<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 27, 1998
FILE NO. 33-43133
FILE NO. 811-6422
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
PRE-EFFECTIVE AMENDMENT NO. ____ [ ]
POST-EFFECTIVE AMENDMENT NO. 11 [ X ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 12 [ 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:
<TABLE>
<S> <C>
- --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
</TABLE>
<PAGE> 2
PROSPECTUS
AON FUNDS
123 NORTH WACKER DRIVE
CHICAGO, ILLINOIS 60606
(312) 701-3300 (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.
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 27, 1998 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.
(logo for each Fund)
FEBRUARY 27, 1998
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary 1
Fund Expenses 3
Financial Highlights 5
Organization and Classification 9
Investment Objectives and Policies 9
MONEY MARKET FUND 9
GOVERNMENT SECURITIES FUND 10
ASSET ALLOCATION FUND 11
S&P 500 INDEX FUND 12
INTERNATIONAL EQUITY FUND 13
REIT INDEX FUND 14
Investment Practices 16
Management of the Trust 23
Distribution of Shares 25
Net Asset Value 25
Purchase of Shares 25
Redemption of Shares 27
Additional Services to Investors 28
Dividends, Distributions and Taxes 29
Performance Information 31
Additional Information 32
</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> 4
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 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.
1
<PAGE> 5
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 for the Government
Securities Fund, Asset Allocation Fund, S&P 500 Index
Fund, International Equity Fund, and REIT Index Fund.
$10,000 minimum on initial purchases for the Money
Market Fund. 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 for each Non-Money Market Fund
and $1,000 for the Money Market Fund. See "Additional
Services to Investors -- Automatic Investment
Program." These minimums may be less for certain
affiliated persons of Aon.
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 check writing privilege
available. See "Redemption of Shares."
DIVIDENDS AND Dividends are accrued daily and paid monthly on the
DISTRIBUTIONS: Money Market Fund. Dividends are paid monthly and
quarterly, respectively, on the Government Securities
Fund and the Asset Allocation Fund. Each of the other
Funds generally pays dividends at least annually.
Dividends are paid from available net investment
income. Other distributions, if any, are generally
paid annually from realized net capital gains. See
"Dividends, Distributions and Taxes."
REINVESTMENT: Unless a shareholder elects to receive income dividends
and capital gains in cash or shares of 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 sections of
certain newspapers. Daily net asset values are also
available by calling (800) 266-3637. See "Net Asset
Value."
ADDITIONAL SHAREHOLDER
SERVICES: Additional shareholder services available include
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> 6
FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are charges investors pay when buying or
selling shares of a Fund.
<TABLE>
<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)(1)
<TABLE>
<CAPTION>
TOTAL
ADVISORY 12b-1 OTHER OPERATING
FEES(2) FEES EXPENSES(3) EXPENSES(2)
-------- ----- ----------- -----------
<S> <C> <C> <C> <C>
Money Market Fund .10% None .10% .20%
Government Securities Fund .10% None .20% .30%
Asset Allocation Fund .25% None .13% .38%
S&P 500 Index Fund .10% None .19% .29%
International Equity Fund .60% None .66% 1.26%
REIT Index Fund .10% None .22% .32%
</TABLE>
(1) Annual Fund Operating Expenses are based on amounts incurred during each
Fund's most recent fiscal year ended October 31, 1997, restated to reflect
advisory fee waivers in effect since May 1, 1997. See "Management of the
Trust--Investment Adviser."
(2) 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 .40% for the Money Market
Fund, .45% and .65% for the Government Securities Fund, .65% and .78% for
the Asset Allocation Fund, .30% and .49% for the S&P 500 Index Fund, .95%
and 1.61% for the International Equity Fund and .60% and.82% for the REIT
Index Fund.
(3) "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.
4
<PAGE> 7
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>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Fund $2 $6 $11 $26
Government Securities Fund $3 $10 $17 $38
Asset Allocation Fund $4 $12 $21 $48
S&P 500 Index Fund $3 $9 $16 $37
International Equity Fund $13 $40 $70 $154
REIT Index Fund $3 $10 $18 $41
</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. AAI's
undertaking with respect to reimbursement of excess expenses cannot be changed
without shareholder approval. 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
REIT Index Fund 1.50% to $30 million; 1.25% thereafter
</TABLE>
5
<PAGE> 8
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 Management 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 conjunction 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.
MONEY MARKET FUND:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR 1/23/92(1)
ENDED ENDED ENDED ENDED ENDED THROUGH
10/31/97 10/31/96 10/31/95 10/31/94 10/31/93 10/31/92
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.05 0.05 0.06 0.04 0.03 0.03
Net realized and unrealized gain 0.00 0.00 (2) (2) (2) (2)
-------- -------- -------- -------- -------- ----------
Total income from investment operations 0.05 0.05 0.06 0.04 0.03 0.03
LESS DISTRIBUTIONS:
Dividends from net investment income 0.05 0.05 0.06 0.04 0.03 0.03
Distributions from net realized gain 0.00 0.00 (2) (2) (2) (2)
-------- -------- -------- -------- -------- ----------
Total distributions 0.05 0.05 0.06 0.04 0.03 0.03
-------- -------- -------- -------- -------- ----------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
======== ======== ======== ======== ======== ==========
Total return 5.44% 5.43% 5.93% 3.77% 3.14% 2.99% (3)
======== ======== ======== ======== ======== ==========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $766,356 $395,104 $420,094 $410,912 $412,068 $399,076
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.22% 0.23% 0.14% 0.15% 0.17% 0.25%(4)
Expenses, before waivers and reimbursements 0.40% 0.46% 0.39% 0.40% 0.42% 0.50%(4)
Net investment income, net of waivers and
reimbursements 5.34% 5.30% 5.79% 3.73% 3.10% 3.57%(4)
Net investment income, before waivers and
reimbursements 5.16% 5.07% 5.54% 3.48% 2.85% 3.32%(4)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations.
(2) Less than $.01 per share.
(3) Not annualized.
(4) Annualized.
6
<PAGE> 9
GOVERNMENT SECURITIES FUND:
<TABLE>
<CAPTION>
YEAR 9/3/96(1)
ENDED THROUGH
10/31/97 10/31/96
-------- ---------
<C> <C> <C>
Net asset value, beginning of period $10.21 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.59 0.07
Net realized and unrealized gain 0.28 0.21
-------- ---------
Total income from investment operations 0.87 0.28
LESS DISTRIBUTIONS:
Dividends from net investment income 0.59 0.07
Distributions from net realized gain 0.00 0.00
-------- ---------
Total distributions 0.59 0.07
-------- ---------
Net asset value, end of period $10.49 $10.21
======== =========
Total return 8.86% 2.79%(2)
======== =========
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (in thousands) $104,385 $40,505
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.46% 0.89%(3)
Expenses, before waivers and reimbursements 0.65% 0.89%(3)
Net investment income, net of waivers and reimbursements 5.92% 5.59%(3)
Net investment income, before waivers and reimbursements 5.73% 5.59%(3)
Portfolio turnover rate 136% 4%
- ------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
ASSET ALLOCATION FUND:
<TABLE>
<CAPTION>
YEAR YEAR YEAR 3/3/94(1)
ENDED ENDED ENDED THROUGH
10/31/97 10/31/96 10/31/95 10/31/94
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $12.75 $12.04 $9.97 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.27 0.31 0.24 0.17
Net realized and unrealized gain 3.85 1.01 2.41 0.01
-------- -------- -------- ---------
Total income from investment operations 4.12 1.32 2.65 0.18
LESS DISTRIBUTIONS:
Dividends from net investment income 0.24 0.31 0.24 0.16
Distributions from net realized gain 0.03 0.30 0.34 0.05
-------- -------- -------- ---------
Total distributions 0.27 0.61 0.58 0.21
-------- -------- -------- ---------
Net asset value, end of period $16.60 $12.75 $12.04 $9.97
======== ======== ======== =========
Total return 32.61% 11.06% 26.92% 1.84% (2)
======== ======== ======== =========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $164,885 $88,280 $73,775 $10,189
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.56% 0.87% 0.96% 1.25%(3)
Expenses, before waivers and reimbursements 0.78% 0.87% 0.96% 1.39%(3)
Net investment income, net of waivers and reimbursements 1.90% 2.48% 2.73% 2.63%(3)
Net investment income, before waivers and reimbursements 1.68% 2.48% 2.73% 2.49%(3)
Portfolio turnover rate 64% 120% 95% 64%
Average commission rate paid per share $0.0593 $0.0585 -------- --------
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
7
<PAGE> 10
S&P 500 INDEX FUND:
<TABLE>
<CAPTION>
YEAR 9/3/96(1)
ENDED THROUGH
10/31/97 10/31/96
-------- ---------
<S> <C> <C>
Net asset value, beginning of period $10.77 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.21 0.02
Net realized and unrealized gain 3.19 0.77
-------- ---------
Total income from investment operations 3.40 0.79
LESS DISTRIBUTIONS:
Dividends from net investment income 0.02 0.02
Distributions from net realized gain 0.00 0.00
-------- ---------
Total distributions 0.02 0.02
-------- ---------
Net asset value, end of period $14.15 $10.77
======== =========
Total return 31.58% 7.86%(2)
======== =========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $118,612 $25,852
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.37% 0.71%(3)
Expenses, before waivers and reimbursements 0.49% 1.26%(3)
Net investment income, net of waivers and reimbursements 1.66% 1.60%(3)
Net investment income, before waivers and reimbursements 1.54% 1.05%(3)
Portfolio turnover rate 13% 0%
Average commission rate paid per share $0.0551 $0.0338
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
INTERNATIONAL EQUITY FUND:
<TABLE>
<CAPTION>
YEAR 9/3/96(1)
ENDED THROUGH
10/31/97 10/31/96
-------- ---------
<S> <C> <C>
Net asset value, beginning of period $10.20 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.11 0.02
Net realized and unrealized gain 1.05 0.21
-------- ---------
Total income from investment operations 1.16 0.23
LESS DISTRIBUTIONS:
Dividends from net investment income 0.02 0.03
Distributions from net realized gain 0.00 0.00
-------- ---------
Total distributions 0.02 0.03
-------- ---------
Net asset value, end of period $11.34 $10.20
======== =========
Total return 11.34% 2.32%(2)
======== =========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $53,143 $25,177
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 1.40% 1.46%(3)
Expenses, before waivers and reimbursements 1.61% 1.46%(3)
Net investment income, net of waivers and reimbursements 1.14% 1.52%(3)
Net investment income, before waivers and reimbursements 0.93% 1.52%(3)
Portfolio turnover rate 27% 0%
Average commission rate paid per share $0.0262 $0.0264
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
8
<PAGE> 11
REIT INDEX FUND:
<TABLE>
<CAPTION>
YEAR 9/3/96(1)
ENDED THROUGH
10/31/97 10/31/96
-------- ---------
<S> <C> <C>
Net asset value, beginning of period $10.44 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.41 0.10(2)
Net realized and unrealized gain 2.99 0.34
-------- ---------
Total income from investment operations 3.40 0.44
LESS DISTRIBUTIONS:
Dividends from net investment income 0.15 0.00
Distributions from net realized gain 0.00 0.00
-------- ---------
Total distributions 0.15 0.00
-------- ---------
Net asset value, end of period $13.69 $10.44
======== =========
Total return 32.78% 4.40%(3)
======== =========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $99,899 $25,690
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.51% 1.20%(4)
Expenses, before waivers and reimbursements 0.82% 1.20%(4)
Net investment income, net of waivers and reimbursements 4.42% 5.97%(4)
Net investment income, before waivers and reimbursements 4.11% 5.97%(4)
Portfolio turnover rate 22% 0%
Average commission rate paid per share $0.0367 $0.0270
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations.
(2) Net investment income per share calculated using average shares
outstanding during the period.
(3) Not annualized.
(4) Annualized.
9
<PAGE> 12
ORGANIZATION AND CLASSIFICATION
The Trust was organized as a business trust under the laws of the State of
Delaware on May 16, 1996, and is registered with the Securities and Exchange
Commission (the "SEC") under the 1940 Act as an open-end management investment
company of the series type. The Trustees of the Trust are responsible for the
overall management and supervision of the Trust's affairs. Prior to September
3, 1996, the Trust conducted business as Aon Asset Management Fund, Inc., a
Virginia corporation. Any reference herein and in the Statement of Additional
Information of the Trust, including any financial information and performance
data, relating to such period reflect the Trust's series as constituted prior
to the commencement of operations of the Trust.
Each Fund is a separate series of the Trust and is treated as a separate
entity for certain purposes under the 1940 Act and for certain other purposes.
A shareholder of one Fund has an interest in the assets only of that Fund and
is not deemed to be a shareholder of any other Fund. As described below, for
certain matters shareholders of the Trust vote together as a group; as to
others they vote separately by Fund. 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.
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
10
<PAGE> 13
U.S. banks which are members of the Federal Deposit Insurance Corporation
and have assets of at least $1 billion.
