AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 29, 2000
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. 14 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 15 [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
Bank One Plaza
10 South Dearborn
Chicago, Illinois 60603
---------------------
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
X immediately upon filing pursuant to paragraph (b) of Rule 485
- -----
on pursuant to paragraph (b) of Rule 485
- ----- -----------------
60 days after filing pursuant to paragraph (a) of Rule 485
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on pursuant to paragraph (a) of Rule 485
- ----- -----------------
75 days after filing pursuant to paragraph (a) (ii) of Rule 485
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on pursuant to paragraph (a) (ii) of Rule 485
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<PAGE>
PROSPECTUS
AON FUNDS
123 NORTH WACKER DRIVE, 29th floor
CHICAGO, ILLINOIS 60606
February 29, 2000
(Aon Logo)
MONEY MARKET FUND
GOVERNMENT SECURITIES FUND
ASSET ALLOCATION FUND
REIT INDEX FUND
This Prospectus provides information about Aon Funds that you should know before
investing. You should keep this Prospectus for future reference.
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
determine that the information in this prospectus is accurate or complete and it
has not approved or disapproved of these securities. Anyone who represents to
you otherwise is committing a criminal offense.
<PAGE>
TABLE OF CONTENTS
1 Overview of Funds
1 Money Market Fund
2 Government Securities Fund
3 Asset Allocation Fund
4 REIT Index Fund
5 Types of Investment Risk
6 Fund Expenses
8 Financial Highlights
12 Additional Investment Policies and Risks
12 Money Market Fund
13 Government Securities Fund
14 Asset Allocation Fund
14 REIT Index Fund
16 Management of the Trust
17 Net Asset Value
18 Purchase of Shares
19 Redemption of Shares
21 Additional Services to Investors
22 Dividends, Distributions and Taxes
23 Additional Information
Rely only on the information contained in this document. We have not authorized
anyone to provide you with information that is different. This prospectus is not
an offer to sell securities in any place where it would be illegal to do so.
"Aon" refers to Aon Corporation. "Aon Funds" and the "Trust" refer to Aon Funds,
an open-ended management investment company, and "Fund" or "Funds" refer to one
or more of the four separate series of shares of Aon Funds, as more fully
described under "Additional Information." "Adviser" refers to Aon Advisors,
Inc., a wholly-owned subsidiary of Aon.
<PAGE>
OVERVIEW OF FUNDS
MONEY MARKET FUND
Investment Objective and
Principal Strategy
The investment objective of the Money Market Fund is to maximize current income
to the extent consistent with the preservation of capital and maintenance of
liquidity. The Fund seeks to achieve its objective by investing in a portfolio
of high-quality, short-term money market instruments which include:
o U.S Government securities
o Certificates of deposit and time deposits issued by U.S. banks
o Repurchase agreements with banks or government securities dealers
o Commercial paper (unsecured promissory notes issued by corporations to
finance short-term credit needs)
The Fund will invest only in U.S. dollar-denominated instruments maturing 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. 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" for a more
complete discussion of how net asset value is determined.
Principal Risks
The Fund invests in securities that may not earn as high a level of current
income as long-term or lower quality securities. The rate of return to
shareholders will vary with the general levels of interest rates that apply to
short-term, high quality debt instruments. Changes in the Fund's operating
expenses will also affect the rate of return.
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Fund.
This Fund may be appropriate for:
o Conservative investors primarily concerned with stability of principal
o Investors needing liquidity to match shorter-term investment goals
7 Day Yield
As of December 31, 1999, the 7 day effective yield was 5.82%.
The bar chart and table below illustrate how performance can vary and give you
an indication of the risks of investing in the Fund. The bar chart shows the
Fund's performance for each full calendar year since its inception. The table
shows how the Fund's average annual returns for one year, five years, and
inception to date compare with those of the Lipper Money Market Fund Index. The
information assumes the reinvestment of all dividends and distributions. Keep in
mind that the Fund's past performance does not indicate how it will perform in
the future.
Calendar Year Total Returns
As of December 31 of each year
1993 1994 1995 1996 1997 1998 1999
Money Market Fund 3.12% 4.15% 5.98% 5.34% 5.49% 5.47% 5.10%
Best and Worst Quarterly Performance
During the periods shown in the above chart, the highest return for a quarter
was 1.50% (quarter ended June 30, 1995) and the lowest return for a quarter was
0.76% (quarter ended June 30, 1993).
Since
Average Annual Total Returns inception
As of December 31, 1999 1-year 5-years 01/03/92
------ ------- ---------
Money Market Fund 5.10% 5.47% 4.77%
Lipper Money Market Fund Index 4.74% 5.10% 4.42%
See "Additional Investment Policies and Risks--Money Market Fund" for a more
complete discussion regarding the risks associated with this Fund.
Aon Funds 1
<PAGE>
GOVERNMENT SECURITIES FUND
Investment Objective and
Principal Strategy
The investment objective of the Government Securities Fund is to seek high
current income with limited credit risk through investing in intermediate and
long-term debt instruments issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. The Government Securities Fund will invest at
least 80% of its total assets in U.S. Government securities of various
maturities. The U.S. Government securities in which the Fund may invest include:
o U.S. Treasury bills, notes, and bonds
And obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, including those of:
o Government National Mortgage Association ("GNMA")
o Federal Home Loan Banks
o Federal National Mortgage Association ("FNMA")
o Federal Land Banks
o Farmer's Home Administration
o Student Loan Marketing Association
The Fund seeks to enhance returns by varying the average maturity of the
portfolio. Generally, the average maturity is between three to twelve years. The
Fund has in the past invested principally in non-callable, non-prepayable
securities with an emphasis on obligations issued or guaranteed by U.S.
Government agencies. However, the Fund has the flexibility to invest up to 50%
of its net assets in securities of the GNMA and FNMA and may invest in certain
other securities which may involve a risk of early repayment of principal.
Prevailing interest rates at the time of such prepayments may be lower than the
current yield of the Fund; therefore, such prepayment could adversely affect the
yield of the Fund. If the Fund is attempting to adjust the average maturity or
take advantage of relatively attractive prices, it may sell securities within
the portfolio.
Principal Risks
The Government Securities 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. They are
vulnerable principally to interest rate risk, but are also exposed to market
risk. See "Types of Investment Risk" for definitions of these 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 and you may lose money investing in
this Fund. In this regard, any U.S. Government or agency guarantee of securities
held in the Government Securities Fund does not guarantee the value of an
investment in the Fund.
This Fund may be appropriate for:
o Investors seeking an opportunity for higher income and capital
appreciation unavailable with shorter-term debt investments
o Investors who desire the relative credit safety that U.S. Government
securities offer
The bar chart and table below illustrate how performance can vary and give you
an indication of the risks of investing in the Fund. The bar chart shows the
Fund's performance for each full calendar year since inception. The table shows
how the Fund's average annual returns for one year and inception to date compare
with those of the Lehman Brothers U.S.Government Bond Index. The information
assumes the reinvestment of all dividends and distributions. Keep in mind that
the Fund's past performance does not indicate how it will perform in the future.
Calendar Year Total Returns
As of December 31 of each year
1997 1998 1999
Government Securities Fund 10.00% 10.58% -4.43%
Best and Worst Quarterly Performance
During the periods shown in the above chart, the highest return for a quarter
was 5.80% (quarter ended September 30, 1998) and the lowest return for a quarter
was -1.79% (quarter ended June 30, 1999).
Aon Funds 2
<PAGE>
Since
Average Annual Total Returns inception
As of December 31, 1999 1-year 09/03/96
------ --------
Government Securities Fund -4.43% 5.67%
Lehman Brothers U.S. Government Bond Index -2.23% 6.39%
See "Additional Investment Policies and Risks--Government Securities Fund" for a
more complete discussion regarding the risks associated with this Fund.
ASSET ALLOCATION FUND
Investment Objective and
Principal Strategy
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. This Fund follows a flexible asset allocation strategy that shifts
among a wide range of investments and markets. Assets are invested in equity
securities, debt securities and money market instruments, the proportion of each
being continuously determined by the Adviser. The Fund generally seeks to
acquire equity securities of businesses that generate significant operating
margins, strong cash flow, or high returns on capital. The Adviser evaluates the
purchase price of the stock in relation to historical and projected earnings and
cash flow. The Fund seeks to buy those equities where the price is reasonable
relative to the projected growth in the earnings and cash flow of the business.
The Fund may invest in small, mid-capitalization and large companies. The Fund
buys primarily U.S. Treasury securities and investment grade bonds for the fixed
income portion of the portfolio. The Fund may sell equity securities when, based
on earnings, or valuation, they no longer are attractive. The Fund may sell debt
securities if their fundamental qualities deteriorate or to take advantage of
more attractive yield opportunities.
Principal Risks
The Asset Allocation Fund is subject to the risks associated with investing in
both equity securities and bonds. These risks include market risk, event risk,
interest rate risk, credit risk, and political/legal risk. The Asset Allocation
Fund is also subject to small/mid-capitalization company risk. See "Types of
Investment Risk" for definitions of these risks. The value of an investment in
the Fund will fluctuate, and you may lose money investing in the Fund.
This Fund may be appropriate for:
o Investors wishing to invest in a mix of stocks, bonds and money market
instruments within the same mutual fund
o Investors who want a professional investment adviser to make their
investment allocation decisions
The bar chart and table below illustrate how performance can vary and give you
an indication of the risks of investing in the Fund. The bar chart shows the
Fund's performance for each full calendar year since inception. The table shows
how the Fund's average annual returns for one year and inception to date compare
with those of the Lipper Flexible Portfolio Fund Average. The information
assumes the reinvestment of all dividends and distributions. Keep in mind that
the Fund's past performance does not indicate how it will perform in the future.
Calendar Year Total Returns
As of December 31 of each year
1995 1996 1997 1998 1999
Asset Allocation Fund 33.77% 10.47% 31.46% 5.57% 14.31%
Best and Worst Quarterly Performance
During the periods shown in the above chart, the highest return for a quarter
was 16.15% (quarter ended June 30, 1997) and the lowest return for a quarter was
- -12.65% (quarter ended September 30, 1998).
Aon Funds 3
<PAGE>
Since
Average Annual Total Returns inception
As of December 31, 1999 1-year 5-years 03/01/94
------ ------- --------
Asset Allocation Fund 14.31% 18.57% 15.85%
Lipper Flexible Portfolio Fund Average 12.50% 16.93% 14.61%
See "Additional Investment Policies and Risks--Asset Allocation Fund" for a more
complete discussion regarding the risks associated with this Fund.
REIT INDEX FUND
Investment Objective and
Principal Strategy
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 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 invest only
in equity REITs and generally will hold dividend paying REIT securities. The
Fund will not invest directly in real estate.
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.
Principal Risks
The REIT Index Fund is subject to the general risks associated with investing in
equity securities. These risks include event risk, market risk, and
political/legal risk. See "Types of Investment Risks" for definitions of these
risks. The REIT Index Fund also involves real estate industry risk. In general,
real estate values are affected by a variety of factors, including:
o Supply and demand for properties
o The health of the U.S. economy and regional economies
o The strength of specific industries renting properties
Ultimately, a REIT's performance depends on the types and locations of the
properties it owns and 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 value of an investment in the Fund will fluctuate, and you may lose money
investing in the Fund.
This Fund may be appropriate for:
o Investors looking for exposure to a broad range of properties diversified
geographically and by industry
o Investors primarily pursuing long-term growth and income
o Investors seeking to diversify their assets using an investment that may
move independently of the overall market
The bar chart and table below illustrate how performance can vary and give you
an indication of the risks of investing in the Fund. The bar chart shows the
Fund's performance for each full calendar year since inception. The table shows
how the Fund's average annual returns for one year and inception to date compare
with those of the Morgan Stanley REIT Index. The information assumes the
reinvestment of all dividends and distributions. Keep in mind that the Fund's
past performance does not indicate how it will perform in the future.
Calendar Year Total Returns
As of December 31 of each year
1997 1998 1999
REIT Index Fund 18.75% -17.11% -4.65%
Aon Funds 4
<PAGE>
Best and Worst Quarterly Performance
During the periods shown in the above chart, the highest return for a quarter
was 11.65% (quarter ended September 30, 1997) and the lowest return for a
quarter was -10.46% (quarter ended September 30, 1998).
Since
Average Annual Total Returns inception
As of December 31, 1999 1-year 09/03/96
------ --------
REIT Index Fund -4.65% 4.11%
Morgan Stanley REIT Index -4.55% 4.34%
See "Additional Investment Policies and Risks--REIT Index Fund" for a more
complete discussion regarding the risks associated with this Fund.
TYPES OF INVESTMENT RISK
Credit Risk
Credit risk, or default risk, refers to the risk that the issuer of a fixed
income security may default (i.e., the issuer will be unable to make timely
principal and interest payments on the security). 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 bond ratings take into
account the relative likelihood that these payments will be made and made on
time. Since lower-rated bonds are considered more risky because they may not
make these payments on time or at all, the 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.
Event Risk
Event risk is the risk that the price of a security may fluctuate due to
industry or corporate developments.
Interest Rate Risk
Interest rate risk is the risk that changing interest rates will affect the
price of a security. This term is generally associated with bond prices, but
applies to all investments. 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. Normally, the
longer the maturity of a fixed-income security, the greater is the price
volatility.
Conversely, bonds that have shorter maturities tend to have greater price
stability, but also tend to have lower yields. These factors may have an effect
on the volatility of the share price of each Fund investing in debt securities.
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 these Funds.
Market Risk
Market risk describes the risk that the price of a security may fall due to
volatility in the marketplace. 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, industry, political and economic
developments.
Political/Legal Risk
Political/legal risk is the possibility of any political or legal actions
adversely affecting the value of a security.
Small/Mid-Capitalization
Company Risk
Small and mid-capitalization companies often have narrower markets and more
limited managerial and financial resources than larger companies. As a result,
their performance can be more volatile and they face greater risk of business
failure.
Aon Funds 5
<PAGE>
FUND EXPENSES
This section describes the fees and expenses you may pay if you buy and hold
shares of any of the Funds.
Shareholder Fees
Shareholder fees are fees you pay directly from your investment when buying or
selling shares of a Fund.
- ------------------------------------------------------------------------------
Maximum Sales Charge Imposed on Purchases None
- ------------------------------------------------------------------------------
Maximum Deferred Sales Charge None
- ------------------------------------------------------------------------------
Maximum Sales Charge Imposed on Reinvested Dividends None
- ------------------------------------------------------------------------------
Redemption Fees None
- ------------------------------------------------------------------------------
Exchange Fees $5 per telephone exchange
- ------------------------------------------------------------------------------
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)(1)
<TABLE>
<CAPTION>
Distribution Total Net
Management Fees Other Operating Fee Operating
Fund Fees (2) (12b-1 Fees) Expenses(3) Expenses Waivers(2) Expenses
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Money Market Fund .30% None .09% .39% .20% .19%
- -------------------------------------------------------------------------------------------------------------------
Government Securities Fund .43% None .12% .55% .33% .22%
- -------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund .65% None .11% .76% .40% .36%
- -------------------------------------------------------------------------------------------------------------------
REIT Index Fund .60% None .17% .77% .50% .27%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Annual Fund Operating Expenses are based on amounts incurred during
each Fund's most recent fiscal year ended October 31, 1999. Management
Fees are payable based on a percentage of average daily net assets.
Other expenses are based on estimated amounts.
(2) The Adviser has entered into an agreement to permanently waive
sufficient management 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 and REIT Index Fund and .25% of average
daily net assets of the Asset Allocation Fund. See "Management of the
Trust--Investment Adviser" for a more complete explanation of the
management fees.
(3) "Other Expenses" includes such expenses as custodial, transfer agent,
fund accounting fees, audit, legal, printing, registration and other
business operating expenses, but excludes extraordinary expenses.
Aon Funds 6
<PAGE>
Example:
This example is intended to help you compare the cost of investing in the Funds
with the cost of investing in other mutual funds. An investor would pay the
following expenses on a $10,000 investment, assuming (1) operating expenses (net
of fee waivers) as incurred during the fiscal year ended October 31, 1999, (2) a
5% annual return and (3) redemption at the end of each time period:
Fund 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------
Money Market Fund $19 $61 $107 $243
- --------------------------------------------------------------------------
Government Securities Fund $23 $71 $124 $281
- --------------------------------------------------------------------------
Asset Allocation Fund $37 $116 $203 $457
- --------------------------------------------------------------------------
REIT Index Fund $28 $87 $152 $344
- --------------------------------------------------------------------------
The example is not a representation of past or future expenses or performance.
Actual expenses may be greater or less than the expenses shown in the example.
Aon Funds 7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years or since inception.
Set forth below are per share data, total investment return (how much your
investment would have increased (or decreased) assuming reinvestment of all
dividends and distributions), 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.
