consideration of best
execution has been met, consideration may be given to additional factors, such
as furnishing of supplemental research and other services deemed to be of value
to the Trust or to the Adviser; the Adviser is authorized to execute orders with
dealers or brokers that provide research and security and economic analysis that
supplements the research and analysis of the Adviser, even through the spread or
commission at which an order is executed may be higher than that which another
dealer or broker might charge, provided the Adviser determines in good faith
that the amount of the spread or commission is reasonable in relation to the
value of the services provided. Such research and services include advice as to
the value of securities, and advisability of securities or purchasers or sellers
of securities; furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and performance of
accounts; and effecting securities transactions and performing functions
incidental thereto (such as clearance and settlement). The research may be
useful to the Adviser in serving all the Funds and other accounts managed by the
Adviser and, conversely, supplemental research obtained by the placement of
business of such other accounts may be useful to the Adviser in carrying out its
obligations to the Funds. The receipt of such supplemental research and other
services is not expected to reduce the Adviser's expenses in advising the Funds.
During the fiscal year ended October 31, 1995, the Asset Allocation Fund
paid brokerage commissions of $70,214, based on $72,078,788 of transactions.
During the fiscal period from March 1, 1994 (commencement of operations) through
October 31, 1994, the Asset Allocation Fund paid brokerage commissions of
$13,437, based on $10,710,108 of transactions.
DETERMINATION OF NET ASSET VALUE
GENERAL
The Trust is open for business on each day that the NYSE is open for
trading, except that shares of the Funds may not be purchased or redeemed, and
such shares will not be priced, on the following days: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day, and Christmas
Day.
The net asset value of the Money Market Fund's shares for purposes of
pricing orders for purchase and redemption of shares is determined twice daily,
once as of 12:30 p.m. (Central Time) and again as of the close of regular
trading (currently 3:00 p.m. Central Time) on the NYSE, on each day the Trust is
open for business. The net asset value of the Non-Money Market Funds' shares for
the purposes of pricing orders for
29
<PAGE> 78
purchase and redemption of shares is determined as of the close of regular
trading (currently 3:00 p.m. Central Time) on the NYSE, on each day that the
Trust is open for business.
The net asset value per share of each Fund is determined by subtracting the
liabilities of such Fund from the value of its assets and dividing the remainder
by the number of outstanding shares of such Fund. Net asset value is calculated
separately for each class of shares of each Fund.
Although the legal rights of holders of Class C and Class Y shares are
substantially identical, the different expenses borne by each class will result
in different net asset values and dividends. The net asset value of Class C
shares will generally be lower than Class Y shares as a result of the
distribution and service fees charged. It is expected, however, that the net
asset value per share of each of the classes will tend to converge immediately
after the recording of dividends since the dividends will differ by
approximately the amount of the distribution expense accrual differential
between the classes.
MONEY MARKET FUND
The Trust intends to use its best efforts to maintain the Money Market
Fund's net asset value at $1.00 per share, although there is no assurance that
it will be able to do so on a continuous basis. Net asset value is computed
using the amortized cost method. The Trustees of the Trust will take such action
as they deem appropriate to eliminate or reduce, to the extent reasonably
practicable, any material dilution or other unfair results that might arise from
differences between net asset value per share based on market value and net
asset value per share based on amortized cost. Such action may include
redemption in kind, selling portfolio instruments prior to maturity to realize
capital gains or losses or to shorten the average portfolio maturity,
withholding dividends or utilizing a net asset value per share as determined by
using available market quotations, if available, or, if not available, at a fair
value as determined in good faith by the Trustees. The Trust may also reduce the
number of the Money Market Fund's outstanding shares by redeeming
proportionately from shareholders, without the payment of any monetary
consideration, such number in full and fractional shares as is necessary to
maintain the net asset value per share at $1.00. By investment in the Money
Market Fund, shareholders are deemed to have agreed to such redemption.
NON-MONEY MARKET FUNDS
Equity securities (including common stocks, preferred stocks, convertible
securities and warrants) and call options written on all portfolio securities,
listed or traded on a national exchange are valued at their last sale price on
the exchange prior to the time when assets are valued. In the absence of any
exchange sales on that day and for unlisted equity securities, such securities
are valued at the last sale price on the Nasdaq Stock Market's National Market.
In the absence of any Nasdaq National Market sales on that day, equity
securities are valued at the last reported bid price.
Debt securities traded on a national exchange are valued at their last sale
price on that exchange prior to the time when assets are valued, or, lacking any
sales, at the last reported bid price. Debt securities other than money market
instruments traded in the over-the-counter market are valued at the last
reported bid price or at yield equivalent as obtained from one or more dealers
that make markets in the securities. Debt securities traded in both the
over-the-counter market and on a national exchange are valued according to the
broadest and most representative market, and it is expected that this ordinarily
will be the over-the-counter market.
Securities that are primarily traded on foreign securities exchanges are
generally valued at the last sale price on the exchange where they are primarily
traded. All foreign securities traded on the over-the-counter market are valued
at the last sale quotation, if market quotations are available, or the last
reported bid price if there is no active trading in a particular security on a
given day. Quotations of foreign securities in foreign currencies are converted,
at current exchange rates, to their U.S. dollar equivalents in order to
determine their current value. In addition, because of the need to value foreign
securities (other than ADRs) as of the close of trading on various exchanges and
over-the-counter markets throughout the world, the calculation of the net asset
value of Funds investing in foreign securities may not take place
contemporaneously with the valuation of such foreign securities in such Fund.
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<PAGE> 79
Securities for which market quotations are not readily available are valued
at fair value as determined in good faith by or under the direction of the
Trustees of the Trust, including valuations provided by a pricing service
retained for this purpose.
Exchange listed put options written and options purchased are valued on the
primary exchange on which they are traded. Over-the-counter options written or
purchased by a Fund are valued based upon prices provided by market-makers in
such securities. Exchange-traded financial futures contracts are valued at their
settlement price established each day by the board of trade or exchange on which
they are traded.
Debt instruments held with a remaining maturity of 60 days or less are
generally valued on an amortized cost basis. Under the amortized cost basis
method of valuation, the security is initially valued at its purchase price (or
in the case of securities purchased with more than 60 days remaining to
maturity, the market value on the 61st day prior to maturity), and thereafter by
amortizing any premium or discount uniformly to maturity. If for any reason the
Trustees of the Trust believe the amortized cost method of valuation does not
fairly reflect the fair value of any security, fair value will be determined in
good faith by or under the direction of the Trustees of the Trust as in the case
of securities having a maturity of more than 60 days.
RETIREMENT PROGRAMS
The Trust expects to make available a Retirement Plan for Self-Employed
Individuals ("Keogh Plan") with both money purchase pension plan and profit
sharing plan options, Simplified Employee Pension Plans ("SEPs") and Individual
Retirement Accounts ("IRAs"). Contributions to each are invested, and dividends
and distributions are automatically reinvested, in shares of the appropriate
Fund. Generally, the maximum contribution allowable each year to an IRA is the
lesser of $2,000 and 100% of compensation includible in gross income for the
year, and the maximum annual contribution allowable to a Keogh Plan is the
lesser of (i) $30,000 and (ii) 25% of an employee's compensation or a
self-employed individuals' earned income (net earnings reduced by Keogh Plan
contributions) for the year. Additionally, the maximum deduction allowable each
year for contribution to the profit sharing option of a Keogh Plan is,
generally, 15% of an employee's compensation or a self-employed individual's
earned income (net earnings reduced by Keogh Plan contributions) for the year.
Under a SEP, an employer, or self-employed individual, is permitted to
contribute a discretionary amount each year up to the lesser of $30,000 or 15%
of an employee's compensation for the year, or a self-employed individual's
earned income (net earnings reduced by SEP contributions) for the year, into an
individual IRA for each employee or selfemployed individual. The annual
compensation of each employee and the earned income of each self-employed
individual which can be taken into account under the Keogh Plan and a SEP for
any year cannot exceed $150,000 as increased by the cost-of-living adjustments
for the calendar year after 1994 as determined by the Internal Revenue Service.
A selfemployed individual may contribute to either a Keogh Plan or a SEP and, in
either case, may also contribute to and IRA. The custodial agreements for the
Keogh Plan and IRAs provide that Firstar Trust Company, Milwaukee, Wisconsin,
will provide the custodial service unless a different custodian is specified.
Firstar Trust Company will receive as compensation from the participant
under the Keogh Plan an annual maintenance fee of $12.50 per participant.
Special services not contemplated in the annual maintenance fee will be rendered
by Firstar Trust Company for such additional charges as will reasonably
compensate it for the services provided. Fees may be changes with at least 30
days' prior written notice. The annual maintenance fee payable to Firstar Trust
Company with respect to an IRA, including each individual IRA established under
a SEP, is presently $12.50 and may be changed at any time. Fees under any of
these types of accounts remaining unpaid may be charged against the accounts. If
a custodian other than Firstar Trust Company is specified, fees will be
determined by such custodian.
The employer or individual, as the case may be, should consult his or her
tax adviser or attorney as to the applicability of the Keogh Plan, SEP or IRA to
his or her particular circumstances. Additionally, since these retirement
programs involve commitments covering future years, the investment objectives of
each Fund, as described in the Prospectus and in this Statement of Additional
Information, should be carefully considered.
31
<PAGE> 80
For further details, including the right to appoint a successor custodian,
see the Keogh Plan, Keogh Custodial Agreement and Keogh Application Form and the
IRA Application Form, IRA Custodial Agreement and IRA Disclosure Statement which
are available from the Trust, telephone (800) 266-3637.
For a discussion of income tax withholding on certain distributions from
qualified retirement plans or taxsheltered annuity plans, see "Taxes" below.
YIELD AND PERFORMANCE INFORMATION
The yield of the Class Y shares of Money Market Fund for the seven-day
period ended April 30, 1996 was 5.12%. This yield quotation is computed by
determining the net change (exclusive of realized gains and losses from the sale
of securities and unrealized appreciation and depreciation) in the value of a
hypothetical account having a balance of one share at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from shareholder
accounts, dividing the net change in account value by the value of the account
at the beginning of the period to obtain the base period return, and analyzing
this quotient on a 365-day basis (i.e., multiplying the base period return by
365/7). The net change in account value reflects the value of additional shares
purchased with dividends from the original share and dividends declared on both
the original share and any such additional shares during this period. The
effective yield of the Class Y shares of Money Market Fund for the seven-day
period, ended April 30, 1996 was 5.26%. The effective yield is computed by
adding 1 to the base period return (calculated as described above), raising that
sum to a power equal to 365 divided by 7, and subtracting 1 from the result.
(The current annualized effective yield is computed by expressing the annualized
return on a compounded, annualized basis).
Current yields will fluctuate from time to time and are not necessarily
representative of future results. The yield is a function of the type and
quality of the instruments in the Fund, portfolio maturity and operating
expenses.
Current yield information may not provide a basis for comparison with bank
deposits or other investments which pay a fixed yield for a stated period of
time. From time to time, advertisements for the Money Market Fund may include
comparison of the Fund's performance to that of various market indices.
The compound annual rates of return of Class Y shares of the Asset
Allocation Fund for the one year period ended April 30, 1996 and for the period
March 1, 1994 (commencement of operations and ended April 30, 1996 were 26.44%
and 15.97%, respectively, computed in accordance with the rules for standardized
computation of performance as established by the SEC. Such rules for
standardized computation of performance provide for determining compound annual
rates of return by taking the total return of the Fund over the period in
question calculated as described in the Prospectus and "annualizing" such total
return -- i.e., computing the annual rate of return which, if earned in each
year of such period, would produce the total return actually earned over such
period.
Inasmuch as the Asset Allocation Fund has no sales load on purchases or
reinvested dividends, no deferred sales load or redemption fee, no adjustments
are made for such items in calculating performance.
TAXES
Each Fund intends to qualify and to continue to qualify as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as amended
(the "Code"). In order to qualify for that treatment, among other things, (1)
the Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of stock or securities or foreign currencies, or
other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies, (2) the Fund must derive less than 30% of its gross income each
taxable year from the sale or other disposition of any of the following held for
less than three months (i) stock or securities, (ii) options, futures or forward
contracts (other than those on foreign currencies), or (iii) foreign currencies
(or options, futures or forward contracts thereon) that are not directly related
to the Fund's principal business of investing in stock or securities (or
32
<PAGE> 81
options and futures with respect to stock or securities); (3) at the close of
each quarter of the Fund's taxable year, (i) at least 50% of the value of its
total assets must be represented by cash and cash items, U.S. Government
securities, securities of other RICs, and other securities that, with respect to
any one issuer, do no exceed 5% of the value of the Fund's total assets and that
do not represent more than 10% of the outstanding voting securities of the
issuer, and (ii) not more than 25% of the value of the Fund's total assets may
be invested in securities (other than U.S. Government securities or the
securities of other RICS) of any one issuer. The 90% and 30% gross income
requirements described above will limit the ability of a Fund to engage in
certain options, futures, and forward transactions, and the 30% gross income
requirement also will limit a Fund's ability to engage in certain foreign
currency transactions. Also, for purposes of the 90% gross income requirement,
the IRS is authorized to issue regulations treating as nonqualifying income
foreign currency gains which are not directly related to a Fund's principal
business of investing in stock or securities (or options and futures with
respect to stock or securities), and under such regulations a Fund may likewise
be limited in its ability to engage in certain foreign currency transactions.
Assuming a Fund qualifies as a RIC, it will not be subject to federal
income tax on its income and gains distributed to shareholders, provided the
Fund distributes to its shareholders at least 90% of its net investment income
(i.e., net income exclusive of net long-term capital gains) each year.
The risk of a Fund failing the 30% test described in the second preceding
paragraph is increased to some extent by trading in stock index options, stock
index futures contracts and options on such contracts. For example, in certain
publicized cases, regulated investment companies holding "short" positions in
stock index futures contracts on October 19, 1987 (at which time there was a
sharp drop in the values of publicly traded equity securities) unexpectedly
realized large gains on those contracts, some of which had been held for less
than three months. For purposes of the 30% test described above, losses on
offsetting positions with respect to those contracts, would not have been taken
into account. Therefore, although those contracts might have effectively hedged
a company's loss on the offsetting positions, the resulting gain on those
contracts could have caused the company to lose its status as a regulated
investment company under Subchapter M of the Code.
In the event a Fund does not qualify in any year as a regulated investment
company under Subchapter M of the Code, its income would be taxed to a Fund
whether or not distributed, and distributions to shareholders would generally be
treated as ordinary dividend income.
If a Fund purchases shares in a foreign corporation treated for U.S.
federal income tax purposes as a "passive foreign investment company" ("PFIC"),
however, the Fund may be subject to U.S. federal income tax, and an additional
charge in the nature of interest, on a portion of distributions from such
foreign corporation and on gain from the disposition of such shares
(collectively referred to as "excess distributions"), even if such excess
distributions are paid by the Fund as a dividend to its shareholders. In certain
limited circumstances, the Fund may be eligible to make a "qualified electing
fund electing" with respect to certain PFICs in which it owns shares. Such an
election would enable the Fund to avoid the taxes and additional charge on
excess distributions by including in income each year the Fund's pro rata share
of the PFIC's income and gains for that year (whether or not the Fund's share of
such income and gains are distributed to the Fund). Alternatively, pursuant to
Proposed Treasury Regulations (which are not yet effective), the Fund may be
eligible to elect under certain circumstances to treat its stock in certain
PFICs as having been sold on the last business day of each taxable year of the
Fund for the stock's fair market value, in which case the Fund would, subject to
certain exceptions, generally avoid the taxes on excess distributions. These
elections, therefore, may cause the Fund to recognize income in a particular
year in excess of the distributions it received in that year from the PFIC.
A nondeductible 4% excise tax will be imposed on a Fund to the extent the
Fund does not distribute during each calendar year (i) 98% of its ordinary
income for such calendar year, (ii) 98% of its capital gain net income for the
one-year period ending on October 31 of such calendar year (or, in certain
circumstances, ending with the Fund's taxable year), and (iii) certain other
amounts not distributed in previous years. The Fund intends to distribute its
income and gains in a manner so as to avoid the imposition of such 4% excise
tax.
33
<PAGE> 82
For purposes of applying the distribution requirements described above, and
for purposes of determining the taxable income of shareholders each year,
dividends declared by a Fund in October, November or December of a year, payable
to shareholders as of a record date in such a month, and paid during the
following January, will be treated for federal income tax purposes as paid by
the Fund and received by shareholders as of December 31 of the calendar year
declared.
If the net asset value of shares is reduced below a shareholder's cost by a
distribution, such distribution would be taxable as described in the Prospectus,
even though the distribution might be viewed in economic terms as a return of
capital. For federal income tax purposes, the shareholder's original cost
continues as his tax basis and on redemption his gain or loss is the difference
between such basis and the redemption price.
Income tax withholding at a rate of 20% is applicable to any distribution
from a qualified retirement plan, such as the Keogh Plan, or a tax-sheltered
annuity plan where the distribution is eligible for tax-free rollover treatment
but is not transferred directly to a specified retirement vehicle such as
another qualified plan or an IRA. Also, all qualified plans must provide
participants and certain other distributees with an election to have an eligible
rollover distribution transferred directly to certain specified retirement
vehicles. If a shareholder receives a distribution which is subject to the 20%
withholding requirement and wishes to roll the distribution into another vehicle
such as an IRA within 60 days, the shareholder will have to contribute to the
IRA the amount of the distribution (after withholding) plus an amount equal to
the amount withheld. The amount withheld can be applied to reduce the
shareholder's Federal income tax liability and may be refunded to the
shareholder upon filing a Federal income tax return if it exceeds such tax
liability. If the amount withheld is not rolled over into the IRA, it will be
subject to income taxes plus, if the shareholder has not attained age 59 1/2, an
additional 10% penalty tax.
The rules broadly define distributions which qualify for rollover
treatment. Shareholders who expect to receive distributions which may qualify
for rollover treatment and therefore may be subject to 20% withholding should
consult their own tax advisers for a complete discussion on the impact of these
rules on such distributions.
The foregoing discussion, together with the related discussion in the
Prospectus, are only general summaries of certain provisions of the Internal
Revenue Code and current Treasury regulations applicable to each Fund and its
shareholders. The Internal Revenue Code and such regulars are subject to change
by legislative or administrative action.
Distributions to shareholder may also be subject to state and local taxes.
Investors are urged to consult their own tax advisers regarding the application
of federal, state, local, and foreign tax laws.
ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING AGENT
Firstar Trust Company ("Firstar") is the custodian, transfer agent, and
accounting agent for the Trust. Under the custodian agreement between the Trust
and Firstar, the bank may appoint a subcustodian bank with the approval of the
Trust's Trustees. Firstar will also calculate the net asset value per share on
each day that the NYSE is open for trading, except that shares of the Trust will
not be priced on the following days: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Thanksgiving Day, Veterans' Day, and Christmas Day. Firstar has no
part in determining the investment policies of the Trust or the securities to be
purchased or sold by the Trust.
INDEPENDENT AUDITORS
Ernst & Young LLP acts as independent auditors for the Trust. Its offices
are at Sears Tower, 233 South Wacker Drive, Chicago, Illinois 60606. Ernst &
Young LLP performs an audit of the financial statements of the Trust annually.
