<PAGE> 1
As filed with the Securities and Exchange Commission on September __, 1999
Securities Act No. 33-44964
Investment Company Act File No. 811-6526
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [_]
--
Post-Effective Amendment No. 61 [X]
--
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 63 [X]
--
THE COVENTRY GROUP
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(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, Ohio 43219
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(Address of Principal Executive Offices)
Registrant's Telephone Number: (614) 470-8000
-----------------
Jeffrey L. Steele, Esq.
Dechert Price & Rhoads
1775 Eye Street, NW
Washington, D.C. 20006
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(Name and Address of Agent for Service)
With Copies to:
Walter B. Grimm
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219
It is proposed that this filing will become effective on September 15, 1999
pursuant to paragraph (b) of Rule 485.
<PAGE> 2
PROSPECTUS
KENSINGTON
STRATEGIC
REALTY
FUND
DATED SEPTEMBER 15, 1999
KENSINGTON
INVESTMENT GROUP, INC.
INVESTMENT ADVISER
Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities and
Exchange Commission passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
<PAGE> 3
KENSINGTON STRATEGIC REALTY FUND TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
RISK/RETURN SUMMARY AND FUND EXPENSES
LOGO
3 Kensington Strategic Realty Fund
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
LOGO
6 Kensington Strategic Realty Fund
SHAREHOLDER INFORMATION
LOGO
11 Pricing of Fund Shares
12 Purchasing and Adding to Your Shares
15 Selling Your Shares
24 Dividends, Distributions And Taxes
FUND MANAGEMENT
LOGO
25 The Investment Adviser
27 Portfolio Manager
</TABLE>
2
<PAGE> 4
[LOGO]
RISK/RETURN SUMMARY AND FUND EXPENSES
KENSINGTON STRATEGIC REALTY FUND
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES The Fund seeks high current income relative
to equity investment alternatives, plus long
term growth of capital.
PRINCIPAL The Fund invests primarily in real estate
INVESTMENT STRATEGIES securities, including securities issued by
real estate investment trusts, master limited
partnerships and other real estate companies.
Investments in these issuers include common,
convertible and preferred stock and debt
securities, rights or warrants to purchase
common stock, and limited partnership
interests. The Fund may engage in
transactions designed to hedge its portfolio
against market declines. The Fund may also
utilize limited portfolio leverage in pursuit
of its objectives.
PRINCIPAL Because the value of the Fund's investments
INVESTMENT RISKS will fluctuate with market conditions, so
will the value of your investment in the
Fund. You could lose money on your investment
in the Fund, or the Fund could underperform
other investments. Some of the Fund's
holdings may underperform its other holdings.
The Fund will be significantly exposed to the
risks of the real estate market. The Fund
will also be non-diversified, which means
that it is more vulnerable to risks affecting
a particular issuer than a diversified fund
would be. Additionally, the Fund can buy
securities with borrowed money (a form of
leverage), which can magnify the Fund's gains
and losses.
WHO MAY Consider investing in the Fund if you are:
WANT TO INVEST? - seeking quarterly income
- wishing to add a growth component to your
portfolio
- willing to accept the risks of investing in
real estate-related securities in exchange
for potentially higher long term returns
This Fund will not be appropriate for anyone:
- pursuing a short-term goal or investing
emergency reserves
- seeking safety of principal
</TABLE>
- -
3
<PAGE> 5
KENSINGTON STRATEGIC REALTY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES
FUND PERFORMANCE
Because the Fund commenced operations only on September 15, 1999, it does not
yet have performance figures that reflect a full calendar year.
As an investor in the Fund, you will pay the following fees and expenses.
Shareholder transaction fees are paid from your account. Annual Fund operating
expenses are paid out of Fund assets, and are reflected in the share price.
FEES AND EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION FEES
(FEES PAID BY YOU DIRECTLY)
Maximum sales charge (load) on purchases 5.75%(1) 0.00% 0.00%
Maximum deferred sales charge (load) None(2) 5.00% 1.00%(3)
ANNUAL FUND OPERATING EXPENSES (EXPENSES PAID FROM FUND ASSETS)
Management Fee(4) 1.50% 1.50% 1.50%
Distribution and Service (12b-1) Fees 0.25% 1.00% 1.00%
Other Expenses(5) 1.17% 1.17% 1.17%
Total Fund Operating Expenses(5) 2.92% 3.67% 3.67%
Fee Waiver and/or Expense Reimbursement(6) 0.67% 0.67% 0.67%
Net Expenses(5) 2.25% 3.00% 3.00%
</TABLE>
(1) Lower sales charges are available depending upon the amount invested. See
"Distribution Arrangements."
(2) A deferred sales charge of 1.00% is applied to redemptions within one year
of purchase of Class A shares initially purchased in an amount of $1 million or
more (not including shares purchased with reinvested dividends and/or
distributions).
(3) Applied to redemptions within one year of purchase.
(4) The management fee is a fulcrum-type performance fee that, after the first
twelve months of Fund operations, increases or decreases from the base fee of
1.50% depending on the Fund's performance relative to that of the NAREIT
Composite Index during the preceding twelve months. The Adviser will receive
the base fee for the first twelve months of Fund operations and, thereafter for
periods when the Fund's performance for the past twelve months equals that of
the Index. Through performance adjustments equal to 15% of the difference
between the performance of the Fund and that of the Index during the previous
twelve months, the fee can range from a minimum of 0.50% to a maximum of 2.50%.
This fee arrangement may result in higher fees than those paid by other
investment companies. The Adviser may receive the maximum fee even if the
Fund's absolute performance is negative, and it may receive the minimum fee
even when the Fund has significant positive performance.
(5) "Other Expenses" are based on estimated amounts for the current fiscal
year.
(6) The Adviser has contractually agreed, until October 31, 2002, to waive fees
and/or reimburse the Fund to the extent necessary to maintain Total Fund
Operating Expenses for Class A, B and C shares at 2.25%, 3.00% and 3.00%,
respectively, provided that these limits do not apply to increases due to
performance fee adjustments. For the first 36 full months of the Fund's
operations, the Fund will pay or repay fees that were waived or reimbursed to
the extent such payments or repayments would not cause the expenses of a Class
to exceed the above limits.
4
<PAGE> 6
KENSINGTON STRATEGIC REALTY FUND
RISK/RETURN SUMMARY AND FUND EXPENSES
Use this table to compare fees and expenses with those of other Funds. It
illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison purposes only, your
actual costs are likely to be different.
EXPENSE EXAMPLE
<TABLE>
<S> <C> <C>
1 3
THE FUND YEAR YEARS
Class A $790 $1,367
Class B $813 $1,376
Class C $405 $1,062
</TABLE>
5
<PAGE> 7
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
KENSINGTON STRATEGIC REALTY FUND
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek high current income relative to
equity investment alternatives, plus long term growth of capital.
INVESTMENT STRATEGY
The Fund will pursue its objective by investing primarily in securities of
companies in the real estate industry, such as real estate investment trusts
("REITs"), master limited partnerships and other real estate firms. Its
investments in these issuers may include common, preferred and convertible
stock, debt obligations and other senior securities, rights and warrants to
purchase securities, and limited partnership interests.
The Adviser will use a variety of strategies in managing the Fund's
investments. It may engage in transactions designed to hedge against changes in
the price of the Fund's portfolio securities, such as purchasing put options or
selling securities short. The Fund may also leverage its portfolio by borrowing
money to purchase securities, and it may lend its portfolio securities to
generate additional income. The Fund may also purchase restricted securities
(securities which are deemed to be not readily marketable).
Under normal market conditions, at least 65% of the Fund's assets will be
invested in securities of issuers engaged primarily in the real estate
business. A Fund will deem an issuer to be primarily in the real estate
business if it derives at least 50% of its revenues from the ownership,
construction, financing, management or sale of commercial, industrial, or
residential real estate or if it has at least 50% of its assets invested in
real estate. Real estate companies may include REITs, real estate operating
companies, companies operating businesses that own a substantial amount of real
estate (such as hotels and assisted living facilities) and development
companies. For liquidity, the Fund will normally invest a portion of its assets
in high quality debt securities (securities rated within the top two rating
categories by a nationally recognized rating agency), money market instruments
and repurchase agreements. For temporary defensive purposes, under unusual
market conditions, the Fund may invest in these instruments without limit.
During periods that the Fund is investing defensively, it will not be pursuing
its investment objective.
The Fund will not be a diversified investment company, which means that it may
invest greater proportions of its assets in individual issuers than a
diversified investment company.
6
<PAGE> 8
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
INVESTMENT STRATEGY
CONTINUED
The Fund may determine to limit sales of its shares from time to time,
depending on the range of attractive investment opportunities available to it.
While the Fund may close to new investors at any time, it will specifically
close to new investors upon reaching $150 million in net asset value and must
remain closed for at least 90 days thereafter. If a decision is made
subsequently to reopen the Fund to new investors, the Fund will thereafter
close to new investors upon reaching a net asset value equal to 0.5% of the
then current market capitalization of the NAREIT Composite Index and reopen for
such periods as the Fund's net assets fall below such 0.5%. Any closing of the
Fund under these provisions will occur beginning 45 days after the close of the
quarter in which the Fund reaches, and continues to have, a size which triggers
such closing. The Fund will reopen to new investors on the first day of any
month following a drop below this 0.5% level, provided the Fund is still below
that level. Existing shareholders may continue to make additional investments
after any such closing.
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund is subject to investment risks, and you can lose
money on your investment. More specifically, the Fund may be affected by the
following types of risks:
The Fund's real estate security investments expose it to the risks of the
commercial real estate market. Real estate values (and the values of real
estate-related securities) fluctuate with changes in general and local economic
conditions such as overbuilding, employment conditions, operating costs and
factors affecting particular neighborhoods. Real estate values are also
affected by changes in interest rates and governmental actions such as tax and
zoning changes, rent restrictions, and infrastructure maintenance. The value of
REIT securities can, additionally, be affected by changes in tax law for REITs,
or failure of a particular REIT to qualify for favorable tax treatment.
While the Fund intends to comply with tax laws applicable to investment
companies which require it to be diversified as to at least half of its assets,
the Fund's non-diversified status means that it is able to concentrate up to
half it portfolio in the securities of a few issuers. Should the Fund pursue
this strategy, it would be more exposed to risks affecting those issuers than
if it held a more diversified portfolio.
7
<PAGE> 9
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
- -
PRINCIPAL RISKS OF INVESTING IN THE FUND
CONTINUED
The Fund may borrow amounts up to one-third of the value of its assets and may
use borrowed funds to purchase securities for the Fund. This practice, known as
"leveraging," will increase returns to the Fund if the additional securities
purchased increase in value more than the interests and other costs of
borrowing. If the additional securities lose value, however, the loss to the
Fund will be greater than if borrowed funds had not been used to make the
purchase. Thus, leveraging is considered to increase risk.
Although the Fund's loans of portfolio securities will be fully collateralized
and marked to market throughout the period of the loan, the Fund may experience
delays in getting the securities returned and may not receive mark-to-market
payments if the borrower enters bankruptcy or has other financial problems.
Short sales can cause a loss to the Fund if the price of the security sold
short increases between the date of the short sale and the date on which the
Fund must settle the transaction. Restricted securities are not registered for
public sale and thus cannot easily be disposed of by the Fund, particularly at
a desirable price. Because they are not publicly traded, they may also be
difficult to price accurately.
The Fund pays the Adviser a fee based on the Fund's performance relative to the
NAREIT Composite Index. This arrangement could provide an incentive to the
Adviser to seek special opportunities that may involve greater risks than if a
non-performance fee arrangement had been adopted. Conversely, the Adviser could
be motivated to avoid risk in order to minimize fluctuations in its performance
based fee.
EQUITY RISK: The value of the equity securities held by the Fund, and thus of
the Fund's shares, can fluctuate -- at times dramatically. The prices of equity
securities are affected by various factors, including market conditions,
political and other events, and developments affecting the particular issuer or
its industry or geographic sector.
MARKET RISK: The Fund's portfolio securities can be affected by events that
affect the securities markets generally or particular segments of the market in
which the Fund has invested. Factors that are part of market risk include
interest rate fluctuations, quality of instruments in the Fund's portfolio,
national and international economic and political conditions and general market
conditions and market psychology.
INTEREST RATE RISK: In addition to the sensitivity of real estate-related
securities to changes in interest rates, the value of the Fund's investments in
debt instruments will tend to fall if current interest rates increase and to
rise if current interest rates decline.
8
<PAGE> 10
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
- -
PRINCIPAL RISKS OF INVESTING IN THE FUND
CONTINUED
CREDIT RISK: The value of the Fund's debt instruments will generally decline if
the credit rating of the issuer declines, while their value will be favorably
affected by an increased credit rating. Also, an issuer whose credit rating has
declined may be unable to make payments of principal and/or interest.
HEDGING RISKS: The Fund's hedging activities, although they are designed to
help offset negative movements in the markets for the Fund's investments, will
not always be successful. Moreover, they can also cause the Fund to lose money
or fail to get the benefit of a gain. Among other things, these negative
effects can occur if the market moves in a direction that the Fund's investment
adviser does not expect or if the Fund cannot close out its position in a
hedging instrument.
YEAR 2000 RISK: Like other funds and business organizations around the world,
the Fund could be adversely affected if the computer systems used by the
Adviser, and the Fund's other service providers do not properly process and
calculate date related information for the year 2000 and beyond. In addition,
Year 2000 issues may adversely affect companies in which the Fund invests
where, for example, such companies incur substantial costs to address Year 2000
issues or suffer losses caused by the failure to adequately or timely do so.
The Fund has been advised that the Adviser and the Fund's other service
providers (i.e., Administrator, Transfer Agent, Fund Accounting Agent,
Custodian and Distributor) have developed and are implementing clearly defined
and documented plans intended to minimize risks to services critical to the
Fund's operations associated with Year 2000 issues. Internal efforts include a
commitment to dedicate adequate staff and funding to identify and remedy Year
2000 issues, and specific actions such as taking inventory of software systems,
determining inventory items that may not function properly after December 31,
1999, reprogramming or replacing such systems, and retesting for Year 2000
readiness. The Fund's Adviser and service providers are likewise seeking
assurances from their respective vendors and suppliers that such entities are
addressing any Year 2000 issues, and each provider intends to engage, where
appropriate, in private and industry or "streetwide" interface testing of
systems for Year 2000 readiness.
In the event that any systems upon which the Fund is dependent are not Year
2000 ready by December 31, 1999, administrative errors and account maintenance
failures would likely occur.
9
<PAGE> 11
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
- -
PRINCIPAL RISKS OF INVESTING IN THE FUND
CONTINUED
While the ultimate costs or consequences of incomplete or untimely resolution
of Year 2000 issues by the Adviser or the Fund's service providers cannot be
accurately assessed at this time, the Fund currently has no reason to believe
that the Year 2000 plans of the Adviser and the Fund's service providers will
not be completed by December 31, 1999, or that the anticipated costs associated
with full implementation of their plans will have a material adverse impact on
either their business operations or financial condition or those of the Fund.
The Fund and the Adviser will continue to closely monitor developments relating
to this issue, including development by the Adviser and the Fund's service
providers of contingency plans for providing back-up computer services in the
event of a systems failure or the inability of any provider to achieve Year
2000 readiness. Separately, the Adviser will monitor potential investment risk
related to Year 2000 issues.
10
<PAGE> 12
[BOOK ICON]
SHAREHOLDER INFORMATION
- -
PRICING OF FUND SHARES
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HOW NAV IS CALCULATED
The NAV for each class of shares is calculated by adding the total value of the
Fund's investments and other assets attributable to each class, subtracting the
liabilities for that class, and then dividing that figure by the number of
outstanding shares of the class:
NAV =
Total Assets - Liabilities
--------------------------
Number of Shares
Outstanding
-------------------------------------------------------------------------------
Per share net asset value (NAV) for each class of shares of the Fund is
determined and its shares are priced at the close of regular trading on the New
York Stock Exchange, normally at 4:00 p.m. Eastern time on days the Exchange is
open.
Your order for purchase or sale of a class of shares is priced at the next NAV
for that class calculated after your order is accepted by the Fund plus any
applicable sales charge as noted in the section on "Distribution
Arrangements/Sales Charges." This is what is known as the offering price.
The Fund's securities are generally valued at current market prices. If market
quotations are not available, prices will be based on fair value as determined
by the Fund's Trustees.
11
<PAGE> 13
SHAREHOLDER INFORMATION
- -
PURCHASING AND ADDING TO YOUR SHARES
You may purchase the Fund through the Distributor or through investment
representatives, who may charge additional fees and may require higher minimum
investments or impose other limitations on buying and selling shares. If you
purchase shares through an investment representative, that party is responsible
for transmitting orders by close of business and may have an earlier cut-off
time for purchase and sale requests. Consult your investment representative for
specific information.
<TABLE>
<CAPTION>
MINIMUM MINIMUM
INITIAL SUBSEQUENT
ACCOUNT TYPE INVESTMENT INVESTMENT
<S> <C> <C>
Regular (non-retirement) $25,000 $25
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Retirement $10,000 $25
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Automatic Investment Plan Regular $25,000 $25
------------------------------------------------------------------------------
Retirement $10,000 $25
</TABLE>
All purchases must be in U.S. dollars. A fee will be charged for any checks
that do not clear. Third-party checks are not accepted.
The Fund may waive its minimum purchase requirements and the Distributor may
reject a purchase order if it considers it in the best interest of the Fund and
its shareholders.
12
<PAGE> 14
SHAREHOLDER INFORMATION
- -
PURCHASING AND ADDING TO YOUR SHARES
CONTINUED
INSTRUCTIONS FOR OPENING OR ADDING TO AN ACCOUNT
BY REGULAR MAIL
Initial Investment:
1. Carefully read and complete the application. Establishing your account
privileges now saves you the inconvenience of having to add them later.
2. Make check, bank draft or money order payable to "Kensington Strategic
Realty Fund."
3. Mail to: Kensington Strategic Realty Fund, P.O. Box 182235, Columbus, OH
43218-2235
Subsequent:
1. Use the investment slip attached to your account statement. Or, if
unavailable,
2. Include the following information on a piece of paper:
- Fund name
- Share class
- Amount invested
- Account name
- Account number
Include your account number on your check.
3. Mail to: Kensington Strategic Realty Fund, P.O. Box 182235, Columbus, OH
43218-2235
BY OVERNIGHT SERVICE
SEE INSTRUCTIONS 1-2 ABOVE FOR SUBSEQUENT INVESTMENTS.
3. Send to: Kensington Strategic Realty Fund Attn: Shareholder Services, 3435
Stelzer Road, Columbus, OH 43219.
BY WIRE TRANSFER
Note: Your bank may charge a wire transfer fee.
Prior to wiring funds and in order to ensure that wire orders are invested
promptly, investors must call the Fund at 1-877-833-7114 to obtain instructions
regarding the bank account number to which the funds should be wired and other
pertinent information.
You can add to your account by using the convenient options described below.
The Fund reserves the right to change or eliminate these privileges at any time
with 60 days notice.
13
<PAGE> 15
SHAREHOLDER INFORMATION
- -
PURCHASING AND ADDING TO YOUR SHARES
CONTINUED
AUTO INVEST PLAN
You can make automatic investments in the Fund from your bank account.
Automatic investments can be as little as $25 after applicable minimum is met.
To invest regularly from your bank account:
Complete the Automatic Investment Plan portion on your Account Application.
Make sure you note:
- The name and address of the bank account
- Your checking or savings account number
- The amount you wish to invest automatically (minimum $500)
- How often you want to invest (every month, twice a month, 4 times a year
or once a year)
- Attach a voided personal check or savings deposit slip.
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DIVIDENDS AND DISTRIBUTIONS
The Fund will pay dividends from any income quarterly. All dividends and
distributions will be automatically reinvested unless you request otherwise.
There are no sales charges for reinvested dividends and distributions. Capital
gains are distributed at least annually.
DISTRIBUTIONS ARE MADE ON A PER SHARE BASIS REGARDLESS OF HOW LONG YOU'VE OWNED
YOUR SHARES. THEREFORE, IF YOU INVEST SHORTLY BEFORE THE DISTRIBUTION DATE,
SOME OF YOUR INVESTMENT WILL BE RETURNED TO YOU IN THE FORM OF A DISTRIBUTION.