<TABLE>
<CAPTION>
Money Market Fund Year Year Year Year Year
ended ended ended ended ended
Selected per share data 10/31/99 10/31/98 10/31/97 10/31/96 10/31/95
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.00 1.00 1.00 1.00 1.00
Income from investment operations:
Net investment income 0.05 0.05 0.05 0.05 0.06
Net realized and unrealized gain 0.00 0.00 0.00 0.00 *
----------- ----------- ---------- ----------- -----------
Total income from investment operations 0.05 0.05 0.05 0.05 0.06
Less distributions:
Dividends from net investment income 0.05 0.05 0.05 0.05 0.06
Distributions from net realized gain 0.00 0.00 0.00 0.00 *
----------- ----------- ---------- ----------- -----------
Total distributions 0.05 0.05 0.05 0.05 0.06
----------- ----------- ---------- ----------- -----------
Net asset value, end of year $ 1.00 1.00 1.00 1.00 1.00
=========== =========== ========== =========== ===========
Total return 5.03% 5.54% 5.44% 5.43% 5.93%
=========== =========== ========== =========== ===========
Ratios and supplemental data:
Net assets, end of year (in thousands) $1,144,842 693,667 766,356 395,104 420,094
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.19% 0.20% 0.22% 0.23% 0.14%
Expenses, before waivers and reimbursements 0.39% 0.40% 0.40% 0.46% 0.39%
Net investment income, net of waivers
and reimbursements 4.93% 5.40% 5.34% 5.30% 5.79%
Net investment income, before waivers
and reimbursements 4.73% 5.20% 5.16% 5.07% 5.54%
- -----------------------------------------------------------------------------------------------------------------
* Less than 1 cent per share
</TABLE>
Aon Funds 8
<PAGE>
<TABLE>
<CAPTION>
Government Securities Fund Year Year Year 9/3/96***
ended ended ended through
Selected per share data 10/31/99 10/31/98 10/31/97 10/31/96
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 11.09 10.49 10.21 10.00
Income from investment operations:
Net investment income 0.56 0.59 0.59 0.07
Net realized and unrealized gain (loss) (0.82) 0.60 0.28 0.21
----------- ----------- ---------- -----------
Total income (loss) from investment operations (0.26) 1.19 0.87 0.28
Less distributions:
Dividends from net investment income 0.56 0.59 0.59 0.07
Distributions from net realized gain 0.36 0.00 0.00 0.00
----------- ---------- -----------
----------- ----------- ---------- -----------
Total distributions 0.92 0.59 0.59 0.07
----------- ----------- ---------- -----------
Net asset value, end of period $ 9.91 11.09 10.49 10.21
=========== =========== ========== ===========
Total return (2.50%) 11.72% 8.86% 2.79%**
=========== =========== ========== ===========
Ratios and supplemental data:
Net assets, end of period (in thousands) $ 155,004 156,312 104,385 40,505
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.22% 0.23% 0.46% 0.89%*
Expenses, before waivers and reimbursements 0.55% 0.57% 0.65% 0.89%*
Net investment income, net of waivers
and reimbursements 5.38% 5.54% 5.92% 5.59%*
Net investment income, before waivers
and reimbursements 5.05% 5.20% 5.73% 5.59%*
Portfolio turnover rate 77% 219% 136% 4%
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** Not annualized
*** Inception of Fund
Aon Funds 9
<PAGE>
<TABLE>
<CAPTION>
Asset Allocation Fund Year Year Year Year Year
ended ended ended ended ended
Selected per share data 10/31/99 10/31/98 10/31/97 10/31/96 10/31/95
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 15.72 16.60 12.75 12.04 9.97
Income from investment operations:
Net investment income 0.40 0.39 0.27 0.31 0.24
Net realized and unrealized gain (loss) 1.93 (0.32) 3.85 1.01 2.41
----------- ----------- ---------- ----------- -----------
Total income from investment operations 2.33 0.07 4.12 1.32 2.65
Less distributions:
Dividends from net investment income 0.43 0.35 0.24 0.31 0.24
Distributions from net realized gain 0.00 0.60 0.03 0.30 0.34
----------- ----------- ---------- ----------- -----------
Total distributions 0.43 0.95 0.27 0.61 0.58
----------- ----------- ---------- ----------- -----------
Net asset value, end of year $ 17.62 15.72 16.60 12.75 12.04
=========== =========== ========== =========== ===========
Total return 14.91% 0.21% 32.61% 11.06% 26.92%
=========== =========== ========== =========== ===========
Ratios and supplemental data:
Net assets, end of year (in thousands) $ 164,429 209,630 164,885 88,280 73,775
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.36% 0.36% 0.56% 0.87% 0.96%
Expenses, before waivers and reimbursements 0.76% 0.76% 0.78% 0.87% 0.96%
Net investment income, net of waivers
and reimbursements 2.14% 2.33% 1.90% 2.48% 2.73%
Net investment income, before waivers
and reimbursements 1.74% 1.93% 1.68% 2.48% 2.73%
Portfolio turnover rate 46% 64% 64% 120% 95%
</TABLE>
Aon Funds 10
<PAGE>
<TABLE>
<CAPTION>
REIT Index Fund Year Year Year 9/3/96****
ended ended ended through
Selected per share data 10/31/99 10/31/98 10/31/97 10/31/96
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 11.42 13.69 10.44 10.00
Income from investment operations:
Net investment income 1.11 0.68 0.41 0.10***
Net realized and unrealized gain (loss) (1.79) (2.40) 2.99 0.34
----------- ----------- ---------- -----------
Total income (loss) from investment operations (0.68) (1.72) 3.40 0.44
Less distributions:
Dividends from net investment income 0.66 0.46 0.15 0.00
Distributions from net realized gain 0.00 0.09 0.00 0.00
----------- ----------- ---------- -----------
Total distributions 0.66 0.55 0.15 0.00
----------- ----------- ---------- -----------
Net asset value, end of period $ 10.08 11.42 13.69 10.44
=========== =========== ========== ===========
Total return (6.31%) (13.27%) 32.78% 4.40%**
=========== =========== ========== ===========
Ratios and supplemental data:
Net assets, end of period (in thousands) $ 23,687 60,990 99,899 25,690
Ratio to average net assets of:
Expenses, net of waivers and reimbursements 0.27% 0.24% 0.51% 1.20%*
Expenses, before waivers and reimbursements 0.77% 0.74% 0.82% 1.20%*
Net investment income, net of waivers
and reimbursements 5.47% 4.80% 4.42% 5.97%*
Net investment income, before waivers
and reimbursements 4.97% 4.30% 4.11% 5.97%*
Portfolio turnover rate 33% 50% 22% 0%
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** Not annualized
*** Calculated based on average shares outstanding throughout the period.
**** Inception of Fund
Aon Funds 11
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RISKS
Each Fund has an investment objective and related investment policies and
restrictions. Each Fund uses various investment practices to pursue its
objective. There is no guarantee that any of the Funds will achieve its
investment objective. You should not consider one Fund to be a complete
investment program. All of the Funds are subject to the risk of changing
economic conditions, as well as the risk 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, you may suffer a loss
by investing in the Funds.
Some investments and investment practices are described in greater detail under
"Money Market Fund Investments, Investment Practices and Restrictions" and
"Additional Investment Practices and Restrictions" in the Statement of
Additional Information.
Money Market Fund
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:
o 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)
o instruments that are supported by the right of the issuer to
borrow from the Treasury (such as securities of the Federal Home
Loan Banks)
o 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)
o instruments that are supported only by the credit of the
instrumentality (such as securities issued by the Federal Farm Credit
Banks, the Student Loan Marketing Association and the Federal Home Loan
Mortgage Corporation).
(2) Certificates of deposit and time deposits issued by U.S. banks which are
members of the Federal Deposit Insurance Corporation and have assets of at least
$1 billion.
(3) Repurchase agreements with (a) banks or (b) government securities dealers
recognized as primary dealers by the Federal Reserve System, provided that:
o 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 agreements
o 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 (an "NRSRO") as defined
under Rule 2a-7, under the Investment Company Act of 1940, as amended (
the "1940 Act"), or by only one NRSRO if only one NRSRO has issued a
rating with respect to the instrument; and
o 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.
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 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 Money Market Fund invests from time to time in U.S. dollar-denominated
foreign securities, provided that the standards outlined above are met. Foreign
money market instruments are subject to additional risks, such as the following:
o International economic and political developments
o Foreign governmental restrictions that may adversely affect the payment
of principal or interest, foreign withholding or other taxes on
interest income
o Difficulties in obtaining or enforcing a judgment against the issuer
o Expropriation or nationalization of foreign issuers
Aon Funds 12
<PAGE>
o The extent and quality of government regulation of financial markets
and institutions
o The possible impact of interruptions in the flow of international
currency transactions
The Money Market Fund should be subject to less 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. 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 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, may adversely affect 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
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:
o the full faith and credit of the U.S. Government (e.g., Government
National Mortgage Association ("GNMA") Certificates)
o 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)
o 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)
o the credit of the issuing agency or instrumentality (e.g., Federal
Land Banks, Farmers Home Administration or Student Loan Marketing
Association).
No assurance can be given that the U.S. Government will provide support to such
U.S. Government sponsored agencies or instrumentalities in the future, since it
is not required to do so by law.
The Government Securities Fund may also from time to time 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 may invest up to 50% of its net assets in GNMA
securities. Such securities (along with certain Federal National Mortgage
Association and Federal Home Loan Corporation securities in which the Government
Securities Fund may invest) have scheduled monthly interest and principal
payments relating to mortgages in the pool that 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 (or at the time the size of the Government Securities Fund's assets may
change materially as a result of significant net purchases or redemptions of
shares), 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
portfolio turnover rate for the Government Securities Fund may be higher than
that of other mutual funds with similar investment objectives due to the
frequent transac-
Aon Funds 13
<PAGE>
tions aimed at maximizing total return. This higher portfolio turnover rate
generates higher transaction expenses and could lead to higher distributable net
investment income or capital gains. The Fund seeks to generate gains in total
return that more than offset the added transaction expenses, but there can be no
assurance that the Fund will be successful or that total return will not be
adversely affected.
Asset Allocation Fund
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.
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.
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 various risks, including credit risk, event risk, political/legal
risk and market risk. However, the Fund's investment in these lower-rated
fixed-income debt securities (i.e., rated lower than Baa or BBB) will be limited
to no more than 30% of the Fund's total assets measured at the time of purchase.
The lowest rating for debt securities in which the Fund may invest is B. Such a
rating indicates that a security generally lacks the characteristics of a
desirable investment and is predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal. See the Statement of
Additional Information for a complete description of ratings.
The Asset Allocation Fund will be subject to varying levels of market risk,
event risk, interest rate risk and current income volatility. The portfolio
turnover rate for the Asset Allocation Fund may be higher than that of other
mutual funds with similar investment objectives due to the frequent transactions
aimed at maximizing total return. This higher portfolio turnover rate generates
higher transaction expenses and could lead to higher distributable net
investment income or capital gains. The Fund seeks to generate gains in total
return that more than offset the added transaction expenses, but there can be no
assurance that the Fund will be successful or that total return will not be
adversely affected.
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.
REIT Index Fund
The REIT Index Fund is intended for investors who can accept the risks,
described below, entailed by indirect investments in real estate.
REITs are pooled investment vehicles that invest primarily in income producing
real estate or real estate-related loans or interests therein. REITs are
generally classified as equity REITs, mortgage REITs or a combination of equity
and mortgage REITs. Equity REITs invest the majority of their assets directly in
real property and derive income primarily from the collection of rents. Equity
REITs can also realize capital gains by selling properties that have appreciated
in value. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments. REITs are
not taxed on income distributed to shareholders, provided that they comply with
several requirements of the Internal Revenue Code of 1986, as amended (the
"Code").
The Morgan Stanley REIT Index is made up of the stocks of all publicly traded
equity REITs (except health care REITs) that meet certain criteria. For example,
to be included in this index, a REIT must have a total market capitalization of
at least $100 million and have enough
Aon Funds 14
<PAGE>
shares and trading volume to be considered liquid. The REIT Index Fund invests
in equity REITs only.
As of December 31, 1999, 127 equity REITs were included in this index. This
index is rebalanced every calendar quarter as well as each time that a REIT is
removed from this index because of corporate activity such as a merger,
acquisition, leveraged buyout, bankruptcy, Internal Revenue Service 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 include retail stores; residential;
office; industrial and hotels.
As of December 31, 1999, this index's ten largest stocks made up over 30% of its
market value.
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 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. 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 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 $100 million to $6 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:
o Declines in the value of real estate
o Adverse changes in the climate for real estate
o Risks related to general and local economic conditions
o Over-building and increased competition
o Increases in property taxes and operating expenses
o Changes in zoning laws
o Casualty or condemnation losses
o Limitations on rents
o Changes in neighborhood values
o The appeal of properties to tenants
o Leveraging of interests in real estate
o Increases in prevailing interest rates
o 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:
o may be affected by changes in the value of the underlying property
owned by them
Aon Funds 15
<PAGE>
o are dependent upon management skill
o may not be diversified
o can be subject to the risk of investing in a single or a limited number
of projects
o are subject to heavy cash flow dependency
o are vulnerable to defaults by borrowers
o may fail to qualify for special tax treatment under Subchapter M of the
Code and maintain an exemption under the 1940 Act
o may be self-liquidating in that a specific term of existence is
provided for in the trust document
o may liquidate at an economically inopportune time.
MANAGEMENT OF THE TRUST
Investment Adviser
Aon Advisors, Inc., 123 North Wacker Drive, Chicago, Illinois 60606, a
wholly-owned subsidiary of Aon, is the investment adviser for the Funds. Aon
Advisors is registered as an investment adviser under the Investment Advisers
Act of 1940.
In addition to Aon Funds, Aon Advisors 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, 1999, the aggregate assets under
Aon Advisors' management were in excess of $7 billion.
Aon Advisors has entered into investment advisory agreements with Aon Funds on
behalf of each of the Funds. Aon Advisors provides day-to-day portfolio
management for each of the Funds. This means that Aon Advisors determines which
securities to buy and sell for each Fund, selects the brokers and dealers to
effect the transactions and negotiates commissions.
During the fiscal year ended October 31, 1999, the Funds incurred the following
total operating expenses (including the advisory fee paid to Aon Advisors),
stated as a percentage of average daily net assets:
Before Net of
fee waivers fee waivers
Money Market 0.39% 0.19%
Government Securities 0.55% 0.22%
Asset Allocation 0.76% 0.36%
REIT Index 0.77% 0.27%
Aon Advisors has agreed to reimburse the Trust for any amount by which the total
annual operating expenses exceed the following amounts, stated as a percentage
of average daily net assets:
Money Market 1.00%
Government Securities 1.50% to $30 million; 1.25%
thereafter
Asset Allocation 1.25%
REIT Index 1.50% to $30 million; 1.25%
thereafter
During the fiscal year ended October 31, 1999, Aon Advisors was not required to
reimburse the Trust for expenses incurred in excess of maximum total operating
expenses.
The Trust pays Aon Advisors compensation in the form of investment advisory
fees. The fees are accrued daily and paid monthly. The investment advisory fee
for each Fund is based upon the average daily net assets of such Fund (See "Net
Asset Value" for a more complete discussion of how net asset value is
determined), at the following annual rates:
Money Market: .30%.
Government Securities: .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: .65% of the first $250 million;
.55% of the next $250 million; and
.45% of amounts in excess of $500
million.
REIT Index: .60% of the first $100 million;
.55% of the next $100 million; and
.50% of amounts in excess of $200
million.
Aon Advisors has entered into an agreement to permanently 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 and the REIT Index Fund and .25% of the average daily net assets of the
Asset Allocation Fund.
During the fiscal year ended October 31, 1999, Aon Funds paid Aon Advisors
investment advisory fees (net of fee waivers) in an amount representing .10%,
.10%,
Aon Funds 16
<PAGE>
.25%, and .10% of the average daily net assets of the Money Market Fund,
Government Securities Fund, Asset Allocation Fund and the REIT Index Fund,
respectively.
Aon Funds has entered into a separate administration agreement with Aon
Securities Corporation, a subsidiary of Aon, pursuant to which Aon Funds pays
Aon Securities Corporation an annual fee of .05% of each Fund's average daily
net assets for administrative services.
Aon Securities Corporation also acts as the distributor for Aon Funds. Aon Funds
do not pay any distribution fee to Aon Securities Corporation for these
services.
Fund Managers
Michael A. Conway has been President of Aon Advisors 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. Mr. Conway is
also a director of Heller Financial Corp.
Keith C. Lemmer, portfolio manager of the Money Market Fund since its inception
in 1992, joined Aon Advisors in 1987 as a Fixed Income Analyst. He became a
Portfolio Manager for Aon Advisors in 1991 and has been a Senior Portfolio
Manager since 1992. Mr. Lemmer holds a B.A. degree from Westrern Illinois
University and a M.B.A. degree from DePaul University. He is a Certified Public
Accountant and a Chartered Financial Analyst. Mr. Lemmer is also a member of
both the Association for Investment Management and Research and the Investment
Analysts Society of Chicago.
Frank P. Wren, portfolio manager of the Government Securities Fund since May
1997, has been employed by Aon Advisors since 1982. Mr. Wren started working
with Aon Advisors as an Equity Trader. During his time with Aon Advisors, Mr.
Wren has managed Utility Common Stock, Preferred Stock, Municipal Bond, and
Taxable Bond portfolios. His current title is Senior Portfolio Manager of Aon
Advisors. Mr. Wren received his B.A. in Philosophy from DePaul University in
1977, a M.M. from Northwestern University in 1982, and has been a Chartered
Financial Analyst since 1985.
John G. Lagedrost, the portfolio manager of the Asset Allocation Fund since
December 1995, joined Aon Advisors as a Vice President in April 1995. His
current title is Executive Director of Aon Advisors. 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.
Andrew T. Ward, Portfolio Manager of the REIT Index Fund since March 1, 1999,
joined Aon Advisors in August of 1998 as Assistant Portfolio Manager for Aon
Advisor's private equity portfolio. Prior to joining Aon Advisors, Mr. Ward was
employed as an Associate at the management consulting firm, A.T. Kearney, Inc.
(1997-1998). From 1995-1997, Mr. Ward attended the University of Chicago
Graduate School of Business where he received his M.B.A. with concentrations in
Finance and Economics. Mr. Ward received a B.S. in Business Marketing from
Indiana University in 1992.
NET ASSET VALUE
The net asset value per share of each Fund is determined by subtracting the
liabilities of the Fund from the value of its assets and dividing the remainder
by the number of outstanding shares of the 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, 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.
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 Aon Funds' Board of
Trustees. See "Net Asset Value" in the Statement of Additional Information for a
more complete explanation of the determination of the fair value of securities.
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. A more detailed description of net
asset value computation and amortized cost method is contained in the Statement
of Additional Information.
Aon Funds 17
<PAGE>
PURCHASE OF SHARES
Aon Funds offers and sells shares of the Funds at the net asset value per share
next calculated after a purchase order is accepted. To make an initial
investment, you must submit a completed account application, as described below.
If you did not receive an account application with this Prospectus, please
contact the transfer agent at (800) 266-3637. The minimum initial investment for
shares of each Fund, other than the Money Market Fund, is $1,000. The initial
minimum investment for the Money Market Fund is $10,000.
You may place subsequent purchase orders by submitting orders to Aon Funds'
transfer agent (Firstar Mutual Fund Services LLC). Subsequent investments in
each Fund, other than the Money Market Fund, must be at least $100. Subsequent
investments in the Money Market Fund 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 for the following:
o Employees, officers and directors of Aon and its affiliates
o Affiliates of Aon
o Firms providing contractual services to Aon Funds
o Members of the "immediate families" of the employees, officers and
directors of Aon and its affiliates.
The subsequent investment amount for the Money Market Fund may also be less for
persons who were shareholders in the Money Market Fund as of February 27, 1998.
The officers of Aon Funds may waive the minimum investment amounts at their
discretion.
Individual retirement accounts (IRAs) and a retirement plan for self-employed
individuals (Keogh Plan) are available. You may request additional information
concerning these plans and accounts from the transfer agent at (800) 266-3637.
You 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 this fee is paid by or
received by the Fund, the Adviser or the distributor.
