<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 28, 1997
FILE NO. 33-43133
FILE NO. 811-6422
================================================================================
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. 10 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 11 [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:
X immediately upon filing pursuant to paragraph (b) of Rule 485
---
on Date pursuant to paragraph (b) of Rule 485
--- ------------
60 days after filing pursuant to paragraph (a) of Rule 485
---
on Date pursuant to paragraph (a) of Rule 485
--- ------------
75 days after filing pursuant to paragraph (a)(ii) of Rule 485
---
on Date pursuant to paragraph (a)(ii) of Rule 485
--- -------------
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,
1996 ON DECEMBER 29, 1996.
<PAGE> 2
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 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
<PAGE> 3
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 February 28, 1997 that has been filed by the
Trust electronically 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 Commission also maintains a
web site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information regarding
registrants (including the Trust) that file electronically with the Commission.
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.
FEBRUARY 28, 1997
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary 1
Fund Expenses 4
Financial Highlights 6
Organization and Classification 12
Investment Objectives and Policies 12
Money Market Fund 13
Government Securities Fund 14
Asset Allocation Fund 15
S&P 500 Index Fund 16
International Equity Fund 18
Reit Index Fund 19
Investment Practices 22
Management of the Trust 29
Distribution of Shares 33
Net Asset Value 33
Purchase of Shares 34
Redemption of Shares 36
Additional Services to Investors 37
Dividends, Distributions and Taxes 38
Performance Information 40
Additional Information 41
</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> 5
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.
The Government Securities Fund and, to the extent
invested in longer-term debt securities the Asset
Allocation Fund, is 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
1
<PAGE> 6
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."
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."
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 any
other Fund. Each exchange pursuant to written request
will be without charge; exchanges pursuant to
telephone request will be 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.
2
<PAGE> 7
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
another Fund, distributions on shares of a Fund will
be automatically reinvested in additional shares
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. 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> 8
FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are charges investors pay when buying or
selling shares of a Fund.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
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 telephone exchange
</TABLE>
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
<TABLE>
<CAPTION>
TOTAL
ADVISORY 12b-1 OTHER OPERATING
FUND FEES FEES EXPENSES(5) EXPENSES
- ---- ---- ---- -------- --------
<S> <C> <C> <C> <C>
Money Market Fund(1) .15%(4) None .16% .31%(4)
Government Securities Fund(2) .45% None .21% .66%
Asset Allocation Fund(3) .65% None .22% .87%
S&P 500 Index Fund(2) .30% None .21% .51%
International Equity Fund(2) .95% None .35% 1.30%
REIT Index Fund (2) .60% None .28% .88%
</TABLE>
(1) Annual Fund Operating Expenses are based on amounts incurred during the
Fund's most recent fiscal year ended October 31, 1996 restated to reflect
a change in the rate of advisory fee waiver which became effective
September 3, 1996, and to reflect the .05% per annum administration fee
under "Other Expenses" rather than "Advisory Fees". See "Management of
the Trust -- Investment Adviser".
(2) Advisory Fees are payable based on a percentage of average daily net
assets. Other expenses are based on estimated amounts.
(3) Annual Fund Operating Expenses are based on amounts incurred during the
Fund's most recent fiscal year ended October 31, 1996, restated to
reflect the .05% per annum administration fee under "Other Expenses"
rather than "Advisory Fees". See "Management of the Trust -- Investment
Adviser".
4
<PAGE> 9
(4) After giving effect to expense reimbursements and fee waivers. Without
such expense reimbursements and fee waivers, Advisory Fees and Total
Operating Expenses would have been 30% and 46%, respectively.
(5) "Other Expenses" includes such expenses as custodial, transfer agent,
fund accounting fees, fund administration, 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 and fee waivers) as
shown, (2) a 5% annual return and (3) redemption at the end of each time
period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Fund $3 $10 $17 $39
Government Securities Fund $7 $21 -- --
Asset Allocation Fund $9 $28 $49 108
S&P 500 Index Fund $5 $16 -- --
International Equity Fund $13 $42 -- --
REIT Index Fund $9 $28 -- --
</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, 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:
MAXIMUM TOTAL
OPERATING EXPENSES
<TABLE>
<S> <C>
Money Market Fund 1.00%
Government Securities Fund 1.50% to $30 million;
1.25% thereafter
Asset Allocation Fund 1.25%
S&P 500 Index Fund .75%
International Equity Fund 1.75% to $30 million;
1.50% thereafter
</TABLE>
5
<PAGE> 10
REIT Index Fund 1.50% to $30 million;
1.25% thereafter
FINANCIAL HIGHLIGHTS
Set forth below are per share data, total investment return, ratios and
other supplemental data for a share of each Fund for the periods indicated.
This information has been derived from information provided in the financial
statements of Aon Funds (and its predecessor, Aon Asset Managment Fund, Inc.).
The following information has been audited by Ernst & Young LLP,
independent auditors, whose unqualified report thereon is included in the
financial statements of the Trust and the notes thereto incorporated by
reference in the Statement of Additional Information. This information should
be read in conjuction with such financial statements and notes. The Annual
Report to Shareholders of the Trust, which may be obtained upon request from
the Trust without charge, contains further information about the performance
of each of the Funds.
6
<PAGE> 11
MONEY MARKET FUND(1):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 23, 1992
YEAR ENDED YEAR YEAR YEAR ENDED (COMMENCEMENT OF
OCTOBER 31, ENDED ENDED OCTOBER 31, OPERATIONS)
1996 OCTOBER OCTOBER 1993 THROUGH
31, 31, OCTOBER 31, 1992
1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD 1.00 1.00 1.00 1.00 1.00
Income from investment operations:
Net investment income 0.05 0.06 0.04 0.03 0.03
Net realized and unrealized gain on 0.00 --(3) --(3) --(3) --(3)
securities ---- ---- ---- ---- ----
TOTAL INCOME FROM INVESTMENT OPERATIONS 0.05 0.06 0.04 0.03 0.03
Less distributions:
Dividends from net investment 0.05 0.06 0.04 0.03 0.03
income
Distributions from capital gains 0.00 --(3) --(3) --(3) --(3)
---- ---- ---- ---- ----
Total distributions 0.05 0.06 0.04 0.03 0.03
---- ---- ---- ---- ----
NET ASSET VALUE AT END OF PERIOD 1.00 1.00 1.00 1.00 1.00
==== ==== ==== ==== ====
Total return 5.43% 5.79% 3.73% 3.10% 3.57% (2)
===== ===== ===== ===== ====
Ratios and supplemental data:
Net assets at end of period (in 393,097 420,094 410,912 412,068 399,076
thousands)
Ratio of operating expenses to 0.23% 0.14% 0.15% 0.17% 0.25% (2)
average net assets(4)
Ratio of net investment income to 5.30% 5.79% 3.73% 3.10% 3.57% (2)
average net assets(4)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On September 3, 1996, all of the assets and liabilities of the Money Market
Portfolio of the Aon Asset Management Fund, Inc., were transferred to the
Trust in exchange for shares of the Money Market Fund of the Trust. The
financial data provided above for periods ended prior to October 31, 1996
is for the Money Market Portfolio of the Aon Asset Management Fund, Inc.
(2) Determined on an annualized basis.
7
<PAGE> 12
(3) Less than $.01 per share.
(4) AAI has agreed to waive a portion of its advisory fees through at least
February 28, 1998. 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 .46% and 5.07% for fiscal 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% for the fiscal period from January 23, 1992
(commencement of operations) through October 31, 1992, respectively.
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES FUND:
PERIOD FROM
SEPTEMBER 3, 1996
(COMMENCEMENT OF OPERATIONS)
THROUGH OCTOBER 31, 1996
<S> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD 10.00
Income from investment operations:
Net investment income 0.07
Net realized and unrealized gain on securities 0.21
-----
TOTAL INCOME FROM INVESTMENT OPERATIONS 0.28
Less distributions:
Dividends from net investment income 0.07
Distributions from capital gains 0.00
-----
Total distributions 0.07
-----
NET ASSET VALUE AT END OF PERIOD 10.21
=====
Total return (not annualized) 2.79%
=====
Ratios and supplemental data:
Net assets at end of period (in thousands) 38,459
Ratio of operating expenses to average net assets 0.89% (1)
Ratio of net investment income to average net assets 5.59% (1)
Portfolio turnover rate 3.93%
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Determined on an annualized basis.
8
<PAGE> 13
ASSET ALLOCATION FUND(1)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD FROM MARCH 1, 1994
OCTOBER 31,1996 OCTOBER 31, 1995 (COMMENCEMENT OF
OPERATIONS)
THROUGH OCTOBER 31, 1994
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD 12.04 9.97 10.00
Income from investment operations:
Net investment income 0.31 0.24 0.17
Net realized and unrealized gain on 1.01 2.41 0.01
---- ---- ----
securities
TOTAL INCOME FROM INVESTMENT OPERATIONS 1.32 2.65 0.18
Less distributions:
Dividends from net investment income 0.31 0.24 0.16
Distributions from capital gains 0.30 0.34 0.05
---- ---- ----
Total distributions 0.61 0.58 0.21
---- ---- ----
</TABLE>
9
<PAGE> 14
<TABLE>
YEAR ENDED YEAR ENDED PERIOD FROM MARCH 1, 1994
OCTOBER 31,1996 OCTOBER 31, 1995 (COMMENCEMENT OF
OPERATIONS)
THROUGH OCTOBER 31, 1994
<S> <C> <C> <C>
NET ASSET VALUE AT END OF PERIOD 12.75 12.04 9.97
===== ====== =====
Total return 11.06% 26.92% 1.84% (4)
===== ====== =====
Ratios and supplemental data:
Net assets at end of period (in thousands) 86,229 73,775 10,189
Ratio of operating expenses to average net assets 0.87% 0.96% 1.25% (3)
Ratio of net investment income to average net assets 2.48% 2.73% 2.63% (2)
Portfolio turnover rate 119.79% 95.17% 64.36%
Average commission rate paid per share $0.0585 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
</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 shares of the Asset Allocation Fund of the
Trust. The financial data provided above for periods ended prior to October 31,
1996 is for the Flexible Asset Allocation Portfolio of the 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 AAI.