(3) Repurchase agreements with (a) banks or (b) government securities
dealers recognized as primary dealers by the Federal Reserve System,
provided that:
i) 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;
ii) 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
iii) the maturity of the repurchase agreement does not exceed 30
days.
(4) Commercial paper, which consists of unsecured promissory notes
issued by corporations to finance short-term credit needs.
Securities in which the Fund invests may not earn as high a level of
current income as long-term or lower quality securities which generally have
less liquidity, greater market risk and more fluctuation in market value.
The Money Market Fund will only invest in instruments denominated in U.S.
dollars that the Adviser, under the general oversight of the Board of Trustees
of the Trust, determines present minimal credit risks and are, at the time of
acquisition, either:
(1) rated in the highest rating category by at least two NRSROs, or by
only one NRSRO if only one NRSRO has issued a rating with respect to the
instrument; or
(2) in the case of an unrated instrument, determined by the Adviser
under the general oversight of the Board of Trustees of the Trust to be
of comparable quality to the above; or
(3) issued by an issuer that has received a rating of the type described
in (1) above on other securities that are comparable in priority and
security to the instrument.
All of the Fund's money market instruments will mature in 13 months or
less. The average maturity of the Fund's portfolio securities based on their
dollar value will not exceed 90 days at the time of each investment. If the
disposition of a portfolio security results in a dollar-weighted average
portfolio maturity in excess of 90 days, the Fund will invest its available
cash in such a manner as to reduce its dollar-weighted average portfolio
maturity to 90 days or less as soon as reasonably practicable. By restricting
the maturity of its investments, the Fund seeks to limit changes in the value
of its assets resulting from market factors in order to maintain a constant net
asset value of $1.00 per share. See "Net Asset Value."
The Money Market Fund should be subject to less market or financial risk
than any other Fund because it invests in high-quality debt obligations that
have a short time period until maturity. The rate of return to shareholders
will vary with the general levels of interest rates applicable to the
short-term debt instruments in which the Money Market Fund invests. The rate
will also be affected by changes in the Money Market Fund's operating expenses.
Although the Money Market Fund usually will hold securities purchased
until maturity, at which time they are redeemable at their full principal value
plus accrued interest, it may, at times, engage in short-term trading to
attempt to take advantage of yield variations in the short-term market. The
Money Market Fund also may sell portfolio securities prior to maturity based on
a revised evaluation of the issuer or to meet redemptions.
Aon, along with its wholly-owned subsidiaries, is expected to own a
substantial percentage of the outstanding shares of the Money Market Fund. Aon
and its subsidiaries may withdraw all or any portion of their investment in the
Fund at any time. A redemption of a significant percentage of the Fund's
shares, either by Aon or its subsidiaries, due to changes in interest rates or
otherwise, could have an adverse impact on the Fund by requiring the Adviser to
sell assets of the Fund prematurely or when it may be disadvantageous to do so,
or to hold assets in cash or cash items in anticipation of a redemption
request. However, management of the Money Market Fund believes that the Fund
and its shareholders will benefit from the substantial investments of Aon and
its subsidiaries in shares of the Fund as a result of the economies of scale
available to a larger fund.
GOVERNMENT SECURITIES FUND
The Government Securities Fund has the investment objective of seeking
high current income with limited credit risk through investment in intermediate
and long-term debt instruments issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. The Government Securities Fund may also invest
in U.S. Government debt instruments having maturities of less than one year and
in other high quality money market instruments. The Government Securities Fund
will invest at least 80% of its total assets, valued at the time of purchase,
in U.S. Government securities of various maturities.
U.S. Government securities in which the Government Securities Fund may
invest include: (1) U.S. Treasury bills, notes and bonds; and (2) obligations
issued or guaranteed by U.S. Government agencies and instrumentalities which
are supported by any of the following: (a) the full faith and credit of the
U.S. Government (e.g., Government National Mortgage Association ("GNMA")
Certificates); (b) the right of the issuer to borrow an amount limited to a
specific line of credit from the U.S. Treasury (e.g., debt of each of the
Federal Home Loan Banks); (c) the discretionary authority of the U.S.
Government or GNMA to purchase certain financial obligations of the agency or
instrumentality (e.g., Federal National Mortgage Association); or (d) the
credit of the issuing agency or instrumentality (e.g., Federal Land Banks,
Farmers Home Administration or Student Loan Marketing Association). No
assurance
11
<PAGE> 14
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.
These instruments, to the extent that they are traded on an exchange or board
of trade located in the U.S., are 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.
ASSET ALLOCATION FUND
The investment objective of the Asset Allocation Fund is to maximize total
return on invested capital, to be derived from capital appreciation, dividends
and interest. The Fund will seek to achieve this objective by following a
flexible asset allocation strategy that shifts among a wide range of
investments and markets. The Asset Allocation Fund will invest in equity
securities, long-term debt securities and money market instruments, the
proportion of each being continuously determined by the Adviser. Total return
consists of current income, including dividends, interest and discount
accruals, and realized and unrealized capital appreciation and/or realized and
unrealized capital depreciation. The Asset Allocation Fund may invest in
equity securities of domestic and foreign issuers, including common stocks,
preferred stocks, convertible securities and warrants; debt securities of
domestic and foreign issuers, including bonds, debentures and notes; and
short-term money market securities. The Fund also may write covered call
options in an effort to increase current income.
Depending upon prevailing economic and market conditions, the Asset
Allocation Fund may at any given time be primarily comprised of equity
securities (including debt securities convertible into equity securities),
corporate bonds and other debt securities, short-term money market securities,
or any combination thereof. For example, during periods when the Adviser
believes that the overall return on equity securities will exceed the return on
debt securities, the Asset Allocation Fund may be fully or substantially
invested in equity securities. In contrast, the Fund may be invested primarily
in debt securities during periods when the Adviser believes that the total
return from investing in debt securities will exceed the return on equity
securities. Also, the 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
12
<PAGE> 15
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. The portfolio turnover rate for the Asset Allocation Fund may 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.
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. To achieve its
investment objective, the Fund purchases equity securities that are expected to
reflect, as a group, the total investment return of the S&P 500 Index. Like
the S&P 500 Index, the Fund will hold both dividend paying and non-dividend
paying common stocks comprising the S&P 500 Index.
Active portfolio management strategies are not used in making investment
decisions for the S&P 500 Index Fund. Rather, the Fund utilizes a passive
investment management approach. The Fund may use statistical selection
techniques to determine which securities to purchase or sell to most
efficiently replicate the investment return of the S&P 500 Index.
The S&P 500 Index Fund may choose not to invest in all the stocks that
comprise the S&P 500 Index, and its holdings may be invested differently by
industry segment than the S&P 500 Index. The Fund may compensate for the
omission from its portfolio of stocks that are included in the S&P 500 Index,
or for purchasing stocks included in the S&P 500 Index in proportions that are
different from their weightings in that Index, by purchasing stocks that may or
may not be included in the S&P 500 Index but which have characteristics similar
to omitted stocks (such as stocks from the same or similar industry groups
having similar market capitalizations and other investment characteristics).
In addition, from time to time adjustments may be made in the Fund's holdings
due to changes in the composition or weighting of issues comprising the S&P 500
Index.
- --------------------------------------------------------------------------------
(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 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,
13
<PAGE> 16
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 Commodity Futures
Trading Commission as contract markets.
Consistent with its investment objective, the S&P 500 Index Fund will
primarily use call and put options and futures contracts, as described above,
to rapidly adjust exposure to the S&P 500 Index in anticipation of investing
cash balances or expected cash flow into the Fund in appropriate common stocks
or in anticipation of liquidating appropriate common stocks to meet expected
redemption requests. See "Investment Practices--Writing Covered Call and Put
Options and Purchasing Call and Put Options" and "--Financial Futures Contracts
and Options on Such Contracts" in this Prospectus for more information about
these practices and their risks.
S&P's only relationship to the S&P 500 Index Fund is the licensing of
certain trademarks and trade names of S&P and of the S&P 500 Index, which is
determined, composed and calculated by S&P without regard to the Fund. S&P has
no obligation to take the needs of the Fund or the investors in the Fund into
consideration in determining, composing or calculating the S&P 500 Index. S&P
is not responsible for and has not participated in the determination of the
prices or composition of the S&P 500 Index Fund or the timing of the issuance
or sale of the shares of the Fund.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500
Index or any data included therein and S&P shall have no liability for any
errors, omissions or interruptions therein. S&P makes no warranty, express or
implied, as to results to be obtained by the S&P 500 Index Fund, or by
investors in the Fund, or any other person or entity from the use of the S&P
500 Index or any data included therein. S&P makes no express or implied
warranties, and expressly disclaims all warranties of merchantability or
fitness for a particular purpose or use with respect to the S&P 500 Index or
any data included therein. Without limiting any of the foregoing, in no event
shall S&P have any liability for any special, punitive, indirect or
consequential damages (including lost profits), even if notified of the
possibility of such damages.
INTERNATIONAL EQUITY FUND
The International Equity Fund has the investment objective of providing
long-term capital appreciation by investing primarily in equity and
equity-related securities of companies that are organized outside the United
States or whose securities are principally traded outside the United States
("foreign issuers"). The Fund also may invest in securities (1) of companies
organized in the United States but having their principal activities and
interests outside the United States, (2) denominated or quoted in foreign
currency ("non-dollar securities") and (3) issued by foreign governments or
agencies or instrumentalities of foreign governments (also "foreign issuers").
The International Equity Fund is intended for investors who can accept the
risks involved in investments in equity and equity-related securities of
foreign issuers and in non-dollar securities. See "Investment
Practices--Foreign Investments and Currency."
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
14
<PAGE> 17
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
Capital International.
The normal currency allocation of the International Equity Fund is
identical to the currency mix of the MSCI Index. The Fund expects to maintain
this normal currency exposure when global currency markets are fairly priced
relative to each other and relative to the associated risks. The Fund may
actively deviate from such normal currency allocations to take advantage of or
to protect the Fund from risk and return characteristics of the currencies and
short-term interest rates when those prices deviate significantly from
fundamental value. Deviations from the MSCI Index are determined by the
Adviser based upon its research.
The International Equity Fund may invest in the securities of issuers
located in countries with emerging economies or securities markets. Investment
in such countries involves certain risks that are not present in investments in
more developed countries. See "Investment Practices--Foreign Investments and
Currency."
Notwithstanding the foregoing, on occasion the International Equity Fund
may, for temporary defensive purposes to preserve capital, hold part or all of
its assets in cash, other money market instruments of the type in which the
Money Market Fund may invest, or, subject to certain tax restrictions, foreign
currencies. The International Equity Fund also may, under normal market
conditions, invest up to 35% of its total assets in dollar denominated and
non-dollar denominated debt securities of foreign issuers and may on occasion,
for 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.
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.
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Mortgage REITs invest the majority of their assets in real estate mortgages and
derive income from the collection of interest payments. REITs are not taxed on
income distributed to shareholders, provided that they comply with several
requirements of the Internal Revenue Code of 1986, as amended (the "Code").
The Morgan Stanley REIT Index is made up of the stocks of all publicly
traded equity REITs (except health care REITs) that meet certain criteria. For
example, to be included in the Index, a REIT must have a total market
capitalization of at least $75 million and have enough shares and trading
volume to be considered liquid. The REIT Index Fund invests in equity REITs
only.
As of January 31, 1998, 124 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 40% 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. To achieve its
investment objective, the Fund will purchase equity securities that are
expected to reflect, as a group, the total investment return of the Morgan
Stanley REIT Index. The Fund generally will hold dividend paying REIT
securities.
Active portfolio management strategies are not used in making investment
decisions for the REIT Index Fund. Rather, the Fund utilizes a passive
investment management approach. The Fund may use statistical selection
techniques to determine which securities to purchase or sell to most
efficiently replicate the investment return of the Morgan Stanley REIT Index.
Although the REIT Index Fund may at times hold each stock in the Morgan
Stanley REIT Index in roughly the same proportions as in the Index itself, it
may alternatively choose at other times not to invest in all the stocks that
comprise the Morgan Stanley REIT Index. The Fund may compensate for the
omission from its portfolio of stocks that are included in the Morgan Stanley
REIT Index, or for purchasing stocks included in the Morgan Stanley REIT Index
in proportions that are different from their weightings in that Index, by
purchasing stocks that may or may not be included in the Morgan Stanley REIT
Index but which have characteristics similar to omitted stocks (such as stocks
representing the same or similar property types or regions or having similar
market capitalizations and other investment characteristics). In addition,
from time to time adjustments may be made in the Fund's holdings due to changes
in the composition or weighting of issues comprising the Morgan Stanley REIT
Index.
The REIT Index Fund will attempt to achieve a correlation between its
total return and that of the Morgan Stanley REIT Index of at least 0.95,
without taking expenses into account. A correlation of 1.00 would indicate
perfect correlation, which would be achieved when the Fund's net asset value,
including the value of its dividends and capital gains distributions, increases
or decreases in exact proportion to changes in the Morgan Stanley REIT Index.