-------------------------------------------------------------------------------
14
<PAGE> 16
SHAREHOLDER INFORMATION
SELLING YOUR SHARES
INSTRUCTIONS FOR SELLING SHARES
You may sell your shares at any time. Your sales price will be the next NAV
after your sell order is received by the Fund, its transfer agent, or your
investment representative. Normally you will receive your proceeds within a
week after your request is received. See section on "General Policies on
Selling Shares" on the following page.
WITHDRAWING MONEY FROM YOUR FUND INVESTMENT
As a mutual fund shareholder, you are technically selling shares when you
request a withdrawal in cash. This is also known as redeeming shares or a
redemption of shares.
BY TELEPHONE (unless you have declined telephone sales privileges)
1. Call 1-877-833-7114 with instructions as to how you wish to receive your
funds (mail, check or wire).
Note: IRA redemptions must be requested by mail.
BY MAIL
1. Call 1-877-833-7114 to request redemption forms or write a letter of
instruction indicating:
- your Fund and account number
- amount you wish to redeem
- address where your check should be sent
- account owner(s) signature
2. Mail to: Kensington Strategic Realty Fund, P.O. Box 182235, Columbus, OH
43218-2235
WIRE TRANSFER
You must indicate this option on your application.
The Fund may charge a wire transfer fee.
Note: Your financial institution may also charge a separate fee.
Call 1-877-833-7114 to request a wire transfer.
If you call by 4 p.m. Eastern time, your payment will normally be wired to your
bank on the next business day.
15
<PAGE> 17
SHAREHOLDER INFORMATION
- -
SELLING YOUR SHARES
CONTINUED
AUTOMATIC WITHDRAWAL PLAN
You can receive automatic payments from your account on a monthly, quarterly or
annual basis. The minimum withdrawal is $50. To activate this feature:
- Make sure you've checked the appropriate box on the Account Application. Or
call 1-877-833-7114.
- Minimum balance required to start this program is $10,000 (provided the
applicable minimum initial investment has been satisfied).
- Include a voided personal check.
- If the value of your account falls below $5,000, you may be asked to add
sufficient funds to bring the account back to $5,000, or the Fund may close
your account and mail the proceeds to you.
16
<PAGE> 18
SHAREHOLDER INFORMATION
GENERAL POLICIES ON SELLING SHARES
REDEMPTIONS IN WRITING REQUIRED
You must request redemption in writing in the following situations:
1. Redemptions from Individual Retirement Accounts ("IRAs").
2. Redemption requests requiring a signature guarantee which include each of
the following.
- You are redeeming over $100,000
- Your account registration or the name(s) in your account has changed within
the last 15 days
- The check is not being mailed to the address on your account
- The check is not being made payable to the owner of the account
- The redemption proceeds are being transferred to another Fund account with
a different registration.
A signature guarantee can be obtained from a financial institution, such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
VERIFYING TELEPHONE REDEMPTIONS
The Fund makes every effort to insure that telephone redemptions are only made
by authorized shareholders. All telephone calls are recorded for your
protection and you will be asked for information to verify your identity. Given
these precautions, unless you have specifically indicated on your application
that you do not want the telephone redemption feature, you may be responsible
for any fraudulent telephone orders. If appropriate precautions have not been
taken, the Transfer Agent may be liable for losses due to unauthorized
transactions.
REDEMPTIONS WITHIN 10 BUSINESS DAYS OF INITIAL INVESTMENT
When you have made your initial investment by check, you cannot redeem any
portion of it until the Transfer Agent is satisfied that the check has cleared
(which may require up to 10 business days). You can avoid this delay by
purchasing shares with a certified check or wire transfer.
REFUSAL OF REDEMPTION REQUEST
Payment for shares may be delayed under extraordinary circumstances or as
permitted by the SEC in order to protect remaining shareholders.
17
<PAGE> 19
SHAREHOLDER INFORMATION
- -
GENERAL POLICIES ON SELLING SHARES
CONTINUED
REDEMPTION IN KIND
The Fund reserves the right to make payment in securities rather than cash,
known as "redemption in kind." This could occur under extraordinary
circumstances, such as a very large redemption that could affect the Fund's
operations (for example, more than 1% of the Fund's net assets). If the Fund
deems it advisable for the benefit of all shareholders, redemption in kind will
consist of securities equal in market value to your shares. When you convert
these securities to cash, you will pay brokerage charges.
CLOSING OF SMALL ACCOUNTS
If your account falls below $5,000, the Fund may ask you to increase your
balance. If it is still below $5,000 after 60 days, the Fund may close your
account and send you the proceeds at the current NAV.
UNDELIVERABLE REDEMPTION CHECKS
For any shareholder who chooses to receive distributions in cash: If
distribution checks (1) are returned and marked as "undeliverable" or (2)
remain uncashed for six months, your account will be changed automatically so
that all future distributions are reinvested in your account. Checks that
remain uncashed for six months will be canceled and the money reinvested in the
Fund.
18
<PAGE> 20
SHAREHOLDER INFORMATION
- -
GENERAL POLICIES ON SELLING SHARES
CONTINUED
DISTRIBUTION ARRANGEMENTS/SALES CHARGES
This section describes the sales charges and fees you will pay as an investor
in the Funds and ways to qualify for reduced sales charges.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Sales Charge (Load) Front-end sales No sales No sales
charge; reduced charge. charge.
sales charges
available.
Distribution and Subject to Subject to Subject to
Service (12b-1) Fee annual annual annual
distribution distribution distribution
and shareholder and shareholder and shareholder
servicing fees servicing fees servicing fees
of up to .25% of up to 1.00% of up to 1.00%
of Fund's total of Fund's total of Fund's total
assets assets assets
applicable to applicable to applicable to
Class A shares. Class B shares. Class C shares.
Fund Expenses Lower annual Higher annual Higher annual
expenses than expenses than expenses than
Class B and Class A shares. Class A shares.
Class C shares.
</TABLE>
CALCULATION OF SALES CHARGES
CLASS A SHARES
Class A shares of the Fund are sold at their public offering price. This price
includes the initial sales charge. Therefore, part of the money you invest will
be used to pay the sales charge. The remainder is invested in Fund shares. The
sales charge decreases with larger purchases. There is no sales charge on
reinvested dividends and distributions.
19
<PAGE> 21
SHAREHOLDER INFORMATION
DISTRIBUTION ARRANGEMENTS/SALES CHARGES
CONTINUED
The current sales charge rates for Class A shares of the Fund are as follows:
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE
YOUR AS A % OF AS A % OF
INVESTMENT OFFERING PRICE YOUR INVESTMENT
<S> <C> <C>
Less than $50,000 5.75% 6.10%
-------------------------------------------------------------------------
$50,000 but less than $100,000 5.00% 5.26%
-------------------------------------------------------------------------
$100,000 but less than $250,000 4.00% 4.17%
-------------------------------------------------------------------------
$250,000 but less than $500,000 3.00% 3.09%
-------------------------------------------------------------------------
$500,000 but less than $1,000,000 2.50% 2.56%
-------------------------------------------------------------------------
$1,000,000 and above* 0.00% 0.00%
</TABLE>
* In the case of investments of $1 million or more, a 1.00% redemption fee will
be assessed on shares redeemed within 12 months of purchase (excluding shares
purchased with reinvested dividends and/or distributions).
CLASS B SHARES
Class B shares are sold at NAV, without any upfront sales charge. Therefore,
all the money you invest is used to purchase Fund shares. However, if you sell
your Class B shares before the 6th anniversary of their purchase, you will have
to pay a contingent deferred sales charge ("CDSC") at the time of redemption.
The CDSC will be based upon the lower of the NAV at the time of purchase or the
NAV at the time of redemption according to the schedule below. There is no CDSC
on reinvested dividends or distributions.
CONTINGENT DEFERRED SALES CHARGE
<TABLE>
<CAPTION>
YEARS SINCE PURCHASE CDSC
<S> <C>
1 5.00%
----------------------------------------------
2 4.00%
----------------------------------------------
3 3.00%
----------------------------------------------
4 3.00%
----------------------------------------------
5 2.00%
----------------------------------------------
6 1.00%
----------------------------------------------
7 0.00%
</TABLE>
20
<PAGE> 22
SHAREHOLDER INFORMATION
- -
DISTRIBUTION ARRANGEMENTS/SALES CHARGES
CONTINUED
If you sell some but not all of your Class B shares, certain shares not subject
to the CDSC (i.e., shares purchased with reinvested dividends) will be redeemed
first, followed by shares subject to the lowest CDSC (typically, shares held
for the longest time).
CONVERSION FEATURE -- CLASS B SHARES
- Class B shares automatically convert to Class A shares of the Fund after 8
years from the end of the month of purchase.
- After conversion, your shares will be subject to the lower distribution and
shareholder servicing fees charged on Class A shares, which will increase
your investment return compared to the Class B shares.
- You will not pay any sales charge or fees when your shares convert, nor
will the transaction give rise to any tax.
CLASS C SHARES
Class C shares are sold at NAV, with no sales charge. Therefore, the entire
amount of your purchase price is invested in Class C shares. A CDSC of 1.00% is
applied to redemptions of Class C shares within one year of the date of
purchase. Class C shares have no conversion feature.
SALES CHARGE REDUCTIONS
Reduced sales charges on purchases of Class A shares are available to
shareholders with investments of $50,000 or more. In addition, you may qualify
for reduced sales charges under the following circumstances.
- LETTER OF INTENT. You inform the Fund in writing that you intend to
purchase enough shares over a 13-month period to qualify for a reduced
sales charge. You must include a minimum of 5% of the total amount you
intend to purchase with your letter of intent.
- RIGHTS OF ACCUMULATION. When the value of shares you already own plus the
amount you intend to invest reaches the amount needed to qualify for
reduced sales charges, your added investment will qualify for the reduced
sales charge.
- COMBINATION PRIVILEGE. Combine accounts of multiple funds or accounts of
immediate family household members (spouse and children under 21) to
achieve reduced sales charges.
21
<PAGE> 23
SHAREHOLDER INFORMATION
- -
SALES CHARGE WAIVERS -- CLASS A SHARES
The following qualify for waivers of front end sales charges when purchasing
Class A shares:
(1) accounts owned by Trustees of the Company, officers, directors, employees
and retired employees of (a) the Adviser and its affiliates and (b) The BISYS
Group, Inc. and its affiliates, and spouses and children under the age of 21 of
each of the foregoing;
(2) accounts owned by employees (and their spouses and children under the age
of 21) of any broker-dealer with whom the Distributor enters into a dealer
agreement to sell Shares of the Funds.
(3) Accounts opened in connection with "wrap fee" programs sponsored by
broker-dealers or other financial organizations.
For items listed above, shareholders must notify the Distributor that they are
entitled to a waiver of the sales charge. The waiver will be granted subject to
confirmation of the investor's situation.
CDSC WAIVERS -- CLASS B SHARES
The CDSC applicable to redemptions of Class B Shares will be waived under
certain circumstances, including the following:
- Distributions from retirement plans if the distributions are made following
the death or disability of shareholders or plan participants.
- Redemptions from accounts other than retirement accounts following the
death or disability of the shareholder.
- Returns of excess contributions to retirement plans.
- Distributions of less than 12% of the annual account value under an
Automatic Withdrawal Plan.
- Shares issued in a plan of reorganization sponsored by the Adviser, or
shares redeemed involuntarily in a similar situation.
The Distributor and the Adviser, at their expense, may provide compensation to
dealers in connection with sales of Shares of the Fund.
DISTRIBUTION AND SERVICE (12B-1) FEES
12b-1 fees compensate the Distributor and other dealers and investment
representatives for services and expenses relating to the sale and distribution
of a Fund's shares and/or for providing shareholder services. 12b-1 fees are
paid from the assets attributable to each Class of shares at the rates
applicable to the particular class, on an ongoing basis, and will increase the
cost of your investment.
- -
22
<PAGE> 24
SHAREHOLDER INFORMATION
- -
SALES CHARGE WAIVERS
CONTINUED
The Distributor may use the 12b-1 fees paid by each class to pay for
distribution-related expenses. Amounts up to .25% out of the 12b-1 fee payable
by each class of shares may be used for shareholder servicing fees. The total
of distribution and shareholder service payments by a particular class may not
exceed the 12b-1 fee limit for that class.
Long-term shareholders may pay indirectly more than the equivalent of the
maximum permitted front-end sales charge due to the recurring nature of 12b-1
distribution and service fees.
INDIVIDUAL RETIREMENT ACCOUNT ("IRA")
An IRA enables individuals, even if they participate in an employer-sponsored
retirement plan, to establish their own retirement programs. IRA contributions
may be tax-deductible and earnings are tax-deferred. Under the Tax Reform Act
of 1986, the tax deductibility of IRA contributions is restricted or eliminated
for individuals who participate in certain employer pension plans and whose
annual income exceeds certain limits. Existing IRAs and future contributions up
to the IRA maximums, whether deductible or not, still earn income on a
tax-deferred basis.
All IRA distribution requests must be made in writing to BISYS Fund Services.
Any additional deposits to an IRA must distinguish the type and year of the
contribution.
For more information on an IRA call the Fund at 1-877-833-7114. Shareholders
are advised to consult a tax adviser regarding IRA contribution and withdrawal
requirements and restrictions.
23
<PAGE> 25
SHAREHOLDER INFORMATION
- -
DIVIDENDS, DISTRIBUTIONS AND TAXES
Any income the Fund receives, less expenses, is paid out in the form of
dividends to its shareholders. Income dividends are usually paid quarterly.
Capital gains for the Fund are distributed at least annually.
Dividends and distributions are treated in the same manner for federal income
tax purposes whether you receive them in cash or in additional shares.
Dividends are taxable as ordinary income. If the Fund designates a distribution
as a long-term capital gains distribution, it will be taxable to you at your
long-term capital gains rate, regardless of how long you have owned your Fund
shares.
Some dividends are taxable in the calendar year in which they are declared,
even though your account statement may reflect them as being distributed in the
following year.
You will be notified in January each year about the federal tax status of
distributions made by the Fund. Depending on your residence for tax purposes,
distributions also may be subject to state and local taxes, including
withholding taxes.
Foreign shareholders may be subject to special withholding requirements. There
is a tax penalty on certain pre-retirement distributions from retirement
accounts. Consult your tax adviser about the federal, state and local tax
consequences in your particular circumstances.
The Fund is required to withhold 31% of taxable dividends, capital gains
distributions and redemptions paid to shareholders who have not provided the
Fund with their certified taxpayer identification number in compliance with IRS
rules or shareholders that are subject to back-up withholding. To avoid
withholding, make sure you provide your correct Tax Identification Number
(Social Security Number for most investors) on your account application.
24
<PAGE> 26
[GRAPH ICON]
FUND MANAGEMENT
- -
THE INVESTMENT ADVISER
Kensington Investment Group, Inc. ("Kensington") is an SEC registered
investment adviser which specializes in traded and non-traded real estate
securities portfolio management. Kensington was founded in 1993 by principals
who have been active in real estate securities research trading and investment
since 1985. Kensington provides discretionary investment management services
for assets totaling $133 million as of June 30, 1999 for private limited
partnerships, separate accounts and registered investment company clients.
Kensington is located at 4 Orinda Way, Suite 220D, Orinda, CA 94563.
- -
THE INVESTMENT COMMITTEE
Kensington's principal owners are John Kramer, Paul Gray and Craig Kirkpatrick.
This group leads the firm's investment strategy formation and implementation.
Their backgrounds are described below.
<TABLE>
<S> <C>
JOHN P. KRAMER, Mr. Kramer is involved in all aspects of the
PRESIDENT organization and is primarily responsible for
directing the firm's investment policies. Mr.
Kramer was previously Executive Vice President
at Liquidity Fund Investment Corporation where
he was responsible for directing the research,
marketing and trading activities of the firm.
Prior to joining Liquidity Fund in 1985, Mr.
Kramer was an associate with Federal Reserve
Chairman Alan Greenspan's economic consulting
firm, Townsend-Greenspan & Co. in New York
City, and an account executive at Sutro & Co.,
Inc. and Prudential-Bache Securities in San
Francisco. He received a B.A. in 1980 from the
State University of New York, Oneonta, in
Economics, graduating as class valedictorian.
Mr. Kramer received his Masters Degree in
Business Administration from the University of
California Berkeley in 1986, receiving an
award for his work in real estate finance
while at the Business School.
</TABLE>
25
<PAGE> 27
[GRAPH ICON]
FUND MANAGEMENT
- -
<TABLE>
<S> <C>
THE INVESTMENT
COMMITTEE
CONTINUED
PAUL GRAY, Mr. Gray is the Portfolio Manager and is
EXECUTIVE VICE PRESIDENT responsible for securities investment
decisions on behalf of Kensington's
portfolios. Prior to joining the Adviser in
1994, Mr. Gray was a partner and founder of
Golden State Financial Services, a mortgage
brokerage company. Prior to founding Golden
State Financial Services, Mr. Gray was a
senior analyst for Liquidity Fund Investment
Corporation where he managed their REIT
portfolios and developed the models used to
evaluate real estate securities. While at
Liquidity Fund, he served as Director of
Research for the National Real Estate Index
where he was instrumental in designing the
methodology and systems used to track real
estate values throughout the United States.
Mr. Gray received a Bachelor of Science in
Finance and Real Estate in 1988 from the
Business School at the University of
California at Berkeley.
CRAIG M. KIRKPATRICK, Mr. Kirkpatrick has been involved in the
EXECUTIVE VICE PRESIDENT research and trading of real estate securities
since 1985. He is a member of Kensington's
investment committee and involved in
Kensington's daily corporate business affairs.
Mr. Kirkpatrick was previously employed as
Vice President at Liquidity Fund Investment
Corporation from 1985-1993 responsible for the
research and trading of non-traded real estate
securities. Prior to joining Liquidity Fund,
Mr. Kirkpatrick was with Crocker Bank in the
finance department, acting as a liaison
between the Finance Division and World Banking
Division. Mr. Kirkpatrick received a Bachelor
of Science in Finance from the Business School
at the University of California at Berkeley in
1984.
</TABLE>
26
<PAGE> 28
FUND MANAGEMENT
- -
THE PORTFOLIO MANAGER
Paul Gray serves as Portfolio Manager for the Fund and is responsible for the
day-to-day management of the Fund's portfolio. Mr. Gray oversees Kensington's
research and trading staff.
- -THE DISTRIBUTOR AND ADMINISTRATOR
BISYS Fund Services, LP is the Fund's distributor and BISYS Fund Services Ohio,
Inc. is the Fund's administrator. Their address is 3435 Stelzer Road, Columbus,
OH 43219
The Statement of Additional Information has more detailed information about the
Fund's service providers.
CAPITAL STRUCTURE. The Coventry Group was organized as a Massachusetts business
trust on January 8, 1992 and overall responsibility for the management of the
Funds is vested in the Board of Trustees. Shareholders are entitled to one vote
for each full share held and a proportionate fractional vote for any fractional
shares held and will vote in the aggregate and not by series or class except as
otherwise expressly required by law.
27
<PAGE> 29
For more information about the Funds, the following documents are available free
upon request:
ANNUAL/SEMI-ANNUAL REPORTS:
The Fund's annual and semi-annual reports to shareholders will contain
additional information on the Fund's investments. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI provides more detailed information about the Fund, including its
operations and investment policies. It is incorporated by reference and is
legally considered a part of this prospectus.
YOU CAN RECEIVE FREE COPIES OF REPORTS AND THE SAI, OR REQUEST OTHER INFORMATION
AND DISCUSS YOUR QUESTIONS ABOUT THE FUND BY CONTACTING A BROKER THAT SELLS THE
FUND. OR CONTACT THE FUND AT:
KENSINGTON STRATEGIC REALTY FUND
P.O. BOX 182235
COLUMBUS, OHIO 43218-2235
TELEPHONE: 1-877-833-7114
You can review the Fund's reports and SAIs at the Public Reference Room of the
Securities and Exchange Commission. You can get text-only copies:
- For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009 or calling 1-800-SEC-0330.