Had the reimbursements not been made, the ratio would have been 1.39%.
(4) Not annualized
<TABLE>
<CAPTION>
S&P 500 INDEX FUND:
PERIOD FROM
SEPTEMBER 3, 1996
(COMMENCEMENT OF OPERATIONS)
THROUGH OCTOBER 31, 1996
<S> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD 10.00
Income from investment operations:
Net investment income 0.02
Net realized and unrealized gain on securities 0.77
----
TOTAL INCOME FROM INVESTMENT OPERATIONS 0.79
Less distributions:
Dividends from net investment income 0.02
Distributions from capital gains 0.00
----
Total distributions 0.02
----
NET ASSET VALUE AT END OF PERIOD 10.77
=====
Total return (not annualized) 7.86%
=====
Ratios and supplemental data:
Net assets at end of period (in thousands) 23,698
Ratio of operating expenses to average net assets 0.71% (1)
Ratio of net investment income to average net assets 1.60% (1)
Portfolio turnover rate 0.05%
Average commission rate paid per share $0.0338
</TABLE>
10
<PAGE> 15
(1) Determined on an annualized basis. Absent an expense reimbursement by AAI,
the ratio of operating expenses to average net assets and the ratio of net
investment income to average net assets would have been 1.26% and 1.05%,
respectively.
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND:
PERIOD FROM
SEPTEMBER 3, 1996
(COMMENCEMENT OF OPERATIONS)
THROUGH OCTOBER 31, 1996
<S> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD 10.00
Income from investment operations:
Net investment income 0.02
Net realized and unrealized gain on securities 0.21
-----
TOTAL INCOME FROM INVESTMENT OPERATIONS 0.23
Less distributions:
Dividends from and in excess of net investment income 0.03
Distributions from capital gains 0.00
-----
Total distributions 0.03
-----
NET ASSET VALUE AT END OF PERIOD 10.20
=====
Total return (not annualized) 2.32%
=====
Ratios and supplemental data:
Net assets at end of period (in thousands) 23,137
Ratio of operating expenses to average net assets 1.46% (1)
Ratio of net investment income to average net assets 1.52% (1)
Portfolio turnover rate 0.0%
Average commission rate paid per share $0.0264
</TABLE>
(1) Determined on an annualized basis.
<TABLE>
<CAPTION>
REIT INDEX FUND:
PERIOD FROM
SEPTEMBER 3, 1996
(COMMENCEMENT OF OPERATIONS)
THROUGH OCTOBER 31, 1996
<S> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD 10.00
Income from investment operations:
Net investment income (2) 0.10
Net realized and unrealized gain on securities 0.34
-----
TOTAL INCOME FROM INVESTMENT OPERATIONS 0.44
Less distributions:
Dividends from net investment income 0.00
Distributions from capital gains 0.00
-----
Total distributions 0.00
-----
NET ASSET VALUE AT END OF PERIOD 10.44
=====
Total return (not annualized) 4.40%
=====
Ratios and supplemental data:
Net assets at end of period (in thousands) 24,124
Ratio of operating expenses to average net assets 1.20% (1)
</TABLE>
11
<PAGE> 16
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 3, 1996
(COMMENCEMENT OF OPERATIONS)
THROUGH OCTOBER 31, 1996
<S> <S>
Ratio of net investment income to average net assets 5.97% (1)
Portfolio turnover rate 0.0%
Average commission rate paid per share $0.0270
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Determined on an annualized basis.
(2) Net investment income per share calculated using average shares outstanding
during the period.
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.
Between September 3, 1996 and February 28, 1997, each of the six Funds of the
Trust issued two classes of shares, Class C and Class Y shares. The principal
difference between the share classes was that Class C shares were subject to
distribution expenses of up to .25% per annum under a Rule 12b-1 Plan
applicable to such shares. The Class C shares of each of the Funds were
eliminated effective February 28, 1997 by converting such shares into Class Y
shares of the respective Funds. The conversion was effected on the basis of
the relative net asset values of the Class C shares and the Class Y shares of
the respective Funds as determined as of the date and time of conversion.
Thereafter, Class Y shares became available to any investor who theretofore
would have qualified to purchase either Class C or Class Y shares, and Class Y
shares became known simply as "shares". Unless otherwise specified, all
references to shares of any Fund herein and in the Statement of Additional
Information relating to the period between September 3, 1996 and February 28,
1997 refer to Class Y shares of such Fund.
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. Each Fund bears its own expenses and
other liabilities and also a share of the Trust's general liabilities.
See "Additional Information."
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.
12
<PAGE> 17
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).
(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.
13
<PAGE> 18
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 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
14
<PAGE> 19
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 Fund 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. 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
15
<PAGE> 20
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
Fund 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.
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.
- ------------
(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 500 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.
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.
16
<PAGE> 21
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 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.
17
<PAGE> 22
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."
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.
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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 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.
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As of January 31, 1997, 104 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.
Stocks in the Morgan Stanley REIT Index represent a broadly diversified range of
property types and regions. Property types may include, but are not limited to:
retail stores; residential; office; industrial and hotels.
The Index's ten largest stocks are expected to make up about 30% of its market
value.
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
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<PAGE> 25
the investment results of the Fund and that of the Morgan Stanley REIT 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
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 $3.0 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 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."
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<PAGE> 26
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, with the exception of the Money Market
Fund, 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
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
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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 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.
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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 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 may 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.
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<PAGE> 29
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 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
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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 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.
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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."
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,
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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 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
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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.
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 Funds. AAI is registered as an investment adviser under the Investment
Advisers Act of 1940. As of February 28, 1997, Mr. Patrick G. Ryan, President
and Chief Executive Officer of Aon, owned directly and beneficially
13,463,477 shares (12.4%) of the outstanding common stock of Aon.
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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 December 31, 1996, the aggregate assets
under AAI's management were approximately $7.0 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.
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) shares of the Money Market Fund in any fiscal year exceed
1.00% of the average daily net assets of that Fund; (ii) shares of the
Government Securities Fund in any fiscal year exceed 1.50% of the first $30
million of average daily net assets of that Fund and 1.25% of average daily
net assets of that Fund in excess of $30 million; (iii) shares of the Asset
Allocation Fund in any fiscal year exceed 1.25% of the average daily net assets
of that Fund; (iv) shares of the S&P 500 Index Fund in any fiscal year exceed
.75% of the average daily net assets of that Fund; (v) shares of the
International Equity Fund in any fiscal year exceed 1.75% of the
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first $30 million of average daily net assets of that Fund and 1.50% of
average daily net assets of that Fund in excess of $30 million; and (vi)
shares of the REIT Index Fund in any fiscal year exceed 1.50% of the first $30
million of average daily net assets of that Fund and 1.25% of average daily net
assets 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, 1996, the total operating expenses
incurred by the Money Market Fund and Asset Allocation Fund (including the
advisory fee paid to AAI), before any reimbursements or fee waivers,
represented .46% (.23% after reimbursements and fee waivers) and .87%,
respectively, of the average daily net assets of each such Fund. For the period
September 3, 1996 (commencement of operations) through October 31, 1996, the
total operating expenses incurred by the Government Securities Fund, S&P 500
Index Fund, International Equity Fund and REIT Index Fund (including the
advisory fee paid to AAI), before any reimbursements or fee waivers,
represented .89%, 1.26% (.71% after reimbursements and fee waivers), 1.46% and
1.20%, respectively, of the average daily net assets of each such Fund on an
annualized basis. During the fiscal year ended October 31, 1996, AAI was
required to reimburse the Trust $13,734 for expenses incurred by the S&P 500
Index Fund in excess of the limit described in the previous paragraph. No
other such reimbursement was required.
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 million; .40%
of the next $100 million; .35% of
the next $100 million; .30% of the
next $100 million; and .25% of
amounts in excess of $400 million.
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 million; .90%
of the next $100 million; and .85% of
amounts in excess of $200 million.
REIT Index Fund: .60% of the first $100 million; .55%
of the next $100 million; and .50% of
amounts in excess of $200 million.
From the time the Money Market Fund began operations to September 3, 1996, 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). Since September 3, 1996, AAI has agreed to waive half of its .30%
annual investment advisory fee until at least February 28, 1998. Prior to
September 3, 1996, the annual investment advisory fee for the Asset
Allocation Fund was at a rate of .70% of average daily net assets and included
fees payable under the Administration Agreement which are now borne directly by
the Trust.