Management will monitor the Fund's correlation to the Morgan Stanley REIT Index
and, to the extent consistent with its goal of keeping transaction costs low,
will attempt to minimize any "tracking error" (i.e., the statistical measure of
the difference between the investment results of the Fund and that of the
Morgan Stanley REIT Index) in its investment decisions for the Fund. However,
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
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"--Financial Futures Contracts and Options on Such Contracts" in this
Prospectus for more information about these practices and other financial
futures contracts and options thereon which the REIT Index Fund may purchase or
sell and the risks associated therewith.
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 Capital International.
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.
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 $5 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."
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 (1) the seller may
experience a decrease in credit quality during the term of the repurchase
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agreement and (2) 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
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
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unsponsored ADR), there may be an increased possibility that the Fund would not
become aware of and be able to respond to corporate actions such as stock
splits or rights offerings involving the foreign issuer in a timely manner. In
addition, the lack of information may result in inefficiencies in the valuation
of such instruments. However, by investing in ADRs rather than directly in the
stock of foreign issuers, a Fund will avoid currency risks during the
settlement period for either purchases or sales. In general, there is a large,
liquid market in the United States for ADRs quoted on a national securities
exchange or the NASD's national market system. The information available for
ADRs is subject to the accounting, auditing and financial reporting standards
of the domestic market or exchange on which they are traded, which standards
are more uniform and more exacting than those to which many foreign issuers may
be subject. The Trust generally considers ADRs to be securities issued,
assumed or guaranteed by a foreign issuer.
EDRs and GDRs are receipts evidencing an arrangement with a non-U.S. bank
similar to that for ADRs and are designed for use in non-U.S. securities
markets. EDRs and GDRs are not necessarily quoted in the same currency as the
underlying security.
INVESTMENTS IN EMERGING MARKETS. The International Equity Fund may invest
in securities of issuers located in countries with emerging economies and/or
securities markets. These countries are located in the Asia-Pacific region,
Eastern Europe, Central and South America and Africa. Political and economic
structures in many of these countries may be undergoing significant evolution
and rapid development, and such countries may lack the social, political and
economic stability characteristic of more developed countries. Certain of
these countries in the past may have failed to recognize private property
rights and have at times nationalized or expropriated the assets of private
companies. As a result, the risks of foreign investment, generally including
the risks of nationalization or expropriation of assets, may be heightened. In
addition, unanticipated political or social developments may affect the values
of the International Equity Fund's investments in those countries and the
availability to the Fund of additional investments in those countries.
The small size and inexperience of the securities markets in certain of
these countries and the limited volume of trading in securities in these
countries may also make the International Equity Fund's investments in such
countries illiquid and more volatile than investments in Japan or most Western
European countries, and the Fund may be required to establish special custody
or other arrangements before making certain investments in these countries.
There may be little financial or accounting information available with respect
to issuers located in certain of such countries, and it may be difficult as a
result to assess the value or prospects of an investment in such issuers. The
laws of some foreign countries may limit the ability of the Fund to invest in
securities of certain issuers located in those countries.
FOREIGN CURRENCY TRANSACTIONS. Because investment in foreign issuers
usually will involve currencies of foreign countries, and because the
Government Securities Fund, the Asset Allocation Fund, the S&P 500 Index Fund,
the International Equity Fund and the REIT Index Fund may have currency
exposure independent of their securities positions, the value of the assets of
these Funds as measured in U.S. dollars may be affected by changes in foreign
currency exchange rates. To the extent that a Fund's assets consist of
investments quoted or denominated in a particular currency, the Fund's exposure
to adverse developments affecting the value of such currency will increase.
The International Equity Fund often will have substantial currency exposure
both from investments quoted or denominated in foreign currencies and from its
currency positions.
Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, a Fund's net asset value to fluctuate
as well. Such exchange rates generally are determined by the forces of supply
and demand in the foreign exchange markets and the relative merits of
investments in different countries, actual or anticipated changes in interest
rates and other complex factors, as seen from an international perspective.
Currency exchange rates also can be affected unpredictably by intervention by
U.S. or foreign governments or central banks, or the failure to intervene, or
by currency controls or political developments in the U.S. or abroad. To the
extent that a substantial portion of a Fund's total assets, adjusted 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
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addition, the Fund may enter into forward foreign currency exchange contracts
in order to protect against anticipated changes in future foreign currency
exchange rates. The International Equity Fund also may engage in proxy-hedging
by using forward contracts in a currency different from that in which the
hedged security is denominated or quoted if the Adviser determines that there
is a pattern of correlation between the two currencies. The Fund also may
purchase and sell forward contracts in cross hedging when the Adviser
anticipates that a foreign currency contained in the MSCI Index will appreciate
or depreciate in value, but securities denominated or quoted in that currency
do not present attractive investment opportunities and are not held by the
Fund.
The International Equity Fund may enter into contracts to purchase foreign
currencies to protect against an anticipated rise in the U.S. dollar price of
securities it intends to purchase. It may enter into contracts to sell foreign
currencies to protect against the decline in value of its foreign currency
denominated or quoted portfolio securities, or a decline in the value of
anticipated dividends from such securities, due to a decline in the value of
foreign currencies against the U.S. dollar. Contracts to sell foreign currency
could limit any potential gain that might be realized by the Fund if the value
of the hedged currency increases. If the International Equity Fund enters into
a forward foreign currency exchange contract for speculative purposes, the Fund
will be required to segregate cash or liquid securities 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
segregated declines, additional cash or securities will be segregated 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 or liquid
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 or liquid 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
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Objectives and Policies -- Money Market Fund." Foreign money market
instruments are subject to risks similar to those affecting domestic money
market instruments. Foreign money market instruments are subject to additional
risks, such as international economic and political developments, foreign
governmental restrictions that may adversely affect the payment of principal or
interest, foreign withholding or other taxes on interest income, difficulties
in obtaining or enforcing a judgment against the issuer, expropriation or
nationalization of foreign issuers, the extent and quality of government
regulation of financial markets and institutions, and the possible impact of
interruptions in the flow of international currency transactions. These
factors, along with the liquidity of proposed foreign investments (including
the availability of an active domestic market) is carefully considered by the
Adviser in selecting any foreign investments for the Fund. For more
information, see "Money Market Fund Investments, Investment Practices and
Restrictions--Foreign Securities" in the Statement of Additional Information.
WRITING COVERED CALL AND PUT OPTIONS AND PURCHASING CALL AND PUT OPTIONS
The Government Securities Fund, S&P 500 Index Fund, International Equity
Fund and REIT Index Fund may write exchange-traded covered call and put options
on or relating to specific securities in order to earn additional income or, in
the case of a call written, to minimize or hedge against anticipated declines
in the value of its portfolio securities. The Asset Allocation Fund may write
covered call options on its portfolio securities in amounts up to 10% of its
total assets in order to earn additional income or to minimize or hedge against
anticipated declines in the value of those securities, and may also enter into
"closing purchase transactions" in order to terminate its obligation as a
writer of a call option prior to the expiration of the option. All call
options written by these Funds are covered, which means that the Fund will own
the securities subject to the option as long as the option is outstanding. All
put options written by these Funds are covered, which means that the Fund has
deposited with the Trust's custodian cash, U.S. Government securities or other
high-grade liquid debt securities with a value at least equal to the exercise
price of the option. Call and put options written by a Fund may also be
covered to the extent that the Fund's liabilities under such options are offset
by its rights under call or put options purchased by the Fund and call options
written by a Fund may also be covered by depositing cash or securities with the
Trust's custodian in the same manner as written puts are covered.
Through the writing of a covered call option, a Fund receives premium
income but obligates itself to sell to the purchaser of such an option the
particular security underlying the option at a specified price at any time
prior to the expiration of the option period, regardless of the market value
of the security during this period. Through the writing of a covered put
option, a Fund receives premium income but obligates itself to purchase a
particular security underlying the option at a specified price at any time
prior to the expiration of the option period, regardless of market value during
the option period.
Each of the S&P 500 Index Fund, the International Equity Fund and the REIT
Index Fund may, in accordance with its investment objective and investment
program, also write exchange-traded covered call and put options on stock
indices. These Funds may write such options for the same purposes as each may
engage in such transactions with respect to individual portfolio
securities--that is, to generate additional income or as a hedging technique to
minimize anticipated declines in the value of the Fund's securities. In
economic effect, a stock index call or put option is similar to an option on a
particular security, except that the value of the option depends on the
weighted value of the group of securities comprising the index, rather than a
particular security, and settlements are made in cash rather than by delivery
of a particular security.
Each of the Government Securities Fund, the S&P 500 Index Fund, the
International Equity Fund and the REIT Index Fund may also purchase
exchange-traded call and put options with respect to securities and, except for
the Government Securities Fund, with respect also to stock indices that
correlate with its particular portfolio securities. All four Funds may
purchase put options for defensive purposes in order to protect against an
anticipated decline in the value of their portfolio securities. As the holder
of a put option with respect to individual securities, each has the right to
sell the securities underlying the option and to receive a cash payment at the
exercise price at any time during the option period. As the holder of a put
option on an index, a Fund has the right to receive, upon exercise of the
option, a cash payment equal to a multiple of any excess of the strike price
specified by the option over the value of the index. Each of the Government
Securities Fund, the S&P 500 Index Fund, the International Equity Fund and the
REIT Index Fund may purchase call options on individual securities and, except
for the Government Securities Fund, on stock indices in order to take advantage
of anticipated increases in the price of those securities by purchasing the
right to acquire the securities underlying the option (or, with respect to
options on indices, to receive income equal to the value of such index over the
strike price). As the holder of a call option with respect to individual
securities, the Funds obtain the right to purchase the underlying securities at
the exercise price at any time during the option period. As the holder of a
call option on a stock index, a Fund obtains the right to receive, upon
exercise of the option, a cash payment equal to the multiple of any excess of
the value of the index on the exercise date over the strike price specified in
the option.
Each of the Government Securities Fund, the International Equity Fund and
the REIT Index Fund may also write and purchase unlisted covered call and put
options. Such
21
<PAGE> 24
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, 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
22
<PAGE> 25
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 on the relevant exchange market) such put option before the
option has expired. If the 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 lack of CFTC regulation of foreign markets; lack of
clearinghouse guarantees on some foreign markets; 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 International Allocation Fund, the Equity Fund and the REIT Index Fund
will not purchase or otherwise acquire any investment if, as a result, more
than 15% of its net assets (taken at current value) would be invested in
instruments that are illiquid by virtue of the absence of a readily available
market.
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.
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<PAGE> 26
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 27, 1998, Mr. Patrick G. Ryan,
Chairman, President and Chief Executive Officer of Aon, owned directly and
beneficially 20,402,223 shares (12.1%) of the outstanding common stock of Aon.
In addition to the Trust, AAI provides investment advice and management to
other investment companies, pension plans, corporations and other
organizations. Assets under management include equity securities, fixed income
securities and real estate. As of December 31, 1997, the aggregate assets
under AAI's management were approximately $7.3 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 provide various
administrative services to the Trust. The Trust pays ASC an annual fee of .05%
of the Fund's average daily net assets under the Administration Agreement.
The Trust is responsible for all expenses other than those to be borne by
AAI or ASC under the Advisory Agreements or Administration Agreement,
respectively.
During the fiscal year ending October 31, 1997, the Funds incurred the
following total operating expenses (including the advisory fee paid to AAI),
stated as a percentage of average daily net assets:
<TABLE>
<CAPTION>
BEFORE ANY REIMBURSEMENTS NET OF ANY REIMBURSEMENTS
OR FEE WAIVERS OF FEE WAIVERS
<S> <C> <C>
Money Market Fund 0.40% 0.22%
Government Securities Fund 0.65% 0.46%
Asset Allocation Fund 0.78% 0.56%
S&P 500 Index Fund 0.49% 0.37%
International Equity Fund 1.61% 1.40%
REIT Index Fund 0.82% 0.51%
</TABLE>
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<PAGE> 27
AAI has agreed to reimburse the Trust for any amount by which the total
expenses exceed certain specified amounts. See "Fund Expenses--Maximum Total
Operating Expenses." During the fiscal year ending October 31, 1997, AAI was
not required to reimburse the Trust for expenses incurred in excess of maximum
total operating expenses.
The Trust pays AAI compensation in the form of investment advisory fees.
The fees are accrued daily but paid to AAI monthly. 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:
<TABLE>
<S> <C>
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.
</TABLE>
Effective May 1, 1997, AAI has agreed to waive sufficient investment
advisory fees to result in a net effective annual rate of .10% of the average
daily net assets of the Money Market Fund, the Government Securities Fund, the
S&P 500 Index Fund, and the REIT Index Fund, .25% of the average daily net
assets of the Asset Allocation Fund, and between .55% and .60% of the average
daily net assets of the International Equity Fund until at least February 28,
1999.