34
<PAGE> 83
LEGAL COUNSEL
Sidley & Austin, One First National Plaza, Chicago, IL 60603, is counsel
for the Trust. Prickett, Jones, Elliott, Kristol & Schnee, 1310 King Street,
Wilmington, DE 19899, is special Delaware counsel for the Trust.
SHARES OF BENEFICIAL INTEREST
Aon Funds is a Delaware business trust, formed on May 16, 1996. It is
authorized to issue an unlimited number of shares of beneficial interest. The
Trustees of the Trust may, at any time and from time to time, by resolution,
authorize the division of shares into an unlimited number of series and the
division of any series into two or more classes.
By this offering, Class C and Class Y shares of each are being offered.
Class C shares of each Fund are offered without a sales charge, but are subject
to a charge imposed pursuant to Rule 12b-1 under the 1940 Act. Class Y shares
are offered without a sales charge and are sold only to (i) the shareholders of
record of outstanding shares of any Fund immediately prior to the commencement
of distribution under the multiple-class program (including additional
investments by such holders), (ii) investment advisory clients of AAI and (iii)
affiliates of Aon or AAI. Other differences between the classes of shares
include the services offered to and expenses borne by each class and certain
voting rights, as described below.
Shareholders of the Trust are entitled to one vote for each full share and
to a proportionate fractional vote for each fractional share, irrespective of
class, standing in the shareholder's name on the books of the Trust. All shares
then issued and outstanding and entitled to be voted shall be voted on a series
by series basis, except that (1) shares shall be voted in the aggregate without
differentiation among the separate series and classes in the case of the
election or removal of Trustees and where otherwise required by the 1940 Act or
the Trust's Agreement and Declaration of Trust, (2) shares shall be voted by
class where required by the 1940 Act, and (3) the Trustees in their sole
discretion may determine that, in situations where the shares of more than one
series or class are entitled to be voted with respect to a matter, such shares
shall be voted as a single class with respect to such matter if and to the
extent permitted under the 1940 Act. Shares do not have preemptive or
subscription rights.
REPORTS
The Trust will issue unaudited semi-annual reports showing each of the
Funds' investments and other information, and it will issue audited annual
reports containing financial statements audited by the Trust's independent
auditors.
OTHER INFORMATION
This Statement of Additional Information and the Prospectus for the Trust
do not contain all the information set forth in the registration statement and
exhibits relating thereto, which the Trust has filed with the Securities and
Exchange Commission, Washington, D.C. under the Securities Act of 1933 and the
1940 Act, to which reference is hereby made.
35
<PAGE> 84
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICES, INC. ("MOODY'S")
AAA -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated Baa are considered as medium grade obligation
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.
D -- Debt rated D is in default, and payment of interest and/or repayment
of principal is in arrears.
The ratings from "Aa" to "B" may be modified by the addition of a plus or
minus sign to indicate relative standing within the major rating categories.
STANDARD & POOR'S CORPORATION ("S&P")
AAA: Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing
36
<PAGE> 85
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for bonds in this category than in higher rated categories.
BB-B-CCC-CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation. While such bonds 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 "BBB" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
Unrated: Indicates that no public 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.
Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative obligations. The Trust is dependent on the Adviser's
judgment, analysis and experience in the evaluation of such bonds.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.: The following rating designations for
commercial paper (defined by Moody's as promissory obligations not having
original maturity in excess of nine months), are judged by Moody's to be
investment grade, and indicate the relative repayment capacity of rated issuers:
PRIME-1: Superior capacity for repayment. Capacity will normally be
evidenced by the following characteristics: (a) leveling market positions
in well-established industries; (b) high rates of return on funds employed;
(c) conservative capitalization structures with moderate reliance on debt
and ample asset protection; (d) broad margins in earning coverage of fixed
financial charges and high internal cash generation; and (e) well
established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2: Strong capacity for repayment. 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 CORPORATION: The following ratings by S&P for commercial
paper (defined by S&P as debt having an original maturity of no more than 365
days) assess the likelihood of payment:
A-1: Strong capacity for timely payment. Those issues determined to
possess extremely strong safety characteristics are denoted with a plus
sign (+) designation.
A-2: Satisfactory capacity for timely payment. However, the relative
degree of safety is not as high as for issues designated "A-1."
FITCH INVESTORS SERVICE, INC. ("FITCH"): Fitch assigns the following
short-term ratings to debt obligations that are payable on demand or have
original maturities of generally up to three years, including commercial paper,
certificates of deposit, medium-term notes, and municipal and investment notes:
F-1+: Exceptionally strong credit quality; the strongest degree of
assurance for timely payment.
F-1: Very strong credit quality, assurance of timely payment is only
slightly less in degree than issues rated "F-1+".
F-2: Good credit quality; satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues assigned
"F-l+" or "F-1" ratings.
DUFF & PHELPS, INC. ("DUFF & PHELPS"): The following ratings are for
commercial paper (defined by Duff & Phelps as obligations with maturities, when
issued, of under one year), asset-backed commercial
37
<PAGE> 86
paper, and certificates of deposit (the ratings cover all obligations of the
institution with maturities, when issued, of under one year, including bankers'
acceptances and letters of credit):
DUFF 1+: Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources
of funds, is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
DUFF 1-: High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk factors
are very small.
DUFF 2: Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.
IBCA LIMITED OR ITS AFFILIATE IBCA INC. ("IBCA"): Short-term ratings,
including commercial paper (with maturities up to 12 months), are as follows:
AL+: Obligations supported by the highest capacity for timely
repayment.
AL: Obligations supported by a very strong capacity for timely
repayment.
A2: Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic, or financial conditions.
THOMSON BANKWATCH, INC. ("TBW"): The following short-term ratings apply to
commercial paper, certificates of deposit, unsecured notes, and other securities
having a maturity of one year or less:
TBW-1: The highest category; indicates the degree of safety regarding
timely repayment of principal and interest is very strong.
TBW-2: The second highest rating category; while the degree of safety
regarding timely repayment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
38
<PAGE> 87
AUDITED FINANCIAL STATEMENTS
AON ASSET MANAGEMENT FUND, INC.
YEAR ENDED OCTOBER 31, 1995
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE> 88
Aon Asset Management Fund, Inc.
Audited Financial Statements
Year ended October 31, 1995
TABLE OF CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-2
Financial Statements
Statements of Assets and Liabilities................................................. F-3
Statements of Operations............................................................. F-4
Statements of Changes in Net Assets.................................................. F-5
Schedule of Investments.............................................................. F-6
Notes to Financial Statements........................................................ F-19
Financial Highlights................................................................. F-23
</TABLE>
F-1
<PAGE> 89
[LETTERHEAD]
Report of Independent Auditors
To the Shareholders and Board of Directors
Aon Asset Management Fund, Inc.
We have audited the statements of assets and liabilities, including the
schedules of investments, of Aon Asset Management Fund, Inc. (comprising, the
Money Market and Flexible Asset Allocation Portfolios) as of October 31, 1995,
and the related statements of operations for the year then ended, the statements
of changes in net assets for each of the two years in the period then ended
(Money Market Portfolio) and for the year ended October 31, 1995 and for the
period from March 1, 1994 to October 31, 1994 (Flexible Asset Allocation
Portfolio), and the financial highlights for each of the fiscal periods since
1992. These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the respective portfolios constituting the Aon Asset Management Fund,
Inc. at October 31, 1995, the results of their operations for the year then
ended, the changes in their net assets for each of the two years in the period
then ended (Money Market Portfolio) and for the year ended October 31, 1995 and
for the period from March 1, 1994 to October 31, 1994 (Flexible Asset Allocation
Portfolio), and the financial highlights for each of the fiscal periods since
1992, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Richmond, Virginia
December 1, 1995
F-2
<PAGE> 90
Statements of Assets and Liabilities
Aon Asset Management Fund, Inc.
October 31, 1995
<TABLE>
<CAPTION>
FLEXIBLE
MONEY ASSET
MARKET ALLOCATION
PORTFOLIO PORTFOLIO
------------ -------------
<S> <C> <C>
ASSETS
Investments in securities at fair value
(cost -- $68,299,794)...................................... $ -- $ 73,267,471
Investments in securities at amortized cost which approximates
fair value................................................. 426,399,125 --
Cash.......................................................... 737 70,680
Dividends receivable.......................................... -- 13,886
Interest receivable........................................... 714,883 442,838
Receivable for securities sold................................ -- 690,993
Due from affiliates........................................... -- 9,432
-------------- ----------
Total Assets.................................................... 427,114,745 74,495,300
LIABILITIES
Dividends payable............................................. 2,017,109 --
Accrued expenses payable...................................... 4,784 184,233
Payable for securities purchased.............................. 4,999,219 535,832
-------------- -------
Total Liabilities............................................... 7,021,112 720,065
-------------- -------
NET ASSETS...................................................... $420,093,633 $ 73,775,235
============== =============
OUTSTANDING SHARES.............................................. 420,093,633 6,126,826.738
============== =============
Net Asset Value Per Share....................................... $1.00 $12.04
===== ======
</TABLE>
See notes to financial statements.
F-3
<PAGE> 91
Statements of Operations
Aon Asset Management Fund, Inc.
Year ended October 31, 1995
<TABLE>
<CAPTION>
FLEXIBLE ASSET
MONEY MARKET ALLOCATION
PORTFOLIO PORTFOLIO
------------ --------------
<S> <C> <C>
INVESTMENT INCOME
Interest......................................................... $28,920,423 $ 940,057
Dividends........................................................ -- 194,292
----------- ----------
28,920,423 1,134,349
EXPENSES
Investment advisory fee (Note 4)................................. 1,706,435 218,580
Custodian, transfer and accounting fees.......................... 146,539 40,874
Directors' fees.................................................. 12,501 12,501
Audit fees....................................................... 12,501 12,501
Registration fees................................................ 5,988 10,136
Other............................................................ 11,136 --
----------- ----------
1,895,100 294,592
Less expense waiver (Note 4)....................................... 1,218,882 --
----------- ----------
676,218 294,592
----------- ----------
NET INVESTMENT INCOME.............................................. 28,244,205 839,757
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on sale of investments......................... 4,758 1,835,265
Change in net unrealized appreciation on investments............. -- 4,907,281
----------- ----------
Net realized and unrealized gain on investments.................. 4,758 6,742,546
----------- ----------
INCREASE IN NET ASSETS FROM OPERATIONS............................. $28,248,963 $7,582,303
=========== ==========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 92
Statements of Changes in Net Assets
Aon Asset Management Fund, Inc.
<TABLE>
<CAPTION>
FLEXIBLE
ASSET
FLEXIBLE ALLOCATION
ASSET PORTFOLIO
ALLOCATION PERIOD FROM
MONEY MARKET PORTFOLIO PORTFOLIO MARCH 1,
YEARS ENDED OCTOBER 31, YEAR ENDED 1994 TO
---------------------------------- OCTOBER 31, OCTOBER 31,
1995 1994 1995 1994
--------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS FROM
OPERATIONS
Net investment income............ $ 28,244,205 $ 15,318,373 $ 839,757 $ 174,960
Net realized gain (loss) on sale
of investments................ 4,758 (605,310) 1,835,265 (46,231)
Change in unrealized appreciation
on investments................ -- -- 4,907,281 60,396
-------------- -------------- ----------- ----------
Net increase in net assets from
operations.................... 28,248,963 14,713,063 7,582,303 189,125
DIVIDENDS PAID TO SHAREHOLDERS
FROM:
Net investment income............ (28,244,205) (15,318,373) (835,923) (174,960)
Net realized gain on
investments................... (4,758) (1,940) (1,835,265) --
Distribution in excess of
realized gains................ -- -- (162,706) (36,041)
-------------- -------------- ----------- ----------
(28,248,963) (15,320,313) (2,833,894) (211,001)
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares..... 4,368,158,454 4,231,505,926 56,003,807 10,000,000
Contribution of capital (Note
4)............................ -- 607,250 -- --
Net asset value of shares issued
upon reinvestment of
dividends..................... 7,851,993 3,932,861 2,833,894 211,001
Cost of redemption of shares..... (4,366,829,092) (4,236,594,456) -- --
-------------- -------------- ----------- ----------
Increase (decrease) in net assets
from capital transactions........ 9,181,355 (548,419) 58,837,701 10,211,001
-------------- -------------- ----------- ----------
Increase (decrease) in net
assets........................... 9,181,355 (1,155,669) 63,586,110 10,189,125
Net assets at beginning of
period........................... 410,912,278 412,067,947 10,189,125 --
-------------- -------------- ----------- ----------
Net assets at end of period........ $ 420,093,633 $ 410,912,278 $73,775,235 $10,189,125
============== ============== =========== ==========
Undistributed net investment
income........................... $ -- $ -- $ 3,834 $ --
============== ============== =========== ==========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 93
Schedule of Investments
Aon Asset Management Fund, Inc.
October 31, 1995
<TABLE>
<CAPTION>
PERCENTAGE
OF PRINCIPAL
NET ASSETS AMOUNT COST VALUE
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
MONEY MARKET PORTFOLIO
COMMERCIAL PAPER
Agricultural Product........................ 3.59%
Weyerhauser Co.
5.73% due November 2, 1995................ 3,090,000 $ 3,089,508 $ 3,089,508
5.74% due November 6, 1995................ 12,000,000 11,990,433 11,990,433
------------ ------------
15,079,941 15,079,941
Auto & Truck................................ 0.38%
Fluor Corp.
5.78% due November 14, 1995............... 1,580,000 1,576,702 1,576,702
Ford Motor Credit Co.
5.67% due November 17, 1995............... 5,000,000 4,987,400 4,987,400
5.73% due December 8, 1995................ 5,000,000 4,970,554 4,970,554
5.70% due January 12, 1996................ 5,000,000 4,943,000 4,943,000
General Mtrs Accep Corp.
5.79% due November 17, 1995............... 5,000,000 4,987,133 4,987,133
5.72% due January 31, 1996................ 10,000,000 9,855,411 9,855,411
------------ ------------
31,320,200 31,320,200
Banking -- Foreign.......................... 7.05%
Canadian Imperial
5.67% due November 27, 1995............... 5,000,000 4,979,525 4,979,525
5.72% due December 1, 1995................ 5,000,000 4,976,167 4,976,167
5.73% due January 4, 1996................. 5,000,000 4,949,067 4,949,067
International Lease Financial Corp.
5.66% due November 15, 1995............... 5,000,000 4,988,994 4,988,994
5.68% due November 21, 1995............... 5,000,000 4,984,222 4,984,222
5.70% due January 2, 1996................. 4,797,000 4,749,909 4,749,909
------------ ------------
29,627,884 29,627,884
Conglomerate................................ 1.29%
Avco Financial Services Inc.
5.75% due January 12, 1996................ 5,500,000 5,436,750 5,436,750
Consumer Cyclical........................... 1.18%
General Electric Co.
5.70% due December 18, 1995............... 5,000,000 4,962,792 4,962,792
Finance -- Miscellaneous.................... 29.56%
American Express
5.60% due November 8, 1995................ 5,000,000 4,994,556 4,994,556
5.65% due November 22, 1995............... 5,000,000 4,983,521 4,983,521
5.70% due January 26, 1996................ 5,000,000 4,931,917 4,931,917
American General Finance
5.73% due November 28, 1995............... 5,000,000 4,978,513 4,978,513
5.70% due December 22, 1995............... 5,000,000 4,959,625 4,959,625
</TABLE>
F-6
<PAGE> 94
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
<TABLE>
<CAPTION>
PERCENTAGE
OF PRINCIPAL
NET ASSETS AMOUNT COST VALUE
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
MONEY MARKET PORTFOLIO (CONTINUED)
COMMERCIAL PAPER (continued)
Finance -- Miscellaneous (continued)
Associates Corp. of North America
5.70% due December 28, 1995............... 10,000,000 $ 9,909,750 $ 9,909,750
5.70% due January 22, 1996................ 5,000,000 4,935,083 4,935,083
Beneficial Corp.
5.67% due December 8, 1995................ 5,000,000 4,970,863 4,970,863
5.65% due February 7, 1996................ 10,000,000 9,846,194 9,846,194
Comerica Bank
5.75% due April 8, 1996................... 5,000,000 5,000,000 5,000,000
Du Pont E I DE Nemours & Co.
5.70% due November 14, 1995............... 5,000,000 4,989,708 4,989,708
First Natl Bank of Chicago
6.17% due August 26, 1996................. 10,000,000 10,000,000 10,000,000
Fleet Mortgage Group
5.74% due January 22, 1996................ 10,000,000 9,869,256 9,869,256
General Electric Capital
5.70% due December 8, 1995................ 5,000,000 4,970,708 4,970,708
5.68% due January 16, 1996................ 5,000,000 4,940,044 4,940,044
Household Finance Corp.
5.73% due November 16, 1995............... 15,000,000 14,964,188 14,964,188
Preferred Receivables FDG Co.
5.80% due November 8, 1995................ 5,000,000 4,994,361 4,994,361
5.70% due December 6, 1995................ 10,000,000 9,944,583 9,944,583
------------ ------------
124,182,870 124,182,870
Finance -- Service.......................... 7.11%
Merrill Lynch & Co.
5.75% due November 2, 1995................ 5,000,000 4,999,201 4,999,201
5.75% due November 3, 1995................ 10,000,000 9,996,806 9,996,806
Morgan Stanley Group
5.73% due November 10, 1995............... 7,000,000 6,989,973 6,989,973
5.73% due January 25, 1996................ 8,000,000 7,891,767 7,891,767
------------ ------------
29,877,747 29,877,747
Insurance................................... 2.97%
Prudential Funding
5.70% due November 3, 1995................ 7,500,000 7,497,625 7,497,625
5.73% due November 15, 1995............... 5,000,000 4,988,858 4,988,858
------------ ------------
12,486,483 12,486,483
Miscellaneous............................... 8.28%
Asset Securitization Corp.
5.70% due January 16, 1996................ 5,000,000 4,939,833 4,939,833
5.63% due January 17, 1996................ 10,000,000 9,879,581 9,879,581
</TABLE>
F-7
<PAGE> 95
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
<TABLE>
<CAPTION>
PERCENTAGE
OF PRINCIPAL
NET ASSETS AMOUNT COST VALUE
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
MONEY MARKET PORTFOLIO (CONTINUED)
COMMERCIAL PAPER (continued)
Miscellaneous (continued)
PHH Corp.
5.72% due November 15, 1995............... 15,000,000 $ 14,966,633 $ 14,966,633
Raytheon Co.
5.72% due November 3, 1995................ 5,000,000 4,998,411 4,998,411
------------ ------------
34,784,458 34,784,458
Oil & Gas................................... 3.57%
Mobil Corp.
5.75% due November 7, 1995................ 15,000,000 14,985,625 14,985,625
Retail...................................... 3.56%
Goldman Sachs Group
5.72% due November 22, 1995............... 5,000,000 4,983,317 4,983,317
5.73% due November 22, 1995............... 10,000,000 9,966,575 9,966,575
------------ ------------
14,949,892 14,949,892
Technology.................................. 3.56%
IBM Credit
5.73% due November 14, 1995............... 15,000,000 14,968,963 14,968,963
Telecommunication........................... 1.18%
Ameritech Cap. FDG. Corp.