During the fiscal year ended October 31, 1996, the Trust paid AAI
investment advisory fees in an amount representing .11% of the average daily
net assets of the Money Market Fund and .68% of the average daily net assets
of the Asset Allocation Fund. For the period from September 3, 1996
(commencement of operations) through October 31, 1996, the Trust paid AAI
investment
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advisory fees in an amount representing .45%, .30%, .95%, and .60% of the
average daily net assets of the Government Securities Fund, S&P 500 Index Fund,
International Equity Fund and REIT Index Fund, respectively, on an annualized
basis.
Effective 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.
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,
managed approximately $61 billion of global stocks and bonds as of
September 30, 1996, and it and its predecessor entities have been managing
non-U.S. 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
million; .475% of the next $100 million; and .45% of amounts in excess of $200
million 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 since its
inception in 1996, 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 and the REIT
Index Fund, joined AAI in 1995 as an Investment Analyst. He is a member of the
Financial Risk Management Group, and also serves as 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
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Institute of Technology in 1995. Mr. DeCaro is a Chartered Financial Analyst
candidate and has passed the Level II examination.
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 the Distributor will acts
as principal underwriter and distributor of the shares of each Fund.
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 for 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 Money Market Fund and
the Government Securities Fund may not be purchased or redeemed on: Martin
Luther King, Jr. Day, Columbus Day, and Veterans' 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
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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 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.
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. 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 intends to make available a retirement plan for self-employed
individuals (Keogh Plan) and makes available 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.
PURCHASE BY CHECK
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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 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 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)
[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. 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. 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.
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<PAGE> 40
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
$25,000, or if the proceeds are to be sent elsewhere than the address of
record, each signature must be guaranteed by an eligible signature guarantor
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 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 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 $12.00 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.
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<PAGE> 41
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.
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
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When opening an account, a shareholder may authorize deductions to be
made from his or her personal bank checking account for investment each month
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 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 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 telephone 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.
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 daily 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 and
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
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shares 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
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. 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.
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
shareholders 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.
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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 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 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 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 was purchased with
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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 these Funds will include the average annual total return for
one, five and ten year periods, or for shorter time periods, depending upon the
length of time during which the Fund 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 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.
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 are treated separately from those of the other series. 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 December 31, 1996, Aon, itself and through its subsidiaries and
affiliates, owned beneficially and of record 99.8%, 99.9%, 99.1%, 99.9%, 99.8%
and 99.8% of the outstanding shares of beneficial interest of the Money
Market Fund, Government Securities Fund, Asset Allocation Fund, S&P 500 Index
Fund, International Equity Fund and REIT Index Fund, respectively. 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
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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 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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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
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<PAGE> 48
AON FUNDS
123 NORTH WACKER DRIVE
CHICAGO, ILLINOIS 60606
DISTRIBUTOR -- AON SECURITIES CORPORATION
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 28, 1997
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.
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<PAGE> 49
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 . . . . . . . . . . . 6
Commercial Paper . . . . . . . . . . . . . . . . . . . . . . . . 6
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . 6
Foreign Securities . . . . . . . . . . . . . . . . . . . . . . . 6
Lending Portfolio Securities . . . . . . . . . . . . . . . . . . 7
Investment Restrictions . . . . . . . . . . . . . . . . . . . . 7
Additional Investment Practices and Restrictions . . . . . . . . 9
When-Issued and Delayed Delivery Securities . . . . . . . . . . 9
Loans of Portfolio Securities . . . . . . . . . . . . . . . . . 9
Convertible Securities . . . . . . . . . . . . . . . . . . . . . 10
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 . . . . . . . . . . . . . 16
Certain Additional Risks of Options and Financial
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . 17
Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Lower-Rated, Lower Quality Debt Instruments . . . . . . . . . . 18
Risks of Lower-Rated, Lower Quality Debt Instruments . . . . . . 18
Covered Call Options . . . . . . . . . . . . . . . . . . . . . . 19
GNMA Certificates . . . . . . . . . . . . . . . . . . . . . . . 19
Investment Restrictions . . . . . . . . . . . . . . . . . . . . 20
Management of the Trust . . . . . . . . . . . . . . . . . . . . . 22
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . 22
Investment Advisers . . . . . . . . . . . . . . . . . . . . . . 24
Investment Advisory and Administration Fees . . . . . . . . . . 25
Investment Sub-Adviser . . . . . . . . . . . . . . . . . . . . . 25
Investment Sub-Advisory Agreement . . . . . . . . . . . . . . . 26
Investment Sub-Advisory Fees . . . . . . . . . . . . . . . . . . 26
Reimbursement of Excess Operating Expenses . . . . . . . . . . . 26
Securities Activities of the Adviser . . . . . . . . . . . . . . 27
</TABLE>
2
<PAGE> 50
<TABLE>
<S> <C>
Control Persons and Principal Holders of Securities . . . . . 27
Portfolio Transactions and Brokerage . . . . . . . . . . . . . 29
Determination of Net Asset Value . . . . . . . . . . . . . . . 30
General . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Money Market Fund . . . . . . . . . . . . . . . . . . . . . 31
Non-Money Market Funds . . . . . . . . . . . . . . . . . . 31
Retirement Programs . . . . . . . . . . . . . . . . . . . . . 32
Yield and Performance Information . . . . . . . . . . . . . . 32
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Additional Information . . . . . . . . . . . . . . . . . . . . 35
Custodian, Transfer Agent and Accounting Agent . . . . . . 35
Independent Auditors . . . . . . . . . . . . . . . . . . . 35
Financial Statements . . . . . . . . . . . . . . . . . . . 35
Legal Counsel . . . . . . . . . . . . . . . . . . . . . . . 35
Shares of Beneficial Interest . . . . . . . . . . . . . . . 35
Reports . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Other Information . . . . . . . . . . . . . . . . . . . . . 36
Appendix A . . . .. . . . . . . . . . . . . . . . . . . . . . 37
</TABLE>
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<PAGE> 51
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, as amended (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. 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.
Between September 3, 1996 and February 28, 1997, each of the six Funds of
the Trust issued two classes of shares, Class C and Class Y shares. The
principal difference between the share classes was that Class C shares were
subject to distribution expenses of up to .25% per annum under a Rule 12b-1
Plan applicable to such shares. The Class C shares of each of the Funds were
eliminated effective February 28, 1997 by converting such shares into Class Y
shares of the respective Funds. The conversion was effected on the basis of
the relative net asset values of the Class C shares and the Class Y shares of
the respective Funds as determined as of the date and time of conversion.
Thereafter, Class Y shares became available to any investor who theretofore
would have qualified to purchase either Class C or Class Y shares, and Class Y
shares became known simply as "shares". Unless otherwise specified, all
references to shares of any Fund herein and in the Statement of Additional
Information relating to the period between September 3, 1996 and February 28,
1997 refer to Class Y shares of such Fund.
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
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<PAGE> 52
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.
The annual portfolio turnover rates for each of the Funds for recent fiscal
periods is set forth under "Financial Highlights" in the Prospectus.
Government Securities, Asset Allocation, S&P 500 Index, REIT Index 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.
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<PAGE> 53
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.
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,
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<PAGE> 54
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.
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
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<PAGE> 55
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;
(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 exploration 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.
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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.
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.
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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 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.
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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.
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
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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 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
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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.
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
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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 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.
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
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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 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
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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.
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
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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) 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 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
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<PAGE> 65
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 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
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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 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
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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-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;
(i) mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or
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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's 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);
(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
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(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's 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);
(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
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The Trustees and officers of the Trust, their addresses, ages as of
February 10, 1997, 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 53 Director and Vice-Chairman and Adviser,
1750 East Golf Road Pioneer Financial Services. President,
Schaumburg, IL 60173 Rockford 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,
29th Floor Aon Corporation
Chicago, IL 60606
Carleton D. Pearl . . . . . . Trustee 52 Senior Vice President & Treasurer,
McDonald's Corporation McDonald's Corporation
McDonald's Plaza
Oak Brook, IL 60521
Richard J. Peters . . . . . . Trustee 49 Executive Vice President, Treasurer and
13400 W. Outer Drive Director,Penske Corporation. President and
Detroit, MI 48239 Director, Penske Motorsports, Inc.
Donald W. Phillips. . . . . . Trustee 48 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
Arlene H. Hardy* . . . . . . Treasurer 39 Director of Corporate Treasury, Aon Corporation
123 North Wacker Drive
26th Floor
Chicago, IL 60606
Karl W. Krause* . . . . . . . Secretary 45 Counsel, Aon Corporation, Secretary, Aon
123 North Wacker Drive Securities Corporation
29th Floor
Chicago, IL 60606
Andrew Kubeck* . . . . . . . Vice President 44 Controller, Aon Advisors, Inc. Assistant
123 North Wacker Drive Vice President - Finance Manager - Investment
27th Floor Accounting, Aon Corporation, 1992 to 1996;
Chicago, IL 60606 Manager - Corporate Accounting, Aon
Corporation, 1985 to 1993.
Brian H. Lawrence*. . . . . Controller 29 Controller, Aon Securities Corporation;
</TABLE>
23
<PAGE> 71
<TABLE>
<S> <C>
123 North Wacker Drive Controller, Aon Financial Institution Services
27th Floor
Chicago, IL 60606
</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.
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 may be
reimbursed for any out-of- pocket expenses incurred in connection with affairs
of the Trust.