During the fiscal year ended October 31, 1997, the Trust paid AAI
investment advisory fees in an amount representing .12%, .26%, .43%, .18%, .74%
and .29% of the average daily net assets of the Money Market Fund, Government
Securities Fund, Asset Allocation Fund, S&P 500 Index Fund, International
Equity Fund and the REIT Index Fund, respectively.
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. 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. On December 8, 1997, Swiss
Bank and Union Bank of Switzerland announced their intention to merge into a
single organization, to be called United Bank of Switzerland. Brinson Partners
is an indirect wholly owned subsidiary of Swiss Bank Corporation and will be,
with UBS Asset Management, a part of the Brinson Division of the new United
Bank of Switzerland. Gary Brinson, President and Managing Partner of Brinson
Partners, will be the Chief Executive Officer and Chief Investment Officer of
the Brinson Division. The proposed merger has been approved by the shareholders
of both banks and, subject to regulatory approval, it is anticipated that the
merger will be completed by the end of May 1998. Brinson Partners has advised
the Trust that the Sub-Advisory Agreement between Brinson Partners and AAI will
not terminate as a result of such merger. Brinson Partners, a registered
investment adviser under the Investment Advisers Act of 1940, managed
approximately $89 billion of global stocks and bonds as of December 31, 1997,
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. He oversees the
investment management of all Trust portfolios. 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.
25
<PAGE> 28
Frank Wren, portfolio manager of the Government Securities Fund since May
1997, has been employed by AAI since 1982. Mr. Wren received his B.A. in
Philosophy from DePaul University in 1977 and M.M. from Northwestern University
in 1982, and has been a Chartered Financial Analyst since 1985.
John G. Lagedrost, portfolio manager of the Asset Allocation Fund since
December 1995, has been employed by 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.
Melissa Aton, portfolio manager of the S&P 500 Index Fund and the REIT
Index Fund since September 1997, joined AAI in 1987 as Senior Statistician,
working with quantitative applications and analysis and developing proprietary
asset allocation models. Prior to joining AAI, Ms. Aton was employed as
project leader for United Airlines (1986-1987) and as Statistician/Analyst at
Dow Chemical Company (1984-1986). Ms. Aton earned her B.S. in Statistics from
Purdue University in 1983. She received her M.S. in Applied Statistics from
Purdue University in 1984.
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 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 Columbus Day
or 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 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, other than the Money Market Fund, is
$1,000. Subsequent investments in each Fund, other than the Money Market Fund,
must be at least $100. The minimum initial investment for the Money Market
Fund is $10,000 and subsequent investments must be at least $1,000. 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 (1) employees, officers and directors of Aon and its
affiliates, (2) affiliates of Aon, (3) firms providing contractual services to
the Trust, or (4) members of the "immediate families" of the aforementioned.
The subsequent investment amount for the Money Market Fund may also be less for
persons who were
26
<PAGE> 29
shareholders in the Money Market Fund as of February 27, 1998. The minimum
investment amounts may be waived for those investors deemed appropriate by the
officers of the Trust.
The Trust makes available individual retirement accounts (IRAs) for
individuals. Additional information concerning these 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
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.
The Trust reserves the right to reject any purchase order for any reason.
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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.
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."
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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
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 Non-Money Market Fund in a minimum amount of $100. A shareholder
may also authorize deductions to be made from his or her personal bank checking
account for investment each month in shares of the Money Market Fund for a
minimum amount of $1,000. (The foregoing minimums may be less for (1)
employees, officers and directors of Aon and its affiliates, (2) affiliates of
Aon, (3) firms providing contractual services to the Trust, or (4) members of
the "immediate families" of the aforementioned. Additionally, the minimum for
the Money Market Fund is $100 for persons who were shareholders in the Money
Market Fund as of February, 27, 1998.) 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 for each fund except the Money Market Fund. Shares being
exchanged for shares in the Money
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Market Fund must have a net asset value of at least $10,000 but not more than
$500,000. (The minimum net asset value for shares being exchanged for shares in
the Money Market Fund may be lower for (1) employees, officers and directors of
Aon or its affiliates, (2) affiliates of Aon, (3) firms providing contractual
services to the Trust, or (4) members of the "immediate families" of the
aforementioned. Additionally, the minimum for the Money Market Fund is $1,000
for persons who were shareholders in the Money Market Fund as of February 27,
1998.)
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, mid 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 net 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 net capital gain
distribution payment will be a taxable dividend or net capital gain
distribution. Unless a shareholder otherwise directs, dividends and
distributions are reinvested in additional full and fractional 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 net 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 capital gains)
each year. Each Fund intends to distribute annually to its shareholders
substantially all of its net investment income and net 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
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 (which includes the Fund's
short-term capital gains) 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. In general,
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distributions by a Fund of its net capital gains will be taxable to
shareholders as gain from the sale or exchange of a capital asset held for more
than one year, regardless of the length of time a shareholder has owned shares
of the Fund. However, net capital gains distributed to non-corporate
shareholders are subject to special rules. Under the Taxpayer Relief Act of
1997, capital gains recognized by non-corporate shareholders are, as described
more fully in the following paragraph, generally taxed as one of three classes
of gain (short-term, long-term or mid-term) depending on the holding period of
the relevant asset. For purposes of characterizing net capital gains
distributed to non-corporate shareholders, capital gains recognized by the Fund
will be characterized as long-term or mid-term gain based on the Fund's holding
period for the relevant asset. Generally, long-term and mid-term gains of the
Fund included in a capital gain distribution will be available to flow through
as such to non-corporate shareholders of the Fund. Distributions designated as
net capital gains may be offset by certain capital losses in determining the
shareholder's net capital gains. 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.
In general, 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 capital gain or loss. As described above, capital gains of
non-corporate shareholders are generally taxed as one of three classes of gain
(short-term, long-term or mid-term) depending on the holding period of the
relevant asset. Net gain on the sale of shares held for more than 18 months is
subject to the long-term rate of 20%. Net gain on the sale of shares held for
more than 12 months and not more than 18 months is subject to a mid-term rate
of 28%. Net gain on shares held for 12 months or less is subject to tax at the
same rates as ordinary income. For sales of shares by corporate shareholders,
the provisions described above do not apply, and net gains and losses will be
taxed to corporate shareholders under rules traditionally applicable to net
gains and losses realized by a corporation. 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. Any loss recognized on the sale of a
share held for less than six months is treated as a long-term capital loss to
the extent of any net capital gain distributions made with respect to such
share.
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) their pro
rata share of the foreign taxes paid by the electing Fund; (2) treat their pro
rata share of such foreign taxes as having been paid by him or her; and
(3) either deduct their pro rata share of foreign taxes in computing their
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 and distributions
that represent income derived from sources within each such country.
The amount of foreign taxes for which a shareholder may claim a credit in
any year will be subject to an overall limitation which is applied separately
to "passive income", which include, 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
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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 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 assuming 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
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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, 1997, Aon, itself and through its subsidiaries and
affiliates, owned beneficially and of record 99.3%, 99.9%, 99.6%, 99.5%, 99.4%
and 99.7% 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
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.
YEAR 2000 PREPAREDNESS
The management services provided to the Trust by the Adviser, and the
services provided by the custodian, accounting agent and transfer agent to
shareholders, in part, depend on the reasonably consistent operations of their
computer systems. Many software programs and, to a lesser extent, computer
hardware in use today cannot distinguish the year 2000 from the year 1900
because of the way dates are encoded and calculated. This design flaw may have
a negative impact on the handling of securities trades, pricing and accounting
services. The Adviser and Firstar Trust Company have been actively working on
necessary changes to their computer systems to deal with the year 2000 and
reasonably believe that their systems will be year 2000 compliant in time for
that event.
33
<PAGE> 36
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> 37
AON FUNDS
123 NORTH WACKER DRIVE
CHICAGO, ILLINOIS 60606
DISTRIBUTOR -- AON SECURITIES CORPORATION
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 27, 1998
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 Aon Funds at 123 North Wacker Drive, Chicago, Illinois 60606, or call (800)
266-3637.
<PAGE> 38
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information....................................................... 4
Prior History........................................................... 4
Portfolio Turnover...................................................... 4
Money Market Fund Investments, Investment Practices and Restrictions...... 5
General Standards....................................................... 5
U.S. Government Securities.............................................. 5
Certificates of Deposit and Time Deposits............................... 5
Commercial Paper........................................................ 5
Repurchase Agreements................................................... 6
Foreign Securities...................................................... 6
Lending Portfolio Securities............................................ 7
Investment Restrictions................................................. 7
Additional Investment Practices and Restrictions.......................... 8
When-Issued and Delayed Delivery Securities............................. 8
Loans of Portfolio Securities........................................... 9
Convertible Securities.................................................. 9
Warrants................................................................ 9
Risks of Foreign Investments............................................ 10
Forward Foreign Currency Exchange Contracts............................. 10
Writing and Purchasing Currency Call and Put Options.................... 11
Special Risks Associated With Options on Currency....................... 12
Currency Swaps.......................................................... 13
Options on Securities and Securities Indices............................ 13
Financial Futures Contracts............................................. 15
Options on Financial Futures Contracts.................................. 16
Certain Additional Risks of Options and Financial Futures Contracts..... 16
Borrowing............................................................... 17
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................................................... 23
Trustees and Officers................................................... 23
Investment Advisers..................................................... 24
Investment Advisory and Administration Fees............................. 25
Investment Sub-Adviser.................................................. 26
Investment Sub-Advisory Agreement....................................... 26
Investment Sub-Advisory Fees............................................ 26
Reimbursement of Excess Operating Expenses.............................. 26
Securities Activities of the Adviser.................................... 27
Control Persons and Principal Holders of Securities....................... 28
Portfolio Transactions and Brokerage...................................... 30
Determination of Net Asset Value.......................................... 31
General................................................................. 31
</TABLE>
<PAGE> 39
<TABLE>
<S> <C>
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...................................... 36
Reports............................................................ 36
Other Information.................................................. 36
Appendix A........................................................... 37
</TABLE>
<PAGE> 40
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 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.
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<PAGE> 41
The annual portfolio turnover rates for each of the Funds for recent
fiscal periods is set forth under "Financial Highlights" in the Prospectus.
The Government Securities Fund, Asset Allocation Fund, S&P 500 Index Fund, REIT
Index Fund and International Equity Fund 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 (1) the full faith and credit of the U.S. Government (such as
securities of the Government National Mortgage Association ("GNMA"), (2) the
right of the issuer to borrow from the Treasury (such as securities of the
Federal Home Loan Banks), (3) the discretionary authority of the U.S.
Government to purchase the agency's obligations (such as securities of the
Federal National Mortgage Association), or (4) only the credit of the issuer.
No assurance can be given that the U.S. Government will provide financial
support to U.S. Government agencies or instrumentalities in the future.
CERTIFICATES OF DEPOSIT AND TIME DEPOSITS
Certificates of deposit include time deposits and negotiable certificates
of deposit. Time deposits are nonnegotiable deposits maintained in a banking
institution for a specified period of time (in no event longer than seven days)
at a stated interest rate. Certificates of deposit are certificates issued
against funds deposited in a bank for a specified period of time. Bank
obligations may be purchased only if (1) the issuing bank is a U.S. bank with
total assets of at least $1 billion, and (2) 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
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<PAGE> 42
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, 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
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<PAGE> 43
diplomatic developments which could affect investment certain foreign issuers;
in those situations, it may be difficult for the Fund to obtain or to enforce a
judgment against the issuer.