Purchase by Check
If you would like to purchase shares of any Fund, you may obtain an account
application from the transfer agent. You should complete the application and
mail it, together with a check or money order (payable to Aon Funds), to Aon
Funds, at Firstar Mutual Fund Services LLC, 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. You may make subsequent investments in an
existing account by sending to the address above:
o A check or money order payable to Aon Funds
And either
o The detachable form that regularly accompanies the confirmation of a
prior transaction
o A letter stating the amount of the investment, the name of the Fund in
which you want to invest and the account number in which the investment
is to be made
You will be charged a $25 fee if you deposit a check into Aon Funds that does
not clear.
Purchase by Wire
You may also purchase shares by directing your bank to transmit immediately
available funds by wire in the amount of the purchase price to:
Firstar Bank, Milwaukee, N.A.
Account of Firstar Mutual Fund Services LLC
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 before sending the wire. Be
sure to specify the name of the Fund in which you want to invest. If you are
making an initial investment by wire, you must promptly complete an account
application and forward it to the transfer agent. Redemption requests will not
be processed until the completed application has been received and accepted by
Aon Funds.
The transfer agent accepts subsequent purchase orders at its Milwaukee
office. Aon Funds may allow certain securities dealers or financial institutions
with which we and the distributor have entered into agreements to purchase
shares of the Funds for next day settlement.
Aon Funds 18
<PAGE>
Otherwise, the transfer agent will not accept an order from securities dealers
or financial institutions unless the dealer or institution pays 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 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.
Aon Funds 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.
Aon Funds reserve the right to reject any purchase order for any reason.
REDEMPTION OF SHARES
Regular Redemption
You 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.
Aon Funds 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 Aon Funds. You should 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 Aon Funds 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:
o Be signed by each owner of the shares to be redeemed in the exact
manner as the share account is registered
o State the amount of redemption
o 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. Eligible signature
guarantor institutions include commercial banks that are members of the FDIC,
trust companies, or member firms 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. Aon Funds may require
additional supporting documents for redemptions made by corporations, executors,
administrators, trustees and guardians. A redemption request will not be
considered received until the transfer agent receives all required documents in
proper form.
Aon Funds reserves the right to make a redemption-in-kind (a payment of
portfolio securities rather than cash) if the amount you are redeeming is in
excess of the greater of $250,000 or 1% of a Fund's assets. Generally,
redemption-in kind is used when large redemption requests may cause harm to a
Fund and its shareholders.
Telephone Redemption
You may redeem shares of Aon Funds by telephone if you check the appropriate box
on the account application. Once this feature has been requested, you may redeem
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 your address or bank of record as
shown on the records of the transfer agent.
Aon Funds 19
<PAGE>
If you redeem shares by telephone and request 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 your 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 your 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. Aon Funds 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, you must send a written request 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.
Aon Funds reserves the right to refuse a telephone redemption if Aon Funds
believes it is advisable to do so. Procedures for redeeming shares by telephone
may be changed or terminated by Aon Funds at any time. In addition, neither Aon
Funds 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 Aon
Funds or the transfer agent may be liable for any unauthorized or fraudulent
instructions). Such procedures may include 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. You would bear any losses resulting from
unauthorized telephone redemption instructions with respect to your account.
During periods of substantial economic or market change, telephone redemptions
may be difficult to execute. If you are unable to contact the transfer agent by
telephone, you may also redeem shares by delivering the redemption request to
the transfer agent in person or by mail as described above under "Regular
Redemption."
Check Redemption for Money Market Fund
You may request on the account application or by later written request that the
Money Market Fund provide to you redemption checks which may be drawn on the
Fund. Redemption checks will be sent only to the registered owner(s) of shares
of the Money Market Fund and only to the address of record. Redemption 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 redemption checks clear the
transfer agent. When a redemption check is presented to the transfer agent for
payment, the transfer agent, as your agent, will cause the Fund to redeem a
sufficient number of your shares to cover the amount of the redemption check.
Redemption checks will not be returned to you after clearance. There is no
charge for the use of the redemption checks; however, the transfer agent will
impose a $25 charge for stopping payment of a redemption check upon your
request. You will also be charged $25 if the transfer agent cannot honor a
redemption check due to insufficient funds or for any other valid reason.
Because dividends on the Money Market Fund accrue daily, redemption 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
other-
Aon Funds 20
<PAGE>
wise be permitted by the SEC. Payment may be delayed:
o 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.
o 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.
o 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. Prior to redemption, dividends on such shares
will accrue and be payable, and you will be entitled to exercise all other
rights of beneficial ownership. If you are purchasing shares by wire you 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, you may authorize deductions to be made from your
personal bank checking account for investment each month in shares of a Fund.
The minimum subsequent investment amounts ($100 for a Non-Money Market Fund and
$1,000 for the Money Market Fund) apply. There is no obligation to continue
automatic investment program purchases, and you, Aon Funds or Firstar Mutual
Funds Service LLC may terminate the program at any time. 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 of the Aon Funds which have been registered in your name for at
least 15 days may be exchanged for shares of any other Aon Funds, as long as the
shares acquired in the exchange are qualified for sale in the jurisdiction of
your residence. Before initiating an exchange, you should carefully read this
Prospectus as it relates to the new Fund in which you are considering investing.
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 Aon Funds, 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 Market Fund must have a net asset value of at least $10,000
but not more than $500,000. (The same exceptions to the initial minimum
investment amounts apply to the minimum exchange amounts.)
To elect the exchange privilege, you must check the appropriate box on the
account application. To exercise the exchange privilege, you must contact the
transfer agent in writing, or telephone the transfer agent at (800) 266-3637 and
request the exchange. You will be charged $5.00 for each telephone exchange
resulting in a redemption out of any Fund. This charge will be deducted from the
amount being exchanged.
An exchange of shares is treated as a sale for federal income tax purposes and,
depending upon the circumstances, a short or long-term capital gain or loss may
be realized. If you have questions as to the tax consequences of an exchange,
you should consult your tax adviser.
The exchange privilege may be modified or terminated at any time upon 60 days'
prior written notice. Although you may make up to four exchanges in any one
calendar year, Aon Funds reserves the right to limit the number of exchanges in
excess of four per year.
Systematic Withdrawal Plan
If you own shares having a value of $7,500 or more you 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. Under the systematic
withdrawal plan, you can elect fixed dollar monthly, quarterly or annual
payments of at least $100 each. Under the systematic withdrawal plan, you 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
systematic withdrawal plan have been redeemed, no more payments are made. Either
you or Aon Funds may terminate participation in the systematic withdrawal plan
at any time. To initiate the systematic withdrawal plan, please complete the
supplemental application, which is attached to the application. For information
on obtaining an application, see "Purchase of Shares."
Aon Funds 21
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
Distribution Policy
Dividends on your interest in the Money Market Fund will accrue daily and
usually be distributed to you monthly. The Government Securities Fund will
generally pay dividends from its net investment income monthly. The Asset
Allocation Fund will generally pay dividends from its net investment income
quarterly. The REIT Index Fund generally pays dividends from its net investment
income at least annually. The Funds distribute any net capital gains at least
annually, usually in December.
Reinvestment of Dividends and
Capital Gain Distributions
Your dividends and net capital gain distributions will be automatically
reinvested in additional shares of your Fund, unless you choose otherwise. Your
other options are to:
o receive checks for these distributions
o receive checks for net investment dividends and to reinvest net capital
gain distributions in your Fund
o have the distributions automatically invested in another of the Funds
Taxable Distributions
Any distributions you receive from a Fund's net income and gains, exclusive of
net capital gains (also called "net investment income"), are taxable to you as
ordinary dividend income at your income tax rate (whether you reinvest your
distributions or take them in cash) and will be eligible for the corporate
dividends received deduction only to the extent paid out of the Fund's
qualifying dividend income. Distributions you receive from the Fund's net
long-term capital gain in excess of its net short-term capital losses (also
called "net capital gain") are generally treated as gain recognized by you from
the sale or exchange of a capital asset held for more than one year. This is
generally true no matter how long you have owned your shares and whether you
reinvest your distributions or take them in cash. You may also have to pay taxes
when you exchange, redeem or sell shares if the value of your shares has
increased above their cost basis since you bought them. However, any loss
recognized on the sale of a share held for six months or less is treated as
long-term capital loss to the extent of any net capital gain distributions made
with respect to such share.
If you are considering buying shares of one of the Funds just prior to a record
date for a taxable distribution you should be aware that the amount of the
distribution will be taxable to you as either a dividend or net capital gain
distribution.
Information Reporting and
Back Up Withholding
By law, Aon Funds must withhold your distributions and proceeds at the 31%
"backup withholding" rate if you have not provided us with complete and correct
taxpayer information such as your Social Security Number (SSN) or Tax
Identification Number (TIN) and you are not exempt from backup withholding.
Year-End Statement
To assist you in tax preparation, after the end of each calendar year, you will
receive a statement of the Fund's ordinary dividends and net capital gain
distributions (Form 1099). However, many of the REITs in which the REIT Index
Fund may invest do not provide complete tax information until after the calendar
year end. As a result, if you invest in the REIT Index Fund, Aon Funds may not
be able to determine how much of the REIT Index Fund's annual distributions are
taxable to you until after the traditional January 31 deadline for issuing the
Form 1099. In this event, Aon Funds may request permission from the IRS for an
extension and mail the Form 1099s to REIT Index Fund shareholders in February.
Because everyone's tax situation is unique, you should consult your tax
professional regarding potential federal, state, local, or foreign taxation of
your investment in any of the Funds.
Reinvesting Outstanding Checks
If you choose to have distribution checks mailed to you and either the U.S.
postal Service is unable to deliver the check(s) to you or if the check(s)
remain outstanding for at least six months, the Funds reserve the right to
reinvest the check(s) at their then current net asset value until you notify Aon
Funds with different instructions.
Aon Funds 22
<PAGE>
ADDITIONAL INFORMATION
Currently, the Aon Fund's Board of Trustees has authorized four separate series
of shares of the Trust. All consideration received by the Trust for shares of
one of the series and all assets in which such consideration is invested belong
to that series and are subject to the liabilities of that series. 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, 1999, Aon, itself and through its subsidiaries and
affiliates, owned beneficially and of record 98.9%, 99.9%, 99.3% and 98.9% of
the outstanding shares of beneficial interest of the Money Market Fund,
Government Securities Fund, Asset Allocation 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.
Aon Funds 23
<PAGE>
Notes
Aon Funds 24
<PAGE>
FOR MORE INFORMATION
More information about Aon Funds is available upon request at no charge,
including the following:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Shareholder reports contain additional information about each Fund's
investments, including:
o Financial statements
o Detailed performance information
o Portfolio holdings
o A statement from portfolio management
The annual report also contains a discussion of recent market conditions,
economic trends and investment strategies that significantly affected your
investment's performance during the last fiscal year and auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains details about investment policies and techniques of the Funds
and certain other additional information. A current SAI is on file with the SEC
and is incorporated into this Prospectus by reference. This means that the SAI
is legally considered a part of this Prospectus even though it is not physically
contained within this Prospectus.
To request information or to ask questions please write or call:
Aon Funds
123 North Wacker Drive, 29th floor
Chicago, Illinois 60606
Telephone: 1-800-AON-FNDS (1-800-266-3637)
You may also obtain information about the Funds (including the SAI) by visiting
the SEC's Public Reference Room in Washington, D.C. or by sending your request
and a duplicating fee to the SEC's Public Reference Section, Washington, D.C.
20549-6009. You may call 1-800-SEC-0330 for information on the operation of the
Public Reference Room. Reports and other information about the Funds are also
available on the SEC's Internet site at http://www.sec.gov.
Investment Company Act File No. 811-6422
<PAGE>
AON FUNDS
123 North Wacker Drive
Chicago, Illinois 60606
MONEY MARKET FUND
GOVERNMENT SECURITIES FUND
ASSET ALLOCATION FUND
REIT INDEX FUND
Distributor -Aon Securities Corporation
STATEMENT OF ADDITIONAL INFORMATION
February 29, 2000
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.
The Fund's financial statements for its fiscal year ended October 31, 1999
included in its 1999 annual report to shareholders are incorporated by reference
into this SAI. You may obtain a copy of this report without charge by writing or
telephoning the Fund at the address and telephone number set forth above.
<PAGE>
TABLE OF CONTENTS
Page
General Information....................................................... 4
Prior History........................................................... 4
Portfolio Turnover...................................................... 5
Money Market Fund Investments, Investment Practices and Restrictions...... 5
U.S. Government Securities.............................................. 5
Certificates of Deposit and Time Deposits............................... 6
Commercial Paper........................................................ 6
Repurchase Agreements................................................... 6
Foreign Securities...................................................... 7
Lending Portfolio Securities............................................ 7
Investment Restrictions................................................. 7
Additional Investment Practices and Restrictions.......................... 9
When-Issued and Delayed Delivery Securities............................. 9
Loans of Portfolio Securities........................................... 9
Convertible Securities.................................................. 10
Warrants................................................................ 10
Foreign Investments and Currency....................................... 11
Foreign Investments Generally and Risks................................ 11
Investments in ADRs, EDRs, and GDRs................................... 12
Foreign Currency Transactions......................................... 12
Options on Securities and Securities Indices............................ 12
Financial Futures Contracts............................................. 14
Options on Financial Futures Contracts.................................. 16
Certain Additional Risks of Options and Financial Futures Contracts..... 17
Restricted Securities and Other Illiquid Investments.................... 18
Lower-Rated, Lower Quality Debt Instruments............................. 19
Risks of Lower-Rated, Lower Quality Debt Instruments.................... 19
Covered Call Options.................................................... 20
GNMA Certificates....................................................... 21
Other Investment Practices ............................................. 21
Investment Restrictions................................................. 21
Management of the Trust................................................... 24
Board of Trustees and Officers.......................................... 24
Investment Adviser...................................................... 26
Investment Advisory Fees................................................ 27
Fund Administrations Fees............................................... 28
Fund Accounting Fees.................................................... 28
Reimbursement of Excess Operating Expenses.............................. 28
Securities Activities of the Adviser.................................... 28
Distribution of Shares.................................................. 29
Control Persons and Principal Holders of Securities....................... 29
Shareholder Meeting and Voting............................................ 31
Portfolio Transactions and Brokerage...................................... 31
Determination of Net Asset Value.......................................... 33
General................................................................. 33
<PAGE>
Money Market Fund....................................................... 33
Non-Money Market Funds.................................................. 33
Retirement Programs....................................................... 34
Yield and Performance Information......................................... 35
Taxes..................................................................... 37
Additional Information.................................................... 39
Custodian, Transfer Agent and Accounting Agent.......................... 39
Independent Auditors.................................................... 39
Financial Statements.................................................... 39
Legal Counsel........................................................... 39
Shares of Beneficial Interest........................................... 39
Reports................................................................. 39
Other Information....................................................... 40
Appendix A................................................................ 41
<PAGE>
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
four 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 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.
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.
All four of the Funds are diversified investment companies within the
meaning of the 1940 Act.
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 this document 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 this
document, as well as the investment policies described in the Prospectus, are
not fundamental and may be changed by the Trust's Board of Trustees without
shareholder approval.
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. (As
used herein, "Adviser" shall refer to AAI.) 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 July 31, 1999, the Trust consisted of six
Funds, the current Funds in addition to the Aon S&P 500 Index Fund and the Aon
International Equity Fund which are now closed.
Between September 3, 1996 and February 28, 1997, each of the six Funds of
the Trust issued two classes of shares, Class C shares 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
4
<PAGE>
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 before then 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 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 referred to below.
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 and REIT Index 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.
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.
5
<PAGE>
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 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 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 that is only temporarily available.
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 agreement and (2)
the value of the collateral may decline due to higher interest rates.
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
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agreement. Accordingly, as explained in the Prospectus, the Fund will only enter
into repurchase agreements with banks and primary government securities dealers
which 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 up to 10% of its total assets, taken at
market value at the time of acquisition, 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. However, the Money Market Fund may invest up to
25% of its total assets in securities of foreign issues 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 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 that are not ordinarily associated with investing in domestic issuers.
These risks include political or economic instability in the country involved,
the difficulty of predicting international trade patterns and the possibility of
imposition of exchange controls. Foreign securities may also be subject to
greater fluctuations in price than similar securities of domestic issuers. In
addition, there may be less publicly available information about a foreign
issuer than about a domestic issuer. Foreign issuers generally are not subject
to uniform accounting, auditing and financial reporting standards comparable to
those applicable to domestic issuers. In many countries, there is less
government regulation of stock exchanges, brokers and listed companies than in
the United States.
With respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, or diplomatic developments which could
affect a Fund's investments in 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. 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);
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(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 paragraph (h) below, 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 paragraphs (c) and (h);
(j) enter into repurchase agreements maturing in more than seven days
if, as a result thereof, more than 10% of the value of the Money Market
Fund's total assets would be invested in such repurchase agreements and any
other assets which are either illiquid or are not readily marketable;
(k) invest in time deposits maturing in more than seven days; in
addition, time deposits maturing in two business days to seven calendar days
may not exceed 10% of the value of the Fund's total assets; and
(1) purchase or sell interests in oil, gas, or other mineral exploration
or development programs, commodities, or commodity contracts, except that
the Money Market Fund may purchase securities of issuers which invest or
deal in any of the above, provided such securities are money market
instruments in which the Fund is otherwise permitted to invest.
Non-Fundamental Restrictions. In addition to the fundamental investment
restrictions set forth above, the Money Market Fund is subject to the following
restrictions in implementing its investment policy. These additional
restrictions are not fundamental and may be changed by the Trustees without
shareholder approval. The Fund may not:
(1) write, purchase or sell puts, calls (other than covered call
options) or combinations thereof;
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(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,
Government Securities Fund and REIT Index Fund (the "Non-Money Market Funds"),
how such Funds seek to achieve such investment objectives and the principal
investment strategies by which such Funds will pursue their objectives are
generally set forth in the Prospectus. This section describes in more detail
certain securities in which such Funds (and in certain cases the Money Market
Fund) may invest and certain investment practices they may use and is intended
to augment the description found in the Prospectus.
When-Issued and Delayed Delivery Securities
From time to time, in the ordinary course of business, each Fund may
purchase securities on a when-issued basis or delayed-delivery basis, i.e.,
delivery and payment can take place a month or more after the date of the
transaction. The securities so purchased are subject to market fluctuation, and
no interest accrues to the purchaser during this period. At the time a Fund
makes the commitment to purchase securities on a when-issued or delayed delivery
basis, it will record the transaction and thereafter reflect the value, each
day, of such security in determining its net asset value. At the time of
delivery of the securities, the value may be more or less than the purchase
price. Each Fund will also establish a segregated account with the Trust's
custodian bank in which it will maintain cash or cash equivalents or other
liquid Fund securities equal in value, marked to market on a daily basis, to
commitments for such when-issued or delayed-delivery securities. As a general
matter each Fund will hold less than 5% of its assets in commitments to purchase
securities on a delayed-delivery or when-issued basis and will not, under any
circumstances, purchase securities on a when-issued basis or delayed-delivery
basis if, as a result, more than 10% of its net assets would be so invested.