Set forth below is a compensation table listing, for each Trustee of
the Trust as of October 31, 1996 entitled to receive compensation, the
aggregate compensation received from the Trust for the period April 26, 1996
(commencement of service of each such Trustee) through October 31, 1996.
TABLE OF TRUSTEES' COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
NAME OF TRUSTEE FROM THE TRUST(1)
--------------- -----------------
<S> <C>
Michael A. Cavataio $6,500
Carleton D. Pearl $6,000
Richard J. Peters $6,500
Donald W. Phillips $6,500
</TABLE>
__________
(1) In addition to the Trust, AAI currently serves as investment
adviser to the Life of Virginia Series Fund, Inc. ("LOVSF"), an open-end
investment company currently consisting of six series. However, the Trustees
of the Trust do not serve as directors or trustees of LOVSF and they receive
compensation only from the Trust.
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 were also approved
by the respective shareholders of the Money Market Fund and the Asset
Allocation Fund on July 10, 1996 and by the respective initial shareholders of
each of the other Funds on September 3, 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
respective Fund. Each Advisory Agreement provides that it shall continue in
effect for two years and can 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 Fund and (b) by a
majority
24
<PAGE> 72
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 Brinson Partners as the investment
sub-adviser to provide day-to-day portfolio management for the International
Equity Fund.
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 prior to September 3, 1996 (net of
reimbursements and fee waivers), during the last three fiscal years: 1996,
$442,559; 1995, $487,553; and 1994, $410,817. The Asset Allocation Fund paid
the following in investment advisory fees, inclusive of administration fees
prior to September 3, 1996 (net of reimbursements and fee waivers), during the
last two fiscal years and the previous period of March 31, 1994 through October
31, 1994: 1996, $609,643; 1995, $218,580; and 1994, $49,839. The Government
Securities Fund, S&P 500 Index Fund, International Equity Fund and REIT Index
Fund paid the following in investment advisory fees, (net of reimbursements and
fee waivers) for the period September 3, 1996 through October 31, 1996:
$15,342; $0; $27,877; and $10,094, respectively.
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 $61 billion of global
stocks and bonds as of September 30, 1996, and it and its predecessor entities
have been managing non-US securities since 1974.
25
<PAGE> 73
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 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.
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) shares of the Money Market Fund in any fiscal year exceed 1.00%
of the average daily net assets of that Fund; (ii)shares of the Asset
Allocation Fund in any fiscal year exceed 1.25% of the average daily net
assets of that Fund; (iii) shares of the Government Securities Fund in any
fiscal year exceed 1.50% of the first $30 million of average daily net assets
of that Fund and 1.25% of average daily net assets of that Fund in excess of
$30 million; (iv) shares of the S&P 500 Index Fund in any fiscal year exceed
.75% of the average daily net assets of that Fund; (v) shares of the
International Equity Fund in any fiscal year exceed 1.75% of the first $30
million of average daily net assets of that Fund and 1.50% of average daily
net assets of that Fund in excess of $30 million; and (vi) shares of the REIT
Index Fund in any fiscal year exceed 1.50% of the first $30 million of daily
net assets of that Fund and 1.25% of average daily net assets 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, 1996, the total operating
expenses incurred by the Money Market Fund and Asset Allocation Fund (including
the advisory fee paid to AAI), before any reimbursements or fee waivers,
represented .46% (.23% after reimbursements and fee waivers) and .87%,
respectively, of the average daily net assets of each such Fund. For the
period September 3, 1996 (commencement of operations)
26
<PAGE> 74
through October 31, 1996, the total operating expenses incurred by the
Government Securities Fund, S&P 500 Index Fund, International Equity Fund and
REIT Index Fund (including the advisory fee paid to AAI), before any
reimbursements or fee waivers, represented .89%, 1.26% (.71% after
reimbursements and fee waivers), 1.46% and 1.20%, respectively, of the average
daily net assets of each such fund on an annualized basis. During the fiscal
year ended October 31, 1996, AAI was required to reimburse the Trust $13,734
for expenses incurred by the S&P 500 Index Fund in excess of the limit
described in the previous paragraph. No other such reimbursement was required.
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.
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 execute
sales of securities among the Funds or between a Fund and other investment
accounts it manages.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The table below sets forth certain information as to all persons known
to the Trust who, as of December 31, 1996, owned of record or beneficially 5%
or more of any Fund's outstanding shares. Each such person is a subsidiary or
an affiliate of Aon Corporation.
<TABLE>
<S> <C> <C> <C> <C>
(1) (2) (3) (4)
Fund Name and Address of Amount and Nature of Percent of
----- Beneficial Owner Beneficial Ownership Fund (%)
---------------- -------------------- --------
</TABLE>
27
<PAGE> 75
<TABLE>
<S> <C> <C> <C>
Money Market Fund Aon Risk Services, Inc. 246,806,000 76.86
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Aon Savings Plan 25,753,656 8.02
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Government Securities Aon Pension Trust 5,476,525 75.82
Fund 123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Aon Savings Plan 1,231,684 17.05
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Asset Allocation Fund Combined Insurance Co. 4,374,615 42.36
123 N. Wacker 27th Flr. directly owned shares
Chicago, IL 60606-1700
Aon Savings Plan 3,931,872 38.08
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Virginia Surety Co. 1,760,205 17.05
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
S&P 500 Index Fund Aon Savings Plan 6,240,733 72.09
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Aon Pension Trust 960,167 11.09
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Virginia Surety Co. 744,991 8.61
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
</TABLE>
28
<PAGE> 76
<TABLE>
<S> <C> <C> <C>
Combined Insurance Co. 501,472 5.79
123 N. Wacker 27th Flr. directly owned shares
Chicago, IL 60606-1700
International Equity Aon Savings Plan 1,114,148 30.93
Fund 123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Virginia Surety Co. 1,004,480 27.89
123 N. Wacker Dr. Suite 26 directly owned shares
Chicago, IL 60606-1700
Combined Insurance Co. 974,425 27.05
123 N. Wacker Dr. Suite 26 directly owned shares
Chicago, IL 60606-1700
Aon Pension Trust 501,313 13.92
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
REIT Index Fund Combined Insurance Co. 2,123,965 49.19
123 N. Wacker Dr. Suite 26 directly owned shares
Chicago, IL 60606-1700
Aon Pension Trust 1,417,016 32.82
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Aon Savings Plan 464,773 10.76
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
</TABLE>
Aon Corporation and its subsidiaries and affiliates may, by virtue of their
interests as shareholders of the Trust at any particular time, 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 Funds. As of December 31, 1996, Aon and its subsidiaries and affiliates
owned in excess of 99.76% of the outstanding shares of the Trust. On that date,
the Trustees and officers of the Trust owned less than 1% of the outstanding
shares of each of the Funds other than holdings attributable to Michael A.
Conway as co-trustee of the Aon Savings Plan and Aon Pension Trust.
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 the Fund's 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
29
<PAGE> 77
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.
During the fiscal year ended October 31, 1996, the Asset Allocation
Fund paid brokerage commissions of $77,035, based on $49,435,511 of
transactions. During the fiscal period from September 3, 1996 (commencement of
operations) through October 31, 1996, the S&P 500 Index Fund paid brokerage
commissions of $16,128, based on $23,239,410 of transactions; the International
Equity Fund paid brokerage commissions of $66,152 based on $23,048,113 of
transactions; and the REIT Index Fund paid $29,985 in brokerage commissions
based on $25,140,593 of transactions.
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.
Arrangements exist with broker-dealers whereby the Adviser obtains
computerized stock quotation services and other research services in exchange
for the direction of portfolio transactions which have generated certain
amounts of dealer concessions or brokerage commissions for such broker-dealer.
From time to time, the adviser may make other similar arrangements with brokers
or dealers which agree to provide research services in consideration for
certain amounts of dealer concessions or brokerage commissions. Brokerage will
be directed to such brokers or dealers pursuant to any such arrangement only
when the Adviser believes that the commissions charged are reasonable in
relation to the value and overall quality of the brokerage and research
services provided. For the period September 3, 1996 through December 31, 1996,
the total amount of brokerage transactions and related brokerage commissions
allocated by the Funds to brokers because of research services provided to the
Funds were: $1,109, $10,834 and $6,383 for the S&P 500 Index Fund, International
Equity Fund and REIT Index Fund, respectively. The total for the Asset
Allocation Fund for the calendar year 1996 was $41,235.
DETERMINATION OF NET ASSET VALUE
GENERAL
The Trust is open for business on each day that the New York Stock
Exchange is open for trading (the NYSE is closed on: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day), except that shares of the Money Market
Fund and Government Securities Fund may not be purchased or redeemed on Martin
Luther King, Jr. Day, Columbus Day and Veterans' 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 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.
30
<PAGE> 78
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.
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
31
<PAGE> 79
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 contributions 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 self-employed individual. The annual
compensation of each employee and the earned income of each self-employed
individual which can be taken into account under a 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 ($160,000 for 1997)as determined by the
Internal Revenue Service. A self-employed individual may contribute to either
a Keogh Plan or a SEP and, in either case, may also contribute to an IRA. The
custodial agreements for the IRAs provide that Firstar Trust Company,
Milwaukee, Wisconsin, will provide the custodial service unless a different
custodian is specified.