- Free from the Commission's Website at http://www.sec.gov.
Investment Company Act file no. 811-6526.
<PAGE> 30
Kensington Strategic Realty Fund
an
Investment Portfolio of
The Coventry Group
Statement of Additional Information
September 15, 1999
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the prospectus for Kensington Strategic
Realty Fund ("Fund") dated September 15, 1999 ("Prospectus"). The Fund is a
separate investment portfolio of The Coventry Group (the "Group"), an open-end
management investment company. This Statement of Additional Information is
incorporated in its entirety into the Prospectus. Copies of the Prospectus may
be obtained by writing the Fund at 3435 Stelzer Road, Columbus, Ohio 43218-2235,
or by telephoning toll free 1-877-833-7114.
<PAGE> 31
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
THE COVENTRY GROUP...........................................................................1
INVESTMENT OBJECTIVE AND POLICIES............................................................1
Additional Information on Portfolio Instruments.....................................1
Investment Restrictions............................................................15
Portfolio Turnover.................................................................17
NET ASSET VALUE.............................................................................17
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................................19
Matters Affecting Redemption.......................................................19
MANAGEMENT OF THE GROUP.....................................................................20
Trustees and
Officers...........................................................................20
Investment Adviser and
Sub-Adviser........................................................................24
Portfolio Transactions.............................................................26
Banking Laws.......................................................................28
Administrator......................................................................28
Distributor........................................................................32
Custodian..........................................................................35
Transfer Agency and Fund Accounting
Services...........................................................................36
Independent Auditors...............................................................37
Legal Counsel......................................................................37
ADDITIONAL INFORMATION......................................................................37
Description of Shares..............................................................37
Vote of a Majority of the Outstanding
Shares.............................................................................38
Additional Tax Information.........................................................38
Yields and Total Returns...........................................................48
Performance Comparisons............................................................51
Principal Shareholders.............................................................52
Miscellaneous......................................................................52
FINANCIAL STATEMENTS........................................................................53
APPENDIX...................................................................................A-1
</TABLE>
<PAGE> 32
STATEMENT OF ADDITIONAL INFORMATION
THE COVENTRY GROUP
KENSINGTON STRATEGIC REALTY FUND
The Coventry Group (the "Group") is an open-end management investment
company which issues its Shares in separate series. Each series of Shares
relates to a separate portfolio of assets. This Statement of Additional
Information deals with the portfolio called Kensington Strategic Realty Fund
("Fund"). Kensington Investment Group, Inc. ("Adviser") serves as investment
adviser to the Fund. Much of the information contained in this Statement of
Additional Information expands upon subjects discussed in the Prospectus of the
Fund. Capitalized terms not defined herein are defined in the Prospectus. No
investment in Shares of the Fund should be made without first reading the
Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
Additional Information on Portfolio Instruments
- -----------------------------------------------
The following policies supplement the investment objective and policies
of the Fund as set forth in the Prospectus.
REAL ESTATE SECURITIES. The Fund is authorized to invest in the senior
and common securities of REITs and other real estate companies, including
preferred stock, convertible preferred stock, and corporate debt. A REIT is a
corporation or a business trust that would otherwise be taxed as a corporation,
which meets the definitional requirements of the Internal Revenue Code of 1986,
as amended (the "Code"). The Code permits a qualifying REIT to deduct dividends
paid , thereby effectively eliminating corporate level federal income tax and
making the REIT a pass-through vehicle for federal income tax purposes. To meet
the definitional requirements of the Code, a REIT must, among other things,
invest substantially all of its assets in interests in real estate (including
mortgages and other REITs) or cash and government securities, derive most of its
income from rents from real property or interest on loans secured by mortgages
on real property; and distribute to shareholders annually 95% or more of its
otherwise taxable income.
REITs are sometimes informally characterized as equity REITs, mortgage
REITs and hybrid REITs. An equity REIT invests primarily in the fee ownership of
land and buildings and derives its income primarily from rental income. An
equity REIT may also realize capital gains (or losses) by selling real estate
properties in its portfolio and have appreciated (or depreciated) in value. A
mortgage REIT invests primarily in mortgages on real estate, which may secure
construction, development or long-term loans. A mortgage REIT generally derives
its income primarily from interest payments on the credit it has extended. A
hybrid REIT combines the
<PAGE> 33
characteristics of equity REITs and mortgage REITs, generally by holding both
ownership interests and mortgage interests in real estate. It is anticipated,
although not required, that under normal circumstances a majority of the Fund's
investments in REITs will consist of equity REITs.
Investments in REITs may be subject to certain of the same risks
associated with the direct ownership of real estate. These risks include:
declines in the value of real estate generally; changes in neighborhood or
property appeal; environmental clean-up costs; condemnation or casualty losses;
risks related to general and local economic conditions, over-building and
competition; increases in property taxes and operating expenses; lack of
availability of mortgage funds; high or extended vacancy rates; and rent
controls or variations in rental income. Rising interest rates may cause REIT
investors to demand a higher annual return, which may cause a decline in the
prices of REIT equity securities. Rising interest rates also generally increase
the costs of obtaining financing, which could cause the value of the Fund's
investments to decline. During periods of declining interest rates, certain
mortgage REITs may hold mortgages that the mortgagors may elect to prepay, and
such prepayment may diminish the yield on securities issued by those REITs. In
addition, mortgage REITs may be affected by the borrowers' ability to repay its
debt to the REIT when due. Equity REIT securities may be affected by the ability
of tenants to pay rent. In addition, REITs may not be diversified. REITs are
subject to the possibility of failing to qualify for tax-free pass-through of
income and failing to maintain exemption under the 1940 Act. Also, equity REITs
may be dependent upon management skill and may be subject to the risks of
obtaining adequate financing for projects on favorable terms.
MORTGAGE-RELATED SECURITIES. The Fund may invest up to 15% of its
assets in commercial mortgage-backed securities (CMBS). Holders of these
securities receive payments derived from the interest and principal on an
underlying pool of commercial loans. The Fund may purchase all grades of CMBS,
including those rated below investment grade.
BANK OBLIGATIONS. The Fund may invest in bank obligations such as
bankers' acceptances, certificates of deposit, and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange
typically drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Bankers' acceptances invested in by the Fund will be those guaranteed by
domestic and foreign banks having, at the time of investment, capital, surplus,
and undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements).
Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return. Certificates of deposit
and time deposits will be those of domestic and foreign banks and savings and
loan associations, provided that (a) at the time of investment the depository
institution has capital, surplus, and undivided profits in excess of
$100,000,000 (as of the date of its most recently published financial
statements), or (b) the principal amount of the instrument is insured in full by
the Bank Insurance Fund or the Savings Association Insurance Fund.
<PAGE> 34
COMMERCIAL PAPER. Commercial paper consists of unsecured promissory
notes issued by corporations. Issues of commercial paper normally have
maturities of less than nine months and fixed rates of return.
The Fund may purchase commercial paper consisting of issues rated at
the time of purchase within the three highest rating categories by a nationally
recognized statistical rating organization (an "NRSRO"). The Fund may also
invest in commercial paper that is not rated but is determined by the Adviser
under guidelines established by the Group's Board of Trustees, to be of
comparable quality.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand
notes are unsecured demand notes that permit the indebtedness thereunder to vary
and provide for periodic readjustments in the interest rate according to the
terms of the instrument. They are also referred to as variable rate demand
notes. Because master demand notes are direct lending arrangements between Fund
and the issuer, they are not normally traded. Although there is no secondary
market in the notes, the Fund may demand payment of principal and accrued
interest at any time or during specified periods not exceeding one year,
depending upon the instrument involved, and may resell the note at any time to a
third party. The Adviser will consider the earning power, cash flow, and other
liquidity ratios of the issuers of such notes and will continuously monitor
their financial status and ability to meet payment on demand.
VARIABLE AND FLOATING RATE NOTES. A variable rate note is one whose
terms provide for the readjustment of its interest rate on set dates and which,
upon such readjustment, can reasonably be expected to have a market value that
approximates its par value. A floating rate note is one whose terms provide for
the readjustment of its interest rate whenever a specified interest rate changes
and which, at any time, can reasonably be expected to have a market value that
approximates its par value. Such notes are frequently not rated by credit rating
agencies; however, unrated variable and floating rate notes purchased by the
Fund will be determined by the Adviser under guidelines approved by the Group's
Board of Trustees to be of comparable quality at the time of purchase to rated
instruments eligible for purchase under the Fund's investment policies. In
making such determinations, the Adviser will consider the earning power, cash
flow and other liquidity ratios of the issuers of such notes (such issuers
include financial, merchandising, bank holding and other companies) and will
continuously monitor their financial condition. Although there may be no active
secondary market with respect to a particular variable or floating rate note
purchased by the Fund, the Fund may resell the note at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable or floating rate note in the
event the issuer of the note defaulted on its payment obligations and the Fund
could, as a result or for other reasons, suffer a loss to the extent of the
default. Variable or floating rate notes may be secured by bank letters of
credit.
U.S. GOVERNMENT OBLIGATIONS. The Fund may invest in U.S. Treasury
bills, notes and other obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities (collectively, "U.S. Government
Obligations"). Obligations of certain agencies and instrumentalities of the U.S.
Government are supported by the full faith and credit of the U.S. Treasury;
others are supported by the right of the issuer to borrow from the Treasury;
others are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations; and still others are supported only by the
credit of the instrumentality. No assurance
<PAGE> 35
can be given that the U.S. Government would provide financial support to U.S.
Government-sponsored agencies or instrumentalities if it is not obligated to do
so by law. The Fund will invest in the obligations of such agencies or
instrumentalities only when the Adviser believes that the credit risk with
respect thereto is minimal.
FUTURES CONTRACTS. The Fund may invest in futures contracts and options
thereon (stock index futures contracts or interest rate futures or options) to
hedge or manage risks associated with the Fund's securities investments.
Although techniques other than sales and purchases of futures contracts could be
used to reduce the Fund's exposure, the Fund may be able to hedge its exposure
more effectively and perhaps at a lower cost through using futures contracts.
A stock index futures contract is an agreement in which one party
agrees to take or make delivery of an amount of cash equal to a specified dollar
amount times the difference between the index value (which assigns relative
values to the common stocks included in the index) at the close of the last
trading day of the contract and the price at which the agreement is originally
made. No physical delivery of the underlying stock in the index is contemplated.
To enter into a futures contract, an amount of cash and cash
equivalents, equal to the market value of the futures contract, is deposited in
a segregated account with the Fund's Custodian and/or in a margin account with a
broker to collateralize the position. Brokerage fees are also incurred when a
futures contract is purchased or sold.
Although futures contracts typically require future delivery of and
payment for financial instruments, the futures contracts are usually closed out
before the delivery date. Closing out an open Futures contract sale or purchase
is effected by entering into an offsetting futures contract purchase or sale,
respectively, for the same aggregate amount of the identical type of financial
instrument and the same delivery date. If the offsetting purchase price is less
than the original sale price, the Fund realizes a gain; if it is more, the Fund
realizes a loss. Conversely, if the offsetting sale price is more than the
original purchase price, the Fund realizes a gain; if it is less, the Fund
realizes a loss. The transaction costs must also be included in these
calculations. There can be no assurance, however, that the Fund will be able to
enter into an offsetting transaction with respect to a particular futures
contract at a particular time. If the Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the contract.
As an example of an offsetting transaction in which the financial
instrument is not delivered, the contractual obligations arising from the sale
of one contract of September Treasury Bills on an exchange may be fulfilled at
any time before delivery of the contract is required (e.g., on a specified date
in September, the "delivery month") by the purchase of one contract of September
Treasury Bills on the same exchange. In such instance the difference between the
price at which the futures contract was sold and the price paid for the
offsetting purchase, after allowance for transaction costs, represents the
profit or loss to the Fund.
Positions in futures contracts may be closed out only on an exchange
that provides a secondary market for such futures. However, there can be no
assurance that a liquid secondary market will exist for any particular futures
contract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, the Fund would
<PAGE> 36
continue to be required to make daily cash payments to maintain its required
margin. In such situations, if the Fund had insufficient cash, it might have to
sell portfolio securities to meet daily margin requirements at a time when it
would be disadvantageous to do so. In addition, the Fund might be required to
make delivery of the instruments underlying futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to hedge or manage risks effectively.
The Fund will not purchase or sell futures contracts (or related
options thereon) if, immediately after the transaction, the aggregate initial
margin deposits and premiums paid by the Fund on its open futures and options
positions that do not constitute bona fide hedging transactions, as defined by
applicable rules, exceed 5% of the liquidation value of the Fund after taking
into account any unrealized profits and unrealized losses on any such futures or
related options contracts into which it has entered.
The Fund will not enter into futures contracts for speculation and will
only enter into futures contracts which are traded on national futures exchanges
and are standardized as to maturity date and underlying financial instrument.
The principal futures exchanges in the United States are the Board of Trade of
the City of Chicago and the Chicago Mercantile Exchange. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission. Futures are also traded in various overseas markets.
The Fund may enter into real estate related futures contracts as a
hedge against changes in prevailing levels of real estate stock values in order
to establish more definitely the effective return on securities held or intended
to be acquired by the Fund. The Fund's hedging may include sales of futures as
an offset against the effect of expected declines in real estate stock values,
and purchases of futures in anticipation of purchasing underlying index stocks
prior to the availability of sufficient assets to purchase such stocks or to
offset potential increases in the prices of such stocks. When selling options or
futures contracts, the Fund will segregate cash and liquid securities to cover
any related liability.
The Fund may enter into stock index futures contracts. A stock index
contract such as the S&P 500 Stock Index Contract, for example, is an agreement
to take or make delivery at a specified future date of an amount of cash equal
to $500 multiplied by the difference between the value of the stock index at
purchase and at the close of the last trading day of the contract. In order to
close long positions in the stock index contracts prior to their settlement
date, the Fund will enter into offsetting sales of stock index contracts.
Using stock index contracts in anticipation of market transactions
involves certain risks. Although the Fund may intend to purchase or sell stock
index contracts only if there is an active market for such contracts, no
assurance can be given that a liquid market will exist for the contracts at any
particular time. In addition, the price of stock index contracts may not
correlate perfectly with the movement in the stock index due to certain market
distortions. Due to the possibility of price distortions in the futures market
and because of the imperfect correlation between movements in the stock index
and movements in the price of stock index contracts, a correct forecast of
general market trends may not result in a successful anticipatory hedging
transaction.
<PAGE> 37
Futures Contracts Generally. Persons who trade in futures contracts may
be broadly classified as "hedgers" and "speculators." Hedgers, such as the Fund,
whose business activity involves investment or other commitments in debt
securities, equity securities, or other obligations, use the futures markets
primarily to offset unfavorable changes in value that may occur because of
fluctuations in the value of the securities and obligations held or expected to
be acquired by them or fluctuations in the value of the currency in which the
securities or obligations are denominated. Debtors and other obligors may also
hedge the interest cost of their obligations. The speculator, like the hedger,
generally expects neither to deliver nor to receive the financial instrument
underlying the futures contract, but, unlike the hedger, hopes to profit from
fluctuations in prevailing interest rates or securities prices,.
The Fund's futures transactions will be entered into for traditional
hedging purposes; that is, futures contracts will be sold to protect against a
decline in the price of securities that the Fund owns, or futures contracts will
be purchased to protect the Fund against an increase in the price of securities
it has a fixed commitment or expectation to purchase.
"Margin" with respect to futures and futures contracts is the amount of
funds that must be deposited by the Fund with a broker in order to initiate
futures trading and to maintain the Fund's open positions in futures contracts.
A margin deposit ("initial margin") is intended to assure the Fund's performance
of the futures contract. The margin required for a particular futures contract
is set by the exchange on which the contract is traded, and may be significantly
modified from time to time by the exchange during the term of the contract.
Futures contracts are customarily purchased and sold on margins that may range
upward from less than 5% of the value of the contract being traded.
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin deposit
("margin variation"). However, if the value of a position increases because of
favorable price changes in the futures contract so that the margin deposit
exceeds the required margin, the broker will pay the excess to the Fund. In
computing daily net asset values, the Fund will mark to market the current value
of its open futures contracts. The Fund expects to earn interest income on its
margin deposits.
The prices of futures contracts are volatile and are influenced, among
other things, by actual and anticipated changes in interest rates, which in turn
are affected by fiscal and monetary policies and national and international
political and economic events.
At best, the correlation between changes in prices of futures contracts
and of the securities being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances such as: variations in
speculative market demand for futures and for securities or currencies,
including technical influences in futures trading; and differences between the
financial instruments being hedged and the instruments underlying the standard
futures contracts available for trading, with respect to interest rate levels,
maturities, and creditworthiness of issuers. A decision of whether, when, and
how to hedge involves skill and judgment, and even a well-conceived hedge may be
unsuccessful to some degree because of unexpected market behavior or interest
rate trends.
<PAGE> 38
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss or
gain to the investor. For example, if at the time of purchase, 10% of the value
of the futures contract is deposited as margin, a subsequent 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out. A 15% decrease would result in a loss equal to 150% of the
original margin deposit, if the contract were closed out. Thus, a purchase or
sale of a futures contract may result in losses in excess of the amount invested
in the futures contract. However, the Fund would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline. Furthermore, in
the case of a futures contract purchase, in order to be certain that the Fund
has sufficient assets to satisfy its obligations under a futures contract, the
Fund segregates and commits to back the futures contract with cash or liquid
securities equal in value to the current value of the underlying instrument less
the margin deposit.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
Successful use of futures by the Fund is subject to the Adviser's
ability to predict movements correctly in the direction of the market. There is
typically an imperfect correlation between movements in the price of the future
and movements in the price of the securities that are the subject of the hedge.
In addition, the price of futures may not correlate perfectly with movement in
the cash market due to certain market distortions. Due to the possibility of
price distortion in the futures market and because of the imperfect correlation
between the movements in the cash market and movements in the price of futures,
a correct forecast of general market trends or interest rate movements by the
Adviser may still not result in a successful hedging transaction over a short
time frame.
The trading of futures contracts is also subject to the risk of trading
halts, suspension, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruption of normal trading activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
CALL OPTIONS. The Fund may write (sell) "covered" call options and
purchase options to close out options previously written by it. Such options
must be listed on a National Securities Exchange and issued by the Options
Clearing Corporation. The purpose of writing covered call options is to generate
additional premium income for the Fund. This premium income will serve to
enhance the Fund's total return and will reduce the effect of any price decline
of the security
<PAGE> 39
involved in the option. Covered call options will generally be written on
securities which, in the opinion of the Adviser, are not expected to make any
major price moves in the near future but which, over the long term, are deemed
to be attractive investments for the Fund.
A call option gives the holder (buyer) the "right to purchase" a
security at a specified price (the exercise price) at any time until a certain
date (the expiration date). So long as the obligation of the writer of a call
option continues, he may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring him to deliver the underlying
security against payment of the exercise price. This obligation terminates upon
the expiration of the call option, or such earlier time at which the writer
effects a closing purchase transaction by repurchasing an option identical to
that previously sold. To secure his obligation to deliver the underlying
security in the case of a call option, a writer is required to deposit in escrow
the underlying security or other assets in accordance with the rules of the
Options Clearing Corporation. The Fund will write only covered call options and
will normally not write a covered call option if, as a result, the aggregate
market value of all portfolio securities covering all call options would exceed
25% of the market value of its net assets.
Fund securities on which call options may be written will be purchased
solely on the basis of investment considerations consistent with the Fund's
investment objective. The writing of covered call options is a conservative
investment technique believed to involve relatively little risk (in contrast to
the writing of naked or uncovered options, which the Fund will not do), but
capable of enhancing the Fund's total return. When writing a covered call
option, the Fund, in return for the premium, gives up the opportunity for profit
from a price increase in the underlying security above the exercise price, but
retains the risk of loss should the price of the security decline. Unlike one
who owns securities not subject to an option, the Fund has no control over when
it may be required to sell the underlying securities, since it may be assigned
an exercise notice at any time prior to the expiration of its obligation as a
writer. If a call option which the Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such gain may be offset by
a decline in the market value of the underlying security during the option
period. If the call option is exercised, the Fund will realize a gain or loss
from the sale of the underlying security. The security covering the call will be
maintained in a segregated account of the Fund's Custodian.