LENDING PORTFOLIO SECURITIES
In order to further the Money Market Fund's investment objective of
seeking a high level of current income, it may lend its portfolio securities to
brokers, dealers, and financial institutions. The amount of loaned securities
will not exceed 5% of the value of the Fund's assets. Securities lending
activities, if and when engaged in by the Money Market Fund, will be carried
out in the manner described and subject to the conditions described in the
caption "Lending Portfolio Securities" in the next section dealing with the
Non-Money Market Funds.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS. The Money Market Fund has adopted a
number of fundamental policies restricting the investment of its assets, which
may not be changed without the affirmative vote of the holders of a majority of
the Fund's outstanding voting securities. The "affirmative vote of the holders
of a majority of a Fund's outstanding voting securities" means the vote of: (1)
67% or more of the shares of the Fund present or represented by proxy at a
meeting of the Fund's shareholders, if more than 50% of the outstanding shares
of such Fund are present in person or by proxy at such meeting, or (2) more
than 50% of the outstanding shares of such Fund, whichever is less. Pursuant to
the Money Market Fund's fundamental investment restrictions, it may not:
(a) issue senior securities (except to the extent that borrowings under
paragraph (h) below exceeding 5% of the value of the Money Market Fund's
total assets are deemed to constitute senior securities under the 1940 Act);
(b) purchase real estate or any interest therein, except through the
purchase of corporate or certain government securities (including securities
secured by a mortgage or a leasehold interest or other interest in real
estate); a security issued by a real estate or mortgage investment trust is
not treated as an interest in real estate;
(c) purchase any securities on margin (except that, subject to the
borrowing limitation in (h), the Money Market Fund may obtain such short-term
credit as may be necessary for the clearance of purchases and sales of
portfolio securities), or make short sales of securities or maintain a short
position;
(d) underwrite securities of other issuers (except insofar as the Money
Market Fund or the Trust might be deemed an underwriter under the Securities
Act of 1933 in certain resales of portfolio securities held by the Fund);
(e) invest more than 25% of the value of its total assets in the
securities of issuers having their principal activity in any particular
industry, other than U.S. Government Securities, as defined in Section
2(a)(16) of the 1940 Act;
(f) invest more than 5% of the value of the Money Market Fund's total
assets in, or invest in more than 10% of the outstanding voting securities
of, any one issuer, except that this restriction does not apply to
investments in U.S. Government Securities;
(g) make loans, except that the Money Market Fund may enter into
repurchase agreements as described above or in the Prospectus, and the Fund
may lend its portfolio securities, but not in amounts in excess of the 5% of
the value of its assets;
(h) borrow money, except from banks for temporary or emergency purposes,
including the meeting of redemption requests which might otherwise require
the untimely disposition of securities. Borrowing in the aggregate may not
exceed 10% of the value of the Money Market Fund's total assets at the time
the borrowing is made, and the Fund will not make additional investments
during any period that borrowings exceed 5% of the value of its total assets;
(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);
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<PAGE> 44
(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:
(1) write, purchase or sell puts, calls (other than covered call
options) or combinations thereof;
(2) 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 (a) issued, assumed or guaranteed by foreign governments, or
political subdivisions or instrumentalities thereof, (b) assumed or
guaranteed by domestic issuers, including Eurodollar securities, or (c)
issued, assumed or guaranteed by foreign issuers having a class of securities
listed for trading on the New York Stock Exchange ("NYSE");
(3) 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);
(4) alone, or together with any other Fund or Funds, make investments
for the purpose of exercising control over, or management of, any issuer; and
(5) purchase securities of other investment companies.
COMPUTATION RULE. If a percentage restriction is adhered to at the time
of an investment, a later increase or decrease in the investment's percentage
of the value of the Money Market Fund's total assets will not constitute a
violation of the percentage restriction.
ADDITIONAL INVESTMENT PRACTICES AND RESTRICTIONS
The respective investment objectives of the Asset Allocation Fund, S&P 500
Index Fund, Government Securities Fund, International Equity Fund and REIT
Index Fund (the "Non-Money Market Funds") and the policies by which such Funds
will pursue their objectives are generally set forth in the Prospectus. This
section describes in more detail certain securities in which such Funds (and in
certain cases the Money Market Fund) may invest and certain investment
practices they may use and is intended to augment the description found in the
Prospectus.
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
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<PAGE> 45
period. At the time a Fund makes the commitment to purchase securities on a
when-issued or delayed delivery basis, it will record the transaction and
thereafter reflect the value, each day, of such security in determining its net
asset value. At the time of delivery of the securities, the value may be more
or less than the purchase price. Each Fund will also establish a segregated
account with the Trust's custodian bank in which it will maintain cash or cash
equivalents or other liquid Fund securities equal in value, marked to market on
a daily basis, to commitments for such when-issued or delayed-delivery
securities. As a general matter each Fund will hold less than 5% of its assets
in commitments to purchase securities on a delayed-delivery or when-issued
basis and will not, under any circumstances, purchase securities on a
when-issued basis or delayed-delivery basis if, as a result, more than 10% of
its net assets would be so invested.
LOANS OF PORTFOLIO SECURITIES
Each Non-Money Market Fund may from time to time lend securities it holds
to brokers, dealers and financial institutions, up to a maximum of 20% of its
total assets, and the Money Market Fund may so lend securities up to a maximum
of 5% of the value of its assets. This percentage may not be increased without
approval of a majority of the outstanding voting securities of the respective
Funds. Such loans will be secured by the collateral in the form of cash or U.S.
Treasury securities, which at all times during which the loan is outstanding
will be maintained in an amount at least equal to the current market value of
the loaned securities. Each Fund will continue to receive interest and
dividends on the loaned securities during the term of its loans and, in
addition, will receive either a fee from the borrower or interest earned from
the securities in which cash collateral is invested during the term of the
loan.
The right to terminate a loan of securities, subject to appropriate
notice, will be given to either party. When a loan is terminated, the borrower
will return the loaned securities to the appropriate Fund. A Fund will not have
the right to vote securities on loan, but would terminate the loan and regain
the right to vote if that were important with respect to the investment.
Each Fund intends to limit the amount of securities lending so that the
aggregate amount of interest received attributed to securities loaned, if
considered "other income" for federal tax purposes, will not cause it to lose
its tax status as a regulated investment company.
The primary risk involved in lending securities is that the borrower will
fail financially and not return the loaned securities at a time when collateral
is insufficient to replace the full amount of the loaned securities. The
borrower would be liable for the shortage, but a Fund would be an unsecured
creditor with respect to such shortage and might not be able to recover all or
any of it. In order to minimize this risk, the Funds will make loans of
securities only to firms that the Adviser (under the general oversight of the
Board of Trustees of the Trust) deems creditworthy.
CONVERTIBLE SECURITIES
The Asset Allocation Fund and International Equity Fund may each invest in
convertible securities. Convertible securities may include corporate notes or
preferred stock but are ordinarily a long-term debt obligation of the issuer
convertible at a stated exchange rate into common stock of the issuer. As with
all debt securities, the market value of convertible securities tends to
decline as interest rates increase and, conversely, to increase as interest
rates decline. Convertible securities generally offer lower interest or
dividend yields than non-convertible securities of similar quality. However,
when the market price of the common stock underlying a convertible security
exceeds the conversion price, the price of the convertible security tends to
reflect the value of the underlying common stock. As the market price of the
underlying common stock declines, the convertible security tends to trade
increasingly on a yield basis, and thus may not depreciate to the same extent
as the underlying common stock. Convertible securities generally rank senior to
common stock in an issuer's capital structure and are consequently of higher
quality and entail less risk of declines in market value than the 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,
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<PAGE> 46
calculated at the time of purchase, in warrants or rights (other than those
acquired in units or attached to other securities) which entitle the holder to
buy equity securities at a specific price for a specific period of time. These
Funds will not invest more than 2% of their total assets, calculated at the
time of purchase, in warrants or rights which are not listed on the NYSE or
American Stock Exchange. Warrants and rights have no voting rights, receive no
dividends and have no rights with respect to the assets of the issuer.
RISKS OF FOREIGN INVESTMENTS
Investing in the securities of companies that are organized outside the
United States or whose securities are principally traded outside the United
States ("foreign issuers") or investing in securities denominated or quoted in
a foreign currency ("non-dollar securities") involves certain special
considerations, including those set forth below, which are not typically
associated with investing in securities of domestic issuers or U.S. dollar
denominated securities.
Since investments in foreign issuers may involve currencies of foreign
countries and since a Non-Money Market Fund may temporarily hold funds in bank
deposits in foreign currencies during completion of investment programs and
since a Fund may be subject to currency exposure as a result of or independent
of its securities positions, the Fund may be affected favorably or unfavorably
by changes in currency exchange rates and in exchange control regulations and
may incur costs in connection with conversions between various currencies.
Since foreign issuers are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. issuers, there may be less publicly available information
about a foreign issuer than about a domestic issuer. Volume and liquidity in
most foreign securities markets are less than in the United States and
securities of many foreign issuers are less liquid and more volatile than
securities of comparable domestic issuers. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although a Non-Money Market Fund may endeavor to achieve the most
favorable net results on its portfolio transactions. There is generally less
government supervision and regulation of securities exchanges, brokers, dealers
and listed and unlisted issuers than in the United States. Mail service between
the United States and foreign countries may be slower or less reliable than
within the United States, thus increasing the risk of delayed settlements of
portfolio transactions or loss of certificates for portfolio securities.
Foreign investment markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of transactions, making it difficult
to conduct such transactions. Such delays in settlement could result in
temporary periods when a portion of the assets of a Non-Money Market Fund are
uninvested and no return is earned on such assets. The inability of a Fund to
make intended securities purchases due to settlement problems could cause such
Fund to miss attractive investment opportunities. Inability to dispose of Fund
investments due to settlement problems could result either in losses to a Fund
due to subsequent declines in value of the portfolio securities or, if the Fund
has entered into a contract to sell the securities, could result in possible
liability to the purchaser. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
a Fund's investments in those countries. Moreover, individual foreign economies
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency or balance of payments position.
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.
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The International Equity Fund may enter into forward foreign currency
exchange contracts in several circumstances. First, when it purchases or enters
into a fixed price contract for the purchase or sale of a security denominated
or quoted in a foreign currency, or when it anticipates the receipt in a
foreign currency of dividend or interest payments on such a security which it
holds, the Fund may desire to "lock in" the U.S. dollar price or value of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for the purchase or sale,
for a fixed amount of dollars, of the amount of foreign currency involved in
the underlying transactions, the Fund will attempt to protect itself against an
adverse change in the relationship between the U.S. dollar and the subject
foreign currency during the period between the date on which the security is
proposed to be purchased and the date on which the security is actually
purchased, or the period during which the security is held (including the
period after sale but prior to the conversion of the proceeds into dollars), or
the period between the declaration of the dividend or interest payment and the
date on which such payments are made or received (and converted into dollars).
When the Adviser believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, it may enter
into a forward contract to sell, for a fixed amount of dollars, the amount of
foreign currency approximating the value of some or all of the International
Equity Fund's portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of the Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which the Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the dollar value of only a portion of the Fund's foreign
assets.
The International Equity Fund may engage in proxy-hedging by using forward
contracts in one currency to hedge against fluctuations in the value of
securities quoted or denominated in a different currency if the Adviser
determines that there is a pattern of correlation between the two currencies.
The Fund also may purchase and sell forward contracts in cross-hedging when the
Adviser anticipates that a foreign currency contained in the Morgan Stanley
Capital International Non-U.S. Equity (Free) ("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 segregate cash or liquid securities 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 segregated declines,
additional cash or liquid securities will be segregated 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 assets 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
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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 a specified currency at a specified price during the option period.
The Fund would ordinarily realize a gain if, during the option period, the
value of such currency exceeded the sum of the exercise price, the premium paid
and transaction costs; otherwise, the Fund would realize either no gain or a
loss on the purchase of the call option.
The International Equity Fund would normally purchase put options in
anticipation of a decline in the dollar value of the 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 a 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 the underlying currency.
In addition to using options for the hedging purposes described above, the
International Equity Fund may use options on the currencies 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 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 market on an exchange will exist for any particular
option, or at any particular time. For some options no market on an exchange
may exist. In such event, it might not be possible to effect closing
transactions in particular options, with the result
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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 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 securities having an aggregate net asset value
at least equal to such accrued excess will be maintained in a segregated
account by the Trust's custodian. The Fund will not enter into any currency
swap unless the credit quality of the unsecured senior debt or the
claims-paying ability of the other party thereto is considered to be investment
grade by the Adviser. If there is a default by the other party to such a
transaction, the Trust will have contractual remedies pursuant to the agreement
applicable to the transaction. The swap market has grown substantially in
recent years with a large number of banks and 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. 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 or
liquid 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 liquid 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
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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 or
liquid securities 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 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 (1) 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, (2)
hedge their investments against an anticipated decline in value, or (3) 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
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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 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, to the extent that they are traded on an exchange or board of trade
located in the U.S., 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
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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 or currency 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, to the extent traded on an
exchange or board of trade located in the U.S., 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. Whether, in order to
achieve a particular objective, a Fund enters into a financial futures
contract, on the one hand, or an option contract on a financial futures
contract, on the other, will depend on all the circumstances, including the
relative costs, liquidity, availability and capital requirements of such
financial futures and options contracts. Each Fund will consider the relative
risks involved, which may be quite different. These factors, among others, will
be considered in light of market conditions and the particular objective to be
achieved.
CERTAIN ADDITIONAL RISKS OF OPTIONS AND FINANCIAL FUTURES CONTRACTS
In addition to the risks described in the Prospectus, the use of options
and financial futures contracts may entail the following risks. First, although
such instruments when used by a Fund are intended to correlate with the Fund's
portfolio securities, in many cases the options or financial futures contracts
used may be based on securities or currencies which, or stock indices the
components of which, are not identical to the portfolio securities owned or
intended to be acquired by the Fund. Second, due to supply and demand
imbalances and other market factors, the price movements of financial futures
contracts, options thereon, and stock index options may not necessarily
correspond exactly to the price movements of the securities, currencies or
stock indices on which such instruments are based. Accordingly, there is a risk
that a Fund's transactions in those instruments will not in fact offset the
impact on the Fund of adverse market developments in the manner or to the
extent contemplated or that such transactions will result in losses to the Fund
which are not offset by gains with respect to corresponding portfolio
securities owned or to be purchased by that Fund.
To some extent, these risks can be minimized by careful management of
hedging activities. For example, where price movements in a financial futures
or option contract are expected to be less volatile than price movements in the
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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 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
17
<PAGE> 54
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 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.