Loans of Portfolio Securities
Each Non-Money Market Fund may from time to time lend securities it holds to
brokers, dealers and financial
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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. Each Fund will also receive any gain or
loss in the market value of its loaned securities.
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 may 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 the Fund may invest are subject to the same rating criteria
as the Fund's investments in non-convertible debt securities.
Warrants
The Asset Allocation Fund may invest up to 5% of its total assets,
calculated at the time of purchase, in warrants or rights (other than those
acquired in units or attached to other securities) which entitle the holder to
buy equity securities at a specific price for a specific period of time. The
Fund will not invest more than 2% of its 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.
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Foreign Investments and Currency
Each Non-Money Market Fund may invest up to 10% of its total assets, taken
at market value at the time of acquisition, in securities of foreign companies
that are organized outside the United States or whose securities are principally
traded outside the United States (a "foreign issuer") and in securities
denominated or quoted in foreign currency ("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.
Foreign Investments Generally and Risks. 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 changes
in exchange control regulations. For example, a decline in the currency exchange
rates of foreign securities 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.
A Non-Money Market 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 is 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
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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.
Investments in ADRs, EDRs and GDRs. Many securities of foreign issuers are
represented by ADRs, EDRs and GDRs. The Government Securities Fund and Asset
Allocation 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.
Generally, ADRs are in registered form. Prices of ADRs are quoted in U.S.
dollars, and ADRs are traded in the United States on exchanges or
over-the-counter and are issued by domestic banks. ADRs do not eliminate all the
risk inherent in investing in the securities of foreign issuers. To the extent
that a Fund acquires ADRs through banks which do not have a contractual
relationship with the foreign issuer of the security underlying the ADR to issue
and service such ADR (i.e., an unsponsored ADR), there may be an increased
possibility that the Fund would not become aware of and be able to respond to
corporate actions such as stock splits or rights offerings involving the foreign
issuer in a timely manner. In addition, the lack of information may result in
inefficiencies in the valuation of such instruments. However, by investing in
ADRs rather than directly in the stock of foreign issuers, a Fund will avoid
currency risks during the settlement period for either purchases or sales. In
general, there is a large, liquid market in the United States for ADRs quoted on
a national securities exchange or the NASD's national market system. The
information available for ADRs is subject to the accounting, auditing and
financial reporting standards of the domestic market or exchange on which they
are traded, which standards are more uniform and more exacting than those to
which many foreign issuers may be subject. The Trust generally considers ADRs to
be securities issued, assumed or guaranteed by a foreign issuer.
EDRs and GDRs are receipts issued by non-U.S. financial institutions
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 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. EDRs
and GDRs are not necessarily quoted in the same currency as the underlying
security.
Foreign Currency Transactions. Because investment in foreign issuers usually
will involve currencies of foreign countries, and because the Non-Money Market
Funds 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.
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.
Options on Securities and Securities Indices
The Government Securities 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
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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 (e.g., closing purchase transactions) 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 Government Securities and REIT Index Funds may each also purchase
exchange-traded call and put options with respect to securities. These Funds may
each 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. These Funds may each
purchase call options on individual securities and 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. 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.
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. The Fund may write such options for the same purposes as each may
engage in such transactions with respect to individual portfolio securities,
that is, to generate additional income or as a hedging technique to minimize
anticipated declines in the value of the Fund's securities. In economic effect,
a stock index call or put option is similar to an option on a particular
security, except that the value of the option depends on the weighted value of
the group of securities comprising the index, rather than a particular security,
and settlements are made in cash rather than by delivery of a particular
security.
If the 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 the 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, the Fund
will cover such options written by segregating with its custodian 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 Fund may also use options on such other indices as
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may now or in the future be available.
The REIT Index Fund 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 it intends to
purchase at a later date, (2) hedge its 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, the
Fund may be able to offset the resulting adverse effect, in whole or in part,
through the options purchased.
The effectiveness of hedging activities of the REIT Index Fund through the
writing or purchase 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.
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 REIT Index Fund 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 and the REIT Index
Fund, however, may write and purchase 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 and the REIT Index Fund may enter into
contracts with the primary dealers with which it writes over-the-counter
options. Such contracts, if entered into, 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. Except
for the amount of this formula price less the amount by which an
over-the-counter option is "in-the-money," this option will generally be
considered illiquid securities. The Adviser has established standards of
creditworthiness for these primary dealers.
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 and there can
be no assurances that the Adviser will be able to employ these practices
successfully.
Financial Futures Contracts
The Government Securities 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.
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These Funds also may purchase and sell exchange-traded financial futures
contracts to earn additional income or otherwise seek to increase total return.
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, as well as options on futures contracts
discussed below, requires special skills in addition to those needed to select
portfolio securities.
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. Financial futures
contracts consist of interest rate futures contracts, stock index futures
contracts and currency futures contracts.
An interest rate futures contract binds the seller either to deliver to the
purchaser on a specified future date a specified quantity of 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, U.S. Treasury Notes and three-month Eurodollars.
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 Dow
Jones Industrial 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.
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 REIT Index Fund may sell stock index
futures contracts. Assuming that any decline in the securities being hedged is
accompanied by a decline in the debt instrument, interest rate or stock index
chosen as a hedge, the sale of a futures contract on that debt instrument,
interest rate or stock index may generate gains that can wholly or partially
offset any decline in the value of the Fund's securities 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
REIT Index Fund may purchase stock index futures contracts. For these Funds,
such a strategy is intended to secure a position in the futures market intended
to approximate the economic equivalent of a position in the securities market.
When used as hedges, the Funds will purchase appropriate financial futures
contracts only when each intends to purchase the underlying securities that may
be affected by such decreases in interest rates or increases in equity prices or
decline in value of the dollar versus the currency in which the security to be
purchased is denominated (as the case may be) and will purchase such financial
futures contracts in approximately the amount being hedged. When used as hedges,
the Adviser expects that purchases of the underlying securities will, in fact,
be made a substantial majority of the time.
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Each of the Government Securities 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.
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 delivery 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 its futures commission merchant ("FCM") an
initial margin of cash or U.S. Treasury bills equal to as much as 5% to 10% or
more of the contract settlement price. The nature of initial margin requirements
in futures transactions differs from traditional margin payments made in
securities transactions in that initial margins for financial futures contracts
do not involve the borrowing of funds by the customer to finance the
transaction. Instead, a customer's initial margin on a financial futures
contract represents a good faith deposit securing the customer's contractual
obligations under the financial futures contract. The initial margin deposit is
returned, assuming these obligations have been met, when the financial futures
contract is terminated. In addition, subsequent payments to and from the FCM,
called "variation margin," are made on a daily basis as the price of the
underlying security or stock index 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."
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).
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 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 REIT Index Fund 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.
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 on a financial futures
contract), for a specified exercise price, at any time before the option
expires. The Funds, as described above, may invest in such options for the same
hedging purposes as they may each purchase or
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sell financial futures contracts or in order to earn additional income or
otherwise seek to increase total return.
The REIT Index Fund may seek to close out (at its market price on the
relevant 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.
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, careful management of hedging activities can minimize these
risks. For example, where price movements in a financial futures or option
contract are expected to be less volatile than price movements in the related
portfolio securities owned or intended to be acquired by a Fund, it may, in
order to compensate for this difference, use an amount of financial futures or
option contracts which is greater than the amount of such portfolio securities.
Similarly, where the price movement of a financial futures or option contract is
anticipated to be more volatile, a Fund may use an amount of such contract which
is smaller than the amount of portfolio securities to which such contracts
relate.
The risk that the hedging technique used will not actually or entirely
offset an adverse change in the value of a Fund's securities is particularly
relevant to financial futures contracts and options written on stock indices. A
Fund entering into a futures purchase contract potentially could lose any or all
of an amount equal to the contract's settlement price multiplied by the
contract's multiplier. In entering into a futures sale contract, a Fund could
potentially lose an amount equal to the excess of the contract's value (marked
to market daily) over the contract's settlement price multiplied by the
contract's multiplier. In writing options on stock indices, a Fund could
potentially lose a sum equal to the excess of the value of the index (marked to
market daily) over the exercise price or the excess of the exercise price over
the value of the index. In addition, because financial futures contracts require
delivery at a future date of either a specified security or an amount of cash
equal to a multiple of the difference between the value of a specified stock
index on that date and the settlement price, an algebraic relationship exists
between any price movement in the underlying security or index and the potential
cost of settlement to a Fund. A small increase or decrease in the value of the
underlying security or stock index can, therefore, result in a much
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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 the Adviser will employ these
techniques or that, if employed, 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.
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. The Money Market Fund and the Government
Securities 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. The Asset Allocation 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
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under the Securities Act of 1933.
The foregoing illiquid investment restrictions do not apply to purchases of
restricted securities eligible for sale to qualified institutional purchasers in
reliance upon Rule 144A under the Securities Act of 1933 that are determined to
be liquid by the Trust's Board of Trustees or by the Adviser under the general
oversight of the Trustees. Such determination would take into account trading
activity for such securities and the availability of reliable pricing
information, among other factors. To the extent that qualified institutional
buyers become for a time uninterested in purchasing these restricted securities,
a Fund's holdings of those securities may become illiquid. The foregoing
investment restrictions also do not apply to purchases of securities of foreign
issuers offered and sold outside the United States in reliance upon the
exemption from registration provided by Regulation S under the Securities Act of
1933.
Lower-Rated, 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
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due to default by the issuer is significantly greater for the holders of
high-yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer.
High yielding securities frequently have call or buy-back features that
would permit an issuer to call or repurchase the security from the Fund. If a
call were exercised by the issuer during a period of declining interest rates,
the Fund would likely have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund.
The Asset Allocation Fund may have difficulty disposing of certain
high-yielding securities for which there is a thin trading market. Because not
all dealers maintain markets in all high-yielding securities, there is no
established retail secondary market for many of these securities, and the Trust
anticipates that they could be sold only to a limited number of dealers or
institutional investors. To the extent there is a secondary trading market for
high-yielding securities, it is generally not as liquid as that for higher-rated
securities. The lack of a liquid secondary market for certain securities may
make it more difficult for the Trust to obtain accurate market quotations for
purposes of valuing the Fund's assets. Market quotations are generally available
on many high-yield issues only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales. When
market quotations are not readily available, lower-rated securities must be
valued by (or under the direction of) the Board of Trustees of the Trust. This
valuation is more difficult and judgment plays a greater role in such valuation
when there is less reliable objective data available.
The Asset Allocation Fund may acquire high-yielding securities that are sold
without registration under the federal securities laws and therefore carry
restrictions on resale. This Fund may incur special costs in disposing of such
securities, but will generally incur no costs when the issuer is responsible for
registering the securities. The Fund also may acquire high-yielding securities
during an initial underwriting. Such securities involve special risks because
they are new issues. The Trust has no arrangement with any person concerning the
acquisition of such securities, and the Adviser will carefully review the credit
and other characteristics pertinent to such new issues.
From time to time, there have been proposals for legislation designed to
limit the use of certain high-yielding securities in connection with leveraged
buy-outs, mergers and acquisitions, or to limit the deductibility of interest
payments on such securities. Such proposals if enacted into law could reduce the
market for such securities generally, could negatively affect the financial
condition of issuers of high-yield securities by removing or reducing a source
of future financing, and could negatively affect the value of specific
high-yield issues. However, the likelihood of any such legislation or the effect
thereof is uncertain.
Covered Call Options
The Asset Allocation Fund may write covered call options that are traded on
a national securities exchange with respect to securities in the Fund (ensuring
that at all times the Fund will have the securities which it may be obligated to
deliver if the option is exercised). The Fund may write call options on its
securities in an attempt to realize a greater current return than would be
realized on the securities alone or to provide greater flexibility in disposing
of such securities. As the writer of a call option, the Fund receives a premium
for undertaking the obligation to sell the underlying security at a fixed price
during the option period if the option is exercised. So long as the Fund remains
obligated as a writer of a call, it forgoes the opportunity to profit from
increases in the market price of the underlying security above the call price of
the option, except insofar as the premium represents such a profit.
The Asset Allocation Fund may also enter into "closing purchase
transactions" in order to terminate its obligation as a writer of a call option
prior to the expiration of the option. Although writing only those call options
that are traded on a national securities exchange increases the likelihood of
being able to make closing purchase transactions, there is no assurance that the
Fund will be able to effect such transactions at any particular time or at any
acceptable price. The writing of call options could result in increases in the
turnover rate of the Fund, especially during periods when market prices of the
underlying securities appreciate, which could affect brokerage costs.
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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.
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.
Other Investment Practices
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 choose not to invest in all the stocks that comprise the Morgan Stanley REIT
Index. The Fund may compensate by investing in stocks with 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).
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 "General Information" 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
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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 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.
(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, 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 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;
22
<PAGE>
(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
(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.
23
<PAGE>
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 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 Government Securities 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 or REIT Index Fund
MANAGEMENT OF THE TRUST
Board of Trustees and Officers
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.
The Trustees and officers of the Trust, their addresses, ages as of February
22, 2000, and their principal
24
<PAGE>
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 56 Real Estate Developer
361A Bienterra Trail Director, Ceres Group Inc.
Rockford, IL 61107 Director, Firstar Bank, Northern Illinois
Michael A. Conway*.............. President and 53 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 56 President and CEO
McDonald's Corporation System Capital Corporation
McDonald's Plaza
Oak Brook, IL 60523-1900
Richard J. Peters............... Trustee 52 President, Penske Corporation
13400 Outer Drive West, B-48 Board Memberships: Penske Corporation, United
Detroit, MI 48239 Auto Group, Kaufman Peters LLC, and CAPTEC Net
Lease Realty
Charles A. Tribbett............. Trustee 44 Managing Director and Co-Manager, Russell
200 S. Wacker Drive Reynolds Associates.
Suite 3600
Chicago, IL 60606
Arlene H. Hardy*................ Treasurer 42 Treasurer, Aon Corporation.
123 North Wacker Drive
26th Floor
Chicago, IL 60606
Catherine Lyczko*............... Secretary 39 Counsel, Aon Corporate Law Department;
123 North Wacker Drive Secretary, Aon Securities Corporation.
13th Floor
Chicago, IL 60606
Brian H. Lawrence*.............. Controller 32 Controller, Aon Securities Corporation;
123 North Wacker Drive Treasurer, Aon Advisors, Inc.
27th Floor
Chicago, IL 60606
</TABLE>
Trustees or officers who are interested persons of the Trust do not receive
any compensation from the Trust for
25
<PAGE>
their services to the Trust. Trustees who are not interested persons of the
Trust receive compensation at a rate of $15,000 annually. 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, 1999 entitled to receive
compensation, the aggregate compensation received from the Trust during such
fiscal year.
Table of Trustees' Compensation
- -------------------------------
Aggregate Compensation
Name of Trustee from the Trust
- --------------- ----------------------
Michael A. Cavataio $16,000
Carleton D. Pearl $16,000
Richard J. Peters $16,000
Charles A. Tribbett $16,000
Investment Adviser
Aon Advisors, Inc., 123 North Wacker Drive, Chicago, Illinois, a wholly
owned subsidiary of Aon Corporation, 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 "Management of the Trust--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, and the continuation of the Advisory
Agreements was last approved by such Trustees at a meeting held July 21, 1999.
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 continuation 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
26
<PAGE>
misfeasance, bad faith, gross negligence, or reckless disregard on the part of
AAI in the performance of its duties thereunder.
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 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
10/31/99 10/31/98 10/31/97
----------------- ------------------ -----------------
<S> <C> <C> <C>
Money Market Fund $777,768 $813,976 $706,893
Government Securities Fund $161,942 $134,035 $192,825
Asset Allocation Fund $479,998 $568,072 $575,161
REIT Index Fund $52,533 $82,226 $186,653
</TABLE>
27
<PAGE>
Fund Administration Fees
The Funds pay Aon Securities Corporation annual fees of .05% of average daily
net assets under the Administration Agreement. The Funds paid the following
amounts in fund administration fees during the last three fiscal years:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
10/31/99 10/31/98 10/31/97
----------------- ------------------ -----------------
<S> <C> <C> <C>
Money Market Fund $388,884 $406,988 $296,710
Government Securities Fund $80,971 $67,018 $36,654
Asset Allocation Fund $96,000 $113,614 $66,922
REIT Index Fund $26,266 $41,113 $31,848
</TABLE>
Fund Accounting Fees
The Funds pay Firstar Trust Company annual fees based on a percentage of assets,
subject to an annual minimum amount per Fund, plus fees per security priced
under the Fund Accounting Agreement. The Funds paid the following amounts in
fund accounting fees to Firstar Trust Company during the last three fiscal
years:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
10/31/99 10/31/98 10/31/97
----------------- ------------------ -----------------
<S> <C> <C> <C>
Money Market Fund $72,064 $73,243 $59,165
Government Securities Fund $53,330 $40,859 $35,421
Asset Allocation Fund $46,689 $44,799 $41,003
REIT Index Fund $25,370 $31,375 $30,640
</TABLE>
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,
administration and accounting (but excluding interest, taxes, brokerage
commissions and extraordinary expenses), exceed the maximum total annual
operating expenses as stated in the prospectus, 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 set forth in the
prospectus.
During the fiscal year ended October 31, 1999, AAI was not required to
reimburse the Trust for expenses incurred in excess of maximum total operating
expenses.
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
28
<PAGE>
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.
In performing their functions, AAI will execute sales of securities among
the Funds or between a Fund and other investment accounts it manages.
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 Corporation, under which the Distributor
acts as principal underwriter and distributor of the shares of each Fund. The
Trust does not pay the Distributor any fees for these services.