The premium received is the market value of an option. The premium the
Fund will receive from writing a call option will reflect, among other things,
the current market price of the underlying security, the relationship of the
exercise price to such market price, the historical price volatility of the
underlying security, and the length of the option period. Once the decision to
write a call option has been made, the Adviser, in determining whether a
particular call option should be written on a particular security, will consider
the reasonableness of the anticipated premium and the likelihood that a liquid
secondary market will exist for such option. The premium received by the Fund
for writing covered call options will be recorded as a liability in the Fund's
statement of assets and liabilities. This liability will be adjusted daily to
the option's current market value, which will be the latest sale price at the
time at which the net asset value per share of the Fund is computed (close of
the New York Stock Exchange), or, in the absence of such sale, the latest asked
price. The liability will be extinguished upon expiration of the option, the
purchase of an identical option in a closing transaction, or delivery of the
underlying security upon the exercise of the option.
<PAGE> 40
Closing transactions will be effected in order to realize a profit on
an outstanding call option, to prevent an underlying security from being called,
or to permit the sale of the underlying security. Furthermore, effecting a
closing transaction will permit the Fund to write another call option on the
underlying security with either a different exercise price or expiration date or
both. If the Fund desires to sell a particular security from its portfolio on
which it has written a call option, it will seek to effect a closing transaction
prior to, or concurrently with, the sale of the security. There is, of course,
no assurance that the Fund will be able to effect such closing transactions at a
favorable price. If the Fund cannot enter into such a transaction, it may be
required to hold a security that it might otherwise have sold, in which case it
would continue to be at market risk on the security. The Fund will pay
transaction costs in connection with the writing of options to close out
previously written options. Such transaction costs are normally higher than
those applicable to purchases and sales of portfolio securities.
Call options written by the Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities at the time the options are written. From time to time, the Fund may
purchase an underlying security for delivery in accordance with an exercise
notice of a call option assigned to it, rather than delivering such security
from its portfolio. In such cases, additional costs will be incurred.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by the Fund.
WRITING COVERED PUT OPTIONS. The Fund may write covered put options. A
put option gives the purchaser of the option the right to sell, and the writer
(seller) has the obligation to buy, the underlying security at the exercise
price during the option period. So long as the obligation of the writer
continues, the writer may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring the writer to make payment of the
exercise price against delivery of the underlying security. The operation of put
options in other respects, including their related risks and rewards, is
substantially identical to that of call options.
The Fund may write put options only on a covered basis, which means
that the Fund would maintain in a segregated account cash and liquid securities
in an amount not less than the exercise price at all times while the put option
is outstanding. (The rules of the Options Clearing Corporation currently require
that such assets be deposited in escrow to secure payment of the exercise
price.) The Fund would generally write covered put options in circumstances
where the Advisor wishes to purchase the underlying security for the Fund's
portfolio at a price lower than the current market price of the security. In
such event the Fund would write a put option at an exercise price which, reduced
by the premium received on the option, reflects the lower price it is willing to
pay. Since the Fund would also receive interest on debt securities maintained to
cover the exercise price of the option, this technique could be used to enhance
current return during periods of market uncertainty. The risk in such a
transaction would be that the market
<PAGE> 41
price of the underlying security would decline below the exercise price less the
premiums received.
PURCHASING PUT OPTIONS. The Fund may purchase put options. As the
holder of a put option, the Fund has the right to sell the underlying security
at the exercise price at any time during the option period. The Fund may enter
into closing sale transactions with respect to such options, exercise them, or
permit them to expire. The Fund may purchase put options for defensive purposes
in order to protect against an anticipated decline in the value of its
securities or currencies. An example of such use of put options is provided
below.
The Fund may purchase a put option on an underlying security (a
"protective put") owned as a defensive technique in order to protect against an
anticipated decline in the value of the security. Such hedge protection is
provided only during the life of the put option when the Fund, as the holder of
the put option, is able to sell the underlying security at the put exercise
price regardless of any decline in the underlying security's market price 's
exchange value. For example, a put option may be purchased in order to protect
unrealized appreciation of a security where the Advisor deems it desirable to
continue to hold the security because of tax considerations. The premium paid
for the put option and any transaction costs would reduce any capital gain
otherwise available for distribution when the security is eventually sold.
The Fund may also purchase put options at a time when the Fund does not
own the underlying security. By purchasing put options on a security it does not
own, the Fund seeks to benefit from a decline in the market price of the
underlying security . If the put option is not sold when it has remaining value,
and if the market price of the underlying security remains equal to or greater
than the exercise price during the life of the put option, the Fund will lose
its entire investment in the put option. In order for the purchase of a put
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale transaction.
The Fund will commit no more than 5% of its assets to premiums when
purchasing put options. The premium paid by the Fund when purchasing a put
option will be recorded as an asset in the Fund's statement of assets and
liabilities. This asset will be adjusted daily to the option's current market
value, which will be the latest sale price at the time at which the Fund's net
asset value per share is computed (close of trading on the New York Stock
Exchange), or, in the absence of such sale, the latest bid price. The asset will
be extinguished upon expiration of the option, the selling (writing) of an
identical option in a closing transaction, or the delivery of the underlying
security upon the exercise of the option.
PURCHASING CALL OPTIONS. The Fund may purchase call options. As the
holder of a call option, the Fund has the right to purchase the underlying
security at the exercise price at any time during the option period. The Fund
may enter into closing sale transactions with respect to such options, exercise
them, or permit them to expire. The Fund may purchase call options for the
purpose of increasing its current return or avoiding tax consequences which
could reduce its current return. The Fund may also purchase call options in
order to acquire the underlying securities. Examples of such uses of call
options are provided below.
<PAGE> 42
Call options may be purchased by the Fund for the purpose of acquiring
the underlying securities for its portfolio. Utilized in this fashion, the
purchase of call options enables the Fund involved to acquire the securities at
the exercise price of the call option plus the premium paid. At times the net
cost of acquiring securities in this manner may be less than the cost of
acquiring the securities directly. This technique may also be useful to the Fund
in purchasing a large block of securities that would be more difficult to
acquire by direct market purchases. So long as it holds such a call option
rather than the underlying security itself, the Fund is partially protected from
any unexpected decline in the market price of the underlying security and in
such event could allow the call option to expire, incurring a loss only to the
extent of the premium paid for the option.
The Fund will commit no more than 5% of its assets to premiums when
purchasing call options. The Fund may also purchase call options on underlying
securities it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options may also be purchased at times to
avoid realizing losses that would result in a reduction of the Fund's current
return. For example, where the Fund has written a call option on an underlying
security having a current market value below the price at which such security
was purchased by the Fund, an increase in the market price could result in the
exercise of the call option written by the Fund and the realization of a loss on
the underlying security with the same exercise price and expiration date as the
option previously written.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts are similar
to options on fixed income or equity securities or options on currencies, except
that options on futures contracts give the purchaser the right, in return for
the premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put), rather than
to purchase or sell the futures contract, at a specified exercise price at any
time during the period of the option. Upon exercise of the option, the delivery
of the futures position by the writer of the option to the holder of the option
will be accompanied by delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price of
the futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the futures
contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference on the expiration date between the exercise price of the
option and the closing level of the securities upon which the futures contracts
are based. Purchasers of options who fail to exercise their options prior to the
exercise date suffer a loss of the premium paid.
As an alternative to purchasing call and put options on futures, the
Fund may purchase call and put options on the underlying securities. Such
options would be used in a manner identical to the use of options on futures
contracts. To reduce or eliminate the leverage then employed by the Fund or to
reduce or eliminate the hedge position then currently held by the Fund, the Fund
may seek to close out an option position by selling an option covering the same
securities or contract and having the same exercise price and expiration date.
<PAGE> 43
RESTRICTED AND ILLIQUID SECURITIES. Restricted securities are subject
to restrictions on resale under federal securities law. Under criteria
established by the Fund's Trustees, certain restricted securities are determined
to be liquid. To the extent that restricted securities are not determined to be
liquid, the Fund will limit their purchase, together with other illiquid
securities including non-negotiable time deposits, and repurchase agreements
providing for settlement in more than seven days after notice, to no more than
15% of its net assets.
Restricted securities in which the Fund may invest may include
commercial paper issued in reliance on the exemption from registration afforded
by Section 4(2) of the Securities Act of 1933. Section 4(2) commercial paper is
restricted as to disposition under federal securities law, and is generally sold
to institutional investors, such as the Fund, who agree that they are purchasing
the paper for investment purposes and not with a view to public distribution.
Any resale by the purchaser must be in an exempt transaction. Section 4(2)
commercial paper is normally resold to other institutional investors like the
Fund through or with the assistance of the issuer or investment dealers who make
a market in Section 4(2) commercial paper, thus providing liquidity. The Adviser
believes that Section 4(2) commercial paper and possibly certain other
restricted securities which meet the criteria for liquidity established by the
Trustees of the Fund are quite liquid. The Fund intends, therefore, to treat the
restricted securities which meet the criteria for liquidity established by the
Trustees, including Section 4(2) commercial paper, as determined by the Adviser,
as liquid and not subject to the investment limitations applicable to illiquid
securities.
SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in
securities issued by the other investment companies. The Fund currently intends
to limit its investments in accordance with applicable law. Among other things,
such law would limit these investments so that, as determined immediately after
a securities purchase is made by the Fund: (a) not more than 5% of the value of
its total assets will be invested in the securities of any one investment
company; (b) not more than 10% of the value of its total assets will be invested
in the aggregate in securities of investment companies as a group; and (c) not
more than 3% of the outstanding voting stock of any one investment company will
be owned by the Fund; and (d) not more than 10% of the outstanding voting stock
of any one closed-end investment company will be owned by the Fund together with
all other investment companies that have the same investment adviser. As a
shareholder of another investment company, the Fund would bear, along with other
shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Investment companies in which the Fund may invest may also impose a sales or
distribution charge in connection with the purchase or redemption of their
Shares and other types of commissions or charges. Such charges will be payable
by the Fund and, therefore, will be borne directly by Shareholders.
REPURCHASE AGREEMENTS. Securities held by a Fund may be subject to
repurchase agreements. These transactions permit the Fund to earn income for
periods as short as overnight. The Fund could receive less than the repurchase
price on any sale of such securities. Under the terms of a repurchase agreement,
the Fund would acquire securities from member banks of the Federal Deposit
Insurance Corporation and registered broker-dealers and other financial
institutions which the Adviser deems creditworthy under guidelines approved by
the Group's Board of Trustees, subject to the seller's agreement to repurchase
such securities at a mutually
<PAGE> 44
agreed-upon date and price. The repurchase price would generally equal the price
paid by the Fund plus interest negotiated on the basis of current short-term
rates, which may be more or less than the rate on the underlying portfolio
securities. The seller under a repurchase agreement will be required to maintain
continually the value of collateral held pursuant to the agreement at not less
than the repurchase price (including accrued interest). If the seller were to
default on its repurchase obligation or become insolvent, the Fund holding such
obligation would suffer a loss to the extent that the proceeds from a sale of
the underlying portfolio securities were less than the repurchase price under
the agreement, or to the extent that the disposition of such securities by the
Fund were delayed pending court action. Additionally, there is no controlling
legal precedent confirming that the Fund would be entitled, as against a claim
by such seller or its receiver or trustee in bankruptcy, to retain the
underlying securities, although the Board of Trustees of the Group believes
that, under the regular procedures normally in effect for custody of the Fund's
securities subject to repurchase agreements and under federal laws, a court of
competent jurisdiction would rule in favor of the Group if presented with the
question. Securities subject to repurchase agreements will be held by the Fund's
custodian or another qualified custodian or in the Federal Reserve/Treasury
book-entry system. Repurchase agreements are considered to be loans by the Fund
under the Investment Company Act of 1940 ("1940 Act").
DIVERSIFICATION. The Fund is a "non-diversified" management investment
company, as defined in the 1940 Act. Therefore, it is not subject to the
diversifications requirements of the 1940 Act which generally limit investments,
as to 75% of a fund's total assets, to no more than 5% in securities in a single
issuer and 10% of an issuer's voting securities. Similar diversification
requirements, as to 50% of the Fund's total assets, will however be applicable
to the Fund under the Internal Revenue Code, which also provide that the Fund
may not invest more than 25% of its total assets in issuers controlled by the
Funds and determined to be in a similar business.
LEVERAGE. The Fund can buy securities with borrowed money (a form of
leverage). Leverage exaggerates the effect on net asset value of any increase or
decrease in the market value of a Fund's portfolio securities. These borrowings
will be subject to interest costs which may or may not be recovered by
appreciation of the securities purchased; in certain cases, interest costs may
exceed the return received on the securities purchased. For borrowings for
investment purposes, including reverse repurchase agreements (see below), the
1940 Act requires the Fund to maintain continuous asset coverage (that is, total
assets including borrowings, less liabilities exclusive of borrowings) of 300%
of the amount borrowed. If the required coverage should decline as a result of
market fluctuations or other reasons, the Fund may be required to sell some of
its portfolio holding within three days to reduce the amount of its borrowings
and restore the 300% asset coverage, even though it may be disadvantageous from
an investment standpoint to sell securities at that time. The Fund also may be
required to maintain minimum average balances in connection with such borrowing
or pay a commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest rate.
REVERSE REPURCHASE AGREEMENTS AND LEVERAGE. The Fund may enter into
reverse repurchase agreements which involve the sale of a security by the Fund
and its agreement to repurchase the security at a specified time and price. This
is another form of leverage. The Fund will maintain in a segregated account with
its custodian cash, cash
<PAGE> 45
equivalents, or liquid securities in an amount sufficient to cover its
obligations under reverse repurchase agreements with broker-dealers (but not
with banks). Under the 1940 Act, reverse repurchase agreements are considered
borrowings by the Fund; accordingly, the Fund will limit its investments in
these transactions, together with any other borrowings, to no more than
one-third of its total assets. The use of reverse repurchase agreements by the
Fund creates leverage which increases the Fund's investment risk. If the income
and gains on securities purchased with the proceeds of these transactions exceed
the cost, the Fund's earnings or net asset value will increase faster than
otherwise would be the case; conversely, if the income and gains fail to exceed
the costs, earnings or net asset value would decline faster than otherwise would
be the case. If the 300% asset coverage required by the 1940 Act should decline
as a result of market fluctuation or other reasons, the Fund may be required to
sell some of its portfolio securities within three days to reduce the borrowings
(including reverse repurchase agreements) and restore the 300% asset coverage,
even though it may be disadvantageous from an investment standpoint to sell
securities at that time. The Fund intends to enter into reverse repurchase
agreements only if the income from the investment of the proceeds is greater
than the expense of the transaction, because the proceeds are invested for a
period no longer than the term of the reverse repurchase agreement.
LOANS OF PORTFOLIO SECURITIES. Each Fund may lend securities if such
loans are secured continuously by liquid assets consisting of cash, U.S.
Government securities or other liquid, high-grade debt securities or by a letter
of credit in favor of the Fund at least equal at all times to 100% of the market
value of the securities loaned, plus accrued interest. While such securities are
on loan, the borrower will pay the Fund any income accruing thereon. Loans will
be subject to termination by the Fund in the normal settlement time, currently
three Business Days after notice, or by the borrower on one day's notice (as
used herein, "Business Day" shall denote any day on which the New York Stock
Exchange and the custodian are both open for business). Any gain or loss in the
market price of the borrowed securities that occurs during the term of the loan
inures to the lending Fund and its shareholders. The Fund may pay reasonable
finders' and custodial fees in connection with loans. In addition, the Fund will
consider all facts and circumstances including the creditworthiness of the
borrowing financial institution, and the Fund will not lend their securities to
any director, officer, employee, or affiliate of the Adviser, the Administrator
or the Distributor, unless permitted by applicable law. Loans of portfolio
securities involve risks, such as delays or an inability to regain the
securities or collateral adjustments in the event the borrower defaults or
enters into bankruptcy.
WHEN-ISSUED SECURITIES AND FIRM COMMITMENT AGREEMENTS. The Fund may
purchase securities on a delayed delivery or "when-issued" basis and enter into
firm commitment agreements (transactions whereby the payment obligation and
interest rate are fixed at the time of the transaction but the settlement is
delayed). The Fund will not purchase securities the value of which is greater
than 5% of its net assets on a when-issued or firm commitment basis. The Fund,
as purchaser, assumes the risk of any decline in value of the security beginning
on the date of the agreement or purchase, and no interest accrues to the Fund
until it accepts delivery of the security. The Fund will not use such
transactions for leveraging purposes and, accordingly, will segregate cash, cash
equivalents, or liquid securities in an amount sufficient to meet its payment
obligations thereunder. Although these transactions will not be entered into for
leveraging purposes, to the extent the Fund's aggregate commitments under these
transactions exceed its holdings of cash and securities that do not fluctuate in
value
<PAGE> 46
(such as short-term money market instruments), the Fund temporarily will be in a
leveraged position (i.e., it will have an amount greater than its net assets
subject to market risk). Should market values of the Fund's portfolio securities
decline while the Fund is in a leveraged position, greater depreciation of its
net assets would likely occur than were it not in such a position. As the Fund's
aggregate commitments under these transactions increase, the opportunity for
leverage similarly increases. The Fund will not borrow money to settle these
transactions and, therefore, will liquidate other portfolio securities in
advance of settlement if necessary to generate additional cash to meet its
obligations thereunder.
SHORT SALES The Fund may from time to time sell securities short. A
sort sale is a transaction in which the Fund sells securities it does not own
(but has borrowed) in anticipation of a decline in the market price of the
securities. To complete a short sale, the Fund must arrange through a broker to
borrow the securities to be delivered to the buyer. The proceeds received by the
Fund from the short sale are retained by the broker until the Fund replaces the
borrowed securities. In borrowing the securities to be delivered to the buyer,
the Fund becomes obligated to replace the securities borrowed at their market
price at the time of replacement, whatever that price may be. The Fund may have
to pay a premium to borrow the securities and must pay any dividends or interest
payable on the securities until they are replaced.
The Fund's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash or obligations of the U.S. Government, its agencies or
instrumentalities ("U.S. Government Securities"). In addition, the Fund will
place in a segregated account with its custodian an amount of cash or U.S.
Government Securities equal to the difference, if any, between (a) the current
market value of the securities sold, and (b) any cash or U.S. Government
Securities deposited as collateral with the broker in connection with the short
sale (not including the proceeds of the short sale). Until it replaces the
borrowed securities, the Fund will maintain the segregated account daily at a
level so that the amount deposited in the account plus the amount deposited with
the broker (not including the proceeds from the short sale) will equal the
current market value of the securities sold short.
The Fund will incur a loss as a result of a short sale (other than a
short sale against the box, see below) if the price of the security increases
between the date of the short sale and the date on which the Fund replaces the
borrowed security. Possible losses from such short sales differ from losses that
could be incurred from a purchase of a security, because losses from such short
sales may be unlimited, whereas losses from purchases of a security can equal
only the total amount invested. Short sales will be limited to no more than 25%
of the value of the Fund's assets.
SHORT SALES AGAINST THE BOX The Fund may enter into a short sale of a
security such that, so long as the short position is open, the Fund will own an
equal amount of preferred stock or debt securities, convertible or exchangeable
without payment of further consideration, into an equal number of shares of the
common stock sold short. This kind of short sales, which is described as one
"against the box," will be entered into by the Fund for the purpose of receiving
a portion of the interest earned by the executing broker from the proceeds of
the sale. The proceeds of
<PAGE> 47
the sale will be held by the broker until the settlement date, when the Fund
delivers the convertible securities to close out its short position. Although,
prior to delivery, the Fund will have to pay an amount equal to any dividends
paid on the common stock sold short, the Fund will receive the dividends from
the preferred stock or interest from the debt securities convertible into the
stock sold short, plus a portion of the interest earned from the proceeds of the
short sale. The Fund will deposit, in a segregated account with its custodian,
convertible preferred stocks or convertible debt securities in connection with
short sales against the box.
Investment Restrictions
- -----------------------
The following are fundamental investment restrictions of the Fund:
1. The Fund has elected to qualify as a non-diversified series of the Trust.
2. The Fund will invest more than 25% of the value of its assets in securities
of issuers in the real estate industry.