Firstar Trust Company would 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 changed 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 per account 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 Trust intends to request the Internal Revenue Service (the "IRS")
to issue an opinion letter that its Keogh Plan is qualified under section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and it
intends to make any amendment to its Keogh Plan requested by the IRS as a
condition of issuing such opinion letter. Furthermore, the Trust intends to
obtain approval from the IRS with respect to money purchase pension plan and
profit sharing plan options for its Keogh Plan with the result that
self-employed persons may adopt either or both of such plans. The IRA Custodial
Agreement has not been submitted to the IRS for approval because it
incorporates IRS Form 5305-A which makes such submission unnecessary.
The employer or individual, as the case may be, should consult his or
her tax adviser or attorney as to the applicability of any Keogh Plan, SEP or
IRA to his or her particular situation. 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.
For further details, including the right to appoint a successor
custodian, see the IRA Application Form, IRA Custodial Agreement and IRA
Disclosure Statement and other materials 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 tax-sheltered annuity plans, see "Taxes"
below.
YIELD AND PERFORMANCE INFORMATION
The yield of the Money Market Fund for the seven-day period ended
October 31, 1996 was 5.18%. 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
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<PAGE> 80
Money Market Fund for the seven-day period, ended October 31, 1996 was 5.32%.
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 rate of return for the Asset Allocation Fund for
the fiscal year ended October 31, 1996 and for the period March 1, 1994
(commencement of operations) through October 31, 1996, were 11.06% and
14.52%, respectively. The annualized total returns for the Government
Securities Fund, S&P 500 Index Fund, International Equity Fund and REIT Index
Fund for the period September 3, 1996 (commencement of operations) through
October 31, 1996, were 17.95%, 57.43%, 14.79% and 29.48%, respectively. The
preceding returns were 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 Funds have 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 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,
33
<PAGE> 81
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"),
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"
election 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.
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 a qualified 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 qualified 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 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
34
<PAGE> 82
provisions of the Internal Revenue Code and current Treasury regulations
applicable to each Fund and its shareholders. The Internal Revenue Code and
such regulations are subject to change by legislative or administrative action.
Distributions to a shareholder may also be subject to state and local
taxes. Investors are urged to consult their 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. 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.
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.
FINANCIAL STATEMENTS
The financial statements of the Trust for the fiscal year ended October
31, 1996, are incorporated herein by reference to the Trust's Annual Report to
Shareholders filed with the SEC on January 9, 1997.
LEGAL COUNSEL
Sidley & Austin, One First National Plaza, Chicago, Illinois 60603, is
counsel for the Trust. Prickett, Jones, Elliott, Kristol & Schnee, 1310 King
Street, Wilmington, Delaware 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.
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.
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<PAGE> 83
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.
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<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 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
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<PAGE> 85
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 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.
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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."
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<PAGE> 87
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
<TABLE>
<S><C>
(a) Financial Statements *****
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> 88
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.***
- ---------------
* 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.
**** Incorporated by reference to post-effective amendment no. 9 to the
Registrant's Registration Statement on Form N-1A, File No. 33-43133,
filed with the Securities and Exchange Commission on August 23, 1996.
***** Incorporated by reference to the registrant's annual report to
shareholders, filed with the Securities and Exchange Commission on
January 9, 1997.
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 FUND AS OF DECEMBER 31, 1996
--------------- ------------------------
<S> <C>
Money Market Fund....................................... 243
Government Securities Fund.............................. 9
Asset Allocation Fund................................... 69
S&P 500 Index Fund...................................... 37
International Equity Fund............................... 26
REIT Index Fund......................................... 38
</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 assist in the performance of its obligations under
the Investment Advisory Agreements), neither the Adviser
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<PAGE> 89
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 and President Director and Senior Vice President -- Investments, Combined
Insurance Company of America, since 1990; Senior Vice
President and Senior Investment Officer, Aon Corporation,
since 1990.
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.
Arlene H. Hardy Director of Corporate Treasury, Aon Corporation
Treasurer
</TABLE>
3
<PAGE> 90
Brinson Partners, Inc. provides investment advisory services consisting of
portfolio management for A variety of individuals and institutions and as of
September, 30, 1996 had approximately $61 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.
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 offices 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 None
Principal
Brian H. Lawrence Controller and Financial Operations None
Principal
</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.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
4
<PAGE> 91
(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> 92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Trust has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago, State of Illinois, on February 28, 1997
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 February 28, 1997.
<TABLE>
<S> <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/ Arlene H. Hardy Principal Accounting Officer, Principal
- --------------------------------------------- Financial Officer and Treasurer
Arlene H. Hardy
* Trustee
- ---------------------------------------------
Michael A. Cavataio
* Trustee
- ---------------------------------------------
Donald W. Phillips
* Trustee
- ---------------------------------------------
Carleton D. Pearl
* Trustee
- ---------------------------------------------
Richard J. Peters
</TABLE>
6
<PAGE> 93
EXHIBIT INDEX
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
<TABLE>
<S><C>
(a) Financial Statements *****
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> 94
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.***
- ---------------
* 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.
**** Incorporated by reference to post-effective amendment no. 9 to the
Registrant's Registration Statement on Form N-1A, File No. 33-43133,
filed with the Securities and Exchange Commission on August 23, 1996.
***** Incorporated by reference to the registrant's annual report to
shareholders, filed with the Securities and Exchange Commission on
January 9, 1997.
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors and Financial Statements" and to the
incorporation by reference of our report dated December 19, 1996 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.
10 to the Registration Statement under the Securities Act of 1933 (Registration
No. 33-43133) and in this Amendment No. 11 to the Registration Statement under
the Investment Company Act of 1940 (Registration No. 811-6422).
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
February 25, 1997
<PAGE> 1
ITEM 24(b)16.
Schedule for Computation of Performance Quotations
Money Market Fund
- ----------------------------------
Yield Quotation: .00099375379 365
------------ X --- = 5.18%
1 7
365/7
Effective Yield Quotation: [(.00099375379 ) ] - 1 = 5.32%
|( ----------- + 1) |
[( 1 ) ]
Asset Allocation Fund
- --------------------------------------
One year period ended October 31, 1996:
12/12
$1,000 (1 + .1106) = $1,110.60
Inception (March 1, 1994) through October 31, 1996:
32/12
$1,000 (1 + .1452) = $1,435.55
Government Securities Fund
- --------------------------------------------
Inception (September 3, 1996) through October 31, 1996:
2/12
$1,000 (1 + .1795) = $1,027.90
<PAGE> 2
ITEM 24(b)16
Continued
International Equity Fund
- ------------------------------------------
Inception (September 3, 1996) through October 31, 1996:
2/12
$1,000 (1 + .1479) = $1,023.26
S&P 500 Index Fund
- -----------------------------------
Inception (September 3, 1996) through October 31, 1996:
2/12
$1,000 (1 + .5743) = $1,078.57
REIT Index Fund
- --------------------------------
Inception (September 3, 1996) through October 31, 1996
2/12
$1,000 (1 + .2948) = $1,044.00
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> MONEY MARKET FUND Y
<NUMBER> 01
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 433,649,538
<INVESTMENTS-AT-VALUE> 433,649,538
<RECEIVABLES> 11,629,002
<ASSETS-OTHER> 94
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 445,278,634
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 50,174,380
<TOTAL-LIABILITIES> 50,174,380
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 395,104,254
<SHARES-COMMON-STOCK> 393,096,650
<SHARES-COMMON-PRIOR> 420,093,633
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 395,104,254
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 22,411,781
<OTHER-INCOME> 0
<EXPENSES-NET> 934,184
<NET-INVESTMENT-INCOME> 21,477,597
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 21,477,597
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 21,461,344
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,623,262,647
<NUMBER-OF-SHARES-REDEEMED> 4,656,418,504
<SHARES-REINVESTED> 6,158,874
<NET-CHANGE-IN-ASSETS> (26,996,983)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,402,293
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,893,918
<AVERAGE-NET-ASSETS> 405,410,468
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.05
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.23
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> MONEY MARKET FUND C
<NUMBER> 02
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 433,649,538
<INVESTMENTS-AT-VALUE> 433,649,538
<RECEIVABLES> 11,629,002
<ASSETS-OTHER> 94