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<PAGE> 55
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 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.
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<PAGE> 56
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:
(1) issue senior securities except: (a) to the extent that borrowing
under paragraph (8) below exceeding 5% may be deemed to be senior securities
under the 1940 Act, or (b) in connection with investments of certain Funds in
options, futures and swap contracts;
(2) 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;
(3) 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;
(4) 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;
(5) purchase any securities on margin except: (a) that a Fund may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities, and (b) in connection with investments in
options, futures and swap contracts;
(6) make loans, except as provided in (7) 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);
(7) lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan;
(8) 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;
(9) mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by such Fund except: (a) as
may be necessary in connection with borrowing mentioned in (8) above, and
then such mortgaging, pledging or hypothecating may not exceed 10% of the
Fund's total assets,
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<PAGE> 57
taken at market value at the time thereof, or (b) in connection with
investment of certain Funds in options, futures and swap contracts;
(10) 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;
(11) 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
(12) 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:
(1) issue senior securities (except to the extent that borrowings under
paragraph (8) 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;
(2) 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;
(3) purchase any securities on margin (except that, subject to the
borrowing limitation in (8), 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;
(4) 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);
(5) 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;
(6) 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;
(7) 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;
(8) 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;
(9) 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 (3) and (8);
(10) 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;
(11) 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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<PAGE> 58
(12) 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 (10) 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.
(1) 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;
(2) 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;
(3) 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;
(4) 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);
(5) 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
(6) Non-fundamental investment restriction (b) of the Money Market Fund
is not applicable to the International Equity Fund.
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<PAGE> 59
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust, their addresses, ages as of
February 12, 1998, 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 54 Director and Vice-Chairman,
361A Bienterra Trail Pioneer Financial Services;
Rockford, IL 61107 Real Estate Developer; Director,
Mercantile Bank, Northern Illinois;
Director, Central Reserve Life Corporation.
Michael A. Conway* President and 50 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 54 Senior Vice President & Treasurer,
McDonald's Corporation McDonald's Corporation.
McDonald's Plaza
Oak Brook, IL 60523-1900
Richard J. Peters............. Trustee 50 President, R.J. Peters & Company; Director,
73 Kercheval Avenue Penske Corporation, Penske Motorsports, Inc.,
Suite 102 and Captec Net Lease Realty, Inc.
Grosse Pointe Farms, MI 48236
Charles A. Tribbett........... Trustee 42 Managing Director and Co-Manager, Russell
200 S. Wacker Drive Reynolds Associates.
Suite 3600
Chicago, IL 60606
Arlene H. Hardy*.............. Treasurer 40 Director of Corporate Treasury, Aon
123 North Wacker Drive Corporation.
26th Floor
Chicago, IL 60606
Catherine Lyczko* Secretary 37 Counsel, Aon Corporation; Secretary, Aon
123 North Wacker Drive Securities Corporation.
13th Floor
Chicago, IL 60606
Brian H. Lawrence*............ Controller 30 Controller, Aon Securities Corporation;
123 North Wacker Drive Controller, Aon Financial Institution Services
27th Floor
Chicago, IL 60606
</TABLE>
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<PAGE> 60
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 during its fiscal year ended October 31, 1997 entitled to receive
compensation, the aggregate compensation received from the Trust during such
fiscal year.
TABLE OF TRUSTEES' COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
NAME OF TRUSTEE FROM THE TRUST
- --------------- ----------------------
<S> <C>
Michael A. Cavataio $12,500
Carleton D. Pearl $12,500
Richard J. Peters $12,500
Donald W. Phillips $9,500
</TABLE>
INVESTMENT ADVISER
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 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.
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<PAGE> 61
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:
(1) supply internal auditing and internal legal services; (2) supply
stationery and office supplies; (3) prepare reports to shareholders and
the Board of Trustees; (4) prepare tax returns; (5) prepare reports to
and filings with the SEC and State Blue Sky authorities; (6) 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; (7) 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 (8) 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:
(1) taxes and fees payable by the Trust to federal, state, or other
government agencies; (2) brokerage fees and commissions, and issue and
transfer taxes; (3) interest; (4) 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; (5) registration,
qualification, filing and other fees in connection with securities
registration requirements of federal and state regulatory authorities;
(6) the charges and expenses for custodial, paying agent, transfer
agent, dividend agent and accounting agent services; (7) 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; (8) charges and expenses of
independent auditors; (9) costs of meetings of shareholders and trustees
of the Trust; (10) costs of maintenance of corporate existence; (11)
insurance premiums; (12) investment advisory fees; (13) costs and fees
associated with printing and delivering registration statements,
shareholders' reports and proxy statements; (14) costs and fees
associated with delivering reports to and filings with the SEC and State
Blue Sky authorities; (15) costs relating to administration of the
Trust's general operations; (16) costs relating to the Trust's own
employees, if any; and (17) costs of preparing, printing, and delivering
the Trust's Prospectus and Statement of Additional Information to
existing shareholders.
INVESTMENT ADVISORY AND ADMINISTRATION FEES
The Funds paid the following amounts in investment advisory fees net of
reimbursements and fee waivers during the last three fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
10/31/97 10/31/96 10/31/95
---------- ---------- ----------
<S> <C> <C> <C>
Money Market Fund (1) $706,893 $442,559 $487,553
Government Securities Fund (2) $192,825 $15,342 -
Asset Allocation Fund (1) $575,161 $609,643 $218,580
S&P 500 Index Fund (2) $181,970 $0 -
International Equity Fund (2) $325,711 $27,877 -
REIT Index Fund (2) $186,653 $10,094 -
</TABLE>
(1) Inclusive of administration fees prior to September 3, 1996.
(2) Inception date September 3, 1996
The Trust pays ASC an annual fee of .05% of the Fund's average daily net assets
under the Administration Agreement.
25
<PAGE> 62
INVESTMENT SUB-ADVISER
Pursuant to a separate sub-advisory agreement described below, AAI has
engaged Brinson Partners, Inc. 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.
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. On December 8, 1997, Swiss Bank and Union Bank of
Switzerland announced their intention to merge into a single organization, to
be called United Bank of Switzerland. Brinson Partners is an indirect wholly
owned subsidiary of Swiss Bank Corporation and will be, with UBS Asset
Management, a part of the Brinson Division of the new United Bank of
Switzerland. Gary Brinson, President and Managing Partner of Brinson Partners,
will be the Chief Executive Officer and Chief Investment Officer of the Brinson
Division. The proposed merger has been approved by the shareholders of both
banks and, subject to regulatory approval, it is anticipated that the merger
will be completed by the end of May 1998. Brinson Partners has advised the
trust that the Sub-Advisory Agreement between Brinson Partners and AAI will not
terminate as a result of such merger. Brinson Partners, a registered
investment adviser under the Investment Advisers Act of 1940, manages
approximately $89 billion of global stocks and bonds as of December 31, 1997,
and it and its predecessor entities have been managing non-US securities since
1974.
INVESTMENT SUB-ADVISORY AGREEMENT
AAI has entered into a separate sub-advisory agreement (the "Sub-Advisory
Agreement") with Brinson Partners for the day-to-day portfolio management of
the International Equity Fund. The Sub-Advisory Agreement was approved by a
vote of the majority of the Trustees of the Trust (including a majority of
trustees who are not parties to such Agreement or interested persons, as
defined by the 1940 Act, or any such party) at a meeting held for that purpose
on August 28, 1996. The Sub-Advisory Agreement was also approved by the
initial shareholder of the International Equity Fund on September 3, 1996. The
Sub-Advisory Agreement is not assignable and may be terminated without penalty
upon 60 days' written notice at the option of AAI or Brinson Partners, by a
vote of the majority of the Trustees of the Trust or by a vote of a majority
of the outstanding shares of the International Equity Fund. The Sub-Advisory
Agreement provides that it shall continue in effect for two years and can
thereafter be continued from year to year so long as such continuance is
specifically approved annually (1) by the Trustees of the Trust or by a
majority of the outstanding shares of the International Equity Fund and (2) 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
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. AAI's
undertaking with respect to reimbursement of excess expenses cannot be changed
without shareholder approval. The maximum total annual operating expenses, as
a percentage of average
26
<PAGE> 63
daily net assets, that a Fund may incur pursuant to AAI's undertaking are as
follows:
<TABLE>
<CAPTION>
<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
REIT Index Fund 1.50% to $30 million; 1.25% thereafter
</TABLE>
During the fiscal year ending October 31, 1997, the Funds incurred the
following total operating expenses (including the advisory fee paid to AAI),
stated as a percentage of average daily net assets:
<TABLE>
<S> <C> <C>
BEFORE ANY REIMBURSEMENTS NET OF ANY REIMBURSEMENTS
OR FEE WAIVERS OF FEE WAIVERS
Money Market Fund 0.40% 0.22%
Government Securities Fund 0.65% 0.46%
Asset Allocation Fund 0.78% 0.56%
S&P 500 Index Fund 0.49% 0.37%
International Equity Fund 1.61% 1.40%
REIT Index Fund 0.82% 0.51%
</TABLE>
During the fiscal year ending October 31, 1997, AAI was not required to
reimburse the Trust for expenses incurred in excess of maximum total operating
expenses as described above.
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.
27
<PAGE> 64
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, 1997, 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>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
FUND BENEFICIAL OWNER BENEFICIAL OWNERSHIP FUND (%)
- --------------------- -------------------------------- --------------------- ----------
<S> <C> <C> <C>
Money Market Fund Aon Risk Services Companies, Inc. 185,314,000 31.73
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Aon Re, Inc. 78,306,135 13.41
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Aon Specialty Group, Inc. 52,069,000 8.92
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Combined Insurance Company 35,465,478 6.07
of America directly owned shares
123 N. Wacker Dr.
Chicago, IL 60606-1700
Aon Savings Plan 29,678,360
123 N. Wacker Dr. directly owned shares 5.08
Chicago, IL 60606-1700
Government Securities Aon Pension Trust 5,807,153 57.05
Fund 123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Pension Plan for Employees 2,448,796 24.06
of Alexander & Alexander directly owned shares
123 N. Wacker Dr.
Chicago, IL 60606-1700
Aon Savings Plan 1,589,430 15.61
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Asset Allocation Fund Aon Savings Plan 4,862,145 46.49
123 N. Wacker directly owned shares
Chicago, IL 60606-1700
Combined Insurance Company 3,054,745, 29.21
of America Directly owned shares
123 N. Wacker Dr.
Chicago, IL 60606-1700
Virginia Surety Company, Inc. 1,854,560 17.73
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Pension Plan for Employees 649,087
</TABLE>
28
<PAGE> 65
<TABLE>
<S> <C> <C> <C>
of Alexander & Alexander directly owned shares 6.21
Service, Inc.
123 N. Wacker Drive
Chicago, IL 60606-1700
S&P 500 Index Fund Aon Savings Plan 8,001,294 88.35
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Aon Pension Trust 1,007,677
123 N. Wacker Dr. directly owned shares 11.13
Chicago, IL 60606-1700
International Equity Combined Insurance Company 1,917,921 39.04
Fund of America directly owned shares
123 N. Wacker Dr.
Chicago, IL 60606-1700
Aon Savings Plan 1,597,241 32.51
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Virginia Surety Company, Inc. 844,565
123 N. Wacker Dr. directly owned shares 17.19
Chicago, IL 60606-1700
Aon Pension Trust 526,800 10.72
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
REIT Index Fund Aon Pension Trust 2,345,936 30.36
123 N. Wacker Dr. Suite 26 directly owned shares
Chicago, IL 60606-1700
Combined Insurance Company 2,776,772 35.93
of America directly owned shares
123 N. Wacker Dr.
Chicago, IL 60606-1700
Aon Savings Plan 1,304,440 16.88
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Pension Plan for Employees of 1,117,213
Alexander & Alexander directly owned shares 14.46
Service, Inc.
123 N. Wacker Dr.
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, 1997, Aon and its subsidiaries and
affiliates owned in excess of 99.5% 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
29
<PAGE> 66
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 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, 1997, the Asset Allocation Fund
paid brokerage commissions of $78,653 based on $48,110,815 of transactions, the
S&P 500 Index Fund paid brokerage commissions of $21,378 based on $21,775,998
of transactions; the International Equity Fund paid brokerage commissions of
$132,710 based on $45,411,861 of transactions; and the REIT Index Fund paid
$125,631 in brokerage commissions based on $88,636,413 of transactions.
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.
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 year ended December 31, 1997 the total amount of
brokerage commissions allocated by the Funds to brokers because of research
services provided to the Funds were: $99,058, $15,565, $14,262 and $24,148 for
the Asset Allocation Fund, S&P 500 Index Fund, International Equity Fund and
REIT Index Fund, respectively.
DETERMINATION OF NET ASSET VALUE
30
<PAGE> 67
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, Martin
Luther King, Jr. Day, Presidents' Day, 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
Columbus Day or 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.