Additionally, the Fund may not:
3. borrow money, except as permitted under the Investment Company Act of 1940,
as amended, and as interpreted or modified by regulatory authority having
jurisdiction, from time to time;
4. issue senior securities, except as permitted under the Investment Company Act
of 1940, as amended, and as interpreted or modified by regulatory authority
having jurisdiction, from time to time;
5. engage in the business of underwriting securities issued by others, except to
the extent that a Fund may be deemed to be an underwriter in connection with the
disposition of portfolio securities;
6. purchase or sell real estate, which does not include securities of companies
which deal in real estate or mortgages or investments secured by real estate or
interests therein, except that the Fund reserves freedom of action to hold and
to sell real estate acquired as a result of the Fund's ownership of securities;
7. purchase physical commodities or contracts relating to physical commodities;
8. make loans to other persons, except (i) loans of portfolio securities, and
(ii) to the extent that entry into repurchase agreements and the purchase of
debt instruments or interests in indebtedness in accordance with a Fund's
investment objective and policies may be deemed to be loans.
<PAGE> 48
Portfolio Turnover
- ------------------
The portfolio turnover rate for the Fund is calculated by dividing the
lesser of the Fund's purchases or sales of portfolio securities for the year by
the monthly average value of the portfolio securities. The calculation excludes
all securities whose remaining maturities at the time of acquisition were one
year or less. The turnover rate for the Fund is not expected to exceed 200%.
NET ASSET VALUE
The net asset value of Shares of the Fund is determined and the Shares
are priced as of the Valuation Time on each Business Day of the Company. A
"Business Day" constitutes any day on which the New York Stock Exchange (the
"NYSE") is open for trading and any other day except days on which there are not
sufficient changes in the value of the Fund's portfolio securities that the
Fund's net asset value might be materially affected and days during which no
Shares are tendered for redemption and no orders to purchase Shares are
received. Currently, the NYSE is closed on New Year's Day, Martin Luther King,
Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
Portfolio equity securities for which market quotations are readily
available are valued based upon their last sales prices in their principal
market. Lacking any sales, these securities are valued at the mean between the
most recent bid and asked quotations. Debt securities with remaining maturities
of 60 days or less will be valued at their amortized cost. Other debt securities
are generally valued by pricing agents based on valuations supplied by
broker-dealers or calculated by electronic methods. Other securities and assets
for which quotations are not readily available, including restricted securities
and securities purchased in private transactions, are valued at their fair value
in the best judgment of the Adviser under the supervision of the Group's Board
of Trustees.
Among the factors that will be considered, if they apply, in valuing
portfolio securities held by the Fund are the existence of restrictions upon the
sale of the security by the Fund, the absence of a market for the security, the
extent of any discount in acquiring the security, the estimated time during
which the security will not be freely marketable, the expenses of registering or
otherwise qualifying the security for public sale, underwriting commissions if
underwriting would be required to effect a sale, the current yields on
comparable securities for debt obligations traded independently of any equity
equivalent, changes in the financial condition and prospects of the issuer, and
any other factors affecting fair value. In making valuations, opinions of
counsel may be relied upon as to whether or not securities are restricted
securities and as to the legal requirements for public sale.
As noted, the Group may use a pricing service to value certain
portfolio securities where the prices provided are believed to reflect the fair
market value of such securities. A pricing service would normally consider such
factors as yield, risk, quality, maturity, type of issue, trading
characteristics, special circumstances and other factors it deems relevant in
determining valuations of normal institutional trading units of debt securities
and would not rely exclusively on quoted prices. The methods used by the pricing
service and the valuations so established will
<PAGE> 49
be reviewed by the Group under the general supervision of the Group's Board of
Trustees. Several pricing services are available, one or more of which may be
used by the Adviser from time to time.
<PAGE> 50
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Fund Shares are sold on a continuous basis by BISYS Fund Services
Limited Partnership d/b/a BISYS Fund Services (the "Distributor") and BISYS Fund
Services has agreed to use appropriate efforts to solicit all purchase orders.
Matters Affecting Redemption
- -----------------------------
The Group may suspend the right of redemption or postpone the date of
payment for Shares with respect to the Fund during any period when (a) trading
on the New York Stock Exchange (the "Exchange") is restricted by applicable
rules and regulations of the Commission, (b) the Exchange is closed for other
than customary weekend and holiday closings, (c) the Commission has by order
permitted such suspension for the protection of security holders of the Group or
the Fund, or (d) the Commission has determined that an emergency exists as a
result of which (i) disposal by the Group or the Fund of securities owned by it
is not reasonably practical, or (ii) it is not reasonably practical for the
Group or the Fund to determine the fair value of its net assets.
The Group may redeem Shares of the Fund involuntarily if redemption
appears appropriate in light of the Group's responsibilities under the 1940 Act.
(See "General Policies on Redeeming Shares" in the Prospectus.)
The Adviser will pay investment dealers of record commissions on
initial sales of Class A shares of $1 million or more based on purchase at net
asset value. Such commissions will be paid at the rate of 1.00%. A contingent
deferred sales charge (CDSC) of 1.00% will be imposed on redemptions of these
shares (exclusive of shares purchased with reinvested dividends and/or
distributions) within the first year after the initial sale.
MANAGEMENT OF THE GROUP
Trustees and Officers
- ---------------------
Overall responsibility for management of the Group rests with its Board
of Trustees, which is elected by the Shareholders of the Group. The Trustees
elect the officers of the Group to supervise actively its day-to-day operations.
The names of the Trustees and officers of the Group, their addresses,
ages and principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation
Name, Address & Age With the Group During Past 5 Years
--------------------------- ------------------- ------------------------
<S> <C> <C>
Walter B. Grimm* Chairman, President and Trustee From June 1992 to present, employee
3435 Stelzer Road of BISYS Fund Services, from 1987 to
Columbus, OH 43219 June 1992, President of Leigh
Age: 52 Investments (investment firm).
Maurice G. Stark Trustee Retired. Until December 31,
</TABLE>
<PAGE> 51
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation
Name, Address & Age With the Group During Past 5 Years
--------------------------- ------------------- ------------------------
<S> <C> <C>
505 King Avenue 1994, Vice President-Finance and
Columbus, Ohio 43201 Treasurer, Battelle Memorial
Age: 62 Institute (scientific research and
development service corporation).
Michael M. Van Buskirk Trustee From June 1991 to present, Executive
37 West Broad Street Vice President of The Ohio Bankers'
Suite 1001 Association (trade association);
Columbus, Ohio 43215 from September 1987 to June 1991,
Age: 50 Vice President - Communications, TRW
Information Systems Group (electronic
and space engineering).
John H. Ferring IV Trustee From 1979 to present, President and
105 Bolte Lane owner of Plaze, Inc., St. Clair,
St. Clair, Missouri 63077 Missouri.
Age: 45
J. David Huber Vice President From June 1987 to present, employee
3435 Stelzer Road of BISYS Fund Services.
Columbus, Ohio 43219
Age: 51
Jennifer J. Brooks Vice President From October 1988 to present,
3435 Stelzer Road employee of BISYS Fund Services.
Columbus, Ohio 43219
Age: 32
Gary R. Tenkman Treasurer From April 1998 to present,
3435 Stelzer Road employee of BISYS Fund Services;
Columbus, Ohio 43219 from September 1990 to March 1998,
Age: 29 employee of Ernst & Young LLP.
George L. Stevens Secretary From September 1996 to present,
3435 Stelzer Road employee of BISYS Fund Services;
Columbus, Ohio 43219 from September 1995 to September
</TABLE>
<PAGE> 52
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation
Name, Address & Age With the Group During Past 5 Years
--------------------------- ------------------- ------------------------
<S> <C> <C>
1996, Independent Consultant;
from September 1989 to September
1995, Senior Vice President,
AmSouth Bank, N.A.
Alaina V. Metz Assistant Secretary From 1995 to present, employee of
3435 Stelzer Road BISYS Fund Services; from May 1989
Columbus, Ohio 43219 to June 1995, employee of Alliance
Age: 30 Capital Management.
- ----------------------------
</TABLE>
* Mr. Grimm is considered to be an "interested person" of the Group as
defined in the 1940 Act.
As of the date of this Statement of Additional Information, the Group's
officers and Trustees, as a group, own less than 1% of either Fund's outstanding
Shares.
The officers of the Group receive no compensation directly from the
Group for performing the duties of their offices. BISYS Fund Services may
receive fees pursuant to the Distribution and Shareholder Services Plan and the
Administrative Services Plan. BISYS Fund Services Ohio, Inc. ("BISYS") receives
fees from the Fund for acting as administrator and transfer agent and for
providing certain fund accounting services. Messrs. Huber, Tenkman, Stevens,
Grimm, Ms. Metz and Ms. Brooks are employees of BISYS.
Trustees of the Group not affiliated with BISYS or BISYS Fund Services
receive from the Group an annual fee of $1,000, plus $2,250 for each regular
meeting of the Board of Trustees attended and $1,000 for each special meeting of
the Board attended in person and $500 for other special meetings of the Board
attended by telephone, and are reimbursed for all out-of-pocket expenses
relating to attendance at such meetings. Trustees who are affiliated with BISYS
or BISYS Fund Services do not receive compensation from the Group.
Investment Adviser
- ------------------
Investment advisory services for the Funds are provided by Kensington
Investment Group, Inc., 4 Orinda Way, Suite 220D, Orinda, CA 94563. Pursuant to
an Investment Advisory Agreement dated as of September 15, 1999 (the
"Agreement"), the Adviser has agreed to provide investment advisory services to
the Fund as described in the Prospectus. For the services provided pursuant to
the Agreement, the Fund pays the Adviser a base fee computed daily and paid
monthly, at an annual rate, calculated as a percentage of the Fund's average
daily net assets, of 1.50%. The management fee is a fulcrum-type performance fee
that, after the first twelve months of the Fund's operations, increases or
decreases
<PAGE> 53
from the base fee of 1.50% depending on the Fund's performance relative to that
of the NAREIT Composite Index during the preceding twelve months. The Adviser
will receive the base fee for the first twelve months of Fund operations and,
thereafter, for periods when the Fund's performance for the past twelve months
equals that of the Index. Through performance adjustments equal to 15% of the
difference between the performance of the Fund and that of the Index during the
previous twelve months, the fee can range from a minimum of 0.50% to a maximum
of 2.50%. This fee arrangement may result in higher fees than those paid by
other investment companies. The Adviser may receive the maximum fee even if the
Fund's absolute performance is negative, and it may receive the minimum fee even
when the Fund has significant positive performance. The Adviser may periodically
waive all or a portion of its advisory fee to increase the net income of the
Fund available for distribution as dividends.
Unless sooner terminated, the Agreement will continue in effect until
September 15, 2001, and from year to year thereafter, if such continuance is
approved at least annually by the Group's Board of Trustees or by vote of a
majority of the outstanding Shares of the Fund and a majority of the Trustees
who are not parties to the Agreement or interested persons (as defined in the
1940 Act of any party to the Agreement by votes cast in person at a meeting
called for such purpose. (See "Vote of a Majority of the Outstanding Shares,"
below). The Agreement is terminable at any time on 60 days' written notice
without penalty by the Trustees, by vote of a majority of the outstanding Shares
of the Fund, or by the Adviser. The Agreement also terminates automatically in
the event of any assignment, as defined in the 1940 Act.
The Agreement provides that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of the Agreement, except a loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith, or gross
negligence on the part of the Adviser in the performance of its duties, or from
reckless disregard by the Adviser of its duties and obligations thereunder.
The Agreement was approved by both the Trustees and the independent
Trustees at a meeting held August 31, 1999.
Portfolio Transactions
- ----------------------
Pursuant to the Investment Advisory Agreement, the Adviser determines,
subject to the general supervision of the Board of Trustees of the Group and in
accordance with the Fund's investment objective and restrictions, which
securities are to be purchased and sold by the Fund, and which brokers are to be
eligible to execute the Fund's portfolio transactions. Certain purchases and
sales of portfolio securities with respect to the Fund are principal
transactions in which portfolio securities are normally purchased directly from
the issuer or from an underwriter or market maker for the securities. Purchases
from underwriters of portfolio securities generally include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
serving as market makers may include the spread between the bid and asked price.
Transactions on stock exchanges involve the payment of negotiated brokerage
commissions. Transactions in the over-the-counter market are generally principal
transactions with dealers. With respect to the over-the-counter market, the
Adviser, where possible, will deal directly with
<PAGE> 54
dealers who make a market in the securities involved except in those
circumstances where better price and execution are available elsewhere.
Firms with which portfolio transactions for the Fund will be conducted
are selected based on a number of factors such as reputation, capital strength
size and difficulty of order, sale of Fund shares and research provided to the
Adviser. The Adviser may cause the Fund to pay commissions higher than those
another broker-dealer would have charged if the Adviser believes the commission
paid is reasonable relative to the value of the brokerage and research services
received by the Adviser. Research services so received by the Adviser may be
useful to the Adviser in providing services to clients other than the Fund, and
not all such services are used by the Adviser in connection with the Fund.
Similarly, research services provided to the Adviser by broker-dealers through
which transactions are executed for clients other than the Fund may be used by
the Adviser in providing services to the Fund.
Investment decisions for the Fund are made independently from those for
other accounts managed by the Adviser. Any such account may also invest in the
same securities as the Fund. Securities purchased for the Fund may not be
purchased for other accounts, and vice versa. When a purchase or sale of the
same security is made at substantially the same time on behalf of the Fund and
another account, the transaction will be averaged as to price, and available
investments will be allocated as to amount in a manner which the Adviser
believes to be equitable to the Fund and such other account. In some instances,
this investment procedure may adversely affect the price paid or received by the
Fund or the size of the position obtained by the Fund. To the extent permitted
by law, the Adviser may aggregate the securities to be sold or purchased for the
Fund with those to be sold or purchased for the other accounts in order to
obtain best execution.
Administrator
- -------------
BISYS serves as administrator ("Administrator") to the Fund pursuant to
a Management and Administration Agreement dated September 15, 1999 (the
"Administration Agreement"). The Administrator assists in supervising all
operations of the Fund (other than those performed by the Adviser under the
Investment Advisory Agreement, the Custodian under the Custodian Agreement and
by BISYS under the Transfer Agency Agreement and Fund Accounting Agreement). The
Administrator is a broker-dealer registered with the Commission, and is a member
of the National Association of Securities Dealers, Inc. The Administrator
provides financial services to institutional clients.
Under the Administration Agreement, the Administrator has agreed to
maintain office facilities and provide the Fund with regulatory reporting, all
necessary office space, equipment, personnel, compensation and facilities to
handle the Fund's affairs. These services include, among other things: assisting
in the selection of and conducting and overseeing relations with various service
providers to the Fund; maintaining the Fund's regulatory compliance calendar;
preparing the periodic reports to the Commission on Form N-SAR or any
replacement forms therefor; coordinating and supervising the preparation and
filing of the Fund's tax returns; monitoring the Fund's compliance with its
status under the Internal Revenue Code; preparing compliance filings pursuant to
state securities laws; developing and preparing, with the assistance of the
Adviser, the Fund's Annual and Semi-Annual Reports and other
<PAGE> 55
communications to Shareholders; assisting Fund counsel in the preparation and
filing the Fund's Registration Statement and any proxy materials; preparing and
filing timely Notices to the Commission required pursuant to Rule 24f-2 under
the 1940 Act; calculating the Fund's expenses, controlling its disbursements,
calculating various measures of performance and operations; and generally
assisting in all aspects of the Fund's operations other than those performed by
the Adviser, under the Investment Advisory Agreement, by the Custodian under the
Custodian Agreement, by BISYS Fund Services as Distributor, or by BISYS under
the Transfer Agency Agreement or Fund Accounting Agreement. Under the
Administration Agreement, the Administrator may delegate all or any part of its
responsibilities thereunder.
The Administrator receives fees from the Fund for its services as
Administrator and for its services under the Transfer Agency Agreement and Fund
Accounting Agreement pursuant to an Omnibus Fee Agreement. In addition to
certain out-of-pocket expenses, these fees include: asset-based fees of 0.18% of
the Fund's average daily net assets up to $1 billion and 0.10 for such assets in
excess of $1 billion; per account fees of $25 per shareholder account. These
asset-based and per-account fees are subject to an annual minimum fee of
$125,000, and an additional annual amount of $25,000 is charged for each class
of shares in addition to the initial class. The Administrator may periodically
waive all or a portion of its fee with respect to the Fund in order to increase
the net income of the Fund available for distribution as dividends.
Unless sooner terminated as provided therein, the Administration
Agreement will continue in effect until September 15, 2002. The Administration
Agreement thereafter shall be renewed automatically for successive two-year
terms, unless written notice not to renew is given by the non-renewing party to
the other party at least 60 days prior to the expiration of the then-current
term. The Administration Agreement is terminable with respect to a particular
Fund only upon mutual agreement of the parties to the Administration Agreement
and for cause (as defined in the Administration Agreement) by the party alleging
cause, on not less than 60 days' notice by the Group's Board of Trustees or by
the Administrator. If the Administrator is replaced for any other reason, the
Administrator shall receive a cash payment equal to fees that would be due for
the balance of the term based on the average previous twelve months' Fund assets
and number of shareholder accounts.
The Administration Agreement provides that the Administrator shall not
be liable for any error of judgment or mistake of law or any loss suffered by a
Fund in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
the Administrator of its obligations and duties thereunder.
Distributor
- -----------
BISYS Fund Services Limited Partnership ("BISYS Fund Services) serves
as distributor to the Funds pursuant to the Distribution Agreement dated
September 15, 1999 (the "Distribution Agreement"). Unless otherwise terminated,
the Distribution Agreement will continue in effect with respect to the Fund
until September 15, 2001, and thereafter, if such continuance is approved at
least annually (i) by the Group's Board of Trustees or by the vote of a majority
of the outstanding Shares of the Fund and (ii) by the vote of a majority of the
Trustees of the Group
<PAGE> 56
who are not parties to the Distribution Agreement or interested persons (as
defined in the 1940 Act) of any party to the Distribution Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Distribution Agreement will terminate automatically in the event of any
assignment, as defined in the 1940 Act.
In its capacity as Distributor, BISYS solicits orders for the sale of
Shares, advertises and pays the costs of advertising, office space and the
personnel involved in such activities. The Distributor receives no compensation
under the Distribution Agreement with the Group, but may receive compensation
from the Fund under the Service and Distribution Plan described below.
The Group has adopted a Service and Distribution Plan for each class of
Shares of the Fund (the "Plan") pursuant to Rule 12b-1 under the 1940 Act under
which the Fund is authorized to compensate the Distributor for payments it makes
to banks, other institutions and broker-dealers, and for expenses the
Distributor and any of its affiliates or subsidiaries incur (with all of the
foregoing organizations being referred to as "Participating Organizations") for
providing administration, distribution or shareholder service assistance.
Payments to such Participating Organizations may be made pursuant to agreements
entered into with the Distributor. The Plan authorizes the Fund to make payments
to the Distributor amounts not to exceed, on an annual basis, 0.25% of the
average daily net assets of Class A Shares of the Fund and 1.00% of Class B and
Class C Shares. Each Class is authorized to pay a Shareholder Service Fee of up
to 0.25% of its average daily net assets. As required by Rule 12b-1, the Plan
was approved by the Board of Trustees, including a majority of the Trustees who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the operation of the Plan ("Independent Trustees") at a
meeting held on August 31, 1999. The Plan may be terminated with respect to a
Class by vote of a majority of the Independent Trustees, or by vote of a
majority of the outstanding Shares of the Class. The Trustees review quarterly a
written report of such costs and the purposes for which such costs have been
incurred. The Plan may be amended by vote of the Trustees including a majority
of the Independent Trustees, cast in person at a meeting called for that
purpose. However, any change in the Plan that would materially increase the
distribution cost to a Class requires approval by a majority of the Shareholders
of that Class. For so long as the Plan is in effect, selection and nomination of
the Independent Trustees shall be committed to the discretion of such
Independent Trustees. All agreements with any person relating to the
implementation of the Plan may be terminated at any time on 60 days' written
notice without payment of any penalty, by vote of a majority of the Independent
Trustees or, with respect to a Class, by vote of a majority of the outstanding
Shares of that Class. The Plan will continue in effect with respect to a Class
for successive one-year periods, provided that each such continuance is
specifically approved (i) by the vote of a majority of the Independent Trustees,
and (ii) by the vote of a majority of the entire Board of Trustees cast in
person at a meeting called for that purpose. The Board of Trustees has a duty to
request and evaluate such information as may be reasonably necessary for it to
make an informed determination of whether the Plan should be implemented or
continued. In addition, for each Class, the Trustees, in approving the Plan,
must determine that there is a reasonable likelihood that the Plan will benefit
the Class and its Shareholders.