5.60% due January 19, 1996................ 5,000,000 4,938,556 4,938,556
Utility -- Communication.................... 7.22%
AT&T Cap. Corp.
5.86% due November 1, 1995................ 5,000,000 5,000,000 5,000,000
Bell Atlantic Financial Svcs.
5.71% due November 30, 1995............... 10,369,000 10,321,305 10,321,305
Bell So. Capital Funding C/P
5.65% due November 1, 1995................ 15,000,000 15,000,000 15,000,000
------------ ------------
30,321,305 30,321,305
Utility -- Electric......................... 3.57%
Pacific Gas & Electric
5.72% due November 10, 1995............... 15,000,000 14,978,550 14,978,550
------------ ------------
TOTAL COMMERCIAL PAPER...................... 91.15% 382,902,016 382,902,016
REPURCHASE AGREEMENTS....................... 1.19%
First Bank America SE MI
5.80% due January 4, 1996................. 2,000,000 2,000,000 2,000,000
Harris Nesbit Thompson Repo
5.70% due November 1, 1995................ 2,994,000 2,994,000 2,994,000
------------ ------------
TOTAL REPURCHASE AGREEMENTS................. 1.19% 4,994,000 4,994,000
</TABLE>
F-8
<PAGE> 96
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
<TABLE>
<CAPTION>
PERCENTAGE
OF PRINCIPAL
NET ASSETS AMOUNT COST VALUE
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
MONEY MARKET PORTFOLIO (CONTINUED)
U.S. GOVERNMENT SECURITIES
U.S. Government Agencies.................... 7.14%
Federal Farm Credit Bank
6.10% due November 1, 1995................ 10,000,000 $ 10,000,000 $ 10,000,000
5.94% due December 1, 1995................ 5,000,000 5,000,000 5,000,000
5.72% due February 1, 1996................ 10,000,000 10,000,000 10,000,000
5.66% due February 1, 1996................ 5,000,000 4,999,219 4,999,219
------------ ------------
29,999,219 29,999,219
------------ ------------
TOTAL U.S. GOVERNMENT SECURITIES............ 7.14% 29,999,219 29,999,219
CORPORATE BONDS
Asset Back Security......................... 2.02%
Corporate Asset Fndg. Co.
5.72% due November 21, 1995............... 8,531,000 8,503,890 8,503,890
------------ ------------
TOTAL CORPORATE BONDS....................... 2.02% 8,503,890 8,503,890
------------ ------------
TOTAL INVESTMENTS........................... 101.50% $426,399,125 426,399,125
===========
Liabilities, less cash and other assets..... -1.50% (6,305,492)
------------
NET ASSETS.................................. 100.00% $420,093,633
===========
</TABLE>
F-9
<PAGE> 97
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL
OF AMOUNT OR
NET ASSETS SHARES COST VALUE
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
FLEXIBLE ASSET ALLOCATION PORTFOLIO
COMMON STOCKS -- BANKING & FINANCIAL SERVICE
Bank & Bank Holding Co......................... 0.53%
NationsBank Corp. ............................. 6,000 $ 315,547 $ 394,500
Financial Service.............................. 1.22%
First Investors Financial Service Group (A).... 7,000 77,000 67,375
Green Tree Financial Corp. (A)................. 24,000 642,936 639,000
PMT Services Inc. (A).......................... 5,000 112,500 134,375
Pioneer Financial Services Inc. ............... 4,000 56,240 56,000
----------- -----------
888,676 896,750
Insurance...................................... 1.98%
American General Corp. ........................ 8,500 297,947 279,438
American International Group................... 14,000 1,059,597 1,181,250
----------- -----------
1,357,544 1,460,688
Real Estate.................................... 0.44%
Centerpoint Properties Corp. .................. 4,000 74,120 90,500
Glimcher Realty Trust.......................... 5,000 105,000 90,000
JDN Realty Corp. (A)........................... 7,000 141,750 142,625
----------- -----------
320,870 323,125
----------- -----------
TOTAL COMMON STOCKS -- BANKING & FINANCIAL
SERVICE...................................... 4.17% 2,882,637 3,075,063
COMMON STOCKS -- CAPITAL GOODS
Production..................................... 0.24%
Illinois Tool Works............................ 3,000 134,805 174,375
Electrical Equipment........................... 0.06%
California Microwave Inc. (A).................. 2,000 57,000 44,000
----------- -----------
TOTAL COMMON STOCKS -- CAPITAL GOODS........... 0.30% 191,805 218,375
COMMON STOCKS -- CONSUMER CYCLICAL
Apparel........................................ 0.38%
Gucci Group (A)................................ 500 11,000 15,000
Tommy Hilfiger Corp. (A)....................... 7,000 151,860 266,875
----------- -----------
162,860 281,875
Auto & Truck................................... 1.19%
Ford Motor Co. ................................ 2,000 58,245 57,500
Harley Davidson (A)............................ 15,000 384,275 401,250
Oxford Resources Corp. CL A (A)................ 16,000 416,416 420,000
----------- -----------
858,936 878,750
</TABLE>
F-10
<PAGE> 98
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL
OF AMOUNT OR
NET ASSETS SHARES COST VALUE
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
FLEXIBLE ASSET ALLOCATION PORTFOLIO (CONTINUED)
COMMON STOCKS -- CONSUMER CYCLICAL (continued)
Auto Parts..................................... 0.60%
Magna International (A)........................ 10,200 $ 439,015 $ 441,150
Household Products............................. 0.71%
Aptargroup, Inc. (A)........................... 2,000 51,000 68,500
Dept 56, Inc. (A).............................. 10,000 406,037 453,750
----------- -----------
457,037 522,250
Retail -- Specialty............................ 1.79%
General Nutrition Co. (A)...................... 40,000 591,969 995,000
Pep Boys -- Manny, Mo, Jack.................... 4,000 122,490 87,500
Talbots Inc. (A)............................... 6,300 258,294 152,775
Walgreen Co. .................................. 3,000 67,144 85,500
----------- -----------
1,039,897 1,320,775
----------- -----------
TOTAL COMMON STOCKS -- CONSUMER CYCLICAL....... 4.67% 2,957,745 3,444,800
COMMON STOCKS -- CONSUMER NON-DURABLE
Communications & Media......................... 3.07%
Clear Channel Communications (A)............... 4,000 230,240 328,000
Cox Communications Inc. A NEW (A).............. 35,000 707,130 656,250
Evergreen Media Corp. CL A (A)................. 5,300 151,050 144,425
Panamsat Corp. (A)............................. 22,000 356,500 332,750
SFX Broadcasting Inc. -- CL A (A).............. 15,000 392,212 405,000
Time Warner Inc. .............................. 4,000 163,677 146,000
Tribune Co. ................................... 4,000 252,184 252,500
----------- -----------
2,252,993 2,264,925
Cosmetic & Soap................................ 0.38%
Procter & Gamble............................... 3,500 245,248 283,500
Drugs.......................................... 6.51%
Abbott Labs.................................... 16,000 625,336 636,000
Becton Dickinson Co. .......................... 10,000 574,350 650,000
Johnson & Johnson Co. ......................... 16,000 1,067,710 1,304,000
Merck & Co. ................................... 8,000 341,855 460,000
Pfizer Inc. ................................... 14,000 672,167 803,250
Schering Plough Corp. ......................... 6,000 230,805 321,750
Watson Pharmaceuticals Inc. (A)................ 14,000 450,413 626,500
----------- -----------
3,962,636 4,801,500
Entertainment & Leisure........................ 0.45%
Viacom Inc. Class A (A)........................ 1,000 44,966 49,750
Viacom Inc. Class B (A)........................ 5,600 251,561 280,000
----------- -----------
296,527 329,750
</TABLE>
F-11
<PAGE> 99
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL
OF AMOUNT OR
NET ASSETS SHARES COST VALUE
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
FLEXIBLE ASSET ALLOCATION PORTFOLIO (CONTINUED)
COMMON STOCKS -- CONSUMER NON-DURABLE (continued)
Food, Beverage & Tobacco....................... 1.14%
Archer-Daniels-Midland Company................. 13,125 $ 237,625 $ 211,641
Pepsico, Inc. ................................. 12,000 546,706 633,000
----------- -----------
784,331 844,641
Health Care.................................... 0.71%
Medisense Inc. (A)............................. 7,000 140,437 149,625
Omega Healthcare Investors..................... 2,000 48,500 50,750
Orthodontic Centers of America (A)............. 10,000 173,750 320,000
----------- -----------
362,687 520,375
Health Care Service............................ 0.92%
Medpartners Inc. (A)........................... 2,500 32,500 70,000
Occusystems Inc. (A)........................... 9,400 149,274 194,463
United Healthcare Corp. (A).................... 7,800 358,978 414,375
----------- -----------
540,752 678,838
Hospital Supply & Service...................... 0.48%
Emcare Holdings Inc. (A)....................... 3,000 33,000 69,000
Inphynet Medical Management (A)................ 16,000 272,375 288,000
----------- -----------
305,375 357,000
Office Product................................. 0.19%
BT Office Products (A)......................... 11,000 131,790 141,625
Printing & Publishing.......................... 0.23%
Mail-Well Inc. (A)............................. 15,000 210,000 172,500
Travel & Recreation............................ 1.25%
Walt Disney Co. ............................... 16,000 879,969 922,000
----------- -----------
TOTAL COMMON STOCKS -- CONSUMER NON-DURABLE.... 15.34% 9,972,308 11,316,654
COMMON STOCKS -- ENERGY
Oil & Gas -- Domestic.......................... 0.61%
Amoco Corp. ................................... 7,000 447,982 447,125
Oil & Gas -- International..................... 0.36%
Mobil Corp. ................................... 2,000 178,745 201,500
Royal Dutch Petroleum -- ADR................... 500 53,030 61,438
----------- -----------
231,775 262,938
----------- -----------
TOTAL COMMON STOCKS -- ENERGY.................. 0.96% 679,757 710,063
</TABLE>
F-12
<PAGE> 100
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL
OF AMOUNT OR
NET ASSETS SHARES COST VALUE
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
FLEXIBLE ASSET ALLOCATION PORTFOLIO (CONTINUED)
COMMON STOCKS -- MANUFACTURING
Chemical....................................... 1.01%
Dupont De Nemours & Co. ....................... 12,000 $ 765,795 $ 748,500
Computer....................................... 0.55%
EMC Corp. Massachusetts (A).................... 19,200 332,259 297,600
MICROCOM Inc. (A).............................. 5,000 78,000 109,375
----------- -----------
410,259 406,975
Miscellaneous.................................. 1.51%
Applied Materials Inc. (A)..................... 10,000 518,026 501,250
Silicon Valley Group Inc. (A).................. 14,000 404,338 453,250
WATSCO Inc. ................................... 3,750 40,171 62,344
WATSCO Inc. Class B............................ 6,000 63,740 98,250
----------- -----------
1,026,275 1,115,094
Non Ferrous Metal.............................. 0.41%
Reynolds Metals................................ 6,000 309,949 302,250
Office Equipment............................... 0.47%
Boise Cascade Office Products (A).............. 9,500 248,920 343,185
----------- -----------
TOTAL COMMON STOCKS -- MANUFACTURING........... 3.95% 2,761,198 2,916,004
COMMON STOCKS -- SERVICE
Business....................................... 0.46%
Avid Tech Inc. (A)............................. 7,800 302,025 341,250
Distributor.................................... 0.66%
Alco Standard Corp. ........................... 5,500 392,080 486,750
Miscellaneous.................................. 0.61%
ADT, Ltd. (A).................................. 28,000 386,680 392,000
ITT Corp. ..................................... 500 41,071 61,250
----------- -----------
427,751 453,250
----------- -----------
TOTAL COMMON STOCKS -- SERVICE................. 1.74% 1,121,856 1,281,250
COMMON STOCKS -- TECHNOLOGY
Aerospace Aircraft............................. 0.13%
Simula Inc. (A)................................ 4,500 57,180 98,438
Business -- Mechanics & Software............... 3.27%
Compaq Computers Corp. (A)..................... 5,500 218,892 306,625
Network General Corp. (A)...................... 10,500 305,315 435,750
</TABLE>
F-13
<PAGE> 101
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL
OF AMOUNT OR
NET ASSETS SHARES COST VALUE
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
FLEXIBLE ASSET ALLOCATION PORTFOLIO (CONTINUED)
COMMON STOCKS -- TECHNOLOGY (continued)
Business -- Mechanics & Software (continued)
Sun Microsystems (A)........................... 8,100 $ 485,675 $ 631,800
Xerox Corp. ................................... 8,000 952,455 1,038,000
----------- -----------
1,962,337 2,412,175
Business -- Service............................ 1.28%
First Data (A)................................. 14,273 709,415 943,809
Electronics.................................... 2.76%
Charter Power Systems Inc. (A)................. 8,000 216,000 200,000
Gemstar International Group (A)................ 11,500 138,000 240,063
Hewlett-Packard Co. ........................... 10,000 809,978 926,250
Motorola Inc. ................................. 9,000 670,165 590,625
Nimbus Co International Inc. (A)............... 10,000 70,000 80,000
----------- -----------
1,904,143 2,036,938
Miscellaneous.................................. 0.13%
Cherry Corp. Class A (A)....................... 500 6,250 6,250
Keane, Inc. (A)................................ 1,400 31,891 37,800
Three Five Systems Inc. (A).................... 3,000 79,429 54,375
----------- -----------
117,570 98,425
Software....................................... 3.32%
HCIA Inc. (A).................................. 7,900 225,150 215,275
Informix Corp. (A)............................. 15,000 372,810 436,875
Intersolv (A).................................. 8,500 178,626 133,875
Mcafee Associates Inc. (A)..................... 12,700 636,511 739,775
SPSS Inc. (A).................................. 8,000 125,504 135,000
Sterling Software, Inc. (A).................... 16,000 663,900 738,000
Transaction Systems Archit-A (A)............... 2,000 30,000 52,000
----------- -----------
2,232,501 2,450,800
Telecommunication.............................. 2.98%
Bell & Howell Holdings Co. (A)................. 39,000 809,793 975,000
Echostar Communications -- A (A)............... 8,000 139,000 116,000
U S Robotics (A)............................... 12,000 646,655 1,110,000
----------- -----------
1,595,448 2,201,000
----------- -----------
TOTAL COMMON STOCKS --
TECHNOLOGY................................... 13.88% 8,578,594 10,241,585
COMMON STOCKS -- TRANSPORTATION
Railroad....................................... 0.09%
Union Pacific Corp. ........................... 1,000 62,660 65,375
----------- -----------
TOTAL COMMON STOCKS -- TRANSPORTATION.......... 0.09% 62,660 65,375
</TABLE>
F-14
<PAGE> 102
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL
OF AMOUNT OR
NET ASSETS SHARES COST VALUE
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
FLEXIBLE ASSET ALLOCATION PORTFOLIO (CONTINUED)
COMMON STOCKS -- TRANSPORTATION (continued)
COMMON STOCKS -- UTILITY
Telephone...................................... 0.31%
AT&T Corp. .................................... 500 $ 26,217 $ 32,000
Worldcom Inc. (A).............................. 6,000 181,500 195,750
----------- -----------
TOTAL COMMON STOCKS -- UTILITY................. 0.31% 207,717 227,750
----------- -----------
COMMON STOCKS -- GRAND TOTAL................... 45.40% 29,416,277 33,496,919
DEMAND NOTES
Utility -- Electrical.......................... 0.04%
Wisconsin Electric Demand Note
5.5082% due December 31, 2031................ 32,235 32,235 32,235
----------- -----------
TOTAL DEMAND NOTES............................. 0.04% 32,235 32,235
COMMERCIAL PAPER
Asset Back Security............................ 0.68%
Asset Securitization Corp.
5.73% due November 15, 1995.................. 500,000 498,886 498,886
Auto & Truck................................... 1.83%
Associates Corp. of North Amer.
5.7445% due November 29, 1995................ 350,000 350,000 350,000
General Electric Capital Corp.
5.7639% due November 17, 1995................ 500,000 500,000 500,000
Household Finance Corp.
5.7666% due November 2, 1995................. 500,000 500,000 500,000
----------- -----------
1,350,000 1,350,000
Finance -- Miscellaneous....................... 1.26%
American Express CR. Corp. CP
5.7906% due November 15, 1995................ 530,000 530,000 530,000
Ford Motor Credit
5.7455% due November 6, 1995................. 100,000 100,000 100,000
5.7657% due December 1, 1995................. 300,000 300,000 300,000
----------- -----------
930,000 930,000
Household Product.............................. 0.72%
Illinois Tool Works
5.73% due November 7, 1995................... 535,000 534,489 534,489
----------- -----------
TOTAL COMMERCIAL PAPER......................... 4.49% 3,313,375 3,313,375
</TABLE>
F-15
<PAGE> 103
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL
OF AMOUNT OR
NET ASSETS SHARES COST VALUE
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
FLEXIBLE ASSET ALLOCATION PORTFOLIO (CONTINUED)
REPURCHASE AGREEMENTS
Beneficial Corp................................ 0.68%
5.7888% due November 10, 1995................ 500,000 $ 500,000 $ 500,000
----------- -----------
TOTAL REPURCHASE AGREEMENTS.................... 0.68% 500,000 500,000
U.S. GOVERNMENT SECURITIES
U.S. Government Agencies....................... 9.54%
FHLMC Disc Notes
5.63% due November 1, 1995................... 1,535,000 1,535,000 1,535,000
5.62% due November 6, 1995................... 2,785,000 2,782,826 2,782,826
5.64% due November 30, 1995.................. 2,735,000 2,722,574 2,722,574
----------- -----------
7,040,400 7,040,400
U.S. Treasury.................................. 35.95%
Treasury Notes
6.00% due August 31, 1997.................... 2,500,000 2,509,294 2,514,842
7.1250% due September 30, 1999............... 200,000 198,991 209,312
7.75% due January 31, 2000................... 500,000 502,092 535,938
6.875% due March 31, 2000.................... 2,500,000 2,500,543 2,603,125
6.25% due May 31, 2000....................... 500,000 506,128 508,438
6.125% due July 31, 2000..................... 2,000,000 1,997,034 2,024,374
6.25% due August 31, 2000.................... 3,000,000 3,027,648 3,051,560
6.375% due August 15, 2002................... 100,000 97,513 102,500
7.25% due August 15, 2004.................... 2,000,000 2,014,058 2,165,624
7.8750% due November 15, 2004................ 450,000 453,647 507,234
6.50% due May 15, 2005....................... 2,500,000 2,522,911 2,588,280
6.50% due August 15, 2005.................... 4,500,000 4,636,918 4,660,313
Treasury Bills
6.25% due August 15, 2023.................... 500,000 410,592 489,063
7.625% due February 15, 2025................. 3,000,000 3,367,642 3,484,685
6.875% due August 15, 2025................... 1,000,000 997,983 1,073,437
----------- -----------
25,742,994 26,518,725
----------- -----------
TOTAL U.S. GOVERNMENT SECURITIES............... 45.49% 32,783,394 33,559,125
CORPORATE BONDS
Bank & Bank Holding Co......................... 0.27%
Huntington National
6.75% due June 15, 2003...................... 100,000 93,763 100,079
NationsBank Corp.