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 445,278,634
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 50,174,380
<TOTAL-LIABILITIES> 50,174,380
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 395,104,254
<SHARES-COMMON-STOCK> 2,007,604
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 395,104,254
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 22,411,781
<OTHER-INCOME> 0
<EXPENSES-NET> 934,184
<NET-INVESTMENT-INCOME> 21,477,597
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 21,477,597
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 16,253
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,000,020
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 7,584
<NET-CHANGE-IN-ASSETS> (26,996,983)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,402,293
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,893,918
<AVERAGE-NET-ASSETS> 2,003,989
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.01
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.37
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> GOVERNMENT SECURITIES FUND Y
<NUMBER> 03
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> SEP-03-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 39,536,778
<INVESTMENTS-AT-VALUE> 40,018,456
<RECEIVABLES> 10,649,520
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 50,667,976
<PAYABLE-FOR-SECURITIES> 9,980,733
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 182,291
<TOTAL-LIABILITIES> 10,163,024
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 40,052,005
<SHARES-COMMON-STOCK> 3,765,478
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 2,401
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (31,132)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 481,678
<NET-ASSETS> 40,504,952
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 240,651
<OTHER-INCOME> 0
<EXPENSES-NET> 33,872
<NET-INVESTMENT-INCOME> 206,779
<REALIZED-GAINS-CURRENT> (31,132)
<APPREC-INCREASE-CURRENT> 481,678
<NET-CHANGE-FROM-OPS> 657,325
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 191,317
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,760,650
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 4,828
<NET-CHANGE-IN-ASSETS> 40,504,952
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 15,342
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 33,872
<AVERAGE-NET-ASSETS> 20,955,163
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.07
<PER-SHARE-GAIN-APPREC> 0.21
<PER-SHARE-DIVIDEND> 0.07
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.21
<EXPENSE-RATIO> 0.89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> GOVERNMENT SECURITIES FUND C
<NUMBER> 04
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> SEP-03-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 39,536,778
<INVESTMENTS-AT-VALUE> 40,018,456
<RECEIVABLES> 10,649,520
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 50,667,976
<PAYABLE-FOR-SECURITIES> 9,980,733
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 182,291
<TOTAL-LIABILITIES> 10,163,024
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 40,052,005
<SHARES-COMMON-STOCK> 200,322
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 2,401
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (31,132)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 481,678
<NET-ASSETS> 40,504,952
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 240,651
<OTHER-INCOME> 0
<EXPENSES-NET> 33,872
<NET-INVESTMENT-INCOME> 206,779
<REALIZED-GAINS-CURRENT> (31,132)
<APPREC-INCREASE-CURRENT> 481,678
<NET-CHANGE-FROM-OPS> 657,325
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 13,061
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 200,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 322
<NET-CHANGE-IN-ASSETS> 40,504,952
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 15,342
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 33,872
<AVERAGE-NET-ASSETS> 2,027,063
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.09
<PER-SHARE-GAIN-APPREC> 0.19
<PER-SHARE-DIVIDEND> 0.07
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.21
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> ASSET ALLOCATION FUND Y
<NUMBER> 05
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 82,314,867
<INVESTMENTS-AT-VALUE> 91,805,055
<RECEIVABLES> 1,413,366
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 93,218,421
<PAYABLE-FOR-SECURITIES> 2,085,987
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,852,554
<TOTAL-LIABILITIES> 4,938,541
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 78,646,756
<SHARES-COMMON-STOCK> 6,763,621
<SHARES-COMMON-PRIOR> 6,126,827
<ACCUMULATED-NII-CURRENT> 4,561
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 138,375
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,490,188
<NET-ASSETS> 88,279,880
<DIVIDEND-INCOME> 735,620
<INTEREST-INCOME> 2,221,290
<OTHER-INCOME> 0
<EXPENSES-NET> 771,795
<NET-INVESTMENT-INCOME> 2,185,115
<REALIZED-GAINS-CURRENT> 2,255,386
<APPREC-INCREASE-CURRENT> 4,522,511
<NET-CHANGE-FROM-OPS> 8,963,012
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,173,721
<DISTRIBUTIONS-OF-GAINS> 2,022,662
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,302,640
<NUMBER-OF-SHARES-REDEEMED> 800,783
<SHARES-REINVESTED> 134,937
<NET-CHANGE-IN-ASSETS> 14,504,645
<ACCUMULATED-NII-PRIOR> 3,834
<ACCUMULATED-GAINS-PRIOR> (46,231)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 609,643
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 771,795
<AVERAGE-NET-ASSETS> 87,819,936
<PER-SHARE-NAV-BEGIN> 12.04
<PER-SHARE-NII> 0.31
<PER-SHARE-GAIN-APPREC> 1.01
<PER-SHARE-DIVIDEND> 0.31
<PER-SHARE-DISTRIBUTIONS> 0.30
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.75
<EXPENSE-RATIO> 0.87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> ASSET ALLOCATION FUND C
<NUMBER> 06
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 82,314,867
<INVESTMENTS-AT-VALUE> 91,805,055
<RECEIVABLES> 1,413,366
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 93,218,421
<PAYABLE-FOR-SECURITIES> 2,085,987
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,852,554
<TOTAL-LIABILITIES> 4,938,541
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 78,646,756
<SHARES-COMMON-STOCK> 160,901
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 4,561
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 138,375
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,490,188
<NET-ASSETS> 88,279,880
<DIVIDEND-INCOME> 735,620
<INTEREST-INCOME> 2,221,290
<OTHER-INCOME> 0
<EXPENSES-NET> 771,795
<NET-INVESTMENT-INCOME> 2,185,115
<REALIZED-GAINS-CURRENT> 2,255,386
<APPREC-INCREASE-CURRENT> 4,522,511
<NET-CHANGE-FROM-OPS> 8,963,012
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 10,667
<DISTRIBUTIONS-OF-GAINS> 48,118
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<NUMBER-OF-SHARES-SOLD> 160,901
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 14,504,645
<ACCUMULATED-NII-PRIOR> 3,834
<ACCUMULATED-GAINS-PRIOR> (46,231)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 609,643
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 771,795
<AVERAGE-NET-ASSETS> 2,086,320
<PER-SHARE-NAV-BEGIN> 12.43
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> 0.65
<PER-SHARE-DIVIDEND> 0.07
<PER-SHARE-DISTRIBUTIONS> 0.30
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.75
<EXPENSE-RATIO> 1.16
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> S&P 500 INDEX FUND Y
<NUMBER> 07
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> SEP-03-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 25,025,735
<INVESTMENTS-AT-VALUE> 25,875,555
<RECEIVABLES> 32,718
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 25,908,273
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 56,527
<TOTAL-LIABILITIES> 56,527
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25,000,000
<SHARES-COMMON-STOCK> 2,200,153
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,956
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (30)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 849,820
<NET-ASSETS> 25,851,746
<DIVIDEND-INCOME> 45,985
<INTEREST-INCOME> 10,860
<OTHER-INCOME> 0
<EXPENSES-NET> 17,945
<NET-INVESTMENT-INCOME> 38,900
<REALIZED-GAINS-CURRENT> (30)
<APPREC-INCREASE-CURRENT> 849,820
<NET-CHANGE-FROM-OPS> 888,690
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 34,529
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,200,153
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 25,851,746
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,035
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 31,679
<AVERAGE-NET-ASSETS> 13,099,956
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.02
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<PER-SHARE-DIVIDEND> 0.02
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<PER-SHARE-NAV-END> 10.77
<EXPENSE-RATIO> 0.71
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> S&P 500 INDEX FUND C
<NUMBER> 08
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> SEP-03-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 25,025,735
<INVESTMENTS-AT-VALUE> 25,875,555
<RECEIVABLES> 32,718
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 25,908,273
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 56,527
<TOTAL-LIABILITIES> 56,527
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25,000,000
<SHARES-COMMON-STOCK> 200,000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,956
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (30)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 849,820
<NET-ASSETS> 25,851,746
<DIVIDEND-INCOME> 45,985
<INTEREST-INCOME> 10,860
<OTHER-INCOME> 0
<EXPENSES-NET> 17,945
<NET-INVESTMENT-INCOME> 38,900
<REALIZED-GAINS-CURRENT> (30)
<APPREC-INCREASE-CURRENT> 849,820
<NET-CHANGE-FROM-OPS> 888,690
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,415
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 200,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 25,851,746
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,035
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 31,679
<AVERAGE-NET-ASSETS> 2,106,600
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> 0.76
<PER-SHARE-DIVIDEND> 0.01
<PER-SHARE-DISTRIBUTIONS> 0.00
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<PER-SHARE-NAV-END> 10.77
<EXPENSE-RATIO> 0.88
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> INTERNATIONAL EQUITY FUND Y
<NUMBER> 09
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> SEP-03-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 25,645,849
<INVESTMENTS-AT-VALUE> 25,788,226
<RECEIVABLES> 40,631
<ASSETS-OTHER> 54,352
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 25,883,209
<PAYABLE-FOR-SECURITIES> 587,010
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 119,241
<TOTAL-LIABILITIES> 706,251
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25,000,000
<SHARES-COMMON-STOCK> 2,268,934
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 1,266
<ACCUMULATED-NET-GAINS> 19
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 178,205
<NET-ASSETS> 25,176,958
<DIVIDEND-INCOME> 53,125
<INTEREST-INCOME> 42,087
<OTHER-INCOME> 0
<EXPENSES-NET> 46,258
<NET-INVESTMENT-INCOME> 48,954
<REALIZED-GAINS-CURRENT> 29,295
<APPREC-INCREASE-CURRENT> 178,205
<NET-CHANGE-FROM-OPS> 256,454
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 73,702
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,268,934
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 25,176,958
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 27,877
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 46,258
<AVERAGE-NET-ASSETS> 17,348,702