The Board of Trustees of the Group believes that the Plan is in the
best interests of each Class since it encourages Fund growth. As the Fund grows
in size, certain expenses, and,
<PAGE> 57
therefore, total expenses per Share, may be reduced and overall performance per
Share may be improved.
Custodian
- ---------
Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey
08540-6231, serves as the Funds' custodian ("Custodian"). The Custodian is an
affiliate of Bear, Stearns & Co. Inc. and Bear, Stearns Securities Corp.,
entities with which the Fund may transact other business including loans of
portfolio securities and repurchase agreements.
Transfer Agency and Fund Accounting Services
- --------------------------------------------
BISYS, in addition to its service as Administrator, also serves as
Transfer Agent and Dividend Disbursing Agent for the Fund. pursuant to a
Transfer Agency Agreement dated September 15, 1999. Pursuant to such Agreement,
the Transfer Agent, among other things, performs the following services in
connection with the Fund's Shareholders of record: maintenance of shareholder
records for the Fund's Shareholders of record; processing shareholder purchase
and redemption orders; processing transfers and exchanges of Shares of the Fund
on the shareholder files and records; processing dividend payments and
reinvestments; and assistance in the mailing of shareholder reports and proxy
solicitation materials. The Fund pays the Transfer Agent for these services
pursuant to the Omnibus Fee Agreement (see "Administrator").
In addition, BISYS provides certain fund accounting services to the
Fund pursuant to Fund Accounting Agreement dated September 15, 1999. Fees for
these services are also paid pursuant to the Omnibus Fee Agreement (see
"Administrator"). Under the Fund Accounting Agreement, BISYS maintains the
accounting books and records for the Fund, including journals containing an
itemized daily record of all purchases and sales of portfolio securities, all
receipts and disbursements of cash and all other debits and credits, general and
auxiliary ledgers reflecting all asset, liability, reserve, capital, income and
expense accounts, including interest accrued and interest received, and other
required separate ledger accounts; maintains a monthly trial balance of all
ledger accounts; performs certain accounting services for the Fund, including
calculation of the net asset value per Share, calculation of the net income and
capital gains, if any, and of yield, verification and reconciliation of the
Fund's daily trade activity with the Custodian; provides certain reports;
obtains dealer quotations, prices from a pricing service or matrix prices on all
portfolio securities in order to mark the portfolio to the market; and prepares
an interim balance sheet, statement of income and expense, and statement of
changes in net assets for the Fund.
Independent Auditors
- --------------------
Ernst & Young LLP has been selected as independent auditors for the
Fund for the fiscal year ended March 31, 2000.
<PAGE> 58
Legal Counsel
- -------------
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006,
is counsel to the Group.
<PAGE> 59
ADDITIONAL INFORMATION
Description of Shares
- ---------------------
The Group is a Massachusetts business trust, organized on January 8,
1992. The Group's Declaration of Trust is on file with the Secretary of State of
Massachusetts. The Declaration of Trust authorizes the Board of Trustees to
issue an unlimited number of Shares, which are Shares of beneficial interest,
with a par value of $0.01 per share. The Group consists of several funds
organized as separate series of Shares. The Group's Declaration of Trust
authorizes the Board of Trustees to divide or redivide any unissued Shares of
the Group into one or more additional series by setting or changing in any one
or more respects their respective preferences, conversion or other rights,
voting power, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption, and to establish separate classes of Shares.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Board of Trustees may grant in its
discretion. When issued for payment as described in the Prospectus and this
Statement of Additional Information, the shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Group,
Shareholders of each fund are entitled to receive the assets available for
distribution belonging to that fund, and a proportionate distribution, based
upon the relative asset values of the respective funds, of any general assets
not belonging to any particular fund which are available for distribution,
subject to any differential class expenses.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Group shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding Shares of each fund
affected by the matter. For purposes of determining whether the approval of a
majority of the outstanding Shares of a fund will be required in connection with
a matter, a fund will be deemed to be affected by a matter unless it is clear
that the interests of each fund in the matter are identical, or that the matter
does not affect any interest of the fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy would be
effectively acted upon with respect to a fund only if approved by a majority of
the outstanding Shares of that fund. However, Rule 18f-2 also provides that the
ratification of independent public accountants (for funds having the same
independent accountants), the approval of principal underwriting contracts, and
the election of Trustees may be effectively acted upon by Shareholders of the
Group voting without regard to individual funds. Rule 18f-3 under the 1940 Act
provides that Shareholders of each class shall have exclusive voting rights on
matters submitted to Shareholders relating solely to distribution and
shareholder service arrangements.
Under Massachusetts law, Shareholders could, under certain
circumstances, be held personally liable for the obligations of the Group.
However, the Declaration of Trust disclaims liability of the Shareholders,
Trustees or officers of the Group for acts or obligations of the Group, which
are binding only on the assets and property of the Group, and requires that
notice of the disclaimer be given in each contract or obligation entered into or
executed by the Group or
<PAGE> 60
the Trustees. The Declaration of Trust provides for indemnification out of Group
property for all loss and expense of any shareholder held personally liable for
the obligations of the Group. The risk of a shareholder incurring financial loss
on account of Shareholder liability is limited to circumstances in which the
Group itself would be unable to meet its obligations, and thus should be
considered remote.
Vote of a Majority of the Outstanding Shares
- --------------------------------------------
As used in the Prospectus and this Statement of Additional Information,
a "vote of a majority of the outstanding Shares" of the Fund or a Class means
the affirmative vote, at a meeting of Shareholders duly called, of the lesser of
(a) 67% or more of the votes of Shareholders of the Fund or Class, as
applicable, present at a meeting at which the holders of more than 50% of the
votes attributable to Shareholders of record of the Fund or Class, as
applicable, are represented in person or by proxy, or (b) the holders of more
than 50% of the outstanding votes of Shareholders of the Fund or Class, as
applicable.
Additional Tax Information
- --------------------------
TAXATION OF THE FUND. The Fund intends to qualify annually and to elect
to be treated as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code").
To qualify as a regulated investment company, the Fund must, among
other things, (a) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) diversify its holdings so that, at the end of each
quarter of each taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items (including receivables), U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities (other than U.S. Government securities or
the securities of other regulated investment companies) of any one issuer, or of
two or more issuers which the Fund controls and which are determined to be
engaged in the same or similar trades or businesses or related trades or
businesses; and (c) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest and net
short-term capital gains in excess of net long-term capital losses) and any net
tax-exempt interest income each taxable year.
As a regulated investment company, the Fund generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (the excess of net long-term capital gains over net short-term
capital losses), if any, that it distributes to Shareholders. The Fund intends
to distribute to its Shareholders, at least annually, substantially all of its
investment company taxable income and net capital gains. Amounts not distributed
on a
<PAGE> 61
timely basis in accordance with a calendar year distribution requirement are
subject to a nondeductible 4% excise tax. To prevent imposition of the excise
tax, the Fund must distribute during each calendar year an amount equal to the
sum of (1) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (2) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses, as
prescribed by the Code) for the one-year period ending on October 31 of the
calendar year, and (3) any ordinary income and capital gains for previous years
that were not distributed during those years. A distribution will be treated as
paid on December 31 of the current calendar year if it is declared by the Fund
in October, November or December to Shareholders of record on a date in such a
month and paid by the Fund during January of the following calendar year. Such
distributions will be treated as received by Shareholders in the calendar year
in which the distributions are declared, rather than the calendar year in which
the distributions are received. To prevent application of the excise tax, the
Fund intends to make its distributions in accordance with the calendar year
distribution requirement.
DISTRIBUTIONS. Dividends paid out of the Fund's investment company
taxable income generally will be taxable to a U.S. Shareholder as ordinary
income. A portion of the Fund's income may consist of dividends paid by U.S.
corporations and, accordingly, a portion of the dividends paid by the Fund may
be eligible for the corporate dividends-received deduction. Properly designated
distributions of net capital gains, if any, generally are taxable to
Shareholders as long-term capital gains, regardless of how long the Shareholder
has held the Fund's Shares, and are not eligible for the dividends-received
deduction. Shareholders receiving distributions in the form of additional
Shares, rather than cash, generally will have a cost basis in each such Share
equal to the net asset value of a Share of the Fund on the reinvestment date.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and Shareholders receiving distributions in the form of
additional Shares will receive a report as to the net asset value of those
Shares.
Distributions by the Fund reduce the net asset value of the Fund's
shares. Should a taxable distribution reduce the net asset value below a
Shareholder's cost basis, the distribution nevertheless would be taxable to the
Shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution by the Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.
DISTRIBUTION CLASSIFIED AS RETURN OF CAPITAL. From time to time
dividends received by the Fund from its securities investments may exceed the
earnings and profits reported. In that event, the excess would constitute a
return of capital for tax purposes. The portion of a Fund distribution
classified as a return of capital generally is not taxable to the Fund
shareholders, but it will reduce their tax basis in their shares, which in turn
would effect the amount of gain or loss shareholders would realize on the sale
or redemption of their shares. If a return of capital distribution exceeds a
shareholder's tax basis in his shares, the excess is generally taxed as capital
gain to the shareholder assuming the shares are a capital asset.
DISCOUNT SECURITIES. Investments by the Fund in securities that are
issued at a discount will result in income to the Fund equal to a portion of the
excess of the face value of the securities over their issue price (the "original
issue discount") each year that the securities are held, even though the Fund
receives no cash interest payments. This income is included in determining the
amount of income which the Fund must distribute to maintain its status as a
regulated investment company and to avoid the payment of federal income tax and
the 4% excise tax.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
Generally, the gain realized on the disposition
<PAGE> 62
of any debt security acquired after April 30, 1993 having market discount will
be treated as ordinary income to the extent it does not exceed the accrued
market discount on such debt security.
Federal Tax Treatment of Futures Contracts. Except for transactions the
Fund identified as hedging transactions, the Fund is required for federal income
tax purposes to recognize as income for each taxable year its net unrealized
gains and losses on futures contracts as of the end of the year as well as those
actually realized during the year. Identified hedging transactions would not be
subject to the mark to market rules and would result in the recognition of
ordinary gain or loss. Otherwise, unless transactions in futures contracts are
classified as part of a "mixed straddle," any gain or loss recognized with
respect to a futures contract is considered to be 60% long-term capital gain or
loss and 40% short-term capital gain or loss, without regard to the holding
period of the contract. In the case of a futures transaction classified as a
"mixed straddle," the recognition of losses may be deferred to a later taxable
year.
Sales of futures contracts which are intended to hedge against a change
in the value of securities held by the Fund may affect the holding period of
such securities and, consequently, the nature of the gain or loss on such
securities upon disposition.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income, i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. It is anticipated that any net gain realized from the
closing out of futures contracts will be considered gain from the sale of
securities and therefore be qualifying income for purposes of the 90%
requirement.
The Fund will distribute to shareholders annually any net long-term
capital gains which have been recognized for federal income tax purposes
(including unrealized gains at the end of the Fund's fiscal year) on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Fund's other investments and shareholders will be advised
of the nature of the payments.
OPTIONS AND HEDGING TRANSACTIONS. The taxation of equity options and
over-the-counter options on debt securities is governed by Code section 1234.
Pursuant to Code section 1234, the premium received by the Fund for selling a
call option is not included in income at the time of receipt. If the option
expires, the premium is short-term capital gain to the Fund. If the Fund enters
into a closing transaction, the difference between the amount paid to close out
its position and the premium received is short-term capital gain or loss. If a
call option written by the Fund is exercised, thereby requiring the Fund to sell
the underlying security, the premium will increase the amount realized upon the
sale of such security and any resulting gain or loss will be a capital gain or
loss, and will be long-term or short-term depending upon the holding period of
the security. With respect to a call option that is purchased by the Fund, if
the option is sold, any resulting gain or loss will be a capital gain or loss,
and will be long-term or short-term, depending upon the holding period of the
option. If the option expires, the resulting loss is a capital loss and is
long-term or short-term, depending upon the holding period of the option. If the
option is exercised, the cost of the option is added to the basis of the
purchased security.
<PAGE> 63
Certain options in which the Fund may invest are "section 1256
contracts". Gains or losses on section 1256 contracts generally are considered
60% long-term and 40% short-term capital gains or losses. Also, section 1256
contracts held by the Fund at the end of each taxable year (and, generally, for
purposes of the 4% excise tax, on October 31 of each year) are
"marked-to-market" (that is, treated as sold at fair market value), resulting in
unrealized gains or losses being treated as though they were realized.
Generally, the hedging transactions undertaken by the Fund may result
in "straddles" for U.S. federal income tax purposes. The straddle rules may
affect the character of gains (or losses) realized by the Fund. In addition,
losses realized by the Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which the losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences to the Fund of engaging in hedging
transactions are not entirely clear. Hedging transactions may increase the
amount of short-term capital gain realized by the Fund which is taxed as
ordinary income when distributed to Shareholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because the straddle rules may affect the character of gains or losses,
defer losses and/or accelerate the recognition of gains or losses from the
affected straddle positions, the amount which may be distributed to
Shareholders, and which will be taxed to them as ordinary income or capital
gain, may be increased or decreased as compared to a fund that did not engage in
such hedging transactions.
Notwithstanding any of the foregoing, the Fund may recognize gain (but
not loss) from a constructive sale of certain "appreciated financial positions"
if the Fund enters into a short sale, offsetting notional principal contract or
forward contract transaction with respect to the appreciated position or
substantially identical property. Appreciated financial positions subject to
this constructive sale treatment are interests (including options and forward
contracts and short sales) in stock, partnership interests, certain actively
traded trust instruments and certain debt instruments. Constructive sale
treatment does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the taxable year, if certain
conditions are met.
Unless certain constructive sales rules (discussed more fully above)
apply, the Fund will not realize gain or loss on a short sale of a security
until it closes the transaction by delivering the borrowed security to the
lender. Pursuant to Code Section 1233, all or a portion of any gain arising from
a short sale may be treated as short-term capital gain, regardless of the period
for
<PAGE> 64
which the Fund held the security used to close the short sale. In addition, the
Fund's holding period of any security, which is substantially identical to that
which is sold short, may be reduced or eliminated as a result of the short sale.
Recent legislation, however, alters this treatment by treating certain short
sales against the box and other transactions as a constructive sale of the
underlying security held by the Fund, thereby requiring current recognition of
gain, as described more fully above. Similarly, if the Fund enters into a short
sale of property that becomes substantially worthless, the Fund will recognize
gain at that time as though it had closed the short sale. Future Treasury
regulations may apply similar treatment to other transactions with respect to
property that becomes substantially worthless.
The diversification requirements applicable to the Fund's assets may
limit the extent to which the Fund will be able to engage in transactions in
options and other hedging transactions.
SALE OF SHARES. Upon the sale or other disposition of Fund Shares, or
upon receipt of a distribution in complete liquidation of the Fund, a
Shareholder generally will realize a taxable capital gain or loss which may be
eligible for reduced capital gains tax rates, generally depending upon the
Shareholder's holding period for the Shares. Any loss realized on a sale or
exchange will be disallowed to the extent the Shares disposed of are replaced
(including Shares acquired pursuant to a dividend reinvestment plan) within a
period of 61 days beginning 30 days before and ending 30 days after disposition
of the Shares. In such a case, the basis of the Shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized by a Shareholder on a
disposition of Fund Shares held by the Shareholder for six months or less will
be treated as a long-term capital loss to the extent of any distributions of net
capital gains received by the Shareholder with respect to such Shares.
In some cases, Shareholders will not be permitted to take sales charges
into account for purposes of determining the amount of gain or loss realized on
the disposition of their Shares. This prohibition generally applies where (1)
the Shareholder incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st day after the
date on which it was acquired, and (3) the Shareholder subsequently acquires
Shares of the same or another regulated investment company and the otherwise
applicable sales charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of Shares of stock. In that case, the gain or
loss recognized will be determined by excluding from the tax basis of the Shares
exchanged all or a portion of the sales charge incurred in acquiring those
Shares. This exclusion applies to the extent that the otherwise applicable sales
charge with respect to the newly acquired Shares is reduced as a result of
having incurred a sales charge initially. Sales charges affected by this rule
are treated as if they were incurred with respect to the stock acquired under
the reinvestment right. This provision may be applied to successive acquisitions
of stock.
BACKUP WITHHOLDING. The Fund may be required to withhold U.S. federal
income tax at the rate of 31% of all reportable payments, including dividends,
capital gain distributions and redemptions payable to Shareholders who fail to
provide the Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the IRS that they are
subject to backup withholding. Corporate Shareholders and certain other
Shareholders specified in the Code generally are exempt from such backup
withholding. Backup
<PAGE> 65
withholding is not an additional tax. Any amounts withheld may be credited
against the Shareholder's U.S. federal income tax liability.
FOREIGN SHAREHOLDERS. The tax consequences to a foreign Shareholder of
an investment in the Fund may be different from those described above. In light
of the Fund's investments in REITs and other real estate assets, an investment
in the Fund may not be appropriate for certain foreign shareholders. Foreign
shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Fund.
OTHER TAXATION. The Group is organized as a Massachusetts business
trust and, under current law, neither the Group nor any fund is liable for any
income or franchise tax in the Commonwealth of Massachusetts, provided that each
fund continues to qualify as a regulated investment company under Subchapter M
of the Code.
Fund Shareholders may be subject to state and local taxes on Fund
distributions. In many states, Fund distributions which are derived from
interest on certain U.S. Government obligations may be exempt from taxation.
Yields and Total Returns
- ------------------------
YIELD CALCULATIONS. Yields on each Class of Fund Shares will be
computed by dividing the net investment income per share (as described below)
earned by the Class during a 30-day (or one month) period by the maximum
offering price per share on the last day of the period and annualizing the
result on a semi-annual basis by adding one to the quotient, raising the sum to
the power of six, subtracting one from the result and then doubling the
difference. The net investment income per share of a Class earned during the
period is based on the average daily number of Shares of that Class outstanding
during the period entitled to receive dividends and includes dividends and
interest earned during the period minus expenses accrued for the period, net of
reimbursements. This calculation can be expressed as follows:
a - b
------
Yield = 2 [(cd + 1)exp(6) - 1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of Shares outstanding during the
period that were Entitled to receive dividends.
d = maximum offering price per Share on the last day of the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by the Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is held by the Fund. Interest earned on any
debt obligations held by the Fund is calculated by computing the yield to
maturity of each obligation held by the Fund based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last Business Day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus
<PAGE> 66
actual accrued interest) and dividing the result by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest) in order to determine the interest income on the obligation for each
day of the subsequent month that the obligation is held by the Fund. For
purposes of this calculation, it is assumed that each month contains 30 days.
The maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date. With respect to debt obligations purchased at a discount or
premium, the formula generally calls for amortization of the discount or
premium. The amortization schedule will be adjusted monthly to reflect changes
in the market values of such debt obligations.
Undeclared earned income will be subtracted from the net asset value
per share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the base period, has not been declared as
a dividend, but is reasonably expected to be and is declared as a dividend
shortly thereafter.
During any given 30-day period, the Adviser, Administrator or
Distributor may voluntarily waive all or a portion of their fees with respect to
the Fund or a Class. Such waiver would cause the yield of a Class to be higher
than it would otherwise be in the absence of such a waiver.