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 January 31, 2000, 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 Savings Plan. 236,396,580 18.44
400 Colony Sq. directly owned shares
Suite 2200
1201 Peachtree St. NE
Atlanta, GA 30361
Aon Re 187,603,696 14.63
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Combined Insurance Company 164,166,793 12.81
Of America directly owned shares
123 N. Wacker Dr.
Chicago, IL 60606-1700
Aon Pension Trust 142,049,439 11.08
29
<PAGE>
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Aon Risk Services 87,312,781 6.81
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Aon Specialty Group Inc 79,986,369 6.24
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Government Aon Pension Trust 10,237,972 71.15
Securities Fund 123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
Aon Savings Plan. 4,133,376 28.72
400 Colony Sq. directly owned shares
Suite 2200
1201 Peachtree St. NE
Atlanta, GA 30361
Asset Allocation Fund Aon Savings Plan. 10,150,880 88.62
400 Colony Sq. directly owned shares
Suite 2200
1201 Peachtree St. NE
Atlanta, GA 30361
Combined Insurance Company 1,227,924 10.72
Of America directly owned shares
123 N. Wacker Dr.
Chicago, IL 60606-1700
REIT Index Fund Aon Savings Plan. 1,796,460 70.51
400 Colony Sq. directly owned shares
Suite 2200
1201 Peachtree St. NE
Atlanta, GA 30361
Aon Pension Trust 728,295 28.59
123 N. Wacker Dr. directly owned shares
Chicago, IL 60606-1700
</TABLE>
Aon Corporation, a Delaware 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 January 31, 2000, Aon Corporation and
its subsidiaries and affiliates owned in excess of 98% 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.
30
<PAGE>
At the close of business February 23, 2000, Mr. Patrick G. Ryan, Chairman
and Chief Executive Officer of Aon, owned directly and beneficially 31,094,288
shares (12.07%) of the voting securities of Aon.
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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser determines which securities to buy and sell for each Fund,
selects brokers and dealers to effect the transactions, and negotiates
commissions. Transactions in equity securities will usually be executed through
brokers who will receive a commission paid by such Fund. Fixed income securities
are generally traded with dealers acting as principal for their own accounts
without a stated commission. The dealer's margin is reflected in the price of
the security. Money market instruments may be traded directly with the issuer.
Underwritten offerings of stock or fixed-income securities may be purchased at a
price that includes compensation to the underwriter.
Decisions with respect to the purchase and sale of the Fund's portfolio,
including allocation of portfolio business and the negotiation of the price of
the securities and commissions, if any, are made by the Adviser. Neither the
Adviser nor any company affiliated with it will act as a broker or dealer for
the purposes of executing portfolio transactions for the Funds.
The primary consideration in allocating transactions to brokers or dealers
is prompt and effective execution of orders at the most favorable security
prices obtainable ("best execution"). When this primary consideration of best
execution has been met, consideration may be given to additional factors, such
as furnishing of supplemental research and other services deemed to be of value
to the Trust or to the Adviser; the Adviser is authorized to execute orders with
dealers or brokers that provide 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
31
<PAGE>
incidental thereto (such as clearance and settlement). The research may be
useful to the Adviser in serving all the Funds and other accounts managed by the
Adviser and, conversely, supplemental research obtained by the placement of
business of such other accounts may be useful to the Adviser in carrying out its
obligations to the Funds.
The Funds paid the following amounts in brokerage commissions during the last
three fiscal years:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
10/31/99 10/31/98 10/31/97
----------------- ----------------- -----------------
<S> <C> <C> <C>
Asset Allocation Fund $197,661 $208,257 $78,653
REIT Index Fund $108,356 $137,110 $125,631
</TABLE>
As of October 31, 1999, the Money Market Fund held the following securities of
its regular broker-dealers:
Name of broker-dealer or parent Principal (000s)
-----------------
American Express $40,000
Household Finance $25,000
First Chicago Financial Corp $6,000
Ford Motor Credit $34,000
Banc One Financial $10,000
Nesbitt Burns Securities $3,836
As of October 31, 1999, the Asset Allocation Fund held the following securities
of its regular broker-dealers:
Name of broker-dealer or parent Principal (000s) Shares
----------------- -------------
Ford Motor Credit $1,100
Citigroup 16,500
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
who 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 October 31, 1999, the amount of transactions and related
brokerage commissions allocated to brokers because of research services provided
to the Funds were as follows:
Transactions Commissions
----------------- -----------------
Asset Allocation Fund $37,776,979 $58,844
32
<PAGE>
DETERMINATION OF NET ASSET VALUE
General
The Trust is open for business on each day that the New York Stock Exchange
is open for trading (the NYSE is closed on: New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day), except that shares of the Money Market
Fund and Government Securities Fund may not be purchased or redeemed on 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
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and over-the-counter markets throughout the world, the calculation of the net
asset value of Funds investing in foreign securities may not take place
contemporaneously with the valuation of such foreign securities in such Fund.
Securities for which market quotations are not readily available are valued
at fair value as determined in good faith by or under the direction of the
Trustees of the Trust, including valuations provided by a pricing service
retained for this purpose.
Exchange listed put options written and options purchased are valued on the
primary exchange on which they are traded. Over-the-counter options written or
purchased by a Fund are valued based upon prices provided by market-makers in
such securities. Exchange-traded financial futures contracts are valued at their
settlement price established each day by the board of trade or exchange on which
they are traded.
Short-term debt securities 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 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.
RETIREMENT PROGRAMS
The Trust makes available a Retirement Plan for Self-Employed Individuals
("Keogh Plan") with both money purchase pension plan and profit sharing plan
options, Simplified Employee Pension Plans ("SEPs") and Individual Retirement
Accounts ("IRAs"). Contributions to each are invested, and dividends and
distributions are automatically reinvested, in shares of the appropriate Fund.
Generally, the maximum contribution allowable each year to an IRA is the lesser
of $2,000 or 100% of compensation includible in gross income for the year, and
the maximum annual contribution allowable to a Keogh Plan is the lesser of (i)
$30,000 or (ii) 25% of an employee's compensation or a self-employed
individuals' earned income (net earnings reduced by Keogh Plan contributions)
for the year. Additionally, the maximum deduction allowable each year for
contributions to the profit sharing option of a Keogh Plan is, generally, 15% of
an employee's compensation or a self-employed individual's earned income (net
earnings reduced by Keogh Plan contributions) for the year. Under a SEP, an
employer, or self-employed individual, is permitted to contribute a
discretionary amount each year up to the lesser of $30,000 or 15% of an
employee's compensation for the year, or a self-employed individual's earned
income (net earnings reduced by SEP contributions) for the year, into an
individual IRA for each employee or self-employed individual. The annual
compensation of each employee and the earned income of each self-employed
individual which can be taken into account under a Keogh Plan and a SEP for any
year cannot exceed $170,000 for 2000. This compensation limitation is to be
adjusted in future years by the Internal Revenue Service for increases in the
cost-of-living. A self-employed individual may contribute to either a Keogh Plan
or a SEP and, in either case, may also contribute to an IRA. The custodial
agreements for the IRAs provide that Firstar Mutual Fund Services LLC,
Milwaukee, Wisconsin, will provide the custodial service unless a different
custodian is specified.
Firstar Mutual Fund Services LLC would receive as compensation from the
participant under the Keogh Plan an annual maintenance fee of $12.50 per
participant. Special services not contemplated in the annual maintenance fee
will be rendered by Firstar Mutual Fund Services LLC for such additional charges
as will reasonably compensate it for the services provided. Fees may be changed
with at least 30 days' prior written notice. The annual maintenance fee payable
to Firstar Mutual Fund Services LLC with respect to an IRA, including each
individual IRA established under a SEP, is presently $12.50 per account and may
be changed at any time. Fees under any of these types of accounts remaining
unpaid may be charged against the accounts. If a custodian other than Firstar
Mutual Fund Services LLC is specified, fees will be determined by such
custodian.
The Trust intends to request the Internal Revenue Service (the "IRS") to
issue an opinion letter that its Keogh Plan is qualified under section 401(a) of
the Internal Revenue Code of 1986, as amended (the "Code"), and it intends
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to make any amendment to its Keogh Plan requested by the IRS as a condition of
issuing such opinion letter. Furthermore, the Trust intends to obtain approval
from the IRS with respect to money purchase pension plan and profit sharing plan
options for its Keogh Plan with the result that self-employed persons may adopt
either or both of such plans. The IRA Custodial Agreement has not been submitted
to the IRS for approval because it incorporates IRS form 5305-A which makes such
submission unnecessary.
The employer or individual, as the case may be, should consult his or her
tax adviser or attorney as to the applicability of any Keogh Plan, SEP or IRA to
his or her particular situation. Additionally, since these retirement programs
involve commitments covering future years, the investment objectives of each
Fund, as described in the Prospectus and in this Statement of Additional
Information, should be carefully considered.
For further details, including the right to appoint a successor custodian,
see the IRA Application Form, IRA Custodial Agreement and IRA Disclosure
Statement and other materials which are available from the Trust, telephone
(800) 266-3637.
For a discussion of income tax withholding on certain distributions from
qualified retirement plans or tax-sheltered annuity plans, see "Taxes" below.
YIELD AND PERFORMANCE INFORMATION
The yield of the Money Market Fund for the seven-day period ended October
31, 1999 was 5.38%. 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, 1999 was
5.52%. 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,
1999 and for the period from inception to October 31, 1999 for the Funds were as
follows:
Inception Year Ended Inception
Date 10/31/99 to 10/31/99
Government Securities Fund 9/3/96 -2.50% 6.46%
Asset Allocation Fund 3/1/94 14.91% 14.84%
REIT Index Fund 9/3/96 -6.31% 3.84%
The preceding returns were computed in accordance with the rules for
standardized computation of performance
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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.
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.
REIT Index Fund
For purposes of advertising, performance of 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 and assumes the reinvestment
of dividends and distributions. Total return generally is expressed as a
percentage rate which is calculated by combining the income and principal
changes for a specified period and dividing by the maximum offering price per
share at the beginning of the period. Advertisements may include the percentage
rate of total return or may include the value of a hypothetical investment at
the end of the period which assumes the application of the percentage rate of
total return.
Average annual total return and total return will be calculated as
described above.
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TAXES
Each Fund has qualified, and intends to remain qualified, as a "regulated
investment company" under Subchapter M of the Code. In order to remain
qualified, the Fund must, among other things, (i) derive in each taxable year at
least 90% of its gross income from dividends, interest, gains from the sale or
other disposition of stock or securities or foreign currencies or other income
derived with respect to its business of investing in such stock, securities or
currencies, and (ii) diversify its holdings so that, at the end of each quarter
of its taxable year, (a) at least 50% of the value of its assets is represented
by cash, cash items, U.S. Government securities, and other securities limited,
in respect of any one issuer, to a value not greater than 5% of the value of the
Fund's total assets and 10% of the outstanding voting securities of such issuer
and (b) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than the U.S. Government).
As a regulated investment company, a Fund is generally not subject to U.S.
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 and gains, exclusive of net capital gains) each year.
If a Fund engages in certain hedged transactions, the transaction may be
treated as a deemed sale of the appreciated property which may accelerate the
gain on the hedged transaction.
The Non-Money Market Funds, each in accordance with its investment
restrictions contained herein, may generate capital gain or loss. In addition,
if a Fund trades in certain options, futures, and forward contracts, the Fund
may be required to recognize its unrealized gains and losses on those contracts
at the end of its fiscal year. In such event, 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
general, distributions of net capital gain (i.e. a Fund's net long-term capital
gains in excess of its net short-term capital losses), when designated as such
by a Fund, are treated as gain recognized by you from the sale or exchange of a
capital asset held for more than one year, regardless of how long you have held
your Fund shares.
In general, among other circumstances, a Fund will generate capital gain or
loss upon liquidating an investment in order to change the composition of its
investment portfolio or, due to the small size of the Fund, in order to satisfy
an unexpected level of redemption requests.
A non-deductible 4% excise tax will be imposed on the Fund to the extent a
Fund does not distribute during each calendar year (i) 98% of its ordinary
income for such calendar year, (ii) 98% of its capital gain net income for the
one-year period ending on October 31 of such calendar year and (iii) certain
other amounts not distributed in previous years. Each Fund intends to distribute
its income and gains in a manner so as to avoid the imposition of this 4% excise
tax.
Distributions declared by a Fund in October, November or December of a
year, payable to you as of a record date in such a month, and paid during the
following January, will be treated for U.S. federal income tax purposes as paid
by the Fund and received by you on December 31 of the calendar year declared.
If the net asset value of shares is reduced below your 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 U.S. federal income tax purposes, your original cost continues as
your tax basis and, on redemption, your gain or loss is the difference between
such basis and the redemption price.
Income tax withholding at a rate of 20% is applicable to any distribution
from a qualified retirement plan, such as the Defined Contribution Plan or
403(b)(7) 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. All
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qualified retirement plans and plans subject to Section 403(b) of the Internal
Revenue Code 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 retirement vehicle such as an IRA within 60 days
without subjecting any part of the distribution to income tax (and a possible
additional 10% penalty tax if the shareholder has not attained age 59 1/2), the
shareholder will have to contribute to the IRA or other retirement vehicle the
amount of the distribution (after withholding) plus an amount equal to the
amount withheld. If the full amount of the distribution (including the amount
withheld) is not contributed to another qualified retirement vehicle within 60
days, the portion of the distribution which is not contributed will be subject
to income tax, plus a possible additional 10% penalty if the shareholder has not
attained age 59 1/2. The amount withheld will be applied to reduce the
shareholder's federal income tax liability and may be refunded by the Internal
Revenue Service to the shareholder upon filing a federal income tax return if
the total amount withheld from the shareholder exceeds such tax liability.
The rules broadly define distributions which qualify for rollover
treatment. Shareholders who expect to receive distributions which may qualify
for rollover treatment and therefore may be subject to 20% withholding should
consult their own tax advisers for a complete discussion of the impact of these
rules on such distributions.
Foreign Investments
If a Fund purchases shares in a foreign corporation treated as a "passive
foreign investment company" ("PFIC") for U.S. federal income tax purposes, 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 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 receives
in that year from the PFIC.
The foregoing is only a general summary of certain provisions of the Code
and current Treasury Regulations applicable to each Fund and its shareholders.
The Code and such regulations are subject to change by legislative or
administrative action.
The tax consequences to a foreign shareholder of a Fund may be different
from those described herein. Foreign shareholders are advised to consult their
own tax advisors with respect to the particular tax consequences to them of an
investment in a Fund.
Distributions to you may also be subject to state, local, and foreign
taxes. We urge you to consult your tax advisors regarding the application of
federal, state, local, and foreign tax laws.
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ADDITIONAL INFORMATION
Custodian, Transfer Agent and Accounting Agent
Firstar Mutual Fund Services LLC ("Firstar") is the custodian, transfer and
dividend paying agent, and accounting agent for the Trust. The principal office
of Firstar Mutual Fund Services LLC is located at 777 E. Wisconsin Avenue,
Milwaukee, Wisconsin 53202. Under the custodian agreement between the Trust and
Firstar, the bank may appoint a subcustodian bank with the approval of the
Trust's Trustees. Firstar 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,
1999 are incorporated herein by reference to the Trust's Annual Report to
Shareholders filed with the SEC on January 7, 2000.
Legal Counsel
Sidley & Austin, Bank One Plaza, 10 South Dearborn, 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.
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Other Information
This Statement of Additional Information and the Prospectus for the Trust do
not contain all the information set forth in the registration statement and
exhibits relating thereto, which the Trust has filed with the Securities and
Exchange Commission, Washington, D.C. under the Securities Act of 1933 and the
1940 Act, to which reference is hereby made.
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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
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rated categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB-B-CCC-CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the 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:
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F-1+: Exceptionally strong credit quality; the strongest degree of
assurance for timely payment.
F-1: Very strong credit quality, assurance of timely payment is only
slightly less in degree than issues rated "F-1+".
F-2: Good credit quality; satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues assigned
"F-l+" or "F-1" ratings.
Duff & Phelps, Inc. ("Duff & Phelps"): The following ratings are for
commercial paper (defined by Duff & Phelps as obligations with maturities, when
issued, of under one year), asset-backed commercial paper, and certificates of
deposit (the ratings cover all obligations of the institution with maturities,
when issued, of under one year, including bankers' acceptances and letters of
credit): Duff 1+: Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
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."
43
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
(a)(1) Agreement and Declaration of Trust of Aon Funds (the "Trust"). **
(a)(2) Resolutions Authorizing Six Series of Shares as amended by Resolutions
Terminating and Liquidating Two Series.
(b) By-Laws of the Trust. **
(c) Not Applicable
(d)(1) Form of Investment Advisory Agreement between AAI and the Trust,
covering the Money Market Fund. **
(d)(2) Form of Investment Advisory Agreement between AAI and the Trust,
covering the Government Securities Fund.**
(d)(3) Form of Investment Advisory Agreement between AAI and the Trust,
covering the Asset Allocation Fund. **
(d)(4) Form of Investment Advisory Agreement between AAI and the Trust,
covering the REIT Index Fund. **
(d)(5) Permanent and Irrevocable Fee Waive Letter
(e) Form of Distribution Agreement between the Trust and Aon Securities
Corporation.**
(f) None.
(g)(1) Form of domestic Custodian Agreement between the Trust and Firstar
Mutual Fund Services LLC ("Firstar"). **
(h)(1) Form of Administration Agreement between the Trust and Aon Securities
Corporation ("ASC"). **
(h)(2) Form of Transfer Agency Agreement between the Trust and Firstar. **
(h)(3) Form of Accounting Servicing Agreement between the Trust and
Firstar. **
(h)(4) Morgan Stanley REIT Index License Agreement. **
(h)(5) Agreement and Plan of Reorganization. **
(h)(6) Limited Powers of Attorney. **
(i) Opinion and Consent of Prickett, Jones, Elliott, Kristol & Schnee
concerning the legality of the securities to be issued. ***
(j) Consent of Ernst & Young LLP.
(k)(1) 1999 Report of Independent Auditors. ****
44
<PAGE>
(k)(2) 1999 Statement of Assets and Liabilities. ****
(k)(3) 1999 Statement of Operations. ****
(k)(4) 1999 Statements of Changes in Net Assets. ****
(k)(5) 1999 Portfolio of Investments. ****
(k)(6) 1999 Notes to Financial Statements. ****
(l)(1) Form of Investment Commitment Letter for Initial Capital of Money
Market and Asset Allocation Funds. *
(l)(2) 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. **
(l)(3) Form of Subscription Agreement between Registrant and Combined relating
to the Government Securities Fund, REIT Index and International Equity
Funds. **
(m) None
(o) None.
(p)(1) Aon Funds Code of Ethics
(p)(2) Aon Advisors, Inc. Code of Ethics
- ----------------------------------
* 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 7, 1999.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Incorporated herein by reference to post-effective amendment No. 13 to
the Registrant's registration on Form N-1A, File No. 33-43133, filed with the
Securities and Exchange Commission on March 1, 1999.
ITEM 25. INDEMNIFICATION.
See Article VII of the Trust's Agreement and Declaration of Trust,
filed as Exhibit (a)(1) to this Registration Statement, which provision is
incorporated herein by reference.