5.375% due December 1, 1995.................. 100,000 99,940 99,940
----------- -----------
193,703 200,019
Chemical....................................... 0.14%
Rhone-Poulenc
6.75% due October 15, 1999................... 100,000 97,210 100,958
</TABLE>
F-16
<PAGE> 104
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL
OF AMOUNT OR
NET ASSETS SHARES COST VALUE
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
FLEXIBLE ASSET ALLOCATION PORTFOLIO (CONTINUED)
CORPORATE BONDS (continued)
Communications & Media......................... 0.16%
Bell Atlantic
5.37% due July 13, 1998...................... 120,000 $ 114,776 $ 117,965
Electronics.................................... 0.21%
Union Pacific
7.00% due June 15, 2000...................... 150,000 148,940 153,981
Finance Company................................ 0.34%
Commercial Credit
6.00% due June 15, 2000...................... 150,000 142,531 148,334
Norwest Financial Inc.
6.25% due February 15, 1997.................. 100,000 99,542 100,215
----------- -----------
242,073 248,549
Food, Beverage & Tobacco....................... 0.13%
Canandaigua Wine
8.75% due December 15, 2003.................. 100,000 98,748 99,250
Health Care.................................... 0.13%
Gillette Company
5.75% due October 15, 2005................... 100,000 87,526 95,562
Investment Company............................. 0.14%
Dean Witter Discover
6.875% due March 1, 2003..................... 100,000 93,944 102,027
Metal & Mineral................................ 0.27%
Aluminum Co. of America
5.75% due February 1, 2001................... 100,000 93,327 97,580
Federated Dept. Stores
9.72% due February 15, 2004.................. 100,000 99,077 99,500
----------- -----------
192,404 197,080
Miscellaneous.................................. 0.65%
Ann Taylor, Inc. Sub Notes
8.75% due June 15, 2000...................... 100,000 97,349 81,000
Argosy Gaming Co.
12.00% due June 1, 2001...................... 100,000 100,000 97,750
CitiCorp Sub NTS
7.1250% due March 15, 2004................... 100,000 98,878 102,842
Merck & Co.
7.75% due May 1, 1996........................ 100,000 100,631 100,983
</TABLE>
F-17
<PAGE> 105
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL
OF AMOUNT OR
NET ASSETS SHARES COST VALUE
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
FLEXIBLE ASSET ALLOCATION PORTFOLIO (CONTINUED)
CORPORATE BONDS (continued)
Miscellaneous (continued)
Pep Boys Notes Non-Callable
6.6250% due May 15, 2003..................... 100,000 $ 91,838 $ 99,454
----------- -----------
488,696 482,029
Paper & Forest Product......................... 0.14%
International Paper Co.
7.50% due May 15, 2004....................... 100,000 98,759 106,202
Retail Trade................................... 0.14%
Black & Decker -- Notes nonCall
6.625% due November 15, 2000................. 100,000 95,057 100,325
----------- -----------
TOTAL CORPORATE BONDS.......................... 2.72% 1,951,836 2,003,947
CONVERTIBLE SECURITIES
Liberty Property SSB Deb. conv
8.00% due July 1, 2001....................... 50,000 50,000 50,620
Morgan Stanley 7.0% "CSCO" PFO (A)............. 7,500 252,677 311,250
----------- -----------
TOTAL CONVERTIBLE SECURITIES................... 0.49% 302,677 361,870
----------- -----------
TOTAL INVESTMENTS.............................. 99.31% $68,299,794 73,267,471
==========
Cash and other assets less liabilities......... 0.69% 507,764
-----------
NET ASSETS..................................... 100.00% $73,775,235
==========
</TABLE>
- ---------------
(A) Non income producing security
F-18
<PAGE> 106
Notes to Financial Statements
Aon Asset Management Fund, Inc.
Year ended October 31, 1995
1. DESCRIPTION OF ENTITY
Aon Asset Management Fund, Inc. (the Fund) incorporated in Virginia on
August 27, 1991 is registered under the Investment Company Act of 1940 as an
open-end, diversified management investment company whose shares are sold
principally to affiliates of Aon Corporation. The Fund consists of two
portfolios: the Money Market Portfolio and the Flexible Asset Allocation
Portfolio. The Money Market Portfolio of the Fund is designated as a "Money
Market Fund", and must adhere to the guidelines governing such funds as
described in Rule 2a-7 of the Investment Company Act of 1940. Pursuant to that
rule, the Money Market Portfolio maintains a constant net asset value of $1.00
per share on a daily basis. Dividends are declared daily and paid monthly for
the Money Market Portfolio and declared and paid quarterly for the Flexible
Asset Allocation Portfolio.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies of the Fund
used in the preparation of its financial statements.
a) Security Valuation -- Securities traded on a national securities
exchange are valued at the last reported sales price on the last business
day of the period. Securities traded in the over-the-counter market are
stated at the last quoted bid price. The investments held by the Money
Market Portfolio and debt instruments held by the Flexible Asset Allocation
Portfolio that mature in 60 days or less are stated at amortized cost,
which approximates fair value. The remaining investments held by the
Flexible Asset Allocation Portfolio are stated at fair value.
b) Investment Transactions and Income -- Security transactions are
accounted for on the trade date (the date the order to buy or sell is
executed). Interest income is recorded on the accrual basis and dividend
income is reported on the ex-dividend date. Realized gains and losses on
investment are determined on the first-in, first-out basis. Discounts and
premiums on securities purchased are amortized over the life of the
respective securities.
c) Distributions to Shareholders -- Distributions of net investment
income and capital gains are determined in accordance with income tax
regulations. The Fund has no material differences in book and tax income or
cost of securities.
3. INCOME TAXES
The Fund intends to qualify as a "regulated investment company" under the
provision of Sub-chapter M of the Internal Revenue Code of 1986 as amended, and
thereby, under the provisions of the income tax laws available to regulated
investment companies, be relieved of substantially all income taxes. Therefore,
no provision has been made for Federal or state income taxes. The Flexible Asset
Allocation Portfolio's accumulated net realized loss on sales of investments for
the Federal income tax purposes at October 31, 1995 of $46,231 is available to
offset future tax gains. If unused, this loss carryover expires in 2002.
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of an investment advisory contract with Aon Advisors, Inc.,
(Investment Advisor), a subsidiary of Aon Corporation, investment advisory fees
will be deducted from the Fund daily and paid monthly at a rate of 0.35% of
average daily net assets in the Money Market Portfolio and 0.75% of average
daily net assets up to $250 million, 0.65% of average daily net assets on the
next $250 million, and 0.50% of average daily net assets in excess of $500
million in the Flexible Asset Allocation Portfolio. Effective April 26, 1995,
the investment advisory contract was amended to change the investment advisory
fees in the Flexible
F-19
<PAGE> 107
Notes to Financial Statements (continued)
Aon Asset Management Fund, Inc.
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES (CONTINUED)
Asset Allocation Portfolio. The amended investment advisory fees are equal to
0.70% of average daily net assets up to $250 million, 0.60% of average daily net
assets on the next $250 million, and 0.50% of average daily net assets in excess
of $500 million in the Flexible Asset Allocation Portfolio. The Investment
Advisor has agreed to waive 0.25% of the advisory fee for the Money Market
Portfolio for a net rate of 0.10% on a daily basis.
The Investment Advisor provides administrative services to the Fund and
manages its business affairs, including personnel, facilities and equipment and
all legal, accounting and other costs incurred in the organization of the Fund.
Expenses of the Fund are subject to reimbursement to the extent that ordinary
business expenses of the Fund (including the advisory fees but excluding
interest, taxes, brokerage commissions, and extraordinary expenses) in any year
exceed 1.0% of the aggregate average daily net assets of the Money Market
Portfolio, and 1.25% of the aggregate net asset in the Flexible Asset Allocation
Portfolio.
To assist in the administration of the Fund, the Investment Advisor has
entered into an administrative contract with Forth Financial Securities
Corporation ("FFSC"), an affiliate of Aon Corporation, to provide certain
administrative services for the Fund. Under this agreement, the Investment
Advisor will pay FFSC an annual fee of $25,000 plus 0.05% of the average daily
net assets of the Fund's portfolios.
Certain officers and directors of the Fund were also officers and directors
of the Investment Advisor and The Life Insurance Company of Virginia an indirect
wholly-owned subsidiary of Aon and parent company of FFSC. During the year ended
October 31, 1995, the Fund made payments totaling $25,002 ($12,501 per
portfolio) to unaffiliated directors of the Money Market Portfolio and the
Flexible Asset Allocation Portfolio.
During 1994, an affiliate of the Investment Advisor purchased securities
from the Money Market Portfolio, at an amount less than their current fair value
resulting in a capital loss of $607,250. The Investment Advisor made a capital
contribution of $607,250.
5. COMPOSITION OF NET ASSETS
At October 31, 1995, net assets of the Flexible Asset Allocation Portfolio
consisted of:
<TABLE>
<S> <C>
Common shares.......................................................... $68,849,955
Accumulated net realized loss on sales of investments.................. (46,231)
Unrealized appreciation on investments................................. 4,967,677
Undistributed net investment income.................................... 3,834
-----------
Net assets............................................................. $73,775,235
===========
</TABLE>
F-20
<PAGE> 108
Notes to Financial Statements (continued)
Aon Asset Management Fund, Inc.
6. CAPITAL SHARE TRANSACTIONS
At October 31, 1995, there were 3,000,000,000 shares of no par value common
stock authorized in the Fund. The shares will be issued in the following classes
and have the following designations:
<TABLE>
<CAPTION>
CLASS SHARES
-----------
<S> <C>
Class A (Money Market Portfolio)....................................... 750,000,000
Class B (Flexible Asset Allocation Portfolio).......................... 450,000,000
Class C................................................................ 400,000,000
Class D................................................................ 400,000,000
Class E................................................................ 250,000,000
Class F................................................................ 250,000,000
Class G................................................................ 250,000,000
Class H................................................................ 250,000,000
</TABLE>
A summary of capital stock transactions follows:
<TABLE>
<CAPTION>
FLEXIBLE
ASSET
MONEY MARKET ALLOCATION
PORTFOLIO PORTFOLIO
------------------ -------------
<S> <C> <C>
Balance at October 31, 1993........................ 412,067,946.750 --
Shares sold........................................ 4,231,505,926.180 1,000,000.000
Shares issued to shareholders in reinvestment of
dividends and distributions...................... 3,932,861.420 21,494.102
------------------ -------------
Total issued....................................... 4,235,438,787.600 1,021,494.102
Shares redeemed.................................... (4,236,594,456.020) --
------------------ -------------
Net change in shares............................... (1,155,668.420) 1,021,494.102
------------------ -------------
Balance at October 31, 1994........................ 410,912,278.330 1,021,494.102
Shares sold........................................ 4,368,158,454.020 4,865,217.717
Shares issued to shareholders in reinvestment of
dividends and distributions...................... 7,851,992.89 240,114.919
------------------ -------------
Total issued....................................... 4,376,010,446.91 5,105,332.636
Shares redeemed.................................... (4,366,829,092.71) --
------------------ -------------
Net change in shares............................... 9,181,354.20 5,105,332.636
------------------ -------------
Balance at October 31, 1995........................ 420,093,632.53 6,126,826.738
================== =============
</TABLE>
F-21
<PAGE> 109
Notes to Financial Statements (continued)
Aon Asset Management Fund, Inc.
7. INVESTMENTS
Purchases and sales of investment securities, excluding maturities, during
the periods were as follows:
<TABLE>
<CAPTION>
FLEXIBLE
MONEY ASSET
MARKET ALLOCATION
PORTFOLIO PORTFOLIO
-------------- ------------
<S> <C> <C>
PURCHASES
U.S. Government and Agency Obligations............... $ -- $ 34,194,530
Corporate bonds...................................... -- 199,000
Commercial paper..................................... 9,874,922,480 193,988,108
Common stock......................................... -- 47,796,532
-------------- ------------
Total purchases........................................ $9,874,922,480 $276,178,170
============== ============
SALES
U.S. Government and Agency Obligations............... $ -- $ 1,105,000
Corporate bonds...................................... -- 618,015
Commercial paper..................................... 174,419,896 16,081,762
Common stock......................................... -- 24,282,256
-------------- ------------
Total Sales............................................ $ 174,419,896 $ 42,087,033
============== ============
</TABLE>
At October 31, 1995, based on cost for federal income tax purposes, net
unrealized appreciation of portfolio securities consisted of the following:
<TABLE>
<CAPTION>
FLEXIBLE ASSET
ALLOCATION
PORTFOLIO
--------------
<S> <C>
Appreciated Securities.................................................. $5,619,765
Depreciated Securities.................................................. (652,088)
----------
Net unrealized appreciation............................................. $4,967,677
==========
</TABLE>
8. OTHER MATTERS
In September 1995, Aon Corporation announced its intention to sell The Life
Insurance Company of Virginia. The sale of The Life Insurance Company of
Virginia will probably include other Richmond based operations, including Forth
Financial Securities Corporation, the fund's principal underwriter.
F-22
<PAGE> 110
Financial Highlights
Aon Asset Management Fund, Inc.
<TABLE>
<CAPTION>
***
MONEY MARKET PORTFOLIO 1995 1994 1993 1992
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net asset value at beginning
of period.................. $1.00 $1.00 1.00 1.00
Investment income............ .06 .04 .03 .03
Expenses..................... * * * *
----- ----- ----- -----
Net investment income........ .06 .04 .03 .03
Net realized gains (losses)
on sale of investments..... * * * *
----- ----- ----- -----
Income from operations....... .06 .04 .03 .03
Dividends paid to
shareholders from:
Net investment income...... (.06) (.04) (.03) (.03)
Net realized gain (loss)... * * * *
----- ----- ----- -----
(.06) (.04) (.03) (.03)
Contribution of capital...... -- * -- --
----- ----- ----- -----
Increase in net asset
value...................... .00 .00 .00 .00
Net asset value at end of
period..................... $1.00 $1.00 $1.00 $1.00
Total return................. 5.79% 3.73% 3.10% 3.57%
Ratios:
Ratio of operating expenses
to average net assets...... 0.14%** 0.15%** 0.17%** 0.25%**
Ratio of net investment
income to average net
assets..................... 5.79%** 3.73%** 3.10** 3.57**
Net assets at end of
period..................... $420,093,633 $410,912,278 $412,067,947 $399,075,531
</TABLE>
- ---------------
* Less than $0.01 per share
** The Investment Advisor has agreed for the first four years of the
Portfolio's operations to waive a portion of its advisory fees. Absent this
agreement, the ratio of expenses to average net assets and the ratio of net
investment income to average net assets would have been .39% and 5.54% for
1995, .40% and 3.48% for 1994, .42% and 2.85% for 1993 and .50% and 3.32%
for 1992, respectively.
*** For the period January 23, 1992 (commencement of operations) to October 31,
1992. Amounts for 1992 have been determined on an annualized basis.
F-23
<PAGE> 111
Financial Highlights (continued)
Aon Asset Management Fund, Inc.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 1,
YEAR ENDED 1994 TO
OCTOBER 31, OCTOBER 31,
FLEXIBLE ASSET ALLOCATION PORTFOLIO 1995 1994
----------- -----------
<S> <C> <C>
Net asset value at beginning of period.......................... $ 9.97 $10.00
Investment income............................................... .32 .25
Expenses........................................................ (.08) (.08)
------ ------
Net investment income........................................... .24 .17
Net realized gains (losses) on sale of investments.............. .66 (.05)
Net unrealized appreciation (depreciation) on investments....... 1.75 .06
------ ------
Income from operations.......................................... 2.65 .18
Dividends paid to shareholders from:
Net investment income......................................... (.24) (.16)
Net realized gains (loss)..................................... (.34) (.05)
------ ------
(.58) (.21)
------ ------
Increase (decrease) in net asset value.......................... 2.07 (.03)
Net asset value at end of period................................ 12.04 9.97
Total return.................................................... 26.92% 1.84%
Ratios:
Ratio of operating expenses to average net assets............. .96% 1.25%*
Ratio of net investment income to average net assets.......... 2.73% 2.63%*
Portfolio turnover............................................ 95.17% 64.36%
Net assets at end of period..................................... $73,775,235 $10,189,125
</TABLE>
- ---------------
* Ratios have been determined on an annualized basis.
F-24
<PAGE> 112
UNAUDITED FINANCIAL STATEMENTS
AON ASSET MANAGEMENT FUND, INC.
SIX MONTHS ENDED APRIL 30, 1996
F-25
<PAGE> 113
Aon Asset Management Fund, Inc.
Unaudited Financial Statements
Six Months ended April 30, 1996
TABLE OF CONTENTS
<TABLE>
<S> <C>
Financial Statements
Statements of Assets and Liabilities................................................. F-27
Statements of Operations............................................................. F-28
Statements of Changes in Net Assets.................................................. F-29
Schedule of Investments.............................................................. F-30
Notes to Financial Statements........................................................ F-42
Financial Highlights................................................................. F-46
</TABLE>
F-26
<PAGE> 114
Statements of Assets and Liabilities
Aon Asset Management Fund, Inc.
April 30, 1996
Unaudited
<TABLE>
<CAPTION>
MONEY FLEXIBLE ASSET
MARKET ALLOCATION
PORTFOLIO PORTFOLIO
------------ --------------
<S> <C> <C>
ASSETS
Investments in securities at fair value (cost -- $83,523,907)... $ -- $ 92,011,773
Investments in securities at amortized cost which approximates
fair value................................................... 323,137,647 --
Cash............................................................ 3,458 17,884
Dividends receivable............................................ -- 42,881
Interest receivable............................................. 32,282 280,235
Receivable for securities sold.................................. -- 18,175
------------ -------------
Total Assets...................................................... 323,173,387 92,370,948
LIABILITIES
Dividends payable............................................... 1,438,283 --
Accrued expenses payable........................................ 233,051 365,327
Payable for securities purchased................................ -- 437,075
------------ -------------
Total Liabilities................................................. 1,671,334 802,402
------------ -------------
NET ASSETS........................................................ $321,502,053 $ 91,568,546
============ =============
OUTSTANDING SHARES................................................ 321,502,053 7,172,966
============ =============
$1.00 $12.77
Net Asset Value Per Share......................................... ============ =============
</TABLE>
See notes to financial statements.
F-27
<PAGE> 115
Statements of Operations
Aon Asset Management Fund, Inc.