TOTAL RETURN CALCULATIONS. Average annual total return is a measure of
the change in value of an investment in a Class of Shares of the Fund over the
period covered, which assumes any dividends or capital gains distributions are
reinvested in Shares of that Class immediately rather than paid to the investor
in cash. The Fund computes the average annual total return for each Class by
determining the average annual compounded rates of return during specified
periods that equate the initial amount invested to the ending redeemable value
of such investment. This is done by dividing the ending redeemable value of a
hypothetical $1,000 initial payment by $1,000 and raising the quotient to a
power equal to one divided by the number of years (or fractional portion
thereof) covered by the computation and subtracting one from the result. This
calculation can be expressed as follows:
Average Annual ERV
Total Return = [ (P) exp (1/n) - 1]
P
Where: ERV = ending redeemable value at the end
of the period covered by the
computation of a hypothetical $1,000
payment made at the beginning of the
period.
P = hypothetical initial payment of
$1,000.
n = period covered by the computation,
expressed in terms of years.
<PAGE> 67
The Fund computes its aggregate total return for each Class by
determining the aggregate compounded rate of return during specified periods
that likewise equate the initial amount invested to the ending redeemable value
of such investment. The formula for calculating aggregate total return is as
follows:
Aggregate Total ERV
Return = [(------] - 1]
ERV = ending redeemable value at the end of the period covered by the
computation of a hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period. The ending redeemable value
(variable "ERV" in each formula) is determined by assuming complete redemption
of the hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations.
Performance Comparisons
- -----------------------
Investors may judge the Fund's performance by comparing it to the
performance of other mutual funds or mutual fund portfolios with comparable
investment objectives and policies through various mutual fund or market
indices, such as those prepared by Dow Jones & Co., Inc., Standard & Poor's
Corporation and the National Association of Real Estate Investment Trusts
("NAREIT"), and to data prepared by Lipper Analytical Services, Inc., a widely
recognized independent service which monitors the performance of mutual funds or
Ibbotson Associates, Inc. Comparisons may also be made to indices or data
published in IBC/Donaghue's MONEY FUND REPORT, a nationally-recognized money
market fund reporting service, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, and U.S.A. Today. In addition to
performance information, general information about the Fund that appears in a
publication, such as those mentioned above, may be included in advertisements
and in reports to Shareholders. The Fund may also include in advertisements and
reports to Shareholders information comparing the performance of the Adviser to
other investment advisers; such comparisons may be published by or included in
Nelsons Directory of Investment Managers, Roger's, Casey/PIPER Manager Database,
CDA/Cadence, or Chase Global Data and Research.
Current yields or performance will fluctuate from time to time and are
not necessarily representative of future results. Accordingly, the yield or
performance of a Class may not be directly comparable to bank deposits or other
investments that pay a fixed return for a stated period of time. Yield and
performance are functions of the quality, composition and maturity of the Fund's
portfolio, as well as expenses allocated to the Fund and each Class. Fees
imposed upon customer accounts by third parties for cash management services
will reduce the effective yield to customers.
<PAGE> 68
From time to time, the Fund may include general comparative
information, such as statistical data regarding inflation, securities indices or
the features or performance of alternative investments, in advertisements, sales
literature and reports to shareholders. The Fund may also include calculations,
such as hypothetical compounding examples, which describe hypothetical
investment results in such communications. Such performance examples will be
based on an express set of assumptions and are not indicative of the performance
of the Fund.
Miscellaneous
- -------------
The Fund may include information in its Annual Report and Semi-Annual
Report to Shareholders that (1) describes general economic trends, (2) describes
general trends within the financial services industry or the mutual fund
industry, (3) describes past or anticipated portfolio holdings for the Fund or
(4) describes investment management strategies for the Fund. Such information is
provided to inform Shareholders of the activities of the Fund for the most
recent fiscal year or half-year and to provide the views of the Adviser and/or
Group officers regarding expected trends and strategies.
The Financial Statements of the Fund will be provided in semi-annual
(unaudited) and annual reports to Shareholders.
Individual Trustees are elected by the Shareholders and, subject to
removal by the vote of two-thirds of the Board of Trustees, serve for a term
lasting until the next meeting of Shareholders at which Trustees are elected.
Such meetings are not required to be held at any specific intervals.
Shareholders owning not less than 10% of the outstanding Shares of the Group
entitled to vote may cause the Trustees to call a special meeting, including for
the purpose of considering the removal of one or more Trustees. Any Trustee may
be removed at any meeting of Shareholders by vote of two-thirds of the Group's
outstanding shares. The Declaration of Trust provides that the Trustees will
assist shareholder communications to the extent required by Section 16(c) of the
1940 Act in the event that a Shareholder request to hold a special meeting is
made.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Commission. Copies of such information may be obtained from the Commission
upon payment of any prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized to
give any information or make any representation other than those contained in
the Prospectus and this Statement of Additional Information.
<PAGE> 69
APPENDIX
The nationally recognized statistical rating organizations
(individually, an "NRSRO") that may be utilized by the Adviser with regard to
portfolio investments for the Fund include Moody's Investors Service, Inc.
("Moody's") and Standard & Poor's Corporation ("S&P") and Duff & Phelps, Inc.
("D&F"). Set forth below is a description of the relevant ratings of each such
NRSRO. The description of each NRSRO's ratings is as of the date of this
Statement of Additional Information, and may subsequently change.
LONG TERM DEBT RATINGS (may be assigned, for example, to corporate and municipal
bonds)
Description of the three highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (1, 2, and 3) in each rating category to indicate
the security's ranking within the category):
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-edged." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the Fundamentally strong position of
such issues.
Aa Bonds 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 risk 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 some time in the
future.
Description of the three highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):
AAA Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only
in small degree.
<PAGE> 70
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
Description of the three highest long-term debt ratings by D&P:
AAA Highest credit quality. The risk factors are negligible being
only slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality Protection factors are strong. AA Risk is
modest but may vary slightly from time to time AA- because of
economic conditions.
A+ Protection factors are average but adequate. However, risk
factors are more A variable and greater in periods of economic
stress.
A-
SHORT-TERM DEBT RATINGS (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit).
Moody's description of its three highest short-term debt ratings:
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on Fund employed.
- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayments of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
<PAGE> 71
S&P's description of its three highest short-term debt ratings:
A-1 This designation indicates that the degree of safety
regarding timely payment is strong. Those issues
determined to have extremely strong safety characteristics
are denoted with a plus sign (+).
A-2 Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree
of safety is not as high as for issues designated "A-1".
A-3 Issues carrying this designation have adequate capacity
for timely payment. They are, however, more vulnerable to
the adverse effects of changes in circumstances than
obligations carrying the higher designations.
D&P's description of the short-term debt ratings (D&P incorporates gradations of
"1+" (one plus) and "1-" (one minus) to assist investors in recognizing quality
differences within the highest rating category):
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.
<PAGE> 72
PART C
-----------
OTHER INFORMATION
-----------------
ITEM 23. EXHIBITS
(a)(1) Declaration of Trust(1).
(a)(2) Establishment and Designation of Series and Classes of
Shares (Kensington Strategic Realty Fund(3).
(b) By-Laws(2).
(c) Certificates for Shares are not issued. Articles IV, V, VI
and VII of the Declaration of Trust, previously filed as
Exhibit (a) hereto, define rights of holders of Shares(1).
(d) Investment Advisory Agreement between Registrant and
Kensington Investment Group(3).
(e) Distribution Agreement between Registrant and BISYS Fund
Services, Inc.(3).
(f) Not Applicable.
(g) Custody Agreement between Registrant and Custodial Trust
Company, filed herewith.
(h)(1) Administration Agreement between the Registrant and BISYS
Fund Services Ohio, Inc.(3).
(h)(2) Fund Accounting Agreement between the Registrant and BISYS
Fund Services Ohio, Inc.(3).
(h)(3) Transfer Agency Agreement between the Registrant and BISYS
Fund Services Ohio, Inc.(3).
(h)(4) Omnibus Fee Agreement between Registrant and BISYS Fund
Services Ohio, Inc.(3).
(h)(5) Expense Limitation Agreement between the Registrant and
Kensington Investment Group, Inc.(3).
(i) Legal opinion, filed herewith.
<PAGE> 73
(j) Not Applicable.
(k) Not Applicable.
(l) Not Applicable.
(m) Form of Service and Distribution Plan. (4)
(n) Form of 18f-3 Plan. (4)
- ------------------
1. Filed with initial Registration Statement on January 8, 1992.
2. Filed with Post-Effective Amendment No. 2 on September 4, 1992.
3. Filed with Post-Effective Amendment No. 53 on July 2, 1999.
4. Filed with Post-Effective Amendment No. 60 on August 9, 1999.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 25. INDEMNIFICATION
Article IV of the Registrant's Declaration of Trust states as follows:
SECTION 4.3. MANDATORY INDEMNIFICATION.
(a) Subject to the exceptions and limitations contained in
paragraph (b) below:
(i) every person who is, or has been, a Trustee or
officer of the Trust shall be indemnified by the
Trust to the fullest extent permitted by law against
all liability and against all expenses reasonably
incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against
amounts paid or incurred by him in the settlement
thereof; and
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or
proceedings (civil, criminal, administrative or
other, including appeals), actual or threatened; and
the words "liability" and "expenses" shall include,
without limitation, attorneys fees, costs, judgments,
amounts paid in settlement, fines, penalties and
other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
(i) against any liability to the Trust, a Series thereof,
or the Shareholders by reason of a final adjudication
by a court or other body before which a
<PAGE> 74
proceeding was brought that he engaged in willful
misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of
his office;
(ii) with respect to any matter as to which he shall have
been finally adjudicated not to have acted in good
faith in the reasonable belief that his action was in
the best interest of the Trust; or
(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in
paragraph (b)(i) or (b)(ii) resulting in a payment by
a Trustee or officer, unless there has been a
determination that such Trustee or officer did not
engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties
involved in the conduct of his office: (A) by the
court or other body approving the settlement or other
disposition; or (B) based upon a review of readily
available facts (as opposed to a full trial-type
inquiry) by (1) vote of a majority of the
Disinterested Trustees acting on the matter (provided
that a majority of the Disinterested Trustees then in
office acts on the matter) or (2) written opinion of
independent legal counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be
severable, shall not affect any other rights to which any
Trustee or officer may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs,
executors, administrators and assigns of such person. Nothing
contained herein shall affect any rights to indemnification to
which personnel of the Trust other than Trustees and officers
may be entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any
claim, action, suit or proceeding of the character described
in paragraph (a) of this Section 4.3 may be advanced by the
Trust prior to final disposition thereof upon receipt of an
undertaking by or on behalf of the recipient to repay such
amount if it is ultimately determined that he is not entitled
to indemnification under this Section 4.3, provided that
either:
(i) such undertaking is secured by a surety bond or some
other appropriate security provided by the recipient,
or the Trust shall be insured against losses arising
out of any such advances; or
(ii) a majority of the Disinterested Trustees acting on
the matter (provided that a majority of the
Disinterested Trustees acts on the matter) or an
independent legal counsel in a written opinion shall
determine, based upon a review of readily available
facts (as opposed to a full trial-type inquiry), that
there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Section 4.3, a "Disinterested
Trustee" is one who is not (i) an Interested Person of the
Trust (including anyone who has been exempted from being an
Interested Person by any rule, regulation or order of the
Commission), or (ii) involved in the claim, action, suit or
proceeding.
<PAGE> 75
Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to
trustees, officers and controlling persons of the
Registrant by the Registrant pursuant to the
Declaration of Trust or otherwise, the Registrant is
aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against
public policy as expressed in the Act, and therefore,
is unenforceable. In the event that a claim for
indemnification against such liabilities controlling
persons of the Registrant in connection with the
successful defense of any act, suit or proceeding) is
asserted by such trustees, officers or controlling
persons in connection with the shares being
registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as
expressed in the Act and will be governed by the
final adjudication of such issues.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER AND THEIR
OFFICERS AND DIRECTORS
Incorporated by reference to the responses in the current Form
10-K of UST Corp., on file with the Commission.
ITEM 27. PRINCIPAL UNDERWRITER
(a) BISYS Fund Services, Limited Partnership ("BISYS Fund
Services") acts as distributor for Registrant. BISYS
Fund Services also distributes the securities of
Alpine Equity Trust, American Performance Funds, the
AmSouth Mutual Funds, The BB&T Mutual Funds Group,
ESC Strategic Funds, Inc., The Eureka Funds, Fifth
Third Funds, Governor Funds, Gradison Custodian
Trust, Gradison Growth Trust, Gradison-McDonald Cash
Reserves Trust, Gradison-McDonald Municipal Custodian
Trust, Hirtle Callaghan Trust, HSBC Funds Trust, HSBC
Mutual Funds Trust, INTRUST Funds Trust, The Infinity
Mutual Funds, Inc., The Kent Funds, Magna Funds, MMA
Praxis Mutual Funds, Mercantile Mutual Funds, Inc.,
Meyers Investment Trust, M.S.D.&T Funds, Pacific
Capital Funds, The Parkstone Advantage Fund, Puget
Sound Alternative Investment Series Trust, The
Republic Funds Trust, The Republic Advisors Funds
Trust, Sefton Funds Trust, SSgA International
Liquidity Fund, Summit Investment Trust, Variable
Insurance Funds, The Victory Portfolios, The Victory
Variable Insurance Funds and The Vintage Mutual
Funds, Inc.
(b) Partners of BISYS Fund Services, as of June 1, 1999,
were as follows:
<TABLE>
<S> <C> <C>
Name and Principal Business Position and Offices with Position and Offices with
Address Underwriter Registrant
BISYS Fund Services, Inc. Sole General Partner None
</TABLE>
<PAGE> 76
3435 Stelzer Road
Columbus, Ohio 43219
WC Subsidiary Corporation Sole Limited Partner None
150 Clove Road
Little Falls, New Jersey 07424
(c) Not Applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
(a) The accounts, books, and other documents required to
be maintained by Registrant pursuant to Section 31(a)
of the Investment Company Act of 1940 and rules
promulgated thereunder are in the possession of
Kensington Investment Group, Inc. (records relating
to its function as investment adviser); BISYS Fund
Services, 3435 Stelzer Road, Columbus, Ohio 43219
(records relating to its functions as transfer agent,
administrator, fund accounting agent and
distributor).
ITEM 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. UNDERTAKINGS.
None
<PAGE> 77
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant represents that this filing meets
all the requirements for effectiveness pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Post-Effective Amendment No. 61
to its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Washington in the District of Columbia
on the 10th day of September, 1999.
THE COVENTRY GROUP
By: /s/ Walter B. Grimm
-------------------------
Walter B. Grimm**
By: /s/ Jeffrey L. Steele
-------------------------------------------
Jeffrey L. Steele, as attorney-in-fact
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/w/ Walter B. Grimm Chairman, President and Trustee September 10, 1999
- ---------------------------------
Walter B. Grimm**
/w/ John H. Ferring IV Trustee September 10, 1999
- ---------------------------------
John H. Ferring IV***
/s/ Maurice G. Stark Trustee September 10, 1999
- ---------------------------------
Maurice G. Stark*
/s/ Michael M. Van Buskirk Trustee September 10, 1999
- ---------------------------------
Michael M. Van Buskirk*
/s/ Gary R. Tenkman Treasurer (Principal Financial September 10, 1999
- --------------------------------- Accounting Officer)
Gary R. Tenkman****
</TABLE>
<PAGE> 78
By: /s/ Jeffrey L. Steele
-------------------------------------------
Jeffrey L. Steele, as attorney-in-fact
* Pursuant to power of attorney filed with Pre-Effective Amendment No. 3
on April 6, 1992.
** Pursuant to power of attorney filed with Post-Effective Amendment No.
26 on May 1, 1996.
*** Pursuant to power of attorney filed with Post-Effective Amendment No.
39 on July 31, 1998.
**** Pursuant to power of attorney filed with Post-Effective Amendment No.
46 on May 14, 1999.
<PAGE> 1
Exhibit 99.g
CUSTODY AGREEMENT
AGREEMENT, dated as of September __, 1999 by and between THE COVENTRY
GROUP (the "Trust"), a business trust organized and existing under the laws of
the Commonwealth of Massachusetts, acting with respect to and on behalf of each
of the KENSINGTON INVESTMENT GROUP series of the Trust that are identified on
Exhibit A hereto (each, a "Portfolio"), and CUSTODIAL TRUST COMPANY, a bank
organized and existing under the laws of the State of New Jersey (the
"Custodian").
WHEREAS, the Trust desires that the securities, funds and other assets
of the Portfolios be held and administered by Custodian pursuant to this
Agreement;
WHEREAS, each Portfolio is an investment portfolio represented by a
series of Shares included among the shares of beneficial interest issued by the
Trust, an open-end management investment company registered under the 1940 Act;
WHEREAS, Custodian represents that it is a bank having the
qualifications prescribed in the 1940 Act to act as custodian for management
investment companies registered under the 1940 Act;
NOW, THEREFORE, in consideration of the mutual agreements herein made,
the Trust and Custodian hereby agree as follows:
ARTICLE I
DEFINITIONS
-----------
Whenever used in this Agreement, the following terms, unless the
context otherwise requires, shall mean:
<PAGE> 2
1.1 "AUTHORIZED PERSON" means any person authorized by resolution of
the Board of Trustees to give Oral Instructions and Written Instructions on
behalf of the Trust and identified, by name or by office, in Exhibit B hereto or
any person designated to do so by an investment adviser of any Portfolio who is
named by the Trust in Exhibit C hereto.
1.2 "BOARD OF TRUSTEES" means the Board of Trustees of the Trust or,
when permitted under the 1940 Act, the Executive Committee thereof, if any.
1.3 "BOOK-ENTRY SYSTEM" means a book-entry system maintained by a
Federal Reserve Bank for securities of the United States government or of
agencies or instrumentalities thereof (including government-sponsored
enterprises).
1.4 "BUSINESS DAY" means any day on which banks in the State of New
Jersey and New York are open for business.
1.5 "CUSTODY ACCOUNT" means, with respect to a Portfolio, the account
in the name of such Portfolio, which is provided for in Section 3.2 below.
1.6 "DEPOSITORY ACCOUNT" has the meaning given in Section 3.10(b)
below.
1.7 "DOMESTIC SECURITIES DEPOSITORY" means The Depository Trust Company
and any other clearing agency registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, which acts as a securities
depository.
1.8 "ELIGIBLE DOMESTIC BANK" means a bank as defined in the 1940 Act.
<PAGE> 3
1.9 "ELIGIBLE FOREIGN CUSTODIAN" means any banking institution, trust
company or other entity (including any Foreign Securities Depository) organized
under the laws of a country other than the United States which is eligible under
the 1940 Act to act as a custodian for securities and other assets of a
Portfolio held outside the United States.
1.10 "FOREIGN CUSTODY MANAGER" has the same meaning as in the 1940 Act.
1.11 "FOREIGN SECURITIES DEPOSITORY" means a foreign securities
depository or clearing agency as defined in the 1940 Act.
1.12 "MASTER REPURCHASE AGREEMENT" means the Master Repurchase
Agreement of even date herewith between the Trust and Bear, Stearns & Co. Inc.
as it may from time to time be amended.
1.13 "MASTER SECURITIES LOAN AGREEMENT" means the Master Securities
Loan Agreement of even date herewith between the Trust and Bear, Stearns
Securities Corp. as it may from time to time be amended.
1.14 "1940 ACT" means the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.
1.15 "ORAL INSTRUCTIONS" means instructions orally transmitted to and
accepted by Custodian which are (a) reasonably believed by Custodian to have
been given by an Authorized Person, (b) recorded and kept among the records of
Custodian made in the ordinary course of business, and (c) completed in
accordance with Custodian's requirements from time to time as to content of
instructions and their manner and timeliness of delivery by the Trust.
-3-
<PAGE> 4
1.16 "PROPER INSTRUCTIONS" means Oral Instructions or Written
Instructions. Proper Instructions may be continuing Written Instructions when
deemed appropriate by the Trust and Custodian.
1.17 "SECURITIES DEPOSITORY" means any Domestic Securities
Depository or Foreign Securities Depository.
1.18 "SHARES" means, with respect to a Portfolio, those shares in a
series or class of the beneficial interests of the Trust that represent
interests in such Portfolio.