45
<PAGE>
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 maintains a directors and officers
"errors and omission" liability insurance policy under which the Trust and its
directors and officers, among other persons, are named insured.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISOR
The Trust's investment advisor, Aon Advisors, Inc., is a
wholly-owned subsidiary of Aon Corporation. Aon Advisors, Inc. provides
investment advice and management to other investment companies, pension plans,
corporations and other organizations. Assets under management include equity
securities, fixed income securities and real estate.
Set forth below is a list of the directors and principal
officers of Aon Advisors, Inc., indicating each business, profession, vocation,
or employment of a substantial nature in which each person has been engaged at
any time during the past two fiscal years, for his or her own account or in the
capacity of director, officer, partner or trustee.
<TABLE>
<CAPTION>
NAME AND POSITION WITH OTHER BUSINESS, PROFESSION,
AON ADVISORS, INC. VOCATION, OR EMPLOYMENT
- ---------------------- ---------------------------
<S> <C>
Michael A. Conway Director and President, Aon Advisors, Inc., since
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.
John Lagedrost Executive Director, Aon Advisors, Inc. since 1997;
Executive Director Senior Portfolio Manager since 1996; Vice President
since April 1995.
Brian Lawrence Treasurer, Aon Advisors, Inc. since 1999;
Treasurer Controller, Aon Securities Corp. since 1996
Controller, Aon Funds since 1996
</TABLE>
46
<PAGE>
ITEM 27. 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 ("ASC"), 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.
POSITIONS AND
POSITIONS AND OFFICES OFFICES WITH
NAME WITH PRINCIPAL UNDERWRITER FUND
- ------------------------ -------------------------------- -------------
Kevin R. Callahan Chairman of the Board of Directors None
William Delaney Director and Chief Compliance Officer None
Kevin P. Diamond President, Director, and None
General Securities Principal
Brian H. Lawrence Controller and Financial Operations Controller
Principal
(c) Not applicable.
ITEM 28. 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 Mutual Fund Services LLC, 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 29. MANAGEMENT OF SERVICES.
There are no management related service contracts not
discussed in Part A or Part B.
ITEM 30. UNDERTAKINGS.
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.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Trust certifies that it meets all of the
requirements for effectiveness of this registration statement under rule 485(b)
under the Securities Act and 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 29, 2000.
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 29, 2000.
/s/ Michael A. Conway In his own capacity as] President
- ------------------------------ and Trustee, and as Attorney-in-Fact
Michael A. Conway for each of the Trustees and
Officers 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
48
<PAGE>
EXHIBITS FILED WITH FORM N-1A
Exhibit Description of Exhibit
- ------- ----------------------
(a)(2) Resolutions Authorizing Six Series of Shares as amended by
Resolutions Terminating and Liquidating Two Series
(d)(5) Permanent and Irrevocable Fee Waive Letter
(j) Consent of Ernst & Young LLP
(p)(1) Aon Funds Code of Ethics
(p)(2) Aon Advisors, Inc. Code of Ethics
EXHIBIT (a)(2)
RESOLUTIONS AUTHORIZING SIX SERIES OF SHARES AS AMENDED BY RESOLUTIONS
TERMINATING AND LIQUIDATING TWO SERIES
Authorization of Six Series of Shares
(and Classes within such Series) of the Trust
WHEREAS, Article III, Section 1 of the Agreement and Declaration of
Trust of Aon Funds (the "Declaration of Trust") grants full power and authority
to the trustees (the "Trustees") of the trust created thereby (the "Trust") to
authorize the division of Shares (as defined in the Declaration of Trust) into
two or more Series (as defined in the Declaration of Trust) and the division of
any Series into two or more Classes (as defined in the Declaration of Trust);
and
WHEREAS, the Trustees deem it to be in the best interests of the Trust
to authorize the issuance of Six Series of the Trust, with each Series initially
consisting of two Classes, as described more fully below;
NOW, THEREFORE, be it
RESOLVED, that the Trustees hereby authorize, and establish and
designate, the following six Series of the Trust:
Asset Allocation Series
S&P 500 Index Series
REIT Index Series
International Equity Series
Government Securities Series; and
Money Market Series
FURTHER RESOLVED, that the investment objectives, policies,
restrictions and limitations of the Series so authorized shall be as set forth
in the Prospectus and Statement of Additional Information contained in
Post-Effective Amendment No. 8 to the Registration Statement on Form N-1A of Aon
Asset Management Fund, Inc., which is expected to be adopted as the Registration
Statement of the Trust (the "Registration Statement"); and
FURTHER RESOLVED, that to the extent the Registration Statement
provides that the investment objectives, policies, restrictions or limitations
set forth with respect to a particular series are "fundamental" policies of that
series, such "fundamental" policies with respect to such series are hereby
approved and adopted as the "fundamental" policies of the corresponding Series
of the Trust authorized hereby; and
FURTHER RESOLVED, that each Series so authorized shall consist of two
Classes of Shares, to be known as "Class C Shares" and "Class Y Shares," or by
such other or additional names as the Trustees may from time to time deem
appropriate; and
FURTHER RESOLVED, that the foregoing division of the Series so
authorized into Classes shall not be deemed to preclude the Trustees from
authorizing additional Classes within such Series from time to time in
accordance with the provisions of the Declaration of Trust; and
FURTHER RESOLVED, that the number of authorized Shares of each Series
and Class so authorized shall be unlimited; and
<PAGE>
FURTHER RESOLVED, that, subject to the following resolutions, the
relative rights, powers, privileges, preferences, and duties of each Series so
authorized be and they hereby are fixed and determined to be identical to the
relative rights, powers, privileges, preferences and duties pertaining to a
Series as set forth in the Declaration of Trust and the By-Laws (as defined in
the Declaration of Trust); and
FURTHER RESOLVED, that the relative rights, powers, privileges,
preferences and duties of each Class so authorized be and they hereby are fixed
and determined to be identical to the relative rights, powers, privileges,
preferences and duties pertaining to a Class as set forth in the Declaration of
Trust and the By-Laws, subject to the provisions of the Trust's "Plan Pursuant
to Rule 18f-3 (d) Under the Investment Company Act of 1940," a copy of which is
attached as Exhibit A hereto and incorporated by reference herein (the "Plan");
and
FURTHER RESOLVED, no holder of Shares of any Series or Class so
authorized, as such, shall have any preemptive or other right to acquire,
purchase or subscribe for any Shares or other securities of the Trust which the
Trust may hereafter issue or sell, whether of the same or of any other Series or
Class or otherwise, unless the Trustees shall so provide by Resolution (as
defined in the Declaration of Trust); and
FURTHER RESOLVED, that holders of Shares of each Series and Class shall
have no exchange privileges, and the Shares shall not be subject to any
conversion features, except (1) those provided for in the Plan and (2) those
that the Trustees may provide by Resolution; and
FURTHER RESOLVED, that Shares of each Series and Class so authorized
shall be subject to redemption at the option of the holder thereof in accordance
with the provisions of Article IV, Section 3 of the Declaration of Trust, and at
the option of the Trust in accordance with the provisions of Article IV, Section
4 of the Declaration of Trust; and
FURTHER RESOLVED, that the foregoing resolutions shall be effective as
of the date of execution and delivery by the Trust and Aon Asset Management
Fund, Inc. ("Company") of the Agreement and Plan of Reorganization by and
between the Trust and the Company which Agreement and Plan of Reorganization has
been approved by the Trustees of the Trust; and
FURTHER RESOLVED, that the foregoing resolutions be and they hereby are
incorporated by reference into the Declaration of Trust; and
FURTHER RESOLVED, that the officers of the Trust are authorized and
directed to prepare and file with the Securities and Exchange Commission a
post-effective amendment or amendments to the Trust's registration statement
under the Securities Act of 1933 and the Investment Company Act of 1940 for the
purposes or registering shares of the Series and Classes so authorized under
said Acts; and
FURTHER RESOLVED, that the Trustees, at any time and from time to time,
may cause the Trust to issue whole and fractional Shares of the Series and
Classes so authorized, to such Person (as defined in the Declaration of Trust)
or Persons, for such type and amount of consideration as is permitted by Section
3802 (a) of the Delaware Business Trust Act (including cash and securities or
other property), or for no consideration, and on such other terms as are not
inconsistent with the foregoing resolutions, as the Trustees may deem
appropriate; and
FURTHER RESOLVED, that the ownership and transfer of Shares of the
Series and Classes so authorized shall be recorded on the books of the Trust or
of a transfer or similar agent for the Trust, that no certificates evidencing
and certifying the ownership of such Shares shall be issued except as the
Trustees may otherwise determine from time to time in their sole discretion and
that such record books shall be conclusive as to who are the holders of such
Shares and as to the number of Shares of each such Series and Class held from
time to time by each.
<PAGE>
PROPOSED RESOLUTIONS
RESTRUCTURING OF S&P 500 INDEX FUND
AND INTERNATIONAL EQUITY FUND
WHEREAS, Article II, Section 1 of the Agreement and Declaration of
Trust (the "Declaration of Trust") of Aon Funds grants full power and authority
to the trustees (the "Trustees") of the trust created thereby (the "Trust") to
authorize the division of Shares (as defined in the Declaration of Trust) into
two or more Series (as defined in the Declaration of Trust) and the division of
any Series into two or more Classes (as defined in the Declaration of Trust);
WHEREAS, the Trustees have authorized the issuance of six Series of the
Trust, with each Series currently consisting of one Class;
WHEREAS, among the six Series of the Trust are the S&P 500 Index Fund
and the International Equity Fund (collectively, the "Affected Series");
WHEREAS, the Aon Savings Plan (the "Plan") and Aon Corporation and its
affiliates have substantial investments in the Affected Series and have notified
the Trust that they intend to redeem their shares in each such Series
(collectively, the "Redemptions");
WHEREAS, as a result of the respective Redemptions, each Affected
Series will be greatly reduced in size, with the assets of the S&P 500 Index
Fund being reduced from approximately $300 million to approximately $2.4 million
and the assets of the International Equity Fund being reduced from approximately
$52 million to $450,000;
WHEREAS, Article IX, Section 1 of the Declaration of Trust, in
accordance with Title 12, Chapter 38, Section 3808, of the Delaware Code,
entitled "Treatment of Delaware Business Trust," provides that any Series or
Class may be terminated at any time by the Trustees, by Resolution (as defined
in the Declaration of Trust) and written notice to the shareholders of that
Series or Class;
WHEREAS, Trustees have determined that termination and liquidation of
each of the Affected Series of the Trust is advisable;
NOW, THEREFORE be it
RESOLVED, that, effective as of the date of the Redemption relating to
the S&P 500 Index Fund Series of the Trust, such Series shall be terminated,
dissolved and liquidated, and as of the date of the Redemption relating to the
International Equity Fund Series of the Trust, such Series shall be terminated,
dissolved and liquidated, in each case pursuant to the following plan
(hereinafter referred to as the "Plan"), which is hereby adopted by the
Trustees:
<PAGE>
TERMINATION AND LIQUIDATION OF
AON FUNDS S&P 500 INDEX FUND
AND INTERNATIONAL EQUITY FUND
(a) As soon as practicable after the date of the Redemption
relating to each of the S&P 500 Index Fund Series and the
International Equity Fund Series (collectively, the "Affected
Series") of Aon Funds, a Delaware business trust (the
"Trust"), the proper officers of the Trust shall perform such
acts, execute and deliver such documents, and do all things as
may be reasonably necessary or advisable to complete the
termination, dissolution and liquidation of such Affected
Series, including, but not limited to, the following: (i) sell
all of the portfolio securities and any and all other property
and assets of such Affected Series for cash at one or more
public or private sales and at such prices and on such terms
and conditions as such officers shall determine to be
reasonable and in the best interests of such Affected Series
and its shareholders; (ii) prosecute, settle or compromise all
claims or actions of such Affected Series or to which such
Affected Series is subject; (iii) file Form____ with the
Internal Revenue Service, together with certified copies of
the Trustees' resolutions approving this Plan relating to such
Affected Series; (iv) mail notice to all known creditors of
such Affected Series, at their respective addresses shown on
the records of such Affected Series or the Trust, that
termination and liquidation of such Affected Series has been
approved; (v) execute in the name and on behalf of such
Affected Series or the Trust on behalf of such Affected Series
those contracts of sale, deeds, assignments, notices and other
documents as in the judgement of such officers may be
necessary, desirable or convenient in connection with the
carrying out of the liquidation of such Affected Series; (vi)
provide written notice of the termination and liquidation of
such Affected Series to each shareholder thereof; and (vii)
pay all costs, fees and expenses, taxed and other liabilities
incurred by such Affected Series and/or by the Trust on behalf
of such Affected Series in carrying out the termination and
liquidation of such Affected Series.
(b) As soon as practicable, the proper officers of the Trust shall
apply the assets of each terminated, dissolved and liquidated
Affected Series to the payment, satisfaction and discharge of
all existing debts and obligations of such Affected Series,
including necessary expenses of termination, dissolution and
liquidation, and distribute in one or more payments the
remaining assets among the shareholders of such Affected
Series, with each such shareholder receiving his or her
proportionate share of each payment.
(c) The proper officers of the Trust may, if such officers deem it
appropriate, establish a reserve to meet any contingent
liabilities of either or both terminated, dissolved and
liquidated Affected Series, including any claims or actions to
which such respective Affected Series or the Trust on behalf
of such Affected Series may be subject, and any amount that is
placed in such reserve shall be deducted from the net assets
distributed to shareholders of such Affected Series until the
contingent liabilities have been settled or otherwise
determined and discharged.
(d) In the event that the Trust is unable to distribute all of the
net assets distributable to shareholders of either or both
terminated, dissolved and liquidated Affected Series because
of the inability to locate shareholders to whom liquidation
distributions are payable, the proper officers of the Trust
may create in the name and on behalf of such respective
Affected Series a liquidation trust with a financial
institution and, subject to applicable abandoned property
laws, deposit any remaining assets of such Affected Series in
such trust for the benefit of the shareholders of such
Affiliated Series that cannot be located. The expenses of any
such trust shall be charged against the assets held therein.
FURTHER RESOLVED, that the officers of the Trust be, and each
of them hereby is, authorized
<PAGE>
to take any and all action and to file all such certificates and
documents as may be necessary to carry out the intent and purposes of the
foregoing resolutions.
EXHIBIT (d)(5)
PERMANENT AND IRREVOCABLE FEE WAIVE LETTER
Aon Advisors, Inc.
123 North Wacker Drive
29th Floor
Chicago, IL 60606
February 29, 2000
Aon Funds
123 North Wacker Drive
Chicago, IL 60606
Attention: Board of Trustees
Gentlemen:
The undersigned, Aon Advisors, Inc. (the "Advisor"), serves as
an investment adviser to Aon Funds, a Delaware business trust (the "Trust"), and
each of the four investment portfolios of the Trust -- the Money Market Fund,
the Government Securities Fund, the Asset Allocation Fund and the REIT Index
Fund (collectively, the "Funds") -- pursuant to respective investment advisory
agreements with the Trust on behalf of each Fund ("Advisory Agreements"). Each
Advisory Agreement is dated September 3, 1996.
Under the Advisory Agreements, the investment advisory fee
payable by each Fund to the Advisor is based upon the average daily net assets
of such Fund, at the following annual rates:
Money Market Fund: .30%
Government Securities Fund: .45% of the first $100 million;
.40% of the next $100 million;
.35% of the next $100 million;
.30% of the next $100 million;
and .25% of amounts in excess of
$400 million
Asset Allocation Fund: .65% of the first $250 million;
.55% of the next $250 million;
and .45% of amounts in excess of $500
million
REIT Index Fund: .60% of the first $100 million;
.55% of the next $100 million;
and .50% of amounts in excess of $200
million.
For at least the last several years, the Advisor has waived a
portion of investment advisory fees payable by each Fund under its respective
Advisory Agreement.
<PAGE>
For instance, until at least February 29, 2000, the Advisor has agreed to waive
sufficient investment advisory fees to result in a net effective annual advisory
fee rate for each Fund, stated as a percentage of average daily net assets, as
follows:
Money Market Fund .10%
Government Securities Fund .10%
Asset Allocation Fund .25%
REIT Index Fund .10%
The purpose of this letter is to confirm the agreement of the
Advisor to irrevocably and permanently continue the fee waivers described above
for each of the Funds.
Very truly yours,
Aon Advisors, Inc.
By: /s/ Michael A. Conway
---------------------------
Michael A. Conway
President
Acknowledged and Accepted:
Aon Funds, on behalf of each of the Money
Market Fund, the Government Securities Fund,
the Asset Allocation Fund and the REIT Index Fund
By: /s/ Michael A. Conway
-----------------------------
Michael A. Conway
Chairman and President
EXHIBIT (j)
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 10, 1999 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. 14 to the Registration Statement
under the Securities Act of 1933 (Registration No. 33-43133) and in this
Amendment No. 15 to the Registration Statement under the Investment Company Act
of 1940 (Registration No. 811-6422).
ERNST & YOUNG LLP
Chicago, Illinois
February 24, 2000
EXHIBIT (p) (1)
AON FUNDS CODE OF ETHICS
AON FUNDS
CODE OF ETHICS
The Code of Ethics is given to all trustees, officers and advisory persons of
Aon Funds ("the Trust"). Those persons are generally required to file various
written reports with the Trust, detailing their security holdings and security
transactions and general compliance with the Code.
January 31, 2000
<PAGE>
AON FUNDS
CODE OF ETHICS
1. Purposes
This Code of Ethics has been adopted by the Board of Trustees of Aon Funds (the
"Trust"), in accordance with Rule 17j-l(c) under the Investment Company Act of
1940 (the "Investment Company Act"). Rule 17j-1 under the Investment Company Act
generally proscribes fraudulent, deceptive or manipulative practices with
respect to purchases or sales of securities held or to be acquired by investment
companies, if effected by certain persons affiliated with such companies or
their investment advisers. The purpose of this Code of Ethics is to provide
regulations and procedures consistent with the Investment Company Act and Rule
17j-1 and to prevent the above-referenced persons from engaging in any conduct
prohibited by Rule 17j-l(b), as follows:
It shall be wrongful for any affiliated person of or principal
underwriter for the Trust, or any affiliated person of an investment
adviser of or principal underwriter for the Trust, in connection with
the purchase or sale, directly or indirectly, by such person of a
security held or to be acquired, as defined herein, by the Trust -
(1) To employ any device, scheme or artifice to defraud the Trust;
(2) To make to the Trust any untrue statement of a material fact
or omit to state to the Trust a material fact necessary in
order to make the statements made, in light of the
circumstances under which they are made, not misleading;
(3) To engage in any act, practice, or course of business that
operates or would operate as a fraud or deceit upon the Trust;
or
(4) To engage in any manipulative practice with respect to the
Trust.