Six months ended April 30, 1996
Unaudited
<TABLE>
<CAPTION>
MONEY FLEXIBLE ASSET
MARKET ALLOCATION
PORTFOLIO PORTFOLIO
----------- --------------
<S> <C> <C>
INVESTMENT INCOME
Interest......................................................... $10,792,666 $1,323,529
Dividends........................................................ -- 287,035
----------- ----------
Total Investment Income............................................ 10,792,666 1,610,564
EXPENSES
Investment Advisory Fee (Note 4)................................. 674,895 302,972
Custodian, transfer and accounting fees.......................... 194,969 31,433
Directors' fees.................................................. 6,215 6,215
Audit fees....................................................... 10,063 7,757
Legal fees....................................................... 10,677 5,528
Registration fees................................................ 2,983 17,591
Other............................................................ 282 282
----------- ----------
Total Expenses..................................................... 900,084 371,778
Less: Fee Waiver................................................... 482,068 --
----------- ----------
Net Expenses....................................................... 418,016 371,778
----------- ----------
NET INVESTMENT INCOME.............................................. 10,374,650 1,238,786
----------- ----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain (loss) on sale of investments.................. (10,062) 569,094
Change in net unrealized appreciation on investments............. -- 3,520,189
----------- ----------
Net realized and unrealized gain (loss) on investments........... (10,062) 4,089,283
----------- ----------
INCREASE IN NET ASSETS FROM OPERATIONS............................. $10,364,588 $5,328,069
=========== ==========
</TABLE>
See notes to financial statements.
F-28
<PAGE> 116
Statements of Changes in Net Assets
Aon Asset Management Fund, Inc.
Unaudited
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO FLEXIBLE ASSET
----------------------------------- ALLOCATION PORTFOLIO
SIX MONTHS ------------------------------------
ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
APRIL 30, 1996 OCTOBER 31, 1995 APRIL 30, 1996 OCTOBER 31, 1995
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS FROM
OPERATIONS
Net investment income.......... $ 10,374,650 $ 28,244,205 $ 1,238,786 $ 839,757
Net realized gain (loss) on
sale of investments......... (10,062) 4,758 569,094 1,835,265
Change in unrealized
appreciation on
investments................. -- -- 3,520,189 4,907,281
--------------- ---------------- ------------ ------------
Net increase in net assets from
operations.................. 10,364,588 28,248,963 5,328,069 7,582,303
DIVIDENDS PAID TO SHAREHOLDERS
FROM:
Net investment income.......... (10,374,650) (28,244,205) (498,978) (835,923)
Net realized gain (loss) on
investments................. 10,062 (4,758) -- (1,835,265)
Distributions in excess of
realized gains.............. -- -- -- (162,706)
--------------- ---------------- ------------ ------------
(10,364,588) (28,248,963) (498,978) (2,833,894)
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares... 2,008,014,887 4,368,158,454 16,081,588 56,003,807
Net asset value of shares
issued upon reinvestment of
dividends................... 2,737,573 7,851,993 498,978 2,833,894
Cost of redemption of shares... (2,109,344,040) (4,366,829,092) (3,616,346) --
--------------- ---------------- ------------ ------------
Increase (decrease) in net
assets from capital
transactions................ (98,591,580) 9,181,355 12,964,220 58,837,701
--------------- ---------------- ------------ ------------
Increase (decrease) in net
assets...................... (98,591,580) 9,181,355 17,793,311 63,586,110
Net assets at beginning of
period...................... 420,093,633 410,912,278 73,775,235 10,189,125
--------------- ---------------- ------------ ------------
Net assets at end of period.... $ 321,502,053 $ 420,093,633 $ 91,568,546 $ 73,775,235
=============== ================ =========== ============
Undistributed net investment
income...................... $ -- $ -- $ 743,642 $ 3,845
=============== ================ ============ ============
</TABLE>
See notes to financial statements.
F-29
<PAGE> 117
Schedule of Investments
Aon Asset Management Fund, Inc.
April 30, 1996
Unaudited
<TABLE>
<CAPTION>
PERCENTAGE
OF PRINCIPAL
NET ASSETS AMOUNT COST VALUE
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
MONEY MARKET PORTFOLIO
COMMERCIAL PAPER
Agricultural Product......................... 3.09%
Weyerhauser Co.
5.28% due June 7, 1996..................... 10,000,000 $ 9,945,733 $ 9,945,733
Auto & Truck................................. 17.04%
American Information
5.28% due May 28, 1996..................... 10,000,000 9,960,400 9,960,400
General Motors Acceptance Corp.
5.13% due May 13, 1996..................... 5,000,000 4,991,450 4,991,450
5.34% due July 18, 1996.................... 10,000,000 9,884,300 9,884,300
PHH Corp.
5.30% due May 17, 1996..................... 10,000,000 9,976,444 9,976,444
Preferred Receivable FDG Corp.
5.27% due May 13, 1996..................... 5,000,000 4,991,217 4,991,217
SouthwesternBell Capital Corp.
5.12% due May 9, 1996...................... 10,000,000 9,988,622 9,988,622
5.09% due May 30, 1996..................... 5,000,000 4,979,499 4,979,499
------------ ------------
54,771,932 54,771,932
Banking -- Foreign........................... 4.61%
International Ls
5.30% due July 19, 1996.................... 15,000,000 14,825,542 14,825,542
Conglomerate................................. 7.74%
Avco Financial Services Inc.
5.06% due May 20, 1996..................... 8,000,000 7,978,636 7,978,636
5.30% due June 21, 1996.................... 7,000,000 6,947,442 6,947,442
Philip Morris
5.30% due May 23, 1996..................... 10,000,000 9,967,611 9,967,611
------------ ------------
24,893,689 24,893,689
Finance -- Miscellaneous..................... 25.31%
AIG Funding
5.35% due May 1, 1996...................... 5,000,000 5,000,000 5,000,000
American Express
5.27% due May 10, 1996..................... 10,000,000 9,986,825 9,986,825
5.30% due May 31, 1996..................... 5,000,000 4,977,917 4,977,917
Associates Corp. of North America
5.05% due June 10, 1996.................... 5,000,000 4,971,944 4,971,944
Comerica Bank
5.03% due June 7, 1996..................... 5,000,000 5,000,000 5,000,000
Fleet Mortgage Group
5.40% due May 1, 1996...................... 10,000,000 10,000,000 10,000,000
</TABLE>
F-30
<PAGE> 118
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
Unaudited
<TABLE>
<CAPTION>
PERCENTAGE
OF PRINCIPAL
NET ASSETS AMOUNT COST VALUE
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
(CONTINUED)COMMERCIAL PAPER (continued)
Ford Motor Credit Co.
5.30% due May 31, 1996..................... 5,000,000 $ 4,977,917 $ 4,977,917
5.25% due June 14, 1996.................... 10,000,000 9,935,833 9,935,833
General Electric Capital
5.32% due May 3, 1996...................... 5,000,000 4,998,522 4,998,522
5.28% due July 2, 1996..................... 8,600,000 8,521,797 8,521,797
Household Finance Corp.
5.24% due May 1, 1996...................... 10,000,000 10,000,000 10,000,000
Suntrust Bank
5.31% due May 13, 1996..................... 3,000,000 2,994,690 2,994,690
------------ ------------
81,365,445 81,365,445
Finance -- Service........................... 11.57%
Goldman Sachs
5.25% due July 12, 1996.................... 15,000,000 14,842,500 14,842,500
Merrill Lynch
5.29% due June 25, 1996.................... 7,500,000 7,439,385 7,439,385
5.30% due July 24, 1996.................... 5,000,000 4,938,167 4,938,167
Morgan Stanley
5.28% due May 6, 1996...................... 5,000,000 4,996,333 4,996,333
5.16% due May 13, 1996..................... 5,000,000 4,991,400 4,991,400
------------ ------------
37,207,785 37,207,785
Insurance.................................... 3.10%
Prudential Funding
5.29% due May 8, 1996...................... 5,000,000 4,994,857 4,994,857
5.25% due June 28, 1996.................... 5,000,000 4,957,708 4,957,708
------------ ------------
9,952,565 9,952,565
Miscellaneous................................ 1.54%
Associates Corp
5.26% due July 24, 1996.................... 5,000,000 4,938,633 4,938,633
Oil & Gas.................................... 4.41%
Baltimore Gas & Electric Co.
5.03% due May 21, 1996..................... 8,300,000 8,276,806 8,276,806
5.28% due June 6, 1996..................... 5,945,000 5,913,610 5,913,610
------------ ------------
14,190,416 14,190,416
Printing & Publishing........................ 1.53%
McGraw-Hill Inc.
5.23% due July 30, 1996.................... 5,000,000 4,934,625 4,934,625
Technology................................... 7.77%
Pitney-Bowes Credit Corp.
5.29% due May 16, 1996..................... 10,000,000 9,977,958 9,977,958
</TABLE>
F-31
<PAGE> 119
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
Unaudited
<TABLE>
<CAPTION>
PERCENTAGE
OF PRINCIPAL
NET ASSETS AMOUNT COST VALUE
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
(CONTINUED)COMMERCIAL PAPER (continued)
Raytheon Co.
5.25% due May 6, 1996...................... 15,000,000 $ 14,989,063 $ 14,989,063
------------ ------------
24,967,021 24,967,021
Telecommunication............................ 1.55%
Ameritech Cap. FDG Corp.
5.29% due May 14, 1996..................... 5,000,000 4,990,449 4,990,449
Utility -- Communication..................... 1.18%
Bellsouth Telcommunications
5.31% due May 3, 1996...................... 3,787,000 3,785,883 3,785,883
Utility -- Electric.......................... 3.11%
Pacific Gas & Electric
5.32% due May 3, 1996...................... 10,000,000 9,997,044 9,997,044
------------ ------------
TOTAL COMMERCIAL PAPER....................... 93.6% 300,766,762 300,766,762
REPURCHASE AGREEMENTS
Savings Passbook............................. 2.17%
Associates Corp
5.29% due June 12, 1996.................... 5,000,000 4,969,142 4,969,142
First Bank America SEMI
5.10% due May 3, 1996...................... 2,000,000 2,000,000 2,000,000
------------ ------------
TOTAL REPURCHASE AGREEMENTS.................. 2.17% 6,969,142 6,969,142
U.S. GOVERNMENT SECURITIES
U.S. Government Agencies..................... 1.79%
Federal Home Loan Mortgage Corp.
5.20% due July 3, 1996..................... 490,000 485,541 485,541
Federal Home Loan Bank
5.17% due May 28, 1996..................... 5,000,000 4,980,613 4,980,613
------------ ------------
TOTAL U.S. GOVERNMENT SECURITIES............. 1.79% 5,466,154 5,466,154
CORPORATE BONDS
Asset Back Security.......................... 3.10%
Corp Asset Fndg Co.
5.27% due June 14, 1996.................... 10,000,000 9,935,589 9,935,589
------------ ------------
TOTAL CORPORATE BONDS........................ 3.10% 9,935,589 9,935,589
------------ ------------
TOTAL INVESTMENTS............................ 100.51% $323,137,647 $323,137,647
===========
Liabilities, less cash and other assets...... -0.51% (1,635,594)
------------
NET ASSETS................................... 100.00% $321,502,053
===========
</TABLE>
F-32
<PAGE> 120
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
Unaudited
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL
OF AMOUNT OR
NET ASSETS SHARES COST VALUE
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
FLEXIBLE ASSET ALLOCATION PORTFOLIO
COMMON STOCKS -- BANKING & FINANCIAL SERVICE
Bank & Bank Holding Co. ....................... 2.28%
Barnett Bank Inc............................... 10,000 $ 577,894 $ 633,750
First Chicago NBD(A)........................... 12,000 461,307 495,000
NationsBank Corp. ............................. 12,000 729,107 957,000
----------- -----------
1,768,308 2,085,750
Finance Company................................ 0.60%
Household International........................ 8,000 510,144 553,000
Financial Service.............................. 3.00%
Cityscape Financial(A)......................... 25,000 450,000 1,093,750
Green Tree Financial Corp.(A).................. 34,000 939,466 1,147,500
Onyx Acceptance Corp.(A)....................... 19,000 236,060 361,000
PMT Services Inc.(A)........................... 5,000 135,000 144,375
----------- -----------
1,760,526 2,746,625
Investment Company............................. 4.73%
S&P 500 Depositary Receipt..................... 66,200 4,123,749 4,328,859
Insurance...................................... 1.72%
American General Corp. ........................ 8,500 297,948 298,563
American International Group................... 14,000 1,059,597 1,279,250
----------- -----------
1,357,545 1,577,813
Real Estate.................................... 1.87%
Colonial Properties............................ 31,000 770,600 744,000
First Industrial Realty(A)..................... 27,500 587,764 656,563
Spieker Properties............................. 11,900 303,450 309,400
----------- -----------
1,661,814 1,709,963
----------- -----------
TOTAL COMMON STOCKS -- BANKING & FINANCIAL
SERVICE...................................... 14.20% 11,182,086 13,002,010
COMMON STOCKS -- CAPITAL GOODS
Machinery -- Agriculture....................... 0.64%
Case Equipment(A).............................. 11,600 626,898 585,800
Pollution Control.............................. 1.10%
Allied Waste Industries(A)..................... 99,100 808,783 966,225
Philip Environmental(A)........................ 5,000 36,875 40,625
----------- -----------
845,658 1,006,850
Production..................................... 1.28%
Deere & Co. ................................... 25,000 933,688 971,875
Illinois Tool Works............................ 3,000 134,805 201,750
----------- -----------
1,068,493 1,173,625
----------- -----------
TOTAL COMMON STOCKS -- CAPITAL GOODS........... 3.02% 2,541,049 2,766,275
</TABLE>
F-33
<PAGE> 121
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
Unaudited
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL
OF AMOUNT OR
NET ASSETS SHARES COST VALUE
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
FLEXIBLE ASSET ALLOCATION PORTFOLIO (CONTINUED)
COMMON STOCKS -- CONSUMER CYCLICAL
Appliance...................................... 0.74 %
Interface Inc.................................. 51,800 $ 640,853 $ 673,400
Auto & Truck................................... 0.08%
Ford Motor Co. ................................ 2,000 58,245 71,750
Household Product.............................. 0.49%
Williams--Sonoma Inc.(A)....................... 18,000 358,884 450,000
Retail--General................................ 2.14%
Cost Plus Inc.(A).............................. 1,300 19,500 30,875
Kroger(A)...................................... 29,000 1,035,952 1,192,625
Tommy Hilfiger Corp.(A)........................ 14,000 460,154 637,000
Walgreen Co. .................................. 3,000 67,145 96,000
----------- -----------
1,582,751 1,956,500
----------- -----------
TOTAL COMMON STOCKS -- CONSUMER
CYCLICAL..................................... 3.44% 2,640,733 3,151,650
COMMON STOCKS -- CONSUMER NON-DURABLE
Communications & Media......................... 4.17%
Cox Communications Inc.(A)..................... 35,000 707,130 717,500
Evergreen Media Corp.(A)....................... 11,900 338,346 467,075
Outdoor Systems(A)............................. 3,000 45,000 69,000
Paging Network Inc.(A)......................... 3,000 752,742 641,550
Panamsat Corp.(A).............................. 22,000 356,500 731,500
Time Warner Inc. .............................. 4,000 163,677 163,500
Tribune Co. ................................... 5,200 328,594 362,700
Turner Broadcasting............................ 25,000 654,351 668,750
----------- -----------
3,346,340 3,821,575
Cosmetic & Soap................................ 0.78%
Colgate Palmolive Co. ......................... 5,500 407,704 421,438
Procter & Gamble............................... 3,500 245,249 295,750
----------- -----------
652,953 717,188
Drugs.......................................... 6.05%
Abbott Labs.................................... 16,000 625,336 650,000
Becton Dickinson Co. .......................... 10,000 574,350 806,250
Humana Inc. ................................... 23,000 600,714 566,375
Johnson & Johnson Co. ......................... 16,000 1,067,710 1,480,000
Merck & Co. ................................... 12,000 587,847 726,000
Pfizer Inc. ................................... 14,000 672,167 964,250
Schering Plough Corp. ......................... 6,000 230,805 344,250
----------- -----------
4,358,929 5,537,125
</TABLE>
F-34
<PAGE> 122
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
Unaudited
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL
OF AMOUNT OR
NET ASSETS SHARES COST VALUE
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
FLEXIBLE ASSET ALLOCATION PORTFOLIO (CONTINUED)
COMMON STOCKS -- CONSUMER NON-DURABLE (continued)
Entertainment & Leisure........................ 0.62%
Livent(A)...................................... 5,000 $ 41,875 $ 41,875
Viacom Inc. Class A(A)......................... 1,960 88,521 78,400
Viacom Inc. Class B(A)......................... 11,000 515,135 451,000
----------- -----------
645,531 571,275
Food, Beverage, & Tobacco...................... 1.31%
Archer--Daniels--Midland....................... 13,125 237,625 247,734
Pepsico Inc. .................................. 15,000 711,886 952,500
----------- -----------
949,511 1,200,234
Health Care.................................... 0.06%
Omega Healthcare Investors..................... 2,000 48,500 56,000
Health Care Service............................ 2.05%
Living Centers(A).............................. 3,500 131,250 129,500
Meditrust...................................... 30,000 1,020,600 1,016,250
United Healthcare Corp.(A)..................... 12,500 648,146 731,250
----------- -----------
1,799,996 1,877,000
Hospital Supply & Service...................... 0.64%
Housecall Medical Resources(A)................. 7,600 125,875 165,300
Respironics(A)................................. 19,400 406,604 424,072
----------- -----------
532,479 589,372
Retail -- Food and Drugs....................... 0.85%
General Nutrition(A)........................... 40,000 591,969 780,000
Travel & Recreation............................ 1.08%
Walt Disney Co. ............................... 16,000 879,969 992,000
----------- -----------
TOTAL COMMON STOCKS -- CONSUMER NON-DURABLE.... 17.63% 13,806,177 16,141,769
COMMON STOCKS -- ENERGY
Oil & Gas -- Domestic.......................... 0.56%
Amoco Corp. ................................... 7,000 447,982 511,000
Oil & Gas -- International..................... 0.33%
Mobil.......................................... 2,000 178,745 230,000
Royal Dutch Petroleum.......................... 500 53,030 71,621
----------- -----------
231,775 301,621
----------- -----------
TOTAL COMMON STOCKS -- ENERGY.................. 0.88% 679,758 812,621
</TABLE>
F-35
<PAGE> 123
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
Unaudited
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL
OF AMOUNT OR
NET ASSETS SHARES COST VALUE
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
FLEXIBLE ASSET ALLOCATION PORTFOLIO (CONTINUED)
COMMON STOCKS -- MANUFACTURING
Chemical....................................... 1.05%
Dupont De Nemours.............................. 12,000 $ 765,795 $ 964,500
Computer....................................... 0.82%
EMC Corp. Massachusetts(A)..................... 36,500 627,582 748,250
Metal & Mineral................................ 1.29%
AK Steel Holding Corp.(A)...................... 9,100 364,695 348,075
Century Aluminum Company(A).................... 23,900 310,700 352,525
Worthington Inds Inc........................... 23,500 489,215 478,813
----------- -----------
1,164,610 1,179,413
Miscellaneous Metals........................... 0.85%
Watsco Inc. ................................... 14,550 277,771 412,856
Watsco Inc. Class B............................ 6,000 63,740 170,250
York Group(A).................................. 10,800 140,400 198,450
----------- -----------
481,911 781,556
----------- -----------
TOTAL COMMON STOCKS -- MANUFACTURING........... 4.01% 3,039,899 3,673,719
COMMON STOCKS -- SERVICE
Business....................................... 0.02%
Superior Services(A)........................... 1,000 11,500 14,000
Distributor.................................... 0.70%
Alco Standard.................................. 11,000 392,080 636,625
Miscellaneous.................................. 0.11%
Centerpoint Properties Corp. .................. 4,000 74,120 96,500
----------- -----------
TOTAL COMMON STOCKS -- SERVICE................. 0.82% 477,700 747,125
COMMON STOCKS -- TECHNOLOGY
Aerospace Aircraft............................. 1.85%
Boeing......................................... 7,500 607,777 615,938
Sundstrand Corp................................ 12,500 448,250 459,375
United Technologies............................ 5,600 635,036 618,800
----------- -----------
1,691,063 1,694,113
Business Mechanics & Software.................. 5.03%
Compaq Computers Corp.(A)...................... 20,500 985,231 955,813
Digital Equipment(A)........................... 10,500 642,839 627,375
Network General Corp.(A)....................... 10,500 310,915 463,313
Sun Microsystems(A)............................ 20,000 687,175 1,085,000
Techforce Corp.(A)............................. 25,000 275,000 300,000
Xerox Corp..................................... 8,000 952,455 1,172,000
----------- -----------
3,853,615 4,603,501
</TABLE>
F-36
<PAGE> 124
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
Unaudited
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL
OF AMOUNT OR
NET ASSETS SHARES COST VALUE
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
FLEXIBLE ASSET ALLOCATION PORTFOLIO (CONTINUED)
COMMON STOCKS -- TECHNOLOGY (continued)
Business Service............................... 1.28%
CSG Systems International(A)................... 2,700 $ 40,500 $ 86,400
First Data(A).................................. 14,273 709,410 1,084,748
----------- -----------
749,910 1,171,148
Electronics.................................... 2.63%
Gemstar International(A)....................... 2,500 63,125 82,813
Hewlett-Packard................................ 12,000 982,138 1,270,500
Sipex Corp.(A)................................. 8,100 87,750 166,050
Tektronix Inc.................................. 22,500 1,009,475 891,563
----------- -----------
2,142,488 2,410,926
Software....................................... 1.20%
Axent Technologies(A).......................... 300 4,200 5,400
Compuserve Corp.(A)............................ 5,100 160,562 145,350
Microware Systems(A)........................... 4,000 40,000 48,500
Saville Systems(A)............................. 30,000 362,505 817,500
Sterling Commerce(A)........................... 500 12,000 17,500
Transition Systems(A).......................... 2,500 45,000 60,625
----------- -----------
624,267 1,094,875
Telecommunications............................. 1.15%
American Portable Telecom(A)................... 25,000 422,188 375,000
Echostar Communications(A)..................... 18,800 344,900 629,800
Lucent Technologies(A)......................... 1,300 35,100 45,663
----------- -----------
802,188 1,050,463
----------- -----------
TOTAL COMMON STOCKS -- TECHNOLOGY.............. 13.13% 9,863,531 12,025,026
COMMON STOCKS -- TRANSPORTATION
Railroad....................................... 0.58%
Conrail Inc.................................... 6,700 475,192 467,325
Union Pacific.................................. 1,000 62,660 68,125
----------- -----------
537,852 535,450
Miscellaneous.................................. 0.86%
Harley Davidson(A)............................. 15,000 384,275 661,875
Hub Group Inc.(A).............................. 5,400 75,600 125,550
----------- -----------
459,875 787,425
----------- -----------
TOTAL COMMON STOCKS -- TRANSPORTATION.......... 1.44% 997,727 1,322,875
</TABLE>
F-37
<PAGE> 125
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
Unaudited
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL
OF AMOUNT OR
NET ASSETS SHARES COST VALUE
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
FLEXIBLE ASSET ALLOCATION PORTFOLIO (CONTINUED)
COMMON STOCKS -- UTILITY
Miscellaneous.................................. 0.66%
Vanguard Cellular(A)........................... 28,000 $ 600,191 $ 602,000
TOTAL COMMON STOCKS -- UTILITY................. 0.66% 600,191 602,000
----------- -----------
COMMON STOCKS -- GRAND TOTAL................... 59.24% 45,828,851 54,245,070
DEMAND NOTES
Utility -- Electrical.......................... 0.02%
Wisconsin Electric Demand Note
5.0742% due December 31, 2031................ 18,165 18,165 18,165
----------- -----------
TOTAL DEMAND NOTES............................. 0.02% 18,165 18,165
COMMERCIAL PAPER
Finance -- Miscellaneous....................... 6.74%
American Express Credit Corp.