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> 0.21
<PER-SHARE-DIVIDEND> 0.03
<PER-SHARE-DISTRIBUTIONS> 0.00
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<PER-SHARE-NAV-END> 10.20
<EXPENSE-RATIO> 1.46
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> INTERNATIONAL EQUITY FUND C
<NUMBER> 10
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> SEP-03-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 25,645,849
<INVESTMENTS-AT-VALUE> 25,788,226
<RECEIVABLES> 40,631
<ASSETS-OTHER> 54,352
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 25,883,209
<PAYABLE-FOR-SECURITIES> 587,010
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 119,241
<TOTAL-LIABILITIES> 706,251
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25,000,000
<SHARES-COMMON-STOCK> 200,000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 1,266
<ACCUMULATED-NET-GAINS> 19
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 178,205
<NET-ASSETS> 25,176,958
<DIVIDEND-INCOME> 53,125
<INTEREST-INCOME> 42,087
<OTHER-INCOME> 0
<EXPENSES-NET> 46,258
<NET-INVESTMENT-INCOME> 48,954
<REALIZED-GAINS-CURRENT> 29,295
<APPREC-INCREASE-CURRENT> 178,205
<NET-CHANGE-FROM-OPS> 256,454
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5,794
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 200,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 25,176,958
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 27,877
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 46,258
<AVERAGE-NET-ASSETS> 2,044,274
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0.20
<PER-SHARE-DIVIDEND> 0.03
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.20
<EXPENSE-RATIO> 1.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> REIT INDEX FUND Y
<NUMBER> 11
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> SEP-03-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 25,198,813
<INVESTMENTS-AT-VALUE> 25,653,149
<RECEIVABLES> 60,522
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 25,713,671
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 23,610
<TOTAL-LIABILITIES> 23,610
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25,100,000
<SHARES-COMMON-STOCK> 2,309,830
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 135,725
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 454,336
<NET-ASSETS> 25,690,061
<DIVIDEND-INCOME> 152,996
<INTEREST-INCOME> 10,190
<OTHER-INCOME> 0
<EXPENSES-NET> 27,461
<NET-INVESTMENT-INCOME> 135,725
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 454,336
<NET-CHANGE-FROM-OPS> 590,061
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,309,830
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 25,690,061
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 10,094
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 27,461
<AVERAGE-NET-ASSETS> 12,428,356
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.10
<PER-SHARE-GAIN-APPREC> 0.34
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.44
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NAME> REIT INDEX FUND C
<NUMBER> 12
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> SEP-03-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 25,198,813
<INVESTMENTS-AT-VALUE> 25,653,149
<RECEIVABLES> 60,522
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 25,713,671
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 23,610
<TOTAL-LIABILITIES> 23,610
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 25,100,000
<SHARES-COMMON-STOCK> 150,000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 135,725
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 454,336
<NET-ASSETS> 25,690,061
<DIVIDEND-INCOME> 152,996
<INTEREST-INCOME> 10,190
<OTHER-INCOME> 0
<EXPENSES-NET> 27,461
<NET-INVESTMENT-INCOME> 135,725
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 454,336
<NET-CHANGE-FROM-OPS> 590,061
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 150,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 25,690,061
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 10,094
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 27,461
<AVERAGE-NET-ASSETS> 1,530,900
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.11
<PER-SHARE-GAIN-APPREC> 0.33
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.44
<EXPENSE-RATIO> 1.38
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<PAGE> 1
EXHIBIT 99.B18
AON FUNDS
PLAN PURSUANT TO RULE 18f-3(d)
UNDER THE INVESTMENT COMPANY ACT OF 1940
RECITALS
A. WHEREAS, if an open-end management investment company registered as
such under the Investment Company Act of 1940, as amended (the "1940 Act"),
wishes to offer multiple classes of shares each representing an interest in the
same portfolio of securities, the board of directors or trustees of such company
must adopt a written plan setting forth the separate arrangement and expense
allocation of each class, and any related conversion features or exchange
privileges;
B. WHEREAS, Aon Funds (the "Trust"), a Delaware business trust
registered under the 1940 Act as an open-end management investment company of
the series type, intends to offer shares in series, as identified from time to
time on Schedule A hereto (each such series being referred to herein
individually as a "Fund" and all of such series being referred to herein
collectively as the "Funds");
C. WHEREAS, the Trust wishes to establish two classes of shares of
each Fund, to be known as the "Class C Shares" and the "Class Y Shares;" and
D. WHEREAS, a majority of the trustees of the Trust (the "Trustees"),
including a majority of the Trustees who are not "interested persons" of the
Trust (as defined in the 1940 Act), have found, as to each Fund, that the
provisions set forth below under "Plan" (including the provisions relating to
expense allocations between classes of such Fund) is in the best interests of
each class of shares of such Fund, considered individually, and of such Fund as
a whole;
E. NOW, THEREFORE, each Fund hereby approves the provisions set forth
below under "Plan" (such provisions being referred to herein collectively as the
"Plan"), effective as of the date set forth opposite the name of such Fund on
Schedule A hereto.
PLAN
1. Differences in Distribution Arrangements.
a. Class Y Shares of any Fund may be offered (i) in connection with
the reorganization of Aon Asset Management Fund,
<PAGE> 2
Inc. (the "Company") into the Trust pursuant to the terms of an Agreement and
Plan of Reorganization between the Company and the Trust (the "Plan of
Reorganization"), (ii) in connection with the initial capitalization of any Fund
and (iii) directly by any distributor(s) of that Fund to (A) the holders of
record of outstanding shares of the Company as of the effective time of the
reorganization of the Company into the Trust pursuant to the Plan of
Reorganization (it being understood that Class Y Shares of a Fund may continue
to be offered to such holders, as such, subsequent to such time); (B) investment
advisory clients of Aon Advisers, Inc. ("AAI") or any of its affiliates; (C)
affiliates of AAI or Aon Corporation; and (D) such other entities and persons as
may be set forth from time to time in that Fund's Prospectus and/or Statement of
Additional Information as persons eligible to purchase Class Y Shares of that
Fund; provided, however, that effective as of and after 3:00 p.m., Central Time,
on February 28, 1997, Class Y Shares of any Fund may be offered directly by any
distributor(s) of that Fund to investors who are eligible to purchase such
Shares as described in the Prospectus and/or Statement of Additional Information
of each Fund as the same may be amended from time to time; and provided,
further, that effective as of such date and time Class Y Shares shall henceforth
be referred to as "Shares."
b. Class C Shares of any Fund may be offered (i) in connection with
the initial capitalization of such Fund and (ii) directly by any distributor(s)
of that Fund to investors who are not eligible to purchase Class Y Shares of
that Fund. To compensate a Fund's distributor(s) for the distribution of Class
C Shares of that Fund to such investors, including making payments to
broker-dealers, retirement plan administrators and/or financial services
companies or similar organizations, and for incurring other expenses in
connection with such distribution and providing shareholder and administrative
services described below, the Fund will pay a distribution fee of 0.25% per
annum of the average daily net asset value of its Class C Shares (0.10% per
annum of the average daily net asset value of Class C Shares of a "money market"
Fund) to its distributor(s) in accordance with a Plan of Distribution adopted by
the Fund pursuant to Rule 12b-1 under the 1940 Act (the "Distribution Plan").
All Class C Shares of each Fund issued and outstanding as of 3:00 p.m., Central
Time, on February 28, 1997, including all Class C Shares of such Fund acquired
by reinvestment of dividends or distributions with respect to Class C Shares,
shall automatically convert into Class Y Shares of such Fund effective as of
such date and time, subject to the conditions set forth below, and thereafter no
additional Class C Shares shall be offered or issued by any Fund (and any Class
C Shares which would otherwise be issuable upon reinvestment of dividends or
distributions with respect to Class C Shares shall instead be issued as Class Y
Shares); provided, however, that such conversion shall occur subject to the
satisfaction of the following conditions: (i) the expenses to which Class Y
Shares of each Fund are subject, including payments authorized under the Class Y
12b-1
<PAGE> 3
plan, if any, of such Fund are not as of such date higher than the expenses of
Class C Shares of such Fund, including payments authorized under such Fund's
Class C 12b-1 plan; (ii) there is available as of such date an opinion of
counsel or of an auditing firm serving as tax adviser to the Trust to the
effect that such conversion of Class C Shares into Class Y Shares does not
constitute a taxable event for the holders of such Class C Shares; (iii) the
amount of expenses to which Class Y Shares of each Fund are subject, including
payments authorized under the Class Y 12b-1 plan, if any, of such Fund is not
increased materially on or prior to such date without approval of the
shareholders of Class C Shares of that Fund and (iv) the conversion is
effected on the basis of the relative net asset values of the Class C Shares
and Class Y Shares as determined as of such date and time, without the
imposition of any sales load or other charge.
c. Shares of each class are subject to such investment minimums
as may be set forth from time to time in the Prospectus and/or Statement of
Additional Information relating to such shares.
2. Differences in Shareholder Services.
Beneficial owners of Class C Shares of any Fund generally will have
smaller accounts than holders of Class Y Shares of the same Fund, will engage in
more shareholder transactions in relation to the size of their holdings, and
will require more information-, communication-, and transaction-related
services, including automatic investment programs, in relation to such holdings.
These services will be provided by broker-dealers, retirement plan
administrators and/or financial services companies or similar organizations who
hold Class C Shares of that Fund for the benefit of their customers, as well as
by that Fund's distributor(s) and transfer or similar agent.
<PAGE> 4
3. Expense Payments and Expense and Income Allocations.
All expenses incurred with respect to a class under the Distribution Plan
shall be paid solely by that class.