2. Definitions
(a) "Access person" means any Trustee, officer or advisory person
of the Trust and any director, officer or advisory person of
the Manager.
(b) "Advisory person" means (i) any employee of the Trust or the
Manager, or of any company in a control relationship to the
Trust or the Manager, who, in connection with his/her regular
functions or duties, makes, participates in, or obtains
information regarding the purchase or sale of Covered
Securities by the Trust, or whose functions relate to the
making of any recommendations with respect to such purchases
or sales; and (ii) any natural person in a control
relationship to the Trust or the Manager who obtains
information concerning recommendations made to the Trust with
regard to the purchase or sale of Covered Securities by the
Trust.
(c) "Beneficial ownership" shall be interpreted in the same manner
as it would be in determining whether a person is subject to
the provisions of Section 16 of the Securities Exchange Act of
1934 and the rules and regulations thereunder. (See Appendix
A)
(d) "Board" means the Board of Trustees of the Trust.
<PAGE>
(e) "Control" means the power to exercise a controlling influence
over the management or policies of a company, unless such
power is solely the result of holding an official position
with such company.
(f) "Covered Security" shall have the meaning ascribed to the term
"security" in Section 2(a) (36) of the Investment Company Act,
except that it shall not include direct obligations of the
Government of the United States; bankers' acceptances, bank
certificates of deposit, commercial paper and high quality
short-term debt instruments, including repurchase agreements;
and shares of registered open-end investment companies (i.e.,
mutual funds).
(g) "Disinterested Trustee" means a Trustee of the Trust who is
not an "interested person" of the Trust within the meaning of
Section 2(a) (19) of the Investment Company Act.
(h) "Initial public offering" means an offering of securities
registered under the Securities Act of 1933 the issuer of
which, immediately before the registration, was not subject to
the reporting requirements of sections 13 or 15(d) of the
Securities Exchange Act of 1934.
(i) "Limited offering" means an offering of securities that is
exempt from registration under the Securities Act of 1933
pursuant to section 4(2) or section 4(6) or pursuant to Rule
504, Rule 505 or Rule 506 under the Securities Act of 1933.
(j) "Manager" means the investment adviser(s) to the Trust
(currently Aon Advisors, Inc.).
(k) "Purchase or sale of a Covered Security" includes, inter alia,
the purchase or writing (sale) of an option to purchase or
sell a Covered Security.
(l) "Security held or to be acquired" by the Trust means:
(1) Any Covered Security which, within the most recent
(15) calendar days:
(A) is or has been held by the Trust or any
portfolio thereof; or
(B) is being or has been considered by the
Trust or any portfolio thereof or the
Manager for purchase by the Trust or any
portfolio thereof; and
(2) Any option to purchase or sell (write), and any
security convertible into or exchangeable for, a
Covered Security described in the foregoing clause
(1) of this Section 2(l).
(m) "Trust" means Aon Funds, a statutory Delaware business trust,
and an investment company registered under the Investment
Company Act.
3. General Principles
The Trust recognizes that it owes a fiduciary duty to its shareholders.
Consistent with that duty, no access person shall (a) place his/her personal
interests ahead of those of the Trust's shareholders, (b) conduct his/her
personal Covered Securities transactions in a manner that is inconsistent with
this Code of Ethics and creates an actual or potential conflict of interest or
abuses his/her position of trust and responsibility or (c) take inappropriate
advantage of his/her position with the Trust.
4. Prohibited Purchases and Sales
(a) No access person (including advisory persons) shall purchase
or sell, directly or indirectly, any Covered Security in which
he or she has, or by reason of such transaction acquires, any
direct or
<PAGE>
indirect beneficial ownership and which he or she knows or
should have known at the time of such purchase or sale:
(1) Is being considered for purchase or sale by the Trust
or any portfolio thereof, or
(2) Is, on that date, being purchased or sold by the
Trust or any portfolio thereof.
A Covered Security is "being considered for purchase or sale
by the Trust" if a portfolio manager of the Trust or any
portfolio thereof intends to consummate a purchase or sale of
that Covered Security within the next fifteen (15) calendar
days.
(b) No advisory person shall:
(1) Purchase securities in an initial public offering;
(2) Acquire securities in a limited offering prior to
obtaining the written approval of the Manager's
President (or, if the advisory person seeking
approval is the Manager's President, one of the
Manager's Senior Executive Directors). Such approval
shall be granted only if the appropriate person
determines that (a) the purchase is not one which
should be reserved for the Trust and (b) the
opportunity to purchase the security was not offered
to the advisory person because of his or her position
with the Trust or the Manager.
5. Pre-Clearance of Personal Covered Securities Transactions
(a) No advisory person shall purchase or sell, directly or
indirectly, any Covered Security in which he or she has, or by
reason of such transaction acquires, any direct or indirect
beneficial ownership until the proposed purchase or sale has
been reviewed and approved ("pre-cleared") by the portfolio
managers of all Trust portfolios that are authorized to
purchase Covered Securities of the same type. If a portfolio
manager of a Trust portfolio wishes to purchase or sell a
Covered Security in which he or she has, or by reason of such
transaction acquires, any direct or indirect beneficial
ownership, he/she shall pre-clear the transaction with all of
the other portfolio managers of all Trust portfolios that are
authorized to purchase Covered Securities of the same type
(and in no event shall such portfolio manager obtain
pre-clearance from less than two other portfolio managers).
(b) The portfolio managers (or, if appropriate, the President of
the Manager) shall grant a pre-clearance authorization to
purchase or sell a Covered Security if they determine that the
proposed transaction does not involve a Covered Security that
is being purchased or sold by the Trust (including a Covered
Security that has been purchased or sold by the Trust within
one (1) business day prior thereto) or is being considered for
purchase or sale by the Trust, as defined in Section 4(a).
(c) A pre-clearance authorization to purchase or sell a Covered
Security shall remain valid for a period of five (5) business
days. If the purchase or sale transaction is not completed
within that five (5) business day period the advisory person
must have the proposed transaction pre-cleared again. This
re-approval requirement shall apply to transactions involving
market orders as well as transactions involving orders to
purchase or sell Covered Securities at a specific price (or
better).
(d) The portfolio mangers and the President of the Manager shall
maintain records of all proposed personal Covered Securities
transactions which they have pre-cleared for advisory persons.
Those records shall list the name of the advisory person, the
indicated intent to purchase or sell, the name and amount of
the security involved in the transaction, and the date on
which the pre-clearance authorization was granted.
<PAGE>
6. Exempted Transactions
The prohibitions of Section 4(a) and the pre-clearance requirements of Section 5
of this Code shall not apply to:
(a) Purchases or sales effected in any account over which the
individual has no direct or indirect influence or control.
(b) Purchases or sales of Covered Securities which are not
eligible for purchase or sale by the Trust.
(c) Purchases or sales which are nonvolitional.
(d) Purchases which are part of an automatic dividend reinvestment
plan.
(e) Purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of its Covered
Securities, to the extent such rights were acquired from such
issuer, and sales of such rights so acquired.
(f) Purchases of securities of Aon Corporation from, or sales of
securities of Aon Corporation to, Aon Corporation; or
purchases or sales of Aon Corporation common stock in amounts
not exceeding 5,000 shares per business day.
(g) Purchases or sales of direct obligations of the Government of
the United States; bankers' acceptances, bank certificates of
deposit, commercial paper and high quality short-term debt
instruments, including repurchase agreements; and shares of
registered open-end investment companies (i.e. mutual funds).
(h) Purchases or sales of Covered Securities included in the
Morgan Stanley REIT Index in amounts not exceeding 1% of the
ten-day average daily trading volume of the Covered Securities
on the date of purchase or sale, provided that this exemption
shall apply solely in the case where the prohibitions of
Section 4(a) or the pre-clearance requirements of Section 5 of
this Code would otherwise apply due to purchases or sales, or
purchases or sales which are being considered, by the Aon
Funds REIT Index Fund, and shall not apply in the case where
such prohibitions or pre-clearance requirements would apply
due to purchases or sales, or purchases or sales which are
being considered, by any other portfolio of the Trust.
7. Prohibited and Required Disclosures
(a) No access person shall:
(1) Reveal to any other person (except in the normal
course of his or her duties on behalf of the Trust)
any information regarding such Trust's securities
transactions or consideration by the Trust or the
Manager of any such securities transaction.
(2) Recommend any securities transaction by the Trust
without having disclosed his or her interest, if any,
in such securities or the issuer thereof, including
without limitation (i) his or her direct or indirect
beneficial ownership of any securities of such
issuer, (ii) any contemplated transaction by such
person in such securities, (iii) any position with
such issuer or its affiliates and (iv) any present or
proposed business relationship between such issuer or
its affiliates, on the one hand, and such person or
any party in which such person has significant
interest, on the other.
(b) Every advisory person who serves on the board of directors of
a publicly traded company shall disclose that fact to the
Trustees of the Trust. Additionally, prior to causing the
Trust to purchase or sell a security of the company for which
he/she serves as director, the advisory person shall
<PAGE>
have the proposed transaction reviewed and approved by the
President of the Manager (or, if the advisory person seeking
approval is the Manager's President, one of the Manager's
Senior Executive Directors). In seeking such review and
approval, the advisory person shall disclose the fact that
he/she is a director of the company whose securities are
proposed to be purchased or sold.
8. Reporting
(a) Unless excepted by Section 8(b), every access person of the
Trust and the Manager (other than an access person solely with
respect to the Money Market Fund) shall report to the Trust as
follows:
(1) Initial Holdings Reports. No later than ten (10)
calendar days after the person becomes an access
person, the following information:
(A) The title, number of shares and principal
amount of each Covered Security in which the
access person had any direct or indirect
beneficial ownership when the person became
an access person;
(B) The name of any broker, dealer or bank with
whom the access person maintained an account
in which any Covered Securities were held
for the direct or indirect benefit of the
access person as of the date the person
became an access person; and
(C) The date that the report is submitted by the
access person.
(2) Quarterly Transaction Reports. No later than ten (10)
calendar days after the end of each calendar quarter,
the following information:
(A) With respect to any transaction during the
quarter in a Covered Security in which the
access person had any direct or indirect
beneficial ownership:
(i) The date of the transaction, the
title, the interest rate and
maturity date (if applicable), the
number of shares and the principal
amount of each Covered Security
involved;
(ii) The nature of the transaction (i.e.,
purchase, sale or any other type of
acquisition or disposition);
(iii) The price of the Covered Security at
which the transaction was effected;
(iv) The name of the broker, dealer or
bank with or through which the
transaction was effected; and
(v) The date that the report is
submitted by the access person.
(B) With respect to any account established by
the access person in which any Covered
Securities were held during the quarter for
the direct or indirect benefit of the access
person:
(i) The name of the broker, dealer or
bank with whom the access person
established the account;
(ii) The date the account was
established; and
<PAGE>
(iii) The date that the report is
submitted by the access person.
(3) Annual Holdings Reports. Annually, the following
information (which information must be current as of
a date no more than thirty (30) calendar days before
the report is submitted):
(A) The title, number of shares and principal
amount of each Covered Security in which the
access person had any direct or indirect
beneficial ownership;
(B) The name of any broker, dealer or bank with
whom the access person maintains an account
in which any securities are held for the
direct or indirect benefit of the access
person; and
(C) The date that the report is submitted by the
access person.
(b) (1) An access person shall not be required to make a
report with respect to transactions effected (i) for
any account over which such person does not have any
direct or indirect influence or control (whether or
not such access person has any direct or indirect
beneficial ownership of such account) or (ii) for any
account over which such person has direct or indirect
influence or control if such person does not have any
direct or indirect beneficial ownership of such
account.
(2) A disinterested Trustee of the Trust who would be
required to make a report solely by reason of being a
Trustee of the Trust need not make:
(A) An initial holdings report under Section
8(a)(1) and an annual holdings report under
Section 8(a)(3); and
(B) A quarterly transaction report under Section
8(a)(2), unless such Trustee knew or, in the
ordinary course of fulfilling his/her
official duties as Trustee of the Trust,
should have known that, during the fifteen
(15) calendar-day period immediately before
or after the date of a transaction in a
Covered Security by the Trustee, the Trust
purchased or sold the Covered Security, or
the Trust or the Manager considered
purchasing or selling the Covered Security.
For this purpose, a disinterested Trustee is
not deemed to know (nor should he/she be
expected to know in the ordinary course of
fulfilling his/her duties as a Trustee) of
purchases or sales of Covered Securities by
the Aon Funds REIT Index Fund solely as a
result of such Covered Securities being
included in the Morgan Stanley REIT Index.
(3) An access person need not make a quarterly
transaction report under Section 8(a)(2) if all the
information in the report would duplicate information
required to be recorded under Rule 204-2(a)(12) or
(13) of the Investment Advisers Act of 1940 or if the
report would duplicate information contained in
broker trade confirmations or account statements
received by the Trust or the Manager with respect to
the access person in the time period required by
Section 8(a)(2), if all of the information required
by such Section is contained in the broker trade
confirmations or account statements, or in the
records of the Trust or the Manager.
(c) The Trust and the Manager shall institute procedures by which
appropriate management or compliance personnel review the
reports required by Section 8(a).
<PAGE>
(d) The Trust and the Manager shall identify all access persons
who are required to make the reports required by Section 8(a)
and shall inform those access persons of their reporting
obligation.
(e) Any report required by Section 8(a) may contain a statement
that the report shall not be construed as an admission by the
person making such report that he/she has any direct or
indirect beneficial ownership in the Covered Security to which
the report relates.
9. Gifts
No access person shall accept, directly or indirectly, any gift, favor or
service of significant value from any person with whom he or she transacts
business on behalf of the Trust under circumstances where to do so would
conflict with the Trust's best interest or would impair the access person's
ability to be completely disinterested when required, in the course of business,
to make judgments and/or recommendations on behalf of the Trust.
10. Sanctions
Upon discovering a violation of this Code, the Trust may impose such sanctions
as it deems appropriate, including, inter alia, a letter of censure or
termination of the employment of the violator.
11. Approval of Code of Ethics.
The Board, including a majority of disinterested Trustees, shall approve (i)
this Code of Ethics and the code of ethics of the Manager by no later than
September 1, 2000, and (ii) any material changes to these codes of ethics. The
Board shall base its approval of these codes of ethics and any material changes
to them on a determination that they contain provisions reasonably necessary to
prevent access persons from engaging in any conduct prohibited by Rule 17j-1(b),
as summarized in Section 1 hereof. Before approving the code of ethics of the
Trust or the Manager, or any amendment to them, the Board shall receive a
certification from the Trust or the Manager, as applicable, that it has adopted
procedures reasonably necessary to prevent access persons from violating the
code of ethics. From and after September 1, 2000, the Board shall approve the
code of ethics of an investment adviser or principal underwriter before
initially retaining the services of the investment adviser or principal
underwriter. The Board must approve a material change to a code of ethics no
later than six months after adoption of the material change.
12. Administration of Code of Ethics.
(a) The Trust and the Manager shall use reasonable diligence and
institute procedures reasonably necessary to prevent
violations of their codes of ethics.
(b) No less frequently than annually, the Trust and the Manager
shall furnish to the Board, and the Board shall consider, a
written report that:
(1) describes any issues arising under the codes of
ethics or procedures since the last report to the
Board, including, but not limited to, information
about material violations of the codes of ethics or
procedures and sanctions imposed in response to the
material violations; and
(2) certifies that the Trust or the Manager, as
applicable, has adopted procedures reasonably
necessary to prevent access persons from violating
the codes of ethics.
13. Recordkeeping Requirements.
(a) The Trust and the Manager shall, at the principal place of
business of the Manager, maintain records in the manner and to
the extent set out in this Section 13:
<PAGE>
(1) A copy of each code of ethics for the organization
that is in effect, or at any time within the past
five years was in effect, shall be maintained in an
easily accessible place;
(2) A record of any violation of the code of ethics, and
of any action taken as a result of the violation,
shall be maintained in an easily accessible place for
at least five years after the end of the fiscal year
in which the violation occurs;
(3) A copy of each report made by an access person as
required by Section 8(a), including any information
provided in lieu of the reports under Section
8(b)(3), shall be maintained for at least five years
after the end of the fiscal year in which the report
is made or the information is provided, the first two
years in an easily accessible place;
(4) A record of all persons, currently or within the past
five years, who are or were required to make reports
under Section 8(a), and who are or were responsible
for reviewing these reports, must be maintained in an
easily accessible place; and
(5) A copy of each report required by Section 12(b) must
be maintained for at least five years after the end
of the fiscal year in which it is made, the first two
years in an easily accessible place.
(b) The Trust or the Manager shall maintain a record of any
decision, and the reasons supporting the decision, to approve
the acquisition by advisory persons of securities under
Section 4(b)(2) (limited offerings), or to grant advisory
persons a waiver of the prohibition contained in Section
4(b)(1) (initial public offerings), for at least five years
after the end of the fiscal year in which the approval or
waiver, as applicable, is granted.
14. Exempted Advisory Persons
Advisory persons who are employed by a sub-advisor of the Manager will not be
subject to this Code of Ethics so long as:
(a) the sub-advisor employing the advisory person has adopted a
code of ethics that complies with the requirements of Rule
17j-l of the Investment Company Act and the Trust has been
provided with a copy of that code of ethics,
(b) the advisory person is reporting his/her personal securities
transactions to the sub-advisor as required by Rule 17j-l(d)
of the Investment Company Act,
(c) the sub-advisor reports all violations of its code of ethics
to the President of the Trust, and
(d) at each quarterly meeting of the Board, the sub-advisor
provides the Trustees with a report stating whether there have
been any violations of the sub-advisor's code of ethics during
the most recently completed calendar quarter and, if so, the
action taken by the sub-advisor after learning of the
violation.
EXHIBIT (p) (2)
AON ADVISORS, INC. CODE OF ETHICS
AON ADVISORS, INC.
CODE OF ETHICS
The Code of Ethics is given to all access persons of Aon Advisors, Inc. (the
"Manager"), a registered investment advisor with the Securities and Exchange
Commission. Those persons are generally required to file various written reports
with the Manager, detailing their security holdings and security transactions
and general compliance with the Code. Additionally, all trades executed by
advisory persons of Aon Advisors must be pre-cleared.
February 23, 2000
<PAGE>
AON ADVISORS, INC.