5.3521% due May 10, 1996..................... 3,450,000 3,450,000 3,450,000
Beneficial Corp.
5.3446% due May 30, 1996..................... 1,900,000 1,900,000 1,900,000
Ford Motor Credit
5.3532% due May 3, 1996...................... 355,000 355,000 355,000
Ford Motor Credit
5.3548% due May 29, 1996..................... 470,000 470,000 470,000
----------- -----------
TOTAL COMMERCIAL PAPER......................... 6.74% 6,175,000 6,175,000
U.S. GOVERNMENT SECURITIES
U.S. Government Agencies....................... 15.77%
Federal National Mortgage Association Discount
Notes
5.28% due May 15, 1996....................... 4,275,000 4,266,239 4,266,239
5.24% due June 11, 1996...................... 4,010,000 3,986,389 3,986,389
----------- -----------
8,252,628 8,252,628
</TABLE>
F-38
<PAGE> 126
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
Unaudited
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL
OF AMOUNT OR
NET ASSETS SHARES COST VALUE
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
FLEXIBLE ASSET ALLOCATION PORTFOLIO (CONTINUED)
U.S. GOVERNMENT SECURITIES (continued)
U.S. Treasury.................................. 21.79%
Treasury Notes
6.000% due August 31, 1997................... 2,500,000 $ 2,506,766 $ 2,503,125
5.125% due February 28, 1998................. 4,000,000 3,950,566 3,937,500
5.000% due February 15, 1999................. 4,000,000 3,896,747 3,880,000
7.125% due September 30, 1999................ 200,000 199,119 204,937
7.750% due January 31, 2000.................. 500,000 501,846 522,968
6.875% due March 31, 2000.................... 2,500,000 2,500,482 2,543,750
6.250% due May 31, 2000...................... 500,000 505,461 497,656
6.125% due July 31, 2000..................... 1,000,000 998,673 990,625
6.250% due August 31, 2000................... 2,000,000 2,020,601 1,989,374
6.375% due August 15, 2002................... 100,000 97,696 99,188
5.625% due February 15, 2006................. 3,000,000 2,818,063 2,780,625
----------- -----------
19,996,020 19,949,748
----------- -----------
TOTAL U.S. GOVERNMENT SECURITIES............... 30.80% 28,248,648 28,202,376
CORPORATE BONDS
Bank & Bank Holding Co......................... 0.11%
Huntington National
6.75% due June 15, 2003...................... 100,000 94,170 97,630
Chemical....................................... 0.11%
Rhone-Poulenc
6.75% due October 15, 1999................... 100,000 97,562 99,511
Communications & Media......................... 0.13%
Bell Atlantic
5.37% due July 13, 1998...................... 120,000 115,741 117,427
Drugs.......................................... 0.11%
Merck & Co.
7.75% due May 1, 1996........................ 100,000 100,000 100,000
Electronics.................................... 0.16%
Union Pacific
7.0% due June 15, 2000....................... 150,000 149,054 150,678
Finance Company................................ 0.27%
Commercial Credit
6.00% due June 15, 2000...................... 150,000 143,336 145,914
Norwest Financial
6.25% due February 15, 1997.................. 100,000 99,718 100,282
----------- -----------
243,054 246,196
</TABLE>
F-39
<PAGE> 127
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
Unaudited
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL
OF AMOUNT OR
NET ASSETS SHARES COST VALUE
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
FLEXIBLE ASSET ALLOCATION PORTFOLIO (CONTINUED)
CORPORATE BONDS (continued)
Food........................................... 0.11%
Canadaigua Wine
8.75% due December 15, 2003.................. 100,000 $ 98,825 $ 99,500
Health Care.................................... 0.10%
Gillette Company
5.75% due October 15, 2005................... 100,000 88,151 90,626
Investment Company............................. 1.64%
Cityscape Financial
19.048% due May 1, 2006...................... 390,000 390,000 390,000
Cobb Theatres
10.625% due March 1, 2003.................... 500,000 500,000 512,500
Dean Witter Discover
6.875% due March 1, 2003..................... 100,000 94,356 98,692
Southdown Inc.
10.00% due March 1, 2006..................... 500,000 500,000 500,000
----------- -----------
1,484,356 1,501,192
Metal & Mineral................................ 0.10%
Aluminum Co. of America
5.75% due February 1, 2001................... 100,000 93,960 95,284
Miscellaneous.................................. 0.21%
Citicorp Sub Notes
7.125% due March 15, 2004.................... 100,000 98,945 99,044
Pep Boys
6.625% due May 15, 2003...................... 100,000 92,378 95,251
----------- -----------
191,323 194,295
Paper & Forest Products........................ 0.11%
International Paper Co.
7.50% due May 15, 2004....................... 100,000 98,832 101,600
Retail Trade................................... 0.11%
Black & Decker
6.625% due November 15, 2000................. 100,000 95,546 98,473
----------- -----------
TOTAL CORPORATE BONDS.......................... 3.27% 2,950,573 2,992,412
</TABLE>
F-40
<PAGE> 128
Schedule of Investments (continued)
Aon Asset Management Fund, Inc.
Unaudited
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL
OF AMOUNT OR
NET ASSETS SHARES COST VALUE
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
FLEXIBLE ASSET ALLOCATION PORTFOLIO (CONTINUED)
CONVERTIBLE SECURITIES
Liberty Property LP SBB Deb. Conv.
8.00% due July 1, 2001....................... 50,000 $ 50,000 $ 52,500
Morgan Stanley(A)
7.0% "CSCO" PFD.............................. 7,500 252,670 326,250
----------- -----------
TOTAL CONVERTIBLE SECURITIES................... 0.41% 302,670 378,750
----------- -----------
TOTAL INVESTMENTS.............................. 100.48% 83,523,907 92,011,773
==========
LIABILITIES, less cash and other assets........ -.48% (443,227)
-----------
NET ASSETS..................................... 100.00% $91,568,546
==========
</TABLE>
- ---------------
(A) Non income producing security.
F-41
<PAGE> 129
Notes to Financial Statements
Aon Asset Management Fund, Inc.
For the period ended April 30, 1996
Unaudited
1. DESCRIPTION OF ENTITY
Aon Asset Management Fund, Inc. (the Fund), incorporated in Virginia on
August 27, 1991 is registered under the Investment Company Act of 1940, as an
open-end, diversified management investment company whose shares are currently
sold principally to affiliates of Aon Corporation. The Fund consists of two
portfolios: the Money Market Portfolio and the Flexible Asset Allocation
Portfolio. The Money Market Portfolio of the Fund is designated as a "Money
Market Fund", and must adhere to the guidelines governing such funds as
described in Rule 2a-7 of the Investment Company Act of 1940. Pursuant to that
rule, the Money Market Portfolio maintains a constant net asset value of $1.00
per share on a daily basis. Dividends are declared daily and paid monthly for
the Money Market Portfolio and declared and paid quarterly for the Flexible
Asset Allocation Portfolio.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies of the Fund
used in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles:
a) Security Valuation -- Securities traded on a national securities
exchange are valued at the last reported sales price on the last business
day of the period. Securities traded in the over-the-counter market are
stated at the last quoted bid price. The investments held by the Money
Market Portfolio and debt instruments held by the Flexible Asset Allocation
Portfolio that mature in 60 days or less are stated at amortized cost,
which approximates fair value. The remaining investments held by the
Flexible Asset Allocation Portfolio are stated at fair value.
b) Investment Transactions and Income -- Security transactions are
accounted for on the trade date (the date the order to buy or sell is
executed). Interest income is recorded on the accrual basis and dividend
income is reported on the ex-dividend date. Realized gains and losses on
investment are determined on the first-in, first-out basis. Discounts and
premiums on securities purchased are amortized over the life of the
respective securities.
c) Distributions to Shareholders -- Distributions of net investment
income and capital gains are determined in accordance with income tax
regulations. The Fund has no material differences in book and tax income or
cost of securities.
3. INCOME TAXES
The Fund intends to qualify as a "regulated investment company" under the
provision of Sub-chapter M of the Internal Revenue Code of 1986, as amended, and
thereby, under the provisions of the income tax laws available to regulated
investment companies, be relieved of substantially all income taxes. Therefore,
no provision has been made for Federal or state income taxes. The Flexible Asset
Allocation Portfolio's accumulated net realized loss on sales of investments for
Federal income tax purposes at October 31, 1995 of $46,231 is available to
offset future tax gains. If unused, this loss carryforward expires in 2002.
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of an investment advisory contract with Aon Advisors, Inc.,
(Investment Advisor), a subsidiary of Aon Corporation, investment advisory fees
will be deducted from the Fund daily and paid monthly at a rate of 0.35% of
average daily net assets in the Money Market Portfolio and .75% of average daily
net assets up to $250 million, 0.65% of average daily net assets on the next
$250 million, and 0.50% of average
F-42
<PAGE> 130
Notes to Financial Statements (continued)
Aon Asset Management Fund, Inc.
Unaudited
4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES (CONTINUED)
daily net assets in excess of $500 million in the Flexible Asset Allocation
Portfolio. Effective April 26, 1995, the investment advisory contract was
amended to change the investment advisory fees in the Flexible Asset Allocation
Portfolio. The amended investment advisory fees are .70% of average daily net
assets up to $250 million, 0.60% of average daily net assets on the next $250
million, and 0.50% of average daily net assets in excess of $500 million in the
Flexible Asset Allocation Portfolio. The Investment Advisor has agreed to waive
0.25% of the advisory fee for the Money Market Portfolio for a net rate of 0.10%
on a daily basis.
The Investment Advisor provides administrative services to the Fund and
manages its business affairs, including personnel, facilities and equipment and
all legal, accounting and other costs incurred in the organization of the Fund.
Expenses of the Fund are subject to reimbursement to the extent that ordinary
business expenses of the Fund (including the advisory fees but excluding
interest, taxes, brokerage commissions, and extraordinary expenses) in any year
exceed 1.0% of the aggregate average daily net assets of the Money Market
Portfolio, and 1.25% of the aggregate net assets in the Flexible Asset
Allocation Portfolio.
To assist in the administration of the Fund, the Investment Advisor has
entered into an administrative contract with Forth Financial Securities
Corporation ("FFSC"), an affiliate of Aon Corporation to provide certain
administrative services for the Fund. Under this agreement, the Investment
Advisor will pay FFSC an annual fee of $25,000 plus 0.05% of the average daily
net assets of the Fund's portfolios.
Certain officers and directors of the Fund were also officers and directors
of the Investment Advisor and The Life Insurance Company of Virginia, an
indirect wholly-owned subsidiary of Aon and parent Company of FFSC. During the
six months ended April 30, 1996, the Fund made payments totalling $12,430
($6,215 per portfolio) to unaffiliated directors of the Fund.
5. COMPOSITION OF NET ASSETS
At April 30, 1996, net assets of the Flexible Asset Allocation Portfolio
consisted of:
<TABLE>
<S> <C>
Common shares........................................................... $81,814,175
Accumulated net realized gain on sales of investments................... 522,863
Unrealized appreciation on investments.................................. 8,487,866
Undistributed net investment income..................................... 743,642
Net assets.............................................................. $91,568,546
</TABLE>
6. CAPITAL SHARE TRANSACTIONS
At April 30, 1996, there were 3,000,000,000 shares of $.001 par value
common stock authorized in the fund. The shares will be issued in the following
classes and have the following designations:
<TABLE>
<CAPTION>
CLASS SHARES
------------------------------------------------------------------------ -----------
<S> <C>
Class A (Money Market Portfolio)........................................ 750,000,000
Class B (Flexible Asset Allocation Portfolio)........................... 450,000,000
Class C................................................................. 400,000,000
Class D................................................................. 400,000,000
Class E................................................................. 250,000,000
Class F................................................................. 250,000,000
Class G................................................................. 250,000,000
Class H................................................................. 250,000,000
</TABLE>
F-43
<PAGE> 131
Notes to Financial Statements (continued)
Aon Asset Management Fund, Inc.
Unaudited
6. CAPITAL SHARE TRANSACTIONS (CONTINUED)
A summary of capital stock transactions follows:
<TABLE>
<CAPTION>
FLEXIBLE ASSET
MONEY MARKET ALLOCATION
PORTFOLIO PORTFOLIO
------------------ --------------
<S> <C> <C>
Balance at October 31, 1994........................ 410,912,278.330 1,021,494.102
Shares sold........................................ 4,368,158,454.020 4,865,217.717
Shares issued to shareholders in reinvestment of
dividends and distributions...................... 7,851,992.890 240,114.919
------------------ --------------
Total issued....................................... 4,376,010,446.910 5,105,332.636
Shares redeemed.................................... (4,366,829,092.710) --
------------------ --------------
Net change in shares............................... 9,181,354.200 5,105,332.636
------------------ --------------
Balance at October 31, 1995........................ 420,093,632.530 6,126,826.738
Shares sold........................................ 2,008,014,887.540 1,294,858.824
Shares issued to shareholders in reinvestment of
dividends and distributions...................... 2,737,572.560 39,664.527
------------------ --------------
Total issued....................................... 2,010,752,460.100 1,334,523.351
Shares redeemed.................................... (2,109,344,040.040) (288,384.497)
------------------ --------------
Net change in shares............................... (98,591,579.940) 1,046,138.854
------------------ --------------
Balance at April 30, 1996.......................... 321,502,052.590 7,172,965.592
================ ============
</TABLE>
7. INVESTMENTS
Purchases and sales, excluding maturities, of investment securities during
the six months ended April 30, 1996 were as follows:
<TABLE>
<CAPTION>
MONEY FLEXIBLE ASSET
MARKET ALLOCATION
PORTFOLIO PORTFOLIO
-------------- ---------------
<S> <C> <C>
PURCHASES
U.S. Government and Agency Obligations............... $ -- $ 31,999,375
Corporate bonds...................................... -- 2,190,000
Commercial paper..................................... 3,351,494,350 113,838,847
Common stock......................................... -- 35,554,926
------------ -----------
Total purchases........................................ $3,351,494,350 $ 183,583,148
============ ===========
SALES
U.S. Government and Agency Obligations............... $ -- $ 36,997,516
Corporate bonds...................................... -- 975,250
Commercial paper..................................... 160,404,000 28,637,221
Common stock......................................... -- 20,460,928
------------ -----------
Total Sales............................................ $ 160,404,000 $ 87,070,915
============ ===========
</TABLE>
F-44
<PAGE> 132
Notes to Financial Statements (continued)
Aon Asset Management Fund, Inc.