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 are valued by an independent pricing service that utilizes
electronic data processing techniques, including a "matrix system," to derive
evaluated bid prices.
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.
31
<PAGE> 68
Exchange listed put options written and options purchased are valued on
the primary exchange on which they are traded. Over-the-counter options written
or purchased by a Fund are valued based upon prices provided by market-makers
in such securities. Exchange-traded financial futures contracts are valued at
their settlement price established each day by the board of trade or exchange
on which they are traded.
Debt instruments held with a remaining maturity of 60 days or less are
generally valued on an amortized cost basis. Under the amortized cost basis
method of valuation, the security is initially valued at its purchase price (or
in the case of securities purchased with more than 60 days remaining to
maturity, the market value on the 61st day prior to maturity), and thereafter
by amortizing any premium or discount uniformly to maturity. If for any reason
the Trustees of the Trust believe the amortized cost method of valuation does
not fairly reflect the fair value of any security, fair value will be
determined in good faith by or under the direction of the Trustees of the Trust
as in the case of securities having a maturity of more than 60 days.
RETIREMENT PROGRAMS
The Trust makes available both regular and Roth 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 for an
individual (including all contirbuitons to both a regular and Roth IRA) is the
lesser of $2,000 and 100% of the individual's compensation includible in gross
income for the year. For a married couple, in general, each spouse may
contribute up to $2,000 to his or her IRA for a year as long as the combined
compensation of both spouses for the year (as shown on their joint income tax
return) is at least $4,000. Under certain circumstances a contribution to a
regular IRA will be tax deductible. Contributions to a Roth IRA are not tax
deductible. The custodial agreements for the IRAs provide that Firstar Trust
Company, Milwaukee, Wisconsin, will provide the custodial service unless a
different custodian is specified.
An annual maintenance fee payable to Firstar Trust Company for acting as
custodian for an IRA is presently $12.50 per account and may be changed at any
time. Fees remaining unpaid may be charged against the IRA. If a custodian
other than Firstar Trust Company is specified, fees will be determined by such
custodian.
The Trust makes available IRS Form 5305-A for establishing an ordinary IRA
and IRS Form 5305-RA for establishing a Roth IRA.
Each individual should consult his or her tax adviser or attorney as to
the applicability of either a regular or Roth IRA to his or her particular
situation. Additionally, 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.
32
<PAGE> 69
YIELD AND PERFORMANCE INFORMATION
The yield of the Money Market Fund for the seven-day period ended October
31, 1997 was 5.46%. 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 Money Market Fund for the seven-day period, ended
October 31, 1997 was 5.61%. The effective yield is computed by adding 1 to the
base period return (calculated as described above), raising that sum to a power
equal to 365 divided by 7, and subtracting 1 from the result. (The current
annualized effective yield is computed by expressing the annualized return on a
compounded, annualized basis).
Current yields will fluctuate from time to time and are not necessarily
representative of future results. The yield is a function of the type and
quality of the instruments in the Fund, portfolio maturity and operating
expenses.
Current yield information may not provide a basis for comparison with bank
deposits or other investments which pay a fixed yield for a stated period of
time. From time to time, advertisements for the Money Market Fund may include
comparison of the Fund's performance to that of various market indices.
The compound annual rates of return for the fiscal year ended October 31,
1997 and for the period from inception to October 31, 1997 for the Funds were
as follows:
<TABLE>
<CAPTION>
INCEPTION YEAR ENDED INCEPTION
DATE 10/31/97 TO 10/31/97
--------- ---------- -----------
<S> <C> <C> <C>
Government Securities Fund 9/3/96 8.86% 10.18%
Asset Allocation Fund 3/1/94 32.61% 19.17%
S&P 500 Index Fund 9/3/96 31.58% 35.27%
International Equity Fund 9/3/96 11.34% 11.91%
REIT Index Fund 9/3/96 32.78% 32.55%
</TABLE>
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,
33
<PAGE> 70
(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 and (2) diversify its holding so that at the close of
each quarter of the Fund's taxable year, (a) 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 not 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 (b) 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% gross income requirement
described above will limit the ability of a Fund to engage in certain options,
futures, and forward 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 capital gains) each year.
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 the 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, 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.
If the Fund engages in certain hedged transactions, the Code may treat the
transaction as a deemed sale of the appreciated property which may accelerate
the gain on the hedged transaction. The mark-to-market rules of the Code may
require a Fund to recognize unrealized gains and losses on certain options,
futures, and forward contracts by the Fund at the end of the fiscal year. Under
these provisions, 60% of any net gain or loss will generally be treated
as long-term capital gain or loss and the remaining 40% of such net gain or
loss will be treated as short-term capital gain or loss. In addition, the
straddle rules of the Code would require deferral of certain losses realized on
positions of a straddle to the extent that the Fund had unrecognized gain in
offsetting positions at year end.
In general, distributions of net capital gain, when designated as such by
the Fund, are taxable to shareholders as long-term capital gains, regardless of
how long the shareholders have held their Fund shares. However, net capital
gains distributed to non-corporate shareholders are subject to special rules.
Under the Taxpayer Relief Act of 1997, capital gains of non-corporate taxpayers
are generally taxed as one of three classes of gain (short-term, long-term or
mid-term) depending on the holding period of the relevant asset (withholding
periods and tax rates as follows: short-term gain applies to capital assets
held for one year or less and is taxed at ordinary income rates; mid-term
applies to capital assets held more than one year and not more than 18 months
and is taxed at a 28% rate; and long-term gain applies to capital assets that
have been held for more than 18 months and is taxed at a 20% rate). For
purposes of characterizing net capital gain distributions to non-corporate
shareholders, capital gains recognized by the Fund will fall into these three
classes based on the Fund's holding period for the relevant asset. Generally,
long-term and mid-term gains of the Fund will flow through to non-corporate
shareholders of the Fund as described below, regardless of how long the
shareholders have held shares of the Fund. The Fund will designate each
capital gain distribution as consisting of long-term and mid-term gain based on
the gain recognized by the Fund.
34
<PAGE> 71
Any net capital gain distribution will be taxed at the mid-term gain rate
unless the Fund provides written notification to the dividend recipients that
the gain is long-term gain. The maximum aggregate amount of long-term gain
that the Fund can allocate as such is the aggregate amount of capital gain that
is derived from sales of capital assets that the Fund has held for more than 18
months. Non-corporate shareholders who are not dealers in securities will be
taxed on the flow-through gains according to the class of gain designated by
the Fund.
A nondeductible 4% excise tax will be imposed on a Fund to the extent the
Fund does not distribute during each calendar year (1) 98% of its ordinary
income for such calendar year, (2) 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 (3) 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 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.,
35
<PAGE> 72
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, 1997 are incorporated herein by reference to the Trust's Annual Report to
Shareholders filed with the SEC on January 9, 1998
LEGAL COUNSEL
Sidley & Austin, One First National Plaza, Chicago, Illinois 60603, is
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.
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.
36
<PAGE> 73
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.
37
<PAGE> 74
BB-B-CCC-CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (--): The ratings from "AA" to "BBB" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
Unrated: Indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks
of lower-rated speculative obligations. The Trust is dependent on the Adviser's
judgment, analysis and experience in the evaluation of such bonds.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.: The following rating designations for
commercial paper (defined by Moody's as promissory obligations not having
original maturity in excess of nine months), are judged by Moody's to be
investment grade, and indicate the relative repayment capacity of rated
issuers:
PRIME-1: Superior capacity for repayment. Capacity will normally be
evidenced by the following characteristics: (a) leveling market positions in
well-established industries; (b) high rates of return on funds employed; (c)
conservative capitalization structures with moderate reliance on debt and
ample asset protection; (d) broad margins in earning coverage of fixed
financial charges and high internal cash generation; and (e) well established
access to a range of financial markets and assured sources of alternate
liquidity.
PRIME-2: Strong capacity for repayment. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions Ample alternate liquidity is maintained.
STANDARD & POOR'S CORPORATION: The following ratings by S&P for
commercial paper (defined by S&P as debt having an original maturity of no more
than 365 days) assess the likelihood of payment:
A-1: Strong capacity for timely payment. Those issues determined to
possess extremely strong safety characteristics are denoted with a plus sign
(+) designation.
A-2: Satisfactory capacity for timely payment. However, the relative
degree of safety is not as high as for issues designated "A-1."
FITCH INVESTORS SERVICE, INC. ("FITCH"): Fitch assigns the following
short-term ratings to debt obligations that are payable on demand or have
original maturities of generally up to three years, including commercial paper,
certificates of deposit, medium-term notes, and municipal and investment notes:
F-1+: Exceptionally strong credit quality; the strongest degree of
assurance for timely payment.
F-1: Very strong credit quality, assurance of timely payment is only
slightly less in degree than issues rated "F-1+".
F-2: Good credit quality; satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues assigned
"F-l+" or "F-1" ratings.
DUFF & PHELPS, INC. ("DUFF & PHELPS"): The following ratings are for
commercial paper (defined by Duff & Phelps as obligations with maturities, when
issued, of under one year), asset-backed commercial 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):
38
<PAGE> 75
DUFF 1+: Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.
DUFF 1--: High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk factors are
very small.
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
IBCA LIMITED OR ITS AFFILIATE IBCA INC. ("IBCA"): Short-term ratings,
including commercial paper (with maturities up to 12 months), are as follows:
AL+: Obligations supported by the highest capacity for timely
repayment.
AL: Obligations supported by a very strong capacity for timely
repayment.
A2: Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic, or financial conditions.
THOMSON BANKWATCH, INC. ("TBW"): The following short-term ratings apply
to commercial paper, certificates of deposit, unsecured notes, and other
securities having a maturity of one year or less:
TBW-1: The highest category; indicates the degree of safety regarding
timely repayment of principal and interest is very strong.
TBW-2: The second highest rating category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
39
<PAGE> 76
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements for the fiscal year ended October 31,1997****
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 the
Brinson Partners, Inc., covering the International Equity Fund. ****
6. Form of Distribution Agreement between the Trust and Aon Securities
Corporation.**
7. None.
8. (a) Form of domestic Custodian Agreement between the Trust and
Firstar Trust Company ("Firstar"). **
(b) Form of Global Custody Agreement between Firstar and Chase Manhattan
Bank ("Chase"), covering the overseas assets of the International Equity
Fund. **
(c) Form of Sub-Custodian Agreement between Chase and foreign
sub-custodians. **
9. (a) Form of Administration Agreement between the Trust and Aon
Securities Corporation ("ASC"). **
(b) Form of Transfer Agency Agreement between the Trust and Firstar. **
(c) Form of Accounting Servicing Agreement between the Trust and
Firstar. **
(d) S&P 500 Index License Agreement. **
(e) Morgan Stanley REIT Index License Agreement. **
(f) Agreement and Plan of Reorganization. **
(g) Limited Powers of Attorney. **
10. Opinion and Consent of Prickett, Jones, Elliott, Kristol & Schnee
concerning the legality of the securities to be issued. ***
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 Fund, S&P 500 Index, REIT Index
and International Equity Funds. **
14. None.
15. None.
<PAGE> 77
16. Schedule for Computation of Performance Calculations.
17. Financial Data Schedules.
18. None.
25. Aon Corporation List of Subsidiaries. **
- ---------------------------------
* Incorporated herein by reference to pre-effective amendment No. 1 to the
Registrant's registration 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. 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, 1998.
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
RECORDHOLDERS AS OF
TITLE OF FUND DECEMBER 31, 1997
- -------------------------- --------------------
<S> <C>
Money Market Fund 360
Government Securities Fund 33
Asset Allocation Fund 212
S&P 500 Index Fund 262
International Equity Fund 120
REIT Index Fund 137
</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 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 Amendments 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 omission" liability insurance policy under which the Trust and its
directors and officers are named insured.
<PAGE> 78
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 of 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 advise
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
Director and President 1990; 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 Senior Executive Director, Aon Advisors, Inc.,
Senior Executive Director effective April 1, 1998; Executive Director, Aon
Advisors, Inc., since 1990; Vice President --
Investments, Combined Insurance Company of
America, since 1984.
Ivan Berk Senior Executive Director, Aon Advisers, Inc., since
Senior Executive Director 1997; Executive Director, Aon Advisors, Inc., since
1993.
John Lagedrost Executive Director, Aon Advisors, Inc. since 1997;
Executive Director Senior Portfolio Manager since 1996; Vice President
since April 1995.
George Lawler Treasurer, Aon Advisors, Inc. since 1998; Vice
Treasurer President Finance, Combined Insurance Company
of America since 1993; Vice President Finance,
Virginia Surety Company since 1997.