All other expenses that are readily associated with a class (collectively,
"Class Expenses") shall be paid by that class. Class Expenses shall include,
without limitation: (a) printing and postage expenses related to preparing and
distributing materials, such as shareholder reports, prospectuses and proxies,
to current shareholders of a specific class; (b) Securities and Exchange
Commission ("SEC"), Blue Sky and foreign registration fees relating to sales of
shares of a specific class; (c) the expense of administrative personnel and
services required to effect such registrations and related activities; (d) the
expense of administrative personnel and services required to support the
shareholders of a specific class; (e) litigation and other legal expenses
relating to a specific class; (f) transfer agent fees identified by the Fund's
transfer agent as being attributable to a specific class; (g) expenses incurred
in connection with Trustee or shareholder meetings as a result of matters
relating to a specific class; and (h) auditors' fees and accounting and
consulting expenses relating to a specific class. In addition, if a class of
shares receives services of a different kind or to a different degree than other
classes, but the fees and expenses associated with such services are not billed
to the Fund or the Trust in such a manner as to be readily associated with one
or more classes, the Trustees may allocate such fees and expenses among classes
in such manner and on such basis as they in their sole discretion deem fair and
equitable. Notwithstanding the other provisions of this Section 3, any such
allocation and any determination of Class Expenses, shall be made in a manner
which the Trust believes will prevent a Fund from failing to satisfy any
requirements necessary to obtain and rely on a private letter ruling from the
Internal Revenue Service relating to the issuance of multiple classes of shares
and from failing to be treated as a regulated investment company under the
Internal Revenue Code.
Subject to the preceding sentence, but otherwise notwithstanding the
foregoing, (1) for purposes of calculating SEC registration fees applicable to
the issuance of shares of a particular class pursuant to Rule 24f-2 under the
1940 Act, to the extent redemptions of shares of a particular class cannot be
used to reduce the registration fee applicable to the issuance of shares of that
class in respect of a given calculation period, such redemptions shall, to the
maximum extent permitted by the 1940 Act, be used to reduce the registration
fees applicable to the issuance of shares of other classes, pro rata among the
classes in respect of which such redemptions are permitted to be so used on the
basis of the net dollar amount of shares issued by each such class (being the
dollar amount of shares issued by such class less the dollar amount of shares
redeemed by such class) during the calculation period in question and (2)
advisory and custodial fees and other expenses related to the management of the
assets of a Fund to which
<PAGE> 5
a class belongs shall in no event be treated as Class Expenses, except to the
extent permitted by the Rule or in an order issued by the SEC.
Income, realized and unrealized capital gains and losses, and expenses of a
Fund not allocated to a particular class pursuant to the first two paragraphs of
this Section 3 shall be allocated between the classes of such Fund pro rata on
the basis of the respective net asset values of such classes; provided, however,
that in the case of a "money market" series, in the discretion of the Trustees,
income, realized and unrealized capital gains and losses and expenses of a Fund
not allocated between the classes of such series pursuant to the first two
paragraphs of this Section 3 shall be allocated:
a. to each share without regard to class provided that the Fund has
received undertakings from its adviser, underwriter or any other provider of
services to the Fund, agreeing to waive or reimburse the Fund for payments to
such service provider by one or more classes, as allocated under the first two
paragraphs of this Section 3, to the extent necessary to assure that both
classes of the Fund maintain the same net asset value per share; or
b. on the basis of relative net assets (settled shares). For purposes
of the foregoing, "relative net assets (settled shares)" are net assets valued
in accordance with generally accepted accounting principles but excluding the
value of subscriptions receivable, in relation to the net assets of that Fund.
The foregoing paragraphs of this Section 3 are designed to be consistent
with and to implement the provisions of paragraphs (a)(i)-(ii) and (c) of the
Rule. In the event the Trustees determine that the application of any provision
in the foregoing paragraphs of this Section 3 (each, an "Allocation Provision")
would be inconsistent with any provision of such paragraphs of the Rule (each, a
"Rule Provision"), the Trustees may adjust such Allocation Provision in such
manner as they may reasonably deem appropriate to remedy such inconsistency with
the Rule Provision.
Nothing in this Plan shall be deemed to prohibit the waiver of fees or
reimbursement of expenses by a Fund's adviser, distributor or any other provider
of services to the Fund, provided that no such adviser, distributor or provider
of services shall be required to waive fees or reimburse expenses unless it
expressly shall have agreed to do so. Any waiver or reimbursement may be
applicable to one or more classes and/or may be in different amounts with
respect to one or more classes. Aon Advisers, Inc. will prepare or cause to be
prepared for the Trustees, on a quarterly basis, a report outlining any
differences in waivers or reimbursements in respect of classes of a particular
Fund.
<PAGE> 6
4. Voting Rights.
Each class of shares shall have exclusive voting rights on any matter that
relates solely to its arrangement, to the extent such matter is required to be
submitted to shareholders by the 1940 Act or the Trust's Agreement and
Declaration of Trust (the "Declaration of Trust").
Each class of shares shall have separate voting rights on any matter in
which the interests of that class differ from the interests of any other class,
to the extent such matter is required to be submitted to shareholders by the
1940 Act or the Declaration of Trust.
5. Similarities Between Classes.
Except as otherwise set forth in this Plan, each class of shares of a Fund
shall have the same rights and obligations as the other class of shares of that
Fund.
6. Conversion Features.
Any Fund may offer a conversion feature whereby shares of one class
("Purchase Class Shares") will convert into shares of another class ("Target
Class Shares") of that Fund, after being held for a requisite period or upon the
happening of a specified event ("Matured Purchase Class Shares"), pursuant to
the terms and conditions of that Fund's Prospectus and/or Statement of
Additional Information. Upon conversion of Matured Purchase Class Shares, all
Purchase Class Shares of that Fund acquired by reinvestment of dividends or
distributions with respect to such Matured Purchase Class Shares shall also be
converted at that time. Purchase Class Shares will convert into Target Class
Shares of that Fund on the basis of the relative net asset values of the two
classes, without the imposition of any sales load, fee or other charge. The
conversion feature shall be offered for so long as (i) the expenses to which
Target Class Shares of a Fund are subject, including payments authorized under
that Fund's Target Class 12b-1 plan, are not higher than the expenses of
Purchase Class Shares of that Fund, including payments authorized under that
Fund's Purchase Class 12b-1 plan; (ii) there continues to be available a ruling
from the Internal Revenue Service, or an opinion of counsel or of an auditing
firm serving as tax adviser, to the effect that the conversion of Purchase Class
Shares into Target Class Shares does not constitute a taxable event for the
holder; and (iii) if the amount of expenses to which Target Class Shares of a
Fund are subject, including payments authorized under that Fund's Target Class
12b-1 plan, is increased materially without approval of the shareholders of
Purchase Class Shares of that Fund, that Fund will establish a new class of
shares ("New Target Class Shares") and shall take such other action as is
necessary to provide that existing Purchase Class Shares are exchanged or
converted into New Target Class Shares, identical in all material respects to
Target
<PAGE> 7
Class Shares as they existed prior to implementation of the proposal to increase
expenses, no later than the date such shares previously were scheduled to
convert into Target Class Shares.
7. Exchange Privileges.
A shareholder may exchange shares of a particular class of a Fund for
shares of the corresponding class of another Fund on the basis of the respective
net asset values of the shares exchanged, plus such charge per exchange as may
be determined by the Trust, and subject to such additional conditions as may be
set forth in the Prospectuses or Statements of Additional Information of such
Funds.
8. Additional Information.
This Plan is qualified by and subject to the terms of the current
Prospectus and Statement of Additional Information for each of the respective
classes; provided, however, that none of the terms set forth in any such
Prospectus or Statement of Additional Information shall be inconsistent with the
terms contained in this Plan.
9. Agreements by Distributors and Advisers.
The Trust shall not enter into any agreement with a distributor with
respect to shares of a Fund unless such distributor shall have agreed (a) to
furnish the Trust, upon its request, such information as reasonably may be
necessary for the Trust to evaluate the services provided by such distributor in
relation to this Plan; (b) to maintain compliance standards as to when each
class of shares may appropriately be sold to particular investors; (c) to
require all persons who are under its control and supervision and who are
engaged in selling shares to conform to such standards; and (d) to report to the
Trustees any conflicts or potential conflicts of interest between classes of a
Fund of which it may become aware.
The Trust shall not enter into any agreement with an adviser unless
such adviser shall have agreed to report to the Trustees any conflicts or
potential conflicts of interest between classes of a Fund of which it may become
aware.
10. Independent Audit.
The methodology and procedures for (a) calculating the net asset value
of, and dividends and other distributions on or with respect to, shares of each
class and (b) determining the proper allocation of income and expenses between
classes of each Fund, shall be reviewed and reported on no less frequently than
<PAGE> 8
annually by an independent auditing firm acceptable to the Trustees (the
"Expert"). The report of the Expert shall also address whether each Fund has
adequate facilities in place to ensure the implementation of such methodology
and procedures. Each Fund and its adviser shall take prompt corrective measures
in the event of any irregularities reported by the Expert.
11. Amendments to Plan.
The Trustees may amend this Plan at any time and from time to time in
any respect without authorization or approval by shareholders of any class,
except as otherwise may be required by the 1940 Act or the Declaration of Trust;
provided, however, that in no event shall the Trustees adopt any material
amendment to this Plan unless a majority of the Trustees, including a majority
of the Trustees who are not "interested persons" of the Trust (as defined in the
1940 Act), shall first have found, as to each Fund to which the amendment
relates, that such amendment is in the best interests of each class of shares of
such Fund, considered individually, and of such Fund as a whole.