Unaudited
7. INVESTMENTS (CONTINUED)
At April 30, 1996, based on cost for federal income tax purposes, net
unrealized appreciation of portfolio securities consisted of the following:
<TABLE>
<CAPTION>
FLEXIBLE ASSET
ALLOCATION
PORTFOLIO
---------------
<S> <C>
Appreciated securities................................................. $ 9,026,249
Depreciated securities................................................. (538,383)
----------
Net unrealized appreciation (depreciation)............................. $ 8,487,866
==========
</TABLE>
8. OTHER MATTERS
On December 26, 1995, Aon Corporation entered into an agreement with
General Electric Capital Corporation to sell The Life Insurance Company of
Virginia, including Forth Financial Securities Corporation ("FFSC"), the Fund's
principal underwriter and administrator. The sale was finalized on April 1,
1996. Pursuant to the terms of the Distribution Agreement, a change in control
of FFSC resulted in a technical assignment and the termination of the agreement.
On April 2, 1996, the Fund's Board of Directors entered into a new Distribution
Agreement with FFSC.
Pursuant to a call for a special shareholders meeting by Aon Corporation, the
Fund's majority shareholder, on April 24, 1996, the shareholders replaced the
Fund's existing board of directors and elected a new slate of directors. On
April 26, 1996, the Fund's new board terminated the Distribution Agreement with
FFSC and entered into a new Distribution Agreement with Aon Securities
Corporation, an affiliate of Aon Corporation and Aon Advisors, Inc., the Fund's
Investment Advisor.
F-45
<PAGE> 133
Financial Highlights
Aon Asset Management Fund, Inc.
Unaudited
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS YEAR ENDED YEAR ENDED YEAR ENDED JANUARY 23, 1992
ENDED OCTOBER 31, OCTOBER 31, OCTOBER 31, TO OCTOBER 31,
MONEY MARKET PORTFOLIO APRIL 30, 1996 1995 1994 1993 1992
-------------- ----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of
period............................ $1.00 $1.00 $1.00 $1.00 $1.00
Investment income................... .03 .06 .04 .03 .03
Expenses............................ * * * * *
--------- ------- ------- ------- ----------
Net investment income............... .03 .06 .04 .03 .03
Net realized gains on investments... * * * * *
--------- ------- ------- ------- ----------
Income (loss) from operations....... .03 .06 .04 .03 .03
Dividends paid to shareholders from:
Net investment income............. .03 .06 .04 .03 .03
Net realized gain................. * * * * *
--------- ------- ------- ------- ----------
.03 .06 .04 .03 .03
--------- ------- ------- ------- ----------
Increase in net asset value......... .00 .00 .00 .00 .00
Net asset value at end of period.... $1.00 $1.00 $1.00 $1.00 $1.00
Total return........................ 2.68% 5.79% 3.73% 3.10% 3.57%
Ratios:
Ratio of operating expenses to
average net assets+............... 0.22%** 0.14 0.15 0.17 0.25**
Ratio of net investment income to
average net assets+............... 5.38%** 5.79 3.73 3.10 3.57**
Net assets at end of period (in
millions)......................... $321.5 $ 420.1 $ 410.9 $ 412.1 $399.1
</TABLE>
- ---------------
* Less than $.01 per share
+ The Investment Advisor has agreed to waive a portion of its advisory fees.
Absent this agreement, the ratio of expenses to average net assets and the
ratio of net investment income to average net assets would have been .47% and
5.13% for 1996, .39% and 5.54% for 1995, .40% and 3.48% for 1994, .42% and
2.85% for 1993 and .50% and 3.32% for 1992, respectively. Ratios for the
period from January 23, 1992 to October 31, 1992 and the six months ended
April 30, 1996 have been determined on an annualized basis.
** These ratios for the period from January 23, 1992 to October 31, 1992 and the
six months ended April 30, 1996 have been determined on an annualized basis.
F-46
<PAGE> 134
Financial Highlights (continued)
Aon Asset Management Fund, Inc.
Unaudited
<TABLE>
<CAPTION>
11/1/95 11/1/94 3/1/94
FLEXIBLE ASSET ALLOCATION PORTFOLIO 4/30/96 10/31/95 10/31/94
------- --------- ---------
<S> <C> <C> <C>
Net asset value at beginning of period............................. $ 12.04 $ 9.97 $ 10.00
Investment income.................................................. .25 .32 .25
Expenses........................................................... (.06) (.08) (.08)
------ ------ ------
Net investment income.............................................. .19 .24 .17
Net realized gains on investments.................................. .08 .66 (.05)
Net unrealized appreciation (depreciation) on investments.......... .53 1.75 .06
------ ------ ------
Income (loss) from operations...................................... .80 2.65 .18
Dividends paid to shareholders from:
Net investment income............................................ (.07) (.24) (.16)
Net realized gain................................................ -- (.34) (.05)
------ ------ ------
(.07) (.58) (.21)
Change in net asset value.......................................... .73 2.07 (.03)
Net asset value at end of period................................... 12.77 12.04 9.97
Total return....................................................... 6.65% 26.92% 1.84%
Ratios:
Ratio of operating expenses to average net assets................ 0.86%* 0.96% 1.25%*
Ratio of net investment income to average net assets............. 2.86%* 2.73% 2.63%*
Portfolio turnover............................................... 79.31% 95.17% 64.36%
Average commission paid............................................ .0607
Net assets at end of period (in millions).......................... 91.6 73.8 10.2
</TABLE>
- ---------------
* Annualized
F-47
<PAGE> 135
PART C
ADDITIONAL INFORMATION
<PAGE> 136
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
<TABLE>
<S> <C> <C>
(a) Financial Statements (included in Part B):
1. Report of the Independent Auditors
2. Statement of Assets and Liabilities.
3. Statement of Operations.
4. Statement of Changes in Net Assets.
5. Portfolio of Investments.
6. Notes to Financial Statements.
(b) Exhibits:
1. (a) Agreement and Declaration of Trust of Aon Funds ("the Trust").***
(b) Resolutions Authorizing Six Series of Shares (and Classes Within Series).***
2. By-Laws of the Trust.***
3. None.
4. None.
5. (a) Form of Investment Advisory Agreement between AAI and the Trust, covering the
Money Market Fund.***
(b) Form of Investment Advisory Agreement between AAI and the Trust, covering the
Government Securities Fund.***
(c) Form of Investment Advisory Agreement between AAI and the Trust covering the
Asset Allocation Fund.***
(d) Form of Investment Advisory Agreement between AAI and the Trust, covering the
S&P 500 Index Fund.***
(e) Form of Investment Advisory Agreement between AAI and the Trust, covering the
REIT Index Fund.***
(f) Form of Investment Advisory Agreement between AAI and the Trust, covering the
International Equity Fund.***
(g) Form of Investment Sub-Advisory Agreement between AAI and Brinson Partners,
Inc., covering the International Equity Fund.
6. Form of Distribution Agreement between the Trust and Aon Securities Corporation.***
7. None.
8. (a) Form of domestic Custodian Agreement between the Trust and Firstar Trust Company
("Firstar").***
(b) Form of Global Custody Agreement between Firstar and Chase Manhattan Bank
("Chase"), covering the overseas assets of the International Equity Fund.***
(c) Form of Sub-Custodian Agreement between Chase and foreign sub-custodians.***
9. (a) Form of Administration Agreement between the Trust and Aon Securities
Corporation ("ASC").***
(b) Form of Transfer Agency Agreement between the Trust and Firstar.***
(c) Form of Accounting Servicing Agreement between the Trust and Firstar.***
(d) S&P 500 Index License Agreement.***
(e) Morgan Stanley REIT Index License Agreement.***
(f) Agreement and Plan of Reorganization.***
(g) Limited Powers of Attorney.***
</TABLE>
<PAGE> 137
<TABLE>
<S> <C> <C>
10. Opinion and Consent of Prickett, Jones, Elliott, Kristol & Schnee concerning the
legality of the securities to be issued.
11. Consent of Ernst & Young LLP.
12. None.
13. (a) Form of Investment Commitment Letter for Initial Capital of Money Market and
Asset Allocation Funds.*
(b) Form of Subscription Agreement between Registrant and Combined Insurance Company
of America ("Combined") relating to Class C of the Money Market and Asset Allocation
Funds.***
(c) Form of Subscription Agreement between Registrant and Combined relating to the
Government Securities, S&P 500 Index, REIT Index and International Equity
Funds.***
14. None.
15. Form of Distribution Plan (Rule 12b-1 Plan).***
16. Schedule for Computation of Performance Calculations.***
17. Financial Data Schedule.**
18. Form of Registrant's Plan pursuant to Rule 18f-3(d).***
25. Aon Corporation List of Subsidiaries.***
</TABLE>
- ---------------
* Incorporated herein by reference to pre-effective amendment No. 1 to the
Registrant's registration statement on Form N-1A, File No. 33-43133, filed
with the Securities and Exchange Commission on December 5, 1991.
** Incorporated by reference to post-effective amendment No. 7 to the
Registrant's registration statement on Form N-1A, file No. 33-43133, filed
with the Securities and Exchange Commission on February 28, 1996.
*** Incorporated by reference to post-effective amendment No. 8 to the
Registrant's registration statement on Form N-1A, file No. 33-43133, filed
with the Securities and Exchange Commission on June 11, 1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
The Trust is a Delaware business trust organized on May 16, 1996. Aon
Corporation, a corporation organized under the laws of the State of Delaware,
and its wholly-owned subsidiaries, have provided or will provide the initial
investment in each of Funds of the Trust and own a substantial percentage of
each series of the outstanding shares of the Trust. The information regarding
persons under common control with the Trust is provided in the list of
subsidiaries of Aon Corporation attached as Exhibit 25 hereto.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF RECORD HOLDERS
TITLE OF SERIES AS OF MARCH 20, 1996
-------------------------------------------------------- ------------------------
<S> <C>
Money Market Fund....................................... 167
Asset Allocation Fund................................... 31
</TABLE>
ITEM 27. INDEMNIFICATION.
See Article VII of the Trust's Agreement and Declaration of Trust, filed as
Exhibit 1 to this Registration Statement, which provision is incorporated herein
by reference.
The Investment Advisory Agreements between the Trust and Aon Advisers, Inc.
("Adviser") each provide that, in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of obligations or duties on the part of
the Adviser (or its officers, directors, agents, employees, controlling persons,
shareholders, and any other person or entity affiliated with the Adviser or
retained by it to perform or
2
<PAGE> 138
assist in the performance of its obligations under the Investment Advisory
Agreements), neither the Adviser nor any of its officers, directors, employees
or agents shall be subject to liability to the Trust or to any shareholder or to
any other person with a beneficial interest in the Trust for any act or omission
in the course of, or connected with, rendering services under the Investment
Advisory Agreements, including without limitation any error of judgment or
mistake of law or for any loss suffered by the Trust or any shareholder or other
person in connection with the matters to which these Agreements relate, except
to the extent specified in Section 36(b) of the 1940 Act concerning loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services.
In addition, the Trust intends to maintain a directors and officers "errors
and omissions" liability insurance policy under which the Trust and its
directors and officers are named insureds.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Trust pursuant to the foregoing provisions, or otherwise, the Trust has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Trust of expenses incurred or
paid by a director, officer or controlling person of the Trust in the successful
defense of such action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Trust will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISOR
The Trust's investment advisor, Aon Advisors, Inc., is a wholly-owned
subsidiary of Aon Corporation. Aon Advisors, Inc. provides investment advice and
management to other investment companies, pension plans, corporations and other
organizations. Assets under management include equity securities, fixed income
securities and real estate.
Set forth below is a list of the directors and principal officers of Aon
Advisors, Inc., indicating each business, profession, vocation, or employment of
a substantial nature in which each person has been engaged at any time during
the past two fiscal years, for his or her own account or in the capacity of
director, officer, partner or trustee.
<TABLE>
<CAPTION>
NAME AND POSITION WITH OTHER BUSINESS, PROFESSION,
AON ADVISORS, INC. VOCATION, OR EMPLOYMENT
- ------------------------- -----------------------------------------------------------------
<S> <C>
Michael A. Conway Director and President, Aon Advisors, Inc., since 1990; Director
Director and President and Senior Vice President -- Investments, Combined Insurance
Company of America, since 1990; Senior Vice President and Senior
Investment Officer, Aon Corporation, since 1990.
Lawrence R. Miller Executive Director, Aon Advisors, Inc., since 1987; Vice
Senior Executive Director President -- Investments, Combined Insurance Company of America,
since 1978.
Mark B. Burka Executive Director, Aon Advisors, Inc., since 1990; Vice
Executive Director President -- Investments, Combined Insurance Company of America,
since 1984.
Ivan Berk Executive Director, Aon Advisers, Inc.
Executive Director
James White Vice President and Controller, Aon Corporation since 1985,
Executive Director Director and Vice President Finance, Combined Insurance Company
of America.
Paul Rabin Treasurer, Combined Insurance Company of America; Assistant
Treasurer Treasurer, Aon Corporation.
</TABLE>
3
<PAGE> 139
<TABLE>
<CAPTION>
NAME AND POSITION WITH OTHER BUSINESS, PROFESSION,
AON ADVISORS, INC. VOCATION, OR EMPLOYMENT
- ------------------------- -----------------------------------------------------------------
<S> <C>
Brinson Partners, Inc. provides investment advisory services
consisting of portfolio management for a variety of individuals
and institutions and as of June 30, 1996 had approximately $58
billion in assets under management. It presently acts as
investment adviser to Fort Dearborn Income Securities, Inc., a
closed-end investment company; The Enterprise Group of Funds,
Inc. -- International Growth Portfolio, an open-end investment
company; the Enterprise Accumulation Trust-International Growth
Portfolio, an open- end investment company; PaineWebber, Inc. --
Management Accounts Services Trust Large Capitalization Value
Equity Investments Portfolio, an open-end investment management
company; The Hirtle Callaghan Trust -- The International Equity
Portfolio, a diversified, open-end management investment company;
and John Hancock Variable Series Trust I -- International
Balanced Portfolio, an open-end management investment company.
For information as to any other business, vocation or employment
of a substantial nature in which each officer of Brinson
Partners, Inc., is or has been engaged for his own account or in
the capacity of officer, employee, partner or trustee, reference
is made to the Form ADV (File#34910) filed by it under the
Investment Advisers Act of 1940, as amended.
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) None
(b) Affiliations of Directors and Officers:
Set forth below is a list of directors and principal officers of Aon
Securities Corporation, indicating the positions and officers held with ASC and
with the Registrant. The principal business address of each person listed below
is 123 N. Wacker Drive, Chicago, Illinois 60606.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH PRINCIPAL UNDERWRITER WITH REGISTRANT
- ------------------------- --------------------------------------- -------------------------
<S> <C> <C>
Michael A. Conway Chairman of the Board of Directors President and Director
Lawrence E. Harb President and General Securities
Principal None
Brian H. Lawrence Controller and Financial Operations
Principal None
Stephen Barrett General Securities Principal None
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the rules thereunder and Rule 2a-7 under the
1940 Act will be maintained at the offices of the Trust, the Trust's custodian,
Firstar Trust Company, 615 East Michigan Street, Third Floor, Milwaukee,
Wisconsin 53202 , or the Trust's investment adviser, Aon Advisors, Inc., 123
North Wacker Drive, Chicago, Illinois 60606.
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
4
<PAGE> 140
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) To the extent required by Item 32(b) of Form N-1A, the Trust hereby
undertakes to file a post-effective amendment, using financial statements which
need not be certified, for the REIT Index, International Equity, Government
Securities and S&P 500 Index Funds, within four to six months from the effective
date of Registrant's Securities Act of 1933 registration statement.
(c) The Trust hereby undertakes to furnish, upon request and without
charge, to each person to whom a prospectus for the Fund is delivered a copy of
the Trust's latest annual report to shareholders.
(d) Insofar as indemnification for liability arising under the Securities
Act of 1933 (the "1933 Act") may be permitted to directors, officers and
controlling persons of the Trust pursuant to the foregoing provisions, or
otherwise, the Trust has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Trust of
expenses incurred or paid by a director, officer or controlling person of the
Trust in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Trust will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
5
<PAGE> 141
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Trust has duly caused this Post-Effective
Amendment to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on August 23, 1996.
AON FUNDS
By
/s/ Michael A. Conway
------------------------------------
Michael A. Conway
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on August 23, 1996.
<TABLE>
<C> <S>
/s/ Michael A. Conway In his own capacity as President and Trustee,
- --------------------------------------------- and as Attorney-in-Fact for each of the
Michael A. Conway Trustees and Officers of the Trust asterisked
below
/s/ Paul Rabin Principal Accounting Officer, Principal
- --------------------------------------------- Financial Officer and Treasurer
Paul Rabin
* Trustee
- ---------------------------------------------
Michael A. Cavataio
* Trustee
- ---------------------------------------------
Donald W. Phillips
* Trustee
- ---------------------------------------------
Carleton D. Pearl
* Trustee
- ---------------------------------------------
Richard J. Peters
</TABLE>
6
<PAGE> 142
EXHIBIT INDEX
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
<TABLE>
<S> <C> <C>
(a) Financial Statements (included in Part B):
1. Report of the Independent Auditors
2. Statement of Assets and Liabilities.
3. Statement of Operations.
4. Statement of Changes in Net Assets.
5. Portfolio of Investments.
6. Notes to Financial Statements.
(b) Exhibits:
1. (a) Agreement and Declaration of Trust of Aon Funds ("the Trust").***
(b) Resolutions Authorizing Six Series of Shares (and Classes Within Series).***
2. By-Laws of the Trust.***
3. None.
4. None.
5. (a) Form of Investment Advisory Agreement between AAI and the Trust, covering the
Money Market Fund.***
(b) Form of Investment Advisory Agreement between AAI and the Trust, covering the
Government Securities Fund.***
(c) Form of Investment Advisory Agreement between AAI and the Trust covering the
Asset Allocation Fund.***
(d) Form of Investment Advisory Agreement between AAI and the Trust, covering the
S&P 500 Index Fund.***
(e) Form of Investment Advisory Agreement between AAI and the Trust, covering the
REIT Index Fund.***
(f) Form of Investment Advisory Agreement between AAI and the Trust, covering the
International Equity Fund.***
(g) Form of Investment Sub-Advisory Agreement between AAI and Brinson Partners,
Inc., covering the International Equity Fund.
6. Form of Distribution Agreement between the Trust and Aon Securities Corporation.***
7. None.
8. (a) Form of domestic Custodian Agreement between the Trust and Firstar Trust Company
("Firstar").***
(b) Form of Global Custody Agreement between Firstar and Chase Manhattan Bank
("Chase"), covering the overseas assets of the International Equity Fund.***
(c) Form of Sub-Custodian Agreement between Chase and foreign sub-custodians.***
9. (a) Form of Administration Agreement between the Trust and Aon Securities
Corporation ("ASC").***
(b) Form of Transfer Agency Agreement between the Trust and Firstar.***
(c) Form of Accounting Servicing Agreement between the Trust and Firstar.***
(d) S&P 500 Index License Agreement.***
(e) Morgan Stanley REIT Index License Agreement.***
(f) Agreement and Plan of Reorganization.***
(g) Limited Powers of Attorney.***
10. Opinion and Consent of Prickett, Jones, Elliott, Kristol & Schnee concerning the
legality of the securities to be issued.