CODE OF ETHICS
1. Purposes
This Code of Ethics has been adopted by Aon Advisors, Inc. (the "Manager"), in
accordance with Rule 17j-l(c) under the Investment Company Act of 1940 (the
"Investment Company Act"). Rule 17j-1 under the Investment Company Act generally
proscribes fraudulent, deceptive or manipulative practices with respect to
purchases or sales of securities held or to be acquired by clients of the
Manager, if effected by certain persons affiliated with the Manager. The purpose
of this Code of Ethics is to provide regulations and procedures consistent with
the Investment Advisers Act of 1940 and Rule 17j-1 of the Investment Company Act
and to prevent the above-referenced persons from engaging in any conduct
prohibited by Rule 17j-l(b), as follows:
It shall be wrongful for the Manager, or any affiliated person of the
Manager, in connection with the purchase or sale, directly or
indirectly, by such person of a security held or to be acquired or
sold, as defined herein, by any client of the Manager -
(1) To employ any device, scheme or artifice to defraud
such client;
(2) To make to such client account any untrue statement
of a material fact or omit to state to the Manager a
material fact necessary in order to make the
statements made, in light of the circumstances under
which they are made, not misleading;
(3) To engage in any act, practice, or course of business
that operates or would operate as a fraud or deceit
upon any such client account; or
(4) To engage in any manipulative practice with respect
to any client accounts.
2. Definitions
(a) "Manager" means Aon Advisors, Inc.;
(b) "Access person" means any director, officer or
advisory person of the Manager;
(c) "Advisory person" means (i) any employee of the
Manager who in connection with his/her regular
functions or duties, makes any recommendation, who
participates in the determination of which
recommendations shall be made, or whose functions or
duties relate to the determination of which
recommendation shall be made, or who in connection
with his/her regular functions or duties, obtains
information regarding the purchase or sale of Covered
Securities by any client, or whose functions relate
to the making of any recommendations with respect to
such purchases or sales; and (ii) any natural person
in a control relationship to the Manager who obtains
information concerning recommendations made to client
accounts with regard to the purchase or sale of
Covered Securities by the Manager.
(d) "Beneficial ownership" shall be interpreted in the
same manner as it would be in determining whether a
person is subject to the provisions of Section 16 of
the Securities Exchange Act of 1934 and the rules and
regulations thereunder, except that the determination
of direct or indirect ownership shall apply to all
Securities which an access person has or acquires.
(See Appendix A)
<PAGE>
(e) "Control" means the power to exercise a controlling
influence over the management or policies of a
company, unless such power is solely the result of
holding an official position with such company.
(f) "Investment Company Act" means the Investment Company
Act of 1940, as amended.
(g) "Covered Security" shall have the meaning ascribed to
the term "security" in Section 2(a) (36) of the
Investment Company Act, except that it shall not
include direct obligations of the Government of the
United States; bankers' acceptances, bank
certificates of deposit, commercial paper and high
quality short-term debt instruments, including
repurchase agreements; and shares of registered
open-end investment companies (i.e., mutual funds).
(h) "Initial public offering" means an offering of
securities registered under the Securities Act of
1933 the issuer of which, immediately before the
registration, was not subject to the reporting
requirements of sections 13 or 15(d) of the
Securities Exchange Act of 1934.
(i) "Limited offering" means an offering of securities
that is exempt from registration under the Securities
Act of 1933 pursuant to section 4(2) or section 4(6)
or pursuant to Rule 504, Rule 505 or Rule 506 under
the Securities Act of 1933.
(j) "Purchase or sale of a Covered Security" includes,
inter alia, the purchase or writing (sale) f an
option to purchase or sell a Covered Security.
(k) "Security held or to be acquired or sold" by the
client of the Manager means:
(1) Any Covered Security which, within
the most recent (15) calendar days:
(A) is or has been
held by the client
of the Manager or
any portfolio
thereof; or
(B) is being or has
been considered
for purchase or
sale by the client
of the Manager or
any portfolio
thereof; and
(2) Any option to purchase or sell
(write), and any security
convertible into or exchangeable
for, a Covered Security described in
the foregoing clause (1) of this
Section 2 (k).
3. General Principles
The Manager recognizes that it owes a fiduciary duty to its clients. Consistent
with that duty, no access person shall (a) place his/her personal interests
ahead of those of clients, (b) conduct his/her personal Covered Securities
transactions in a manner that is inconsistent with this Code of Ethics and
creates an actual or potential conflict of interest or abuses his/her position
of trust and responsibility or (c) take inappropriate advantage of his/her
position with the Manager.
4. Prohibited Purchases and Sales
(a) No access person (including advisory persons) shall
purchase or sell, directly or indirectly, any Covered
Security in which he or she has, or by reason of such
transaction acquires, any direct or indirect
beneficial ownership and which he or she knows or
should have known at the time of such purchase or
sale:
<PAGE>
(1) Is being considered for purchase or
sale for any client account, or
(2) Is, on that date, being purchased or
sold for any client account.
A Covered Security is "being considered for purchase or sale
by any client" if a portfolio manager of the Manager intends
to consummate a purchase or sale of that Covered Security
within the next fifteen (15) calendar days.
(b) No advisory person shall:
(1) Purchase securities in an initial
public offering;
(2) Acquire securities in a limited
offering prior to obtaining the
written approval of the Manager's
President (or, if the advisory
person seeking approval is the
Manager's President, one of the
Manager's Senior Executive
Directors). Such approval shall be
granted only if the appropriate
person determines that (a) the
purchase is not one which should be
reserved for any client account and
(b) the opportunity to purchase the
security was not offered to the
advisory person because of his or
her position with the Manager. The
Manager shall maintain copies of
any written approvals that are
granted in accordance with the
requirements of Section 12 (b).
5. Pre-Clearance of Personal Covered Securities Transactions
(a) No advisory person shall purchase or sell, directly
or indirectly, any Covered Security in which he or
she has, or by reason of such transaction acquires,
any direct or indirect beneficial ownership until the
proposed purchase or sale has been reviewed and
approved ("pre-cleared") by the applicable portfolio
managers of any client portfolios that are authorized
to purchase Covered Securities of the same type. If
a portfolio manager of a client portfolio wishes to
purchase or sell a Covered Security in which he or
she has, or by reason of such transaction acquires,
any direct or indirect beneficial ownership, he/she
shall pre-clear the transaction with all of the other
applicable portfolio managers of any client
portfolios that are authorized to purchase Covered
Securities of the same type (and in no event shall
such portfolio manager obtain preclearance from less
than two other portfolio managers).
(b) The portfolio managers (or, if appropriate, the
President of the Manager) shall grant a pre-clearance
authorization to purchase or sell a Covered Security
if they determine that the proposed transaction does
not involve a Covered Security that is being
purchased or sold by any client accounts (including a
Covered Security that has been purchased or sold by
any client accounts within one (1) business day prior
thereto) or is being considered for purchase or sale
by any client account, as defined in Section 4(a).
(c) A pre-clearance authorization to purchase or sell a
Covered Security shall remain valid for a period of
five (5) business days. If the purchase or sale
transaction is not completed within that five (5)
business day period the advisory person must have the
proposed transaction pre-cleared again. This
re-approval requirement shall apply to transactions
involving market orders as well as transactions
involving orders to purchase or sell Covered
Securities at a specific price (or better).
(d) The portfolio managers and the President of the
Manager (or his/her representative) shall maintain
records of all proposed personal Covered Securities
transactions which they
<PAGE>
have pre-cleared for advisory persons. Those records
shall list the name of the advisory person, the
indicated intent to purchase or sell, the name and
amount of the security involved in the transaction,
and the date on which the pre-clearance authorization
was granted.
6. Exempted Transactions
The prohibitions of Section 4(a) and the pre-clearance requirements of Section 5
of this Code shall not apply to:
(a) Purchases or sales effected in any account over which
the individual has no direct or indirect influence or
control.
(b) Purchases or sales of Covered Securities which are
not eligible for purchase or sale by any client
account.
(c) Purchases or sales which are nonvolitional.
(d) Purchases which are part of an automatic dividend
reinvestment plan.
(e) Purchases effected upon the exercise of rights issued
by an issuer pro rata to all holders of a class of
its Covered Securities, to the extent such rights
were acquired from such issuer, and sales of such
rights so acquired.
(f) Purchases of securities of Aon Corporation from, or
sales of securities of Aon Corporation to, Aon
Corporation; or purchases or sales of Aon Corporation
common stock in amounts not exceeding 5,000 shares
per business day.
(g) Purchases or sales of direct obligations of the
Government of the United States; bankers'
acceptances, bank certificates of deposit, commercial
paper and high quality short-term debt instruments,
including repurchase agreements; and shares of
registered open-end investment companies (i.e. mutual
funds).
(h) Purchases or sales of Covered Securities included in
the Morgan Stanley REIT Index in amounts not
exceeding 1% of the ten-day average daily trading
volume of the Covered Securities on the date of
purchase or sale, provided that this exemption shall
apply solely in the case where the prohibitions of
Section 4(a) or the pre-clearance requirements of
Section 5 of this Code would otherwise apply due to
purchases or sales, or purchases or sales which are
being considered, by the Aon Funds REIT Index Fund,
and shall not apply in the case where such
prohibitions or pre-clearance requirements would
apply due to purchases or sales, or purchases or
sales which are being considered, by any other client
of the Manager.
7. Prohibited and Required Disclosures
(a) No access person shall:
(1) Reveal to any other person (except
in the normal course of his or her
duties on behalf of the Manager) any
information regarding the Manager's
securities transactions or
consideration by the Manager of any
such securities transaction.
(2) Recommend any securities transaction
without having disclosed his or her
interest, if any, in such securities
or the issuer thereof, including
without limitation (i) his or her
direct or indirect beneficial
ownership of any securities of such
issuer, (ii) any contemplated
transaction by
<PAGE>
such person in such securities,
(iii) any position with such issuer
or its affiliates and (iv) any
present or proposed business
relationship between such issuer or
its affiliates, on the one hand, and
such person or any party in which
such person has significant
interest, on the other.
(b) Every advisory person who serves on the board of
directors of a publicly traded company shall disclose
that fact to the President of the Manager (or, if the
disclosing person is the Manager's President, one of
the Manager's Senior Executive Directors).
Additionally, prior to causing a client account to
purchase or sell a security of the company for which
he/she serves as director, the advisory person shall
have the proposed transaction reviewed and approved
by the President of the Manager (or, if the advisory
person seeking approval is the Manager's President,
one of the Manager's Senior Executive Directors). In
seeking such review and approval, the advisory person
shall disclose the fact that he/she is a director of
the company whose securities are proposed to be
purchased or sold.
8. Reporting
(a) Unless excepted by Section 8(b), every access person
of the Manager shall report to the Manager as
follows:
(1) Initial Holdings Reports. No later than
ten (10) calendar days after the person
becomes an access person, the following
information:
(A) The title, number of
shares or ownership
interest or principal
amount of each Covered
Security in which the
access person had any
direct or indirect
beneficial ownership
when the person became
an access person;
(B) The name of any broker,
dealer or bank with
whom the access person
maintained an account
in which any Covered
Securities were held
for the direct or
indirect benefit of the
access person as of the
date the person became
an access person; and
(C) The date that the
report is submitted by
the access person.
(2) Quarterly Transaction Reports. No later
than ten (10) calendar days after the end
of each calendar quarter, the following
information:
(A) With respect to any
transaction during the
quarter in a Covered
Security in which the
access person had any
direct or indirect
beneficial ownership:
(i) The date of the
transaction, the
title, the number
of shares or
ownership
interest, or the
principal amount
of each Covered
Security
involved;
(ii) The nature of the
transaction
(i.e., purchase,
sale or any other
type of
acquisition or
disposition);
<PAGE>
(iii) The price of the
Covered Security
at which the
transaction was
effected;
(iv) The name of the
broker, dealer or
bank with or
through which the
transaction was
effected; and
(v) The date that the
report is
submitted by the
access person.
(B) With respect to any
account established by
the access person in
which any Covered
Securities were held
during the quarter for
the direct or indirect
benefit of the access
person:
(i) The name of the
broker, dealer or
bank with whom
the access person
established the
account;
(ii) The date the
account was
established; and
(iii) The date that the
report is
submitted by the
access person.
(3) Annual Holdings Reports. Annually, the
following information (which information
must be current as of a date no more than
thirty (30) calendar days before the report
is submitted):
(A) The title, number of
shares, or ownership
interest, or principal
amount of each Covered
Security in which the
access person had any
direct or indirect
beneficial ownership;
(B) The name of any broker,
dealer or bank with whom
the access person maintains
an account in which any
securities are held for the
direct or indirect benefit
of the access person; and
(C) The date that the report is
submitted by the access
person.
(b) (1) An access person shall not be
required to make a report under
Section (8)(a) with respect to
transactions effected for, or
Covered Securities held in (i) any
account over which such person does
not have any direct or indirect
influence or
<PAGE>
control (whether or not such access
person has any direct or indirect
beneficial ownership of such
account) or (ii) any account over
which such person has direct or
indirect influence or control if
such person does not have any direct
or indirect beneficial ownership of
such account.
(2) An access person need not make a
quarterly transaction report under
Section 8(a)(2) if all the
information in the report would
duplicate information required to be
recorded under Rule 204-2(a)(12) or
(13) of the Investment Advisers Act
of 1940 or if the report would
duplicate information contained in
broker trade confirmations or
account statements received by the
Manager with respect to the access
person in the time period required
by Section 8(a)(2), if all of the
information required by such Section
is contained in the broker trade
confirmations or account statements,
or in the records of the Manager.
(c) The Manager shall institute procedures by
which appropriate management or compliance
personnel review the reports required by
Section 8(a).
(d) The Manager shall identify all access
persons who are required to make the reports
required by Section 8(a) and shall inform
those access persons of their reporting
obligation.
(e) Any report required by Section 8(a) may
contain a statement that the report shall
not be construed as an admission by the
person making such report that he/she has
any direct or indirect beneficial ownership
in the Covered Security to which the report
relates.
9. Gifts
No access person shall accept, directly or indirectly, any gift, favor or
service of significant value from any person with whom he or she transacts
business on behalf of the Trust under circumstances where to do so would
conflict with the client's best interest or would impair the access person's
ability to be completely disinterested when required, in the course of business,
to make judgments and/or recommendations on behalf of any client account.
10. Sanctions
Upon discovering a violation of this Code, the President of the Manager (or,
with respect to violations by the President, the Board of Directors of the
Manager or the Board of Directors of Aon Corporation) may impose such sanctions
as it deems appropriate, including, inter alia, a letter of censure or
termination of the employment of the violator.
11. Administration of Code of Ethics.
The Manager shall use reasonable diligence and institute procedures reasonably
necessary to prevent violations of the applicable codes of ethics.
12. Recordkeeping Requirements.
(a) The Manager shall, commencing with the date of
adoption of this code of ethics, at the principal
place of business of the Manager, maintain records in
the manner and to the extent set out in this Section
13:
(1) A copy of each code of ethics for
the organization that is in effect,
or at any time within the past five
years was in effect, shall be
maintained in an easily accessible
place;
<PAGE>
(2) A record of any violation of the
code of ethics, and of any action
taken as a result of the violation,
shall be maintained in an easily
accessible place for at least five
years after the end of the fiscal
year in which the violation occurs;
(3) A copy of each report made by an
access person as required by Section
8(a), including any information
provided in lieu of the reports
under Section 8(b)(2), shall be
maintained for at least five years
after the end of the fiscal year in
which the report is made or the
information is provided, the first
two years in an easily accessible
place;
(4) A record of all persons, currently
or within the past five years, who
are or were required to make reports
under Section 8(a), and who are or
were responsible for reviewing these
reports, must be maintained in an
easily accessible place; and
(5) A copy of each report required by
Section 12(b) must be maintained for
at least five years after the end of
the fiscal year in which it is made,
the first two years in an easily
accessible place.
(b) The Manager shall maintain a record of any decision,
and the reasons supporting the decision, to approve
the acquisition by advisory persons of securities
under Section 4(b)(2) (limited offerings), or to
grant advisory persons a waiver of the prohibition
contained in Section 4(b)(1) (initial public
offerings), for at least five years after the end of
the fiscal year in which the approval or waiver, as
applicable, is granted.
13. Exempted Advisory Persons
Advisory persons who are employed by a sub-advisor of the Manager will not be
subject to this Code of Ethics so long as: (a) the sub-advisor employing
the advisory person has adopted a code of ethics that complies with the
requirements of Rule 17j-l of the Investment Company Act and the advisory person
has been provided with a copy of that code of ethics,
(b) the advisory person is reporting his/her personal
securities transactions to the sub-advisor as
required by Rule 17j-l(d) of the Investment Company
Act,
(c) the sub-advisor reports all violations of its code of
ethics to the President of the Manager.
Appendix A
The term "beneficial ownership" of securities includes not only ownership of
securities held by an access person for his or her name or otherwise, but also
ownership of securities held for his or her benefit by others (regardless of
whether or how they are registered) such as custodians, brokers, executors,
administrators or trustees (including trusts in which he or she has only a
remainder interest), and securities held for his or her account by pledgees,
securities owned by a partnership in which he or she is a member, and securities
owned by any corporation which he or she should regard as a personal holding
corporation. Correspondingly, this term would exclude securities held by an
access person for the benefit of someone else.
Ordinarily, this term would not include securities held by executors or
administrators of estates in which an access person is a legatee or beneficiary
unless there is a specific legacy to such person of such securities or such
person is the sole legatee or beneficiary and there are other assets in the
estate sufficient to pay debts ranking ahead of such legacy, or the securities
are held in the estate more than a year after the decedent's death.
<PAGE>
Securities held in the name of another should be considered as "beneficially"
owned by an access person where such person enjoys "benefits substantially
equivalent to ownership". The SEC has said that although the final determination
of beneficial ownership is a question to be determined in the light of the facts
of the particular case, generally a person is regarded as the beneficial owner
of securities held in the name of his or her spouse or their minor children.
Absent special circumstances, such relationship ordinarily results in such
person obtaining benefits substantially equivalent to ownership, e.g.,
application of the income derived from such securities to maintain a common
home, to meet expense which such person otherwise would meet from other sources,
or the ability to exercise a controlling influence over the purchase, sale or
voting of such securities.
An access person also may be regarded as the beneficial owner of securities held
in the name of another person, if by reason of any contract, understanding,
relationship, agreement, or other arrangement, he obtains therefrom benefits
substantially equivalent to those of ownership. Moreover, the fact that the
holder is a relative or relative of a spouse and sharing the same home as an
access person may in itself indicate that the access person would obtain
benefits substantially equivalent to those of ownership from securities held in
the name of such relative. Thus, absent countervailing facts, it is expected
that securities held by relatives who share the same home as an access person
will be treated as being beneficially owned by the access person.
An access person also is regarded as the beneficial owner of securities held in
the name of the spouse, minor children or other person, even though he does not
obtain therefrom the aforementioned benefits of ownership, if he can vest or
revest title in himself at once or at some future time.