</TABLE>
Brinson Partners, Inc. provides investment advisory services consisting of
portfolio management for a variety of individuals and institutions and as of
December 31, 1997 had approximately $89 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,
<PAGE> 79
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; John Hancock Variable Series Trust I --
International Balanced Portfolio, an open-end management investment company;
and the Republic Funds - Republic Equity Fund, 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
POSITIONS AND OFFICES OFFICES WITH
NAME WITH PRINCIPAL UNDERWRITER REGISTRANT
- ----------------- ---------------------------------- ---------------------
<S> <C> <C>
Michael A. Conway Chairman of the Board of Directors President and Trustee
Kevin P. Diamond President and General Securities None
Principal
Brian H. Lawrence Controller and Financial Controller
Operations 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 OF SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(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
<PAGE> 80
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 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.
<PAGE> 81
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 27, 1998.
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 27, 1998.
<TABLE>
<S> <C>
/s/ Michael A. Conway In his own capacity as President and Trustee, and as
- --------------------------- Attorney-in-Fact for each of the Trustees and Officers
Michael A. Conway of the Trust asterisked below
/s/ Arlene H. Hardy Treasurer (principal financial officer)
- ---------------------------
Arlene H. Hardy
/s/ Brian Lawrence
- --------------------------- Controller (principal accounting officer)
Brian Lawrence
* Trustee
- ---------------------------
Michael A. Cavataio
* Trustee
- ---------------------------
Charles A. Tribbett
* Trustee
- ---------------------------
Carleton D. Pearl
* Trustee
- ---------------------------
Richard J. Peters
</TABLE>
<PAGE> 82
EXHIBIT INDEX
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements for the fiscal year ended October 31, 1997 ****
1. Report of the Independent Auditors
2. Statement of Assets and Liabilities.
3. Statement of Operations.
4. Statement of Change 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 Authoring 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 the
Brinson Partners, Inc., covering the International Equity Fund. ***
6. Form of Distribution Agreement between the Trust and Aon Securities
Corporation.**
7. None.
8. (a) Form of domestic Custodian Agreement between the Trust and Firstar
Trust Company ("Firstar"). **
(b) Form of Global Custody Agreement between Firstar and Chase
Manhattan Bank ("Chase"), covering the overseas assets of the
International Equity Fund. **
(c) Form of Sub-Custodian Agreement between Chase and foreign
sub-custodians. **
9. (a) Form of Administration Agreement between the Trust and Aon
Securities Corporation ("ASC").**
(b) Form of Transfer Agency Agreement between the Trust and Firstar. **
(c) Form of Accounting Servicing Agreement between the Trust and
Firstar. **
(d) S&P 500 Index License Agreement. **
(e) Morgan Stanley REIT Index License Agreement. **
(f) Agreement and Plan of Reorganization. **
(g) Limited Powers of Attorney. **
10. Opinion and Consent of Prickett, Jones, Elliott, Kristol & Schnee
concerning the legality of the securities to be issued. ***
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 Fund, S&P 500 Index, REIT Index
and International Equity Funds. **
14. None.
15. None.
16. Schedule for Computation of Performance Calculations.
<PAGE> 83
17. Financial Data Schedule.
18. None.
25. Aon Corporation List of Subsidiaries. **
- ----------------------
* Incorporated herein by reference to pre-effective amendment No. 1 to the
Registrant's registration 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. 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
EX-99.B11
CONSENT OF ERNST & YOUNG LLP
EXHIBIT 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors" and to the incorporation by reference of
our report dated December 12, 1997 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. 11 to the Registration
Statement under the Securities Act of 1933 (Registration No. 33-43133) and in
this Amendment No. 12 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 23, 1998
<PAGE> 1
ITEM 24(b)16
SCHEDULE FOR COMPUTATION OF PERFORMANCE CALCULATIONS
Money Market Fund
-----------------
7 Day Yield Quotation:
.00104653105 x (365/7) = 5.46%
7 Day Effective Yield Quotation:
365/7
(.00104653105 + 1) -1 = 5.61%
Government Securities Fund
--------------------------
One year period ended October 31,1997:
365/365
$1,000 (1 + .0886) = $1,088.60
Inception (September 3, 1996) through October 31, 1997:
423/365
$1,000 (1 + .1018) = $1,118.91
Asset Allocation Fund
---------------------
One year period ended October 31,1997:
365/365
$1,000 (1 + .3261) = $1,326.10
Inception (March 1, 1994) through October 31, 1997:
1340/365
$1,000 (1 + .1917) = $1,903.82
S&P 500 Index Fund
------------------
One year period ended October 31,1997:
365/365
$1,000 (1 + .3158) = $1,315.80
Inception (September 3, 1996) through October 31, 1997:
423/365
$1,000 (1 + .3527) = $1,419.22
International Equity Fund
-------------------------
One year period ended October 31,1997:
365/365
$1,000 (1 + .1134) = $1,113.40
Inception (September 3, 1996) through October 31, 1997:
423/365
$1,000 (1 + .1191) = $1,139.29
REIT Index Fund
---------------
One year period ended October 31,1997:
365/365
$1,000 (1 + .3278) = $1,327.80
Inception (September 3, 1996) through October 31, 1997:
423/365
$1,000 (1 + .3255) = $1,386.20
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> MONEY MARKET FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 768,265
<INVESTMENTS-AT-VALUE> 768,265
<RECEIVABLES> 2,220
<ASSETS-OTHER> 2
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 770,487
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,131
<TOTAL-LIABILITIES> 4,131
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 766,356
<SHARES-COMMON-STOCK> 766,356
<SHARES-COMMON-PRIOR> 395,104
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 766,356
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 32,972
<OTHER-INCOME> 0
<EXPENSES-NET> 1,289
<NET-INVESTMENT-INCOME> 31,683
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 31,683
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 31,863
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,575,729
<NUMBER-OF-SHARES-REDEEMED> 6,217,231
<SHARES-REINVESTED> 12,754
<NET-CHANGE-IN-ASSETS> 371,252
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,780
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,362
<AVERAGE-NET-ASSETS> 593,423
<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> 0.22
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> GOVERNMENT SECURITIES FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 99,913
<INVESTMENTS-AT-VALUE> 102,975
<RECEIVABLES> 1,920
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 104,895
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 510
<TOTAL-LIABILITIES> 510
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 101,757
<SHARES-COMMON-STOCK> 9,954
<SHARES-COMMON-PRIOR> 3,966
<ACCUMULATED-NII-CURRENT> 9
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (443)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,062
<NET-ASSETS> 104,385
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,697
<OTHER-INCOME> 0
<EXPENSES-NET> 340
<NET-INVESTMENT-INCOME> 4,357
<REALIZED-GAINS-CURRENT> (412)
<APPREC-INCREASE-CURRENT> 2,580
<NET-CHANGE-FROM-OPS> 6,525
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,350)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,890
<NUMBER-OF-SHARES-REDEEMED> 344
<SHARES-REINVESTED> 442
<NET-CHANGE-IN-ASSETS> 63,880
<ACCUMULATED-NII-PRIOR> 2
<ACCUMULATED-GAINS-PRIOR> (31)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 330
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 477
<AVERAGE-NET-ASSETS> 73,573
<PER-SHARE-NAV-BEGIN> 10.21
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> 0.28
<PER-SHARE-DIVIDEND> 0.59
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.49
<EXPENSE-RATIO> 0.46
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> ASSET ALLOCATION FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 125,624
<INVESTMENTS-AT-VALUE> 164,251
<RECEIVABLES> 2,037
<ASSETS-OTHER> 36
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 166,324
<PAYABLE-FOR-SECURITIES> 1,351
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 88
<TOTAL-LIABILITIES> 1,439
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 119,700
<SHARES-COMMON-STOCK> 9,934
<SHARES-COMMON-PRIOR> 6,925
<ACCUMULATED-NII-CURRENT> 271
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,179
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 38,735
<NET-ASSETS> 164,885
<DIVIDEND-INCOME> 1,326
<INTEREST-INCOME> 1,971
<OTHER-INCOME> 0
<EXPENSES-NET> 752
<NET-INVESTMENT-INCOME> 2,545
<REALIZED-GAINS-CURRENT> 6,331
<APPREC-INCREASE-CURRENT> 29,245
<NET-CHANGE-FROM-OPS> 38,121
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,279
<DISTRIBUTIONS-OF-GAINS> 290
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,318
<NUMBER-OF-SHARES-REDEEMED> 2,686
<SHARES-REINVESTED> 377
<NET-CHANGE-IN-ASSETS> 76,605
<ACCUMULATED-NII-PRIOR> 5
<ACCUMULATED-GAINS-PRIOR> 138
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 870
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,047
<AVERAGE-NET-ASSETS> 134,117
<PER-SHARE-NAV-BEGIN> 12.75
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> 3.85
<PER-SHARE-DIVIDEND> 0.24
<PER-SHARE-DISTRIBUTIONS> 0.03
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 16.60
<EXPENSE-RATIO> 0.56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> S&P 500 INDEX FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 98,165
<INVESTMENTS-AT-VALUE> 118,508
<RECEIVABLES> 954
<ASSETS-OTHER> 3
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 119,465
<PAYABLE-FOR-SECURITIES> 796
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 57
<TOTAL-LIABILITIES> 853
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 92,534
<SHARES-COMMON-STOCK> 8,382
<SHARES-COMMON-PRIOR> 2,400
<ACCUMULATED-NII-CURRENT> 1,582
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,249
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 20,247
<NET-ASSETS> 118,612
<DIVIDEND-INCOME> 1,740
<INTEREST-INCOME> 366
<OTHER-INCOME> 0
<EXPENSES-NET> 381
<NET-INVESTMENT-INCOME> 1,725
<REALIZED-GAINS-CURRENT> 4,249
<APPREC-INCREASE-CURRENT> 19,397
<NET-CHANGE-FROM-OPS> 25,371
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 145
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,854
<NUMBER-OF-SHARES-REDEEMED> 1,888
<SHARES-REINVESTED> 16
<NET-CHANGE-IN-ASSETS> 92,760
<ACCUMULATED-NII-PRIOR> 2
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 310
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 509
<AVERAGE-NET-ASSETS> 103,618
<PER-SHARE-NAV-BEGIN> 10.77
<PER-SHARE-NII> 0.21
<PER-SHARE-GAIN-APPREC> 3.19
<PER-SHARE-DIVIDEND> 0.02
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.15
<EXPENSE-RATIO> 0.37
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 005
<NAME> INTERNATIONAL EQUITY FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 51,255
<INVESTMENTS-AT-VALUE> 52,514
<RECEIVABLES> 134
<ASSETS-OTHER> 636
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 53,284
<PAYABLE-FOR-SECURITIES> 62
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 79
<TOTAL-LIABILITIES> 141
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 49,636
<SHARES-COMMON-STOCK> 4,687
<SHARES-COMMON-PRIOR> 2,469
<ACCUMULATED-NII-CURRENT> 471
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,670
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,366
<NET-ASSETS> 53,143
<DIVIDEND-INCOME> 953
<INTEREST-INCOME> 171
<OTHER-INCOME> 0
<EXPENSES-NET> 618
<NET-INVESTMENT-INCOME> 506
<REALIZED-GAINS-CURRENT> 1,691
<APPREC-INCREASE-CURRENT> 1,188
<NET-CHANGE-FROM-OPS> 3,385
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 55
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,493
<NUMBER-OF-SHARES-REDEEMED> 288
<SHARES-REINVESTED> 13
<NET-CHANGE-IN-ASSETS> 27,966
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (1,266)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 419
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 711
<AVERAGE-NET-ASSETS> 44,182
<PER-SHARE-NAV-BEGIN> 10.20
<PER-SHARE-NII> 0.11
<PER-SHARE-GAIN-APPREC> 1.05
<PER-SHARE-DIVIDEND> 0.02
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.34
<EXPENSE-RATIO> 1.40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 006
<NAME> REIT INDEX FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 86,555
<INVESTMENTS-AT-VALUE> 99,753
<RECEIVABLES> 184
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 99,937
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 38
<TOTAL-LIABILITIES> 38
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 83,785
<SHARES-COMMON-STOCK> 7,299
<SHARES-COMMON-PRIOR> 2,460
<ACCUMULATED-NII-CURRENT> 2,322
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 594
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,198
<NET-ASSETS> 99,899
<DIVIDEND-INCOME> 3,122
<INTEREST-INCOME> 33
<OTHER-INCOME> 0
<EXPENSES-NET> 330
<NET-INVESTMENT-INCOME> 2,825
<REALIZED-GAINS-CURRENT> 598
<APPREC-INCREASE-CURRENT> 12,744
<NET-CHANGE-FROM-OPS> 16,167
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 639
<DISTRIBUTIONS-OF-GAINS> 4
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,486
<NUMBER-OF-SHARES-REDEEMED> 700
<SHARES-REINVESTED> 53
<NET-CHANGE-IN-ASSETS> 74,209
<ACCUMULATED-NII-PRIOR> 136
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 382
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 526
<AVERAGE-NET-ASSETS> 63,920
<PER-SHARE-NAV-BEGIN> 10.44
<PER-SHARE-NII> 0.41
<PER-SHARE-GAIN-APPREC> 2.99
<PER-SHARE-DIVIDEND> 0.15
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.69
<EXPENSE-RATIO> 0.51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