</TABLE>
<PAGE> 143
<TABLE>
<S> <C> <C>
11. Consent of Ernst & Young LLP.
12. None.
13. (a) Form of Investment Commitment Letter for Initial Capital of Money Market and
Asset Allocation Funds.*
(b) Form of Subscription Agreement between Registrant and Combined Insurance Company
of America ("Combined") relating to Class C of the Money Market and Asset Allocation
Funds.***
(c) Form of Subscription Agreement between Registrant and Combined relating to the
Government Securities, S&P 500 Index, REIT Index and International Equity
Funds.***
14. None.
15. Form of Distribution Plan (Rule 12b-1 Plan).***
16. Schedule for Computation of Performance Calculations.***
17. Financial Data Schedule.**
18. Form of Registrant's Plan pursuant to Rule 18f-3(d).***
25. Aon Corporation List of Subsidiaries.***
</TABLE>
- ---------------
* Incorporated herein by reference to pre-effective amendment No. 1 to the
Registrant's registration statement on Form N-1A, File No. 33-43133, filed
with the Securities and Exchange Commission on December 5, 1991.
** Incorporated by reference to post-effective amendment No. 7 to the
Registrant's registration statement on Form N-1A, file No. 33-43133, filed
with the Securities and Exchange Commission on February 28, 1996.
*** Incorporated by reference to post-effective amendment No. 8 to the
Registrant's registration statement on Form N-1A, file No. 33-43133, filed
with the Securities and Exchange Commission on June 11, 1996.
<PAGE> 1
Exhibit 99.B5(g)
INVESTMENT SUB-ADVISORY AGREEMENT
THIS INVESTMENT SUB-ADVISORY AGREEMENT ("Agreement") made this day of
, 1996 by and between Aon Advisors, Inc., a Virginia corporation, (the
"Advisor") and Brinson Partners, Inc., a Delaware corporation (the
"Sub-Advisor").
Advisor and Sub-Advisor agree as follows:
1. Advisor hereby engages the services of Sub-Advisor in connection with
Advisor's management of the International Equity Fund (the "Portfolio") of Aon
Funds, a Delaware business trust (the "Fund"). Pursuant to this Agreement and
subject to the oversight and supervision by Advisor and the officers and the
Board of Trustees of the Fund, Sub-Advisor shall manage the investment and
reinvestment of the assets of the Portfolio.
2. Sub-Advisor hereby accepts employment by Advisor in the foregoing
capacity and agrees, at its own expense, to render the services set forth herein
and to provide the office space, furnishings, equipment and personnel required
by it to perform such services on the terms and for the compensation provided in
this Agreement.
3. In particular, Sub-Advisor shall furnish continuously an investment
program for the Portfolio and shall determine from time to time in its
discretion the securities and other investments to be purchased or sold or
exchanged and what portions of the Portfolio shall be held in various
securities, cash or other investments. In this connection, Sub-Advisor shall
provide Advisor and the officers and Trustees of the Fund with such reports and
documentation as the latter shall reasonably request regarding Sub-Advisor's
management of the Portfolio's assets.
4. Sub-Advisor shall carry out its responsibilities under this Agreement
in compliance with: (a) the Portfolio's investment objective, policies and
restrictions as set forth in the Fund's current registration statement, (b) such
policies or directives as the Fund's Trustees may from time to time establish or
issue, and (c) applicable law and related regulations. In particular,
Sub-Advisor shall exercise its best efforts to ensure that the Portfolio
continuously qualifies as a regulated investment company under sub-chapter M of
the Internal Revenue Code of 1986, as amended, (the "Code"). Advisor shall
promptly notify Sub-Advisor in writing of changes to (a) or (b) above and shall
notify Sub-Advisor of changes to (c) above promptly after it becomes aware of
such changes.
Advisor agrees to provide or cause the Fund's custodian to provide
Sub-Advisor with timely information regarding such matters as purchases and
redemptions of shares in the Portfolio, the cash requirements of and the cash
available for investment in the Portfolio, the monthly accounting statements and
such other information as may be reasonably necessary or appropriate in order
for Sub-Adviser to perform its responsibilities hereunder.
5. Sub-Advisor shall take all actions which it considers necessary to
implement the investment policies of the Portfolio, and in particular, to place
all orders for the purchase or sale of securities or other investments for the
Portfolio with brokers or dealers selected by it, and to that end, Sub-Advisor
is authorized as the agent of the Fund to give instructions to the Fund's
custodian as to deliveries of securities or other investments and payment of
cash for the account of the Portfolio. In connection with the selection of
brokers or dealers and the placing of purchase and sale orders with respect to
investments of the Portfolio, Sub-Advisor is directed at all times to seek to
obtain best execution and price within the policy guidelines determined by the
Fund's Trustees and set forth in the Fund's current registration statement.
In addition to seeking the best price and execution, Sub-Advisor may also
take into consideration research and statistical information and wire and other
quotation services provided by brokers and dealers to Sub-Advisor. Sub-Advisor
is also authorized to effect individual securities transactions at commission
rates in excess of the minimum commission rates available, if it determines in
good faith that such amount of
1
<PAGE> 2
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or Sub-Advisor's overall responsibilities with respect to
the Portfolio. The policies with respect to brokerage allocation, determined
from time to time by the Fund's Trustees, are those disclosed in the Fund's
currently effective registration statement. Sub-Advisor will periodically
evaluate the statistical data, research and other investment services provided
to it by brokers and dealers. Such services may be used by Sub-Advisor in
connection with the performance of its obligations under this Agreement or in
connection with other advisory or investment operations, including using such
information in managing its own accounts.
6. Sub-Advisor's services under this Agreement are not exclusive.
Sub-Advisor may provide the same or similar services to other clients provided
that the Advisor is not treated less favorably than other clients of
Sub-Advisor. Sub-Advisor shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise expressly provided or
authorized, have no authority to act for or represent the Advisor, the Fund or
the Portfolio or otherwise be deemed agents of the Advisor, the Fund or the
Portfolio.
7. Sub-Advisor is registered with the U.S. Securities and Exchange
Commission ("SEC") under the Investment Advisers Act of 1940, as amended (the
"Act"). The Sub-Advisor shall notify Advisor immediately if Sub-Advisor ceases
to be so registered as an investment advisor.
8. Subject to: (a) the requirement that Sub-Advisor seek to obtain best
execution and price within the policy guidelines determined by the Fund's
Trustees and set forth in the Fund's current registration statement, (b) the
provisions of the Act, (c) the provisions of the Securities Exchange Act of
1934, as amended, and (d) other applicable provisions of law, including, without
limitation, the Investment Company Act of 1940, as amended, and the Rules of the
SEC promulgated thereunder an affiliated person of Sub-Advisor may act as broker
for the Portfolio in connection with the purchase or sale of securities or other
investments for the Portfolio. Subject to the requirements of applicable law and
any procedures adopted by Fund's Trustees, Sub-Advisor or its affiliated persons
may receive brokerage commissions, fees or other remuneration from the Portfolio
or the Fund for such services in addition to Sub-Advisor's fees for services
under this Agreement.
9. For the service rendered, the facilities furnished and the expenses
assumed by Sub-Advisor, Advisor shall pay Sub-Advisor at the end of each
calendar month a fee based on the average daily net asset value of the Portfolio
at the following annual rates:
.50% of the first $100,000,000; .475% of the next $100,000,000 and .45% of
assets in excess of $200,000,000.
Sub-Advisor's fee shall be accrued daily at 1/365th of the applicable annual
rate set forth above. For the purpose of accruing compensation, the net assets
of the Portfolio shall be determined in the manner and on the dates set forth in
the current prospectus of the Fund, and, on days on which the net assets are not
so determined, the net asset value computation to be used shall be as determined
on the next preceding business day on which the net assets shall have been
determined. In the event of termination of this Agreement, all compensation due
through the date of termination will be calculated on a pro-rated basis through
the date of termination and paid within thirty business days of the date of
termination.
During any period when the determination of net asset value is suspended,
the net asset value of the Portfolio as of the last business day prior to such
suspension shall for this purpose be deemed to be the net asset value at the
close of each succeeding business day until it is again determined.
10. Sub-Advisor hereby undertakes and agrees to maintain, in the form and
for the period required by Rule 31a-2 under the Investment Company Act of 1940,
all records relating to the Portfolio's investments that are required to be
maintained by the Fund pursuant to the requirements of Rule 31a-1 of that Act.
Sub-Advisor agrees that all books and records which it maintains for the
Portfolio or the Fund are the property of the Fund and further agrees to
surrender promptly to the Advisor or the Fund any such books, records or
information upon the Advisor's or the Fund's request. All such books and records
shall be made available, within five business days of a written request, to the
Fund's accountants or auditors during regular business hours at Sub-Advisor's
offices. Advisor and the Fund or either of their authorized representatives
2
<PAGE> 3
shall have the right to copy any records in the possession of Sub-Advisor which
pertain to the Portfolio or the Fund. Such books, records, information or
reports shall be made available to properly authorized government
representatives consistent with state and federal law and/or regulations. In the
event of the termination of this Agreement, all such books, records or other
information shall be returned to Advisor or the Fund free from any claim or
assertion of rights by Sub-Advisor. Notwithstanding the foregoing, Sub-Advisor
may retain copies of all such books, records and information.
11. Sub-Advisor agrees that it will not disclose or use any records or
information obtained pursuant to this Agreement in any manner whatsoever except
as authorized in this Agreement and that it will keep confidential any
information obtained pursuant to this Agreement and disclose such information
only if Advisor or the Fund has authorized such disclosure, or if such
disclosure is required by federal or state regulatory authorities, or is
necessary and proper to the Sub-Advisor's fulfilling its duties hereunder.
12. In the absence of willful misfeasance, bad faith or gross negligence on
the part of Sub-Advisor or its officers, directors or employees, or reckless
disregard by Sub-Advisor of its duties under this Agreement, Sub-Advisor shall
not be liable to Advisor, the Portfolio, the Fund or to any shareholder of the
Portfolio for any act or omission in the course of, or connected with, rendering
services hereunder or for any losses that may be sustained in the purchase,
holding or sale of any security, except to the extent specified in Section 36(b)
of the Investment Company Act of 1940 concerning loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation services.
13. This Agreement shall not become effective unless and until it is
approved by the Board of Trustees of the Fund, including a majority of Trustees
who are not parties to this Agreement or interested persons of any such party to
this Agreement. This Agreement shall continue in effect for two years and shall
thereafter continue in effect from year to year so long as such continuance is
specifically approved at least annually by (i) the Board of Trustees of the
Fund, or by the vote of a majority of the outstanding shares of the series of
the Fund representing an interest in the Portfolio; and (ii) a majority of those
Trustees who are not parties to this Agreement or interested persons of any such
party cast in person at a meeting called for the purpose of voting on such
approval.
14. This Agreement may be terminated at any time without the payment of any
penalty, by the Fund's Board of Trustees, or by vote of a majority of the
outstanding shares of the series of the Fund representing an interest in the
Portfolio on sixty days' written notice to the Advisor and Sub-Advisor, or by
the Advisor or by the Sub-Advisor, on sixty days written notice to the other.
This Agreement shall automatically terminate in the event of its assignment or
in the event of the termination of the investment advisory agreement between the
Advisor and the Fund regarding the Advisor's management of the Portfolio.
15. This Agreement may be amended by either party only if such amendment is
specifically approved by (i) the vote of a majority of outstanding shares of the
series of the Fund representing an interest in the Portfolio, and (ii) a
majority of those Trustees who are not parties to this Agreement or interested
persons of any such party cast in person at a meeting called for the purpose of
voting on such approval.
16. The terms "assignment," "affiliated persons" and "interested person,"
when used in this Agreement, shall have the respective meanings specified in the
Investment Company Act of 1940. The term "majority of the outstanding shares of
the series" means the lesser of (a) 67% or more of the shares of such series
present at a meeting if more than 50% of such shares are present or represented
by proxy or (b) more than 50% of the shares of such series.
17. This Agreement shall be construed in accordance with the laws of the
State of Illinois, and applicable provisions of the Act and the Investment
Company Act of 1940.
18. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby.
19. The Sub-Advisor agrees to report to the Fund and its Trustees any
conflicts of interest between classes of shares of the Portfolio of which the
Sub-Advisor may become aware.
3
<PAGE> 4
20. Adviser hereby acknowledges receipt of Sub-Advisor's SEC Form ADV, Part
II more than forty-eight (48) hours prior to the execution of this Agreement.
21. During the term of this Agreement, the Fund shall have the right to use
Sub-Advisor's name in all materials relating to the Portfolio; provided that
prior to the distribution of such materials, Sub-Advisor has had the opportunity
to review such materials and consents in writing to the distribution thereof,
such consent to not be unreasonably withheld.
22. Notices hereunder shall be in writing and shall be delivered, or mailed
by first-class mail, postage prepaid, addressed as follows:
(a) If to the Advisor, to:
________________________
________________________
________________________
Attn: ________________
Fax No.: (___) ___-____
(b) If to the Sub-Advisor, to:
Brinson Partners, Inc.
209 South LaSalle Street
Chicago, Illinois 60606-1295
Attn: ________________
Fax No.: (312) 220-7199
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
AON ADVISORS, INC.
ATTEST:
By:
Its:
BRINSON PARTNERS, INC.
ATTEST:
By: Samuel W. Anderson
Its: Vice President
5
<PAGE> 1
EXHIBIT 99.B10
[LETTERHEAD OF PRICKETT, JONES, ELLIOTT, KRISTOL & SCHNEE]
August 23, 1996
Aon Funds
123 North Wacker Drive
Chicago, Illinois 60606
RE: AON FUNDS
Ladies and Gentlemen:
We have been retained as special Delaware counsel to Aon Funds, a Delaware
business trust (the "Trust"), to furnish this opinion to you with respect to the
status of the Shares to be issued by the Trust.
In rendering this opinion, we have reviewed the Agreement and Declaration
of Trust of the Trust made and entered into as of the 15th day of May, 1996 by
the Initial Trustees, including the By-laws of the Trust dated as of May 22,
1996 (the "By-laws") and the Authorization of Six Series of Shares (and Classes
within such Series) of the Trust as adopted by the Trustees on May 22, 1996 with
the Form of Trust Plan Pursuant to Rule 18f-3(d) Under the Investment Company
Act of 1940 attached thereto as Exhibit A (the "Authorization") (collectively,
the "Trust Agreement"); the Certificate of Trust of the Trust which was filed
with the Office of the Secretary of State of the State of Delaware (the
"Delaware Secretary of State") on May 16, 1996 (the "Trust Certificate");
Post-Effective Amendment No. 9 to the Registration Statement on Form N-1A of Aon
Asset Management Fund, Inc. (as proposed to be adopted by the Trust) in the
form to be filed with the Securities and Exchange Commission on the date hereof
(the "Registration Statement"); a Certificate of Good Standing for the Trust
obtained from the Delaware Secretary of State; and a Certificate of the
Secretary of the Trust certifying as to certain matters of fact with certain
resolutions of the Trustees attached thereto (the "Resolutions"). In rendering
this opinion, we have not received or reviewed any other documents.
In our review, we have assumed the authenticity of all documents submitted
to us and the genuineness of all signatures on such documents, and have relied
on the facts, which we have assumed to be correct, contained in those documents,
as well as the facts recited herein. We also have assumed that the Trust
Agreement and the Resolutions constitute the entire agreement with respect to
the subject matter thereof among the respective parties, are in full force and
effect and have not been amended or rescinded. All capitalized terms used
herein, other than those defined herein, are intended to have the meanings set
forth in the Trust Agreement.
For purposes of this opinion, we have made, and our opinion is based upon,
the following additional assumptions:
(1) The Trust Certificate and the Trust Agreement have been validly
executed and delivered by the Initial Trustees;
(2) No action has been taken to dissolve or terminate the Trust;
(3) Each of the persons to be Shareholders pursuant to the terms of
the Trust Agreement who is not a natural person will be duly organized,
validly existing and in good standing under the laws of its domiciliary
jurisdiction with full power and authority to enter into and perform the
provisions in the Trust Agreement applicable to it, and each Trustee, and
each Shareholder who is a natural person, will have the capacity to enter
into and perform the provisions in the Trust Agreement applicable to it;
and
(4) The Registration Statement will become effective with the
Securities and Exchange Commission prior to the issuance, offering and sale
of the Shares registered thereunder, and such Shares will be
<PAGE> 2
qualified or exempted from qualifying as required under the securities laws
of those states in which they are to be offered and sold.
We note that Article X, Section 2 of the Trust Agreement provides in
pertinent part that:
This Declaration of Trust is executed and delivered by all the
Trustees with reference to the Act and the laws of the State of
Delaware, and this Trust and all provisions of this Declaration of
Trust (which shall be the governing instrument of this Trust), and
the rights, duties and obligations of the Trustees and
Shareholders hereunder, are to be governed by and construed and
administered in accordance with the Act and the internal
substantive laws of said State without regard to principles of
conflict of laws (unless and to the extent preempted by the 1940
Act or other applicable Federal securities laws)...
This opinion is based upon the application of the Delaware Business Trust
Act, 12 Del. C. Ch. 38, to the matters set forth below which are the laws of
Delaware normally applicable to such matters (with the exception that the
Delaware Securities Act may be applicable to such matters, but we have been
expressly asked not to consider such law). We have not been requested to and do
not opine as to the applicability of the laws of any other jurisdiction. This
opinion speaks to the status of the Trust upon the date hereof and not to the
effect of any future events or future amendments to the documents referred to in
the second paragraph of this letter.
Based upon the foregoing, subject thereto, and in reliance thereon, we are
of the opinion that the Trust is a Delaware business trust duly formed, validly
existing and in good standing under the laws of the State of Delaware and the
Shares registered under the Registration Statement, when issued and sold by the
Trust in accordance with the provisions of the Trust Agreement and the
Registration Statement, will be duly authorized, validly issued, fully paid and
nonassessable.
The opinions expressed herein are for your sole benefit. We do not purport
to represent the Shareholders in the Trust or other potential investors in
Shares. In rendering this opinion and other legal advice with respect to the
Trust, we are serving as counsel on behalf of the Trust only. We do not act as
counsel for any other party in connection with this transaction other than the
Trust. Without admitting that we are within the class of persons required to
consent under Section 7 of the Securities Act of 1933, as amended, and the Rules
and Regulations thereunder, we consent to the filing of this opinion as an
exhibit to the Registration Statement and with any state securities commission.
We further consent to the reference to our firm under the heading "Additional
Information -- Legal Counsel" in the Statement of Additional Information
forming part of the Registration Statement. Except as set forth above, we do
not consent to the use of our name or this opinion for any purpose.
Very truly yours,
/s/ Prickett, Jones,
Elliott, Kristol
& Schnee
<PAGE> 1
EXHIBIT 99.B11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors" and to the use of our report dated
December 1, 1995 for the Aon Asset Management Fund, Inc. (comprised of the
Money Market Portfolio and the Flexible Asset Allocation Portfolio) in the
Registration Statement (Form N-1A) and related Prospectus of the Aon Funds
filed with the Securities and Exchange Commission in this Post-Effective
Amendment No. 9 to the Registration Statement under the Securities Act of 1933
(Registration No. 33-43133) and in this Amendment No. 10 to the Registration
Statement under the Investment Company Act of 1940 (Registration No.
811-6422).
ERNST & YOUNG LLP
Chicago, Illinois
August 23, 1996