1.19 "WRITTEN INSTRUCTIONS" means written communications received by
Custodian that are (a) reasonably believed by Custodian to have been signed or
sent by an Authorized Person, (b) sent or transmitted by letter, facsimile,
central processing unit connection, on-line terminal or magnetic tape, and (c)
completed in accordance with Custodian's requirements from time to time as to
content of instructions and their manner and timeliness of delivery by the
Trust.
ARTICLE II
APPOINTMENT OF CUSTODIAN
------------------------
2.1 APPOINTMENT. The Trust hereby appoints Custodian as custodian of
all such securities, funds and other assets of each Portfolio as may be
acceptable to Custodian and from time to time delivered to it by the Trust or
others for the account of such Portfolio.
2.2 ACCEPTANCE. Custodian hereby accepts appointment as such custodian
and agrees to perform the duties thereof as hereinafter set forth.
-4-
<PAGE> 5
ARTICLE III
CUSTODY OF SECURITIES, FUNDS AND OTHER ASSETS
---------------------------------------------
3.1 SEGREGATION. All securities and non-cash property of a Portfolio in
the possession of Custodian (other than securities maintained by Custodian with
a sub-custodian appointed pursuant to this Agreement or in a Securities
Depository or Book-Entry System) shall be physically segregated from other such
securities and non-cash property in the possession of Custodian. All cash,
securities and other non-cash property of a Portfolio shall be identified as
belonging to such Portfolio.
3.2 CUSTODY ACCOUNT. (a) Custodian shall open and maintain in its trust
department a custody account in the name of each Portfolio, subject only to
draft or order of Custodian, in which Custodian shall enter and carry all
securities, funds and other assets of such Portfolio which are delivered to
Custodian and accepted by it.
(b) If, with respect to any Portfolio, Custodian at any time fails to
receive any of the documents referred to in Section 3.10(a) below, then, until
such time as it receives such document, it shall not be obligated to receive any
securities into the Custody Account of such Portfolio and shall be entitled to
return to such Portfolio any securities that it is holding in such Custody
Account.
3.3 SECURITIES IN PHYSICAL FORM. Custodian may, but shall not be
obligated to, hold securities that may be held only in physical form.
3.4 DISCLOSURE TO ISSUERS OF SECURITIES. Custodian is authorized to
disclose the Trust's and any Portfolio's names and addresses, and the securities
positions in such Portfolio's
-5-
<PAGE> 6
Custody Account, to the issuers of such securities when requested by them to do
so.
3.5 EMPLOYMENT OF DOMESTIC SUB-CUSTODIANS. At any time and from time to
time, Custodian in its discretion may appoint and employ, and may also cease to
employ, any Eligible Domestic Bank as sub-custodian to hold securities and other
assets of a Portfolio that are maintained in the United States and to carry out
such other provisions of this Agreement as it may determine, provided, however,
that the employment of any such sub-custodian has been approved by the Trust.
The employment of any such sub-custodian shall be at Custodian's expense and
shall not relieve Custodian of any of its obligations or liabilities under this
Agreement.
3.6 EMPLOYMENT OF FOREIGN SUB-CUSTODIANS. (a) At any time and from time
to time, Custodian in its discretion may appoint and employ in accordance with
the 1940 Act, and may also cease to employ, (i) any overseas branch of any
Eligible Domestic Bank, or (ii) any Eligible Foreign Custodian selected by the
Foreign Custody Manager, in each case as a foreign sub-custodian for securities
and other assets of a Portfolio that are maintained outside the United States,
provided, however, that the employment of any such overseas branch has been
approved by the Trust and, provided further that, in the case of any such
Eligible Foreign Custodian, the Foreign Custody Manager has approved, in
writing, the agreement (and/or, in the case of a Foreign Securities Depository,
the rules and/or established practices and procedures thereof) pursuant to which
Custodian employs such Eligible Foreign Custodian.
(b) Set forth on Exhibit D hereto, with respect to each Portfolio, are
the foreign sub-custodians (including Foreign Securities Depositories) that
Custodian may employ pursuant to Section 3.6(a) above. Exhibit D shall be
revised from time to time as foreign sub-custodians are added or deleted.
-6-
<PAGE> 7
(c) If the Trust proposes to have a Portfolio make an investment which
is to be held in a country in which Custodian does not have appropriate
arrangements in place with a foreign sub-custodian selected by the Foreign
Custody Manager, then the Trust shall inform Custodian sufficiently in advance
of such investment to allow Custodian to make such arrangements.
(d) Notwithstanding anything to the contrary in Section 8.1 below,
Custodian shall have no greater liability to any Portfolio or the Trust for the
actions or omissions of any foreign sub-custodian appointed pursuant to this
Agreement than any such foreign sub-custodian has to Custodian, and Custodian
shall not be required to discharge any such liability which may be imposed on it
unless and until such foreign sub-custodian has effectively indemnified
Custodian against it or has otherwise discharged its liability to Custodian in
full.
(e) Upon the request of the Foreign Custody Manager, Custodian shall
furnish to the Foreign Custody Manager information concerning all foreign
sub-custodians employed pursuant to this Agreement which shall be similar in
kind and scope to any such information that may have been furnished to the
Foreign Custody Manager in connection with the initial approval by the Foreign
Custody Manager of the agreements pursuant to which Custodian employs such
foreign sub-custodians or as otherwise required by the 1940 Act.
3.7 EMPLOYMENT OF OTHER AGENTS. Custodian may employ other suitable
agents, which may include affiliates of Custodian such as Bear, Stearns & Co.
Inc. ("Bear Stearns") or Bear, Stearns Securities Corp.("BS Securities"), both
of which are securities broker-dealers, provided, however, that Custodian shall
not employ (a) BS Securities to hold any collateral pledged by BS Securities
under the Master Securities Loan Agreement or any other securities loan
agreement between the Trust and BS Securities, whether now or hereafter in
effect, or (b) Bear
-7-
<PAGE> 8
Stearns to hold any securities purchased from Bear Stearns under the Master
Repurchase Agreement or any other repurchase agreement between the Trust and
Bear Stearns, whether now or hereafter in effect. The appointment of any agent
pursuant to this Section 3.7 shall not relieve Custodian of any of its
obligations or liabilities under this Agreement.
3.8 BANK ACCOUNTS. In its discretion and from time to time Custodian
may open and maintain one or more demand deposit accounts with any Eligible
Domestic Bank (any such accounts to be in the name of Custodian and subject only
to its draft or order), provided, however, that the opening and maintenance of
any such account shall be at Custodian's expense and shall not relieve Custodian
of any of its obligations or liabilities under this Agreement.
3.9 DELIVERY OF ASSETS TO CUSTODIAN. Provided they are acceptable to
Custodian, the Trust shall deliver to Custodian the securities, funds and other
assets of each Portfolio, including (a) payments of income, payments of
principal and capital distributions received by such Portfolio with respect to
securities, funds or other assets owned by such Portfolio at any time during the
term of this Agreement, and (b) funds received by such Portfolio for the
issuance, at any time during such term, of Shares of such Portfolio. Custodian
shall not be under any duty or obligation to require the Trust to deliver to it
any securities or other assets owned by a Portfolio and shall have no
responsibility or liability for or on account of securities or other assets not
so delivered.
3.10 DOMESTIC SECURITIES DEPOSITORIES AND BOOK-ENTRY SYSTEMS. Custodian
and any sub-custodian appointed pursuant to Section 3.5 above may deposit and/or
maintain securities of any Portfolio in a Domestic Securities Depository or in a
Book-Entry System, subject to the following provisions:
-8-
<PAGE> 9
(a) Prior to a deposit of securities of a Portfolio in any Domestic
Securities Depository or Book-Entry System, the Trust shall deliver to Custodian
a resolution of the Board of Trustees, certified by an officer of the Trust,
authorizing and instructing Custodian (and any sub-custodian appointed pursuant
to Section 3.5 above) on an on-going basis to deposit in such Domestic
Securities Depository or Book-Entry System all securities eligible for deposit
therein and to make use of such Domestic Securities Depository or Book-Entry
System to the extent possible and practical in connection with the performance
of its obligations hereunder (or under the applicable sub-custody agreement in
the case of such sub-custodian), including, without limitation, in connection
with settlements of purchases and sales of securities, loans of securities, and
deliveries and returns of collateral consisting of securities.
(b) Securities of a Portfolio kept in a Book-Entry System or Domestic
Securities Depository shall be kept in an account ("Depository Account") of
Custodian (or of any sub-custodian appointed pursuant to Section 3.5 above) in
such Book-Entry System or Domestic Securities Depository which includes only
assets held by Custodian (or such sub-custodian) as a fiduciary, custodian or
otherwise for customers.
(c) The records of Custodian with respect to securities of a Portfolio
that are maintained in a Book-Entry System or Domestic Securities Depository
shall at all times identify such securities as belonging to such Portfolio.
(d) If securities purchased by a Portfolio are to be held in a
Book-Entry System or Domestic Securities Depository, Custodian (or any
sub-custodian appointed pursuant to Section 3.5 above) shall pay for such
securities upon (i) receipt of advice from the Book-Entry System or Domestic
Securities Depository that such securities have been transferred to the
Depository Account, and (ii) the making of an entry on the records of Custodian
(or of
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such sub-custodian) to reflect such payment and transfer for the account of such
Portfolio. If securities sold by a Portfolio are held in a Book-Entry System or
Domestic Securities Depository, Custodian (or such sub-custodian) shall transfer
such securities upon (A) receipt of advice from the Book-Entry System or
Domestic Securities Depository that payment for such securities has been
transferred to the Depository Account, and (B) the making of an entry on the
records of Custodian (or of such sub-custodian) to reflect such transfer and
payment for the account of such Portfolio.
(e) Custodian shall provide the Trust with copies of any report
obtained by Custodian (or by any sub-custodian appointed pursuant to Section 3.5
above) from a Book-Entry System or Domestic Securities Depository in which
securities of a Portfolio are kept on the internal accounting controls and
procedures for safeguarding securities deposited in such Book-Entry System or
Domestic Securities Depository.
(f) At its election, the Trust shall be subrogated to the rights of
Custodian (or of any sub-custodian appointed pursuant to Section 3.5 above) with
respect to any claim against a Book-Entry System or Domestic Securities
Depository or any other person for any loss or damage to a Portfolio arising
from the use of such Book-Entry System or Domestic Securities Depository, if and
to the extent that such Portfolio has not been made whole for any such loss or
damage.
3.11 RELATIONSHIP WITH SECURITIES DEPOSITORIES. No Book-Entry System,
Securities Depository, or other securities depository or clearing agency
(whether foreign or domestic) which it is or may become standard market practice
to use for the comparison and settlement of trades in securities shall be an
agent or sub-contractor of Custodian for purposes of Section 3.7 above or
otherwise.
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3.12 PAYMENTS FROM CUSTODY ACCOUNT. Upon receipt of Proper Instructions
with respect to a Portfolio but subject to its right to foreclose upon and
liquidate collateral pledged to it pursuant to Section 9.3 below, Custodian
shall make payments from the Custody Account of such Portfolio, but only in the
following cases, provided, first, that such payments are in connection with the
clearance and/or custody of securities or other assets, second, that there are
sufficient funds in such Custody Account, whether belonging to such Portfolio or
advanced to it by Custodian in its sole and absolute discretion as set forth in
Section 3.18 below, for Custodian to make such payments, and, third, that after
the making of such payments, such Portfolio would not be in violation of any
margin or other requirements agreed upon pursuant to Section 3.18 below:
(a) For the purchase of securities for such Portfolio but only (i) in
the case of securities (other than options on securities, futures contracts and
options on futures contracts), against the delivery to Custodian (or any
sub-custodian appointed pursuant to this Agreement) of such securities
registered as provided in Section 3.20 below or in proper form for transfer or,
if the purchase of such securities is effected through a Book-Entry System or
Domestic Securities Depository, in accordance with the conditions set forth in
Section 3.10 above, and (ii) in the case of options, futures contracts and
options on futures contracts, against delivery to Custodian (or such
sub-custodian) of evidence of title thereto in favor of such Portfolio, the
Custodian, any such sub-custodian, or any nominee referred to in Section 3.20
below;
(b) In connection with the conversion, exchange or surrender, as set
forth in Section 3.13(f) below, of securities owned by such Portfolio;
(c) For transfer in accordance with the provisions of any agreement
among the Trust, Custodian and a securities
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broker-dealer, relating to compliance with rules of The Options Clearing
Corporation and of any registered national securities exchange (or of any
similar organization or organizations) regarding escrow or other arrangements in
connection with transactions of such Portfolio;
(d) For transfer in accordance with the provisions of any agreement
among the Trust, Custodian and a futures commission merchant, relating to
compliance with the rules of the Commodity Futures Trading Commission and/or any
contract market (or any similar organization or organizations) regarding margin
or other deposits in connection with transactions of such Portfolio;
(e) For the funding of any time deposit (whether certificated or not)
or other interest-bearing account with any banking institution (including
Custodian), provided that Custodian shall receive and retain such certificate,
advice, receipt or other evidence of deposit (if any) as such banking
institution may deliver with respect to any such deposit or account;
(f) For the purchase from a banking or other financial institution of
loan participations, but only if Custodian has in its possession a copy of the
agreement between the Trust and such banking or other financial institution with
respect to the purchase of such loan participations and provided that Custodian
shall receive and retain such participation certificate or other evidence of
participation (if any) as such banking or other financial institution may
deliver with respect to any such loan participation;
(g) For the purchase and/or sale of foreign currencies or of options to
purchase and/or sell foreign currencies, for spot or future delivery, for the
account of such Portfolio pursuant to contracts between the Trust and any
banking or other financial
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institution (including Custodian, any sub-custodian appointed pursuant to this
Agreement and any affiliate of Custodian);
(h) For transfer to a securities broker-dealer as margin for a short
sale of securities for such Portfolio, or as payment in lieu of dividends paid
on securities sold short for such Portfolio;
(i) For the payment as provided in Article IV below of any dividends,
capital gain distributions or other distributions declared on the Shares of such
Portfolio;
(j) For the payment as provided in Article IV below of the redemption
price of the Shares of such Portfolio;
(k) For the payment of any expense or liability incurred by such
Portfolio, including but not limited to the following payments for the account
of such Portfolio: interest, taxes, and administration, investment advisory,
accounting, auditing, transfer agent, custodian, trustee, legal and distribution
and service (12b-1)fees, and other operating expenses of such Portfolio; in all
cases, whether or not such expenses are to be in whole or in part capitalized or
treated as deferred expenses; and
(l) For any other proper purpose, but only upon receipt of Proper
Instructions, specifying the amount and purpose of such payment, certifying such
purpose to be a proper purpose of such Portfolio, and naming the person or
persons to whom such payment is to be made.
3.13 DELIVERIES FROM CUSTODY ACCOUNT. Upon receipt of Proper
Instructions with respect to a Portfolio but subject to its right to foreclose
upon and liquidate collateral pledged to it pursuant to Section 9.3 below,
Custodian shall release and deliver securities and other assets from the Custody
Account of such
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Portfolio, but only in the following cases, provided, first, that such
deliveries are in connection with the clearance and/or custody of securities or
other assets, second, there are sufficient amounts and types of securities or
other assets in such Custody Account for Custodian to make such deliveries, and,
third, that after the making of such deliveries, such Portfolio would not be in
violation of any margin or other requirements agreed upon pursuant to Section
3.18 below:
(a) Upon the sale of securities for the account of such Portfolio but,
subject to Section 3.14 below, only against receipt of payment therefor or, if
such sale is effected through a Book-Entry System or Domestic Securities
Depository, in accordance with the provisions of Section 3.10 above;
(b) To an offeror's depository agent in connection with tender or other
similar offers for securities of such Portfolio; provided that, in any such
case, the funds or other consideration for such securities is to be delivered to
Custodian;
(c) To the issuer thereof or its agent when such securities are called,
redeemed or otherwise become payable, provided that in any such case the funds
or other consideration for such securities is to be delivered to Custodian;
(d) To the issuer thereof or its agent for exchange for a different
number of certificates or other evidence representing the same aggregate face
amount or number of units; provided that, in any such case, the new securities
are to be delivered to Custodian;
(e) To the securities broker through whom securities are being sold for
such Portfolio, for examination in accordance with the "street delivery" custom;
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<PAGE> 15
(f) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the issuer of
such securities, or pursuant to provisions for conversion contained in such
securities, or pursuant to any deposit agreement, including surrender or receipt
of underlying securities in connection with the issuance or cancellation of
depository receipts; provided that, in any such case, the new securities and
funds, if any, are to be delivered to Custodian;
(g) In the case of warrants, rights or similar securities, to the
issuer of such warrants, rights or similar securities, or its agent, upon the
exercise thereof, provided that, in any such case, the new securities and funds,
if any, are to be delivered to Custodian;
(h) To the borrower thereof, or its agent, in connection with any loans
of securities for such Portfolio pursuant to any securities loan agreement
entered into by the Trust, but only against receipt by Custodian of such
collateral as is required under such securities loan agreement;
(i) To any lender, or its agent, as collateral for any borrowings from
such lender by such Portfolio that require a pledge of assets of such Portfolio,
but only against receipt by Custodian of the amounts borrowed;
(j) Pursuant to any authorized plan of liquidation, reorganization,
merger, consolidation or recapitalization of such Portfolio or the Trust;
(k) For delivery in accordance with the provisions of any agreement
among the Trust, Custodian and a securities broker-dealer, relating to
compliance with the rules of The Options Clearing Corporation and of any
registered national securities exchange (or of any similar organization or
organizations)
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regarding escrow or other arrangements in connection with transactions of such
Portfolio;
(l) For delivery in accordance with the provisions of any agreement
among the Trust, Custodian, and a futures commission merchant, relating to
compliance with the rules of the Commodity Futures Trading Commission and/or any
contract market (or any similar organization or organizations) regarding margin
or other deposits in connection with transactions of such Portfolio;
(m) For delivery to a securities broker-dealer as margin for a short
sale of securities for such Portfolio;
(n) To the issuer of American Depositary Receipts or International
Depositary Receipts (hereinafter, collectively, "ADRs") for such securities, or
its agent, against a written receipt therefor adequately describing such
securities, provided that such securities are delivered together with
instructions to issue ADRs in the name of Custodian or its nominee and to
deliver such ADRs to Custodian;
(o) In the case of ADRs, to the issuer thereof, or its agent, against a
written receipt therefor adequately describing such ADRs, provided that such
ADRs are delivered together with instructions to deliver the securities
underlying such ADRs to Custodian or an agent of Custodian; or
(p) For any other proper purpose, but only upon receipt of Proper
Instructions, specifying the securities or other assets to be delivered, setting
forth the purpose for which such delivery is to be made, certifying such purpose
to be a proper purpose of such Portfolio, and naming the person or persons to
whom delivery of such securities or other assets is to be made.
3.14 DELIVERY PRIOR TO FINAL PAYMENT. When instructed by the
Trust to deliver securities of a Portfolio against payment,
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Custodian shall be entitled, but only if in accordance with generally accepted
market practice, to deliver such securities prior to actual receipt of final
payment therefor and, exclusively in the case of securities in physical form,
prior to receipt of payment therefor. In any such case, such Portfolio shall
bear the risk that final payment for such securities may not be made or that
such securities may be returned or otherwise held or disposed of by or through
the person to whom they were delivered, and Custodian shall have no liability
for any of the foregoing.
3.15 CREDIT PRIOR TO FINAL PAYMENT. In its sole discretion and from
time to time, Custodian may credit the Custody Account of a Portfolio, prior to
actual receipt of final payment thereof, with (a) proceeds from the sale of
securities of such Portfolio which it has been instructed to deliver against
payment, (b) proceeds from the redemption of securities or other assets in such
Custody Account, and (c) income from securities, funds or other assets in such
Custody Account. Any such credit shall be conditional upon actual receipt by
Custodian of final payment and may be reversed if final payment is not actually
received in full. Custodian may, in its sole discretion and from time to time,
permit a Portfolio to use funds so credited to its Custody Account in
anticipation of actual receipt of final payment. Any funds so used shall
constitute an advance subject to Section 3.18 below.
3.16 DEFINITION OF FINAL PAYMENT. For purposes of this Agreement,
"final payment" means payment in funds which are (or have become) immediately
available, under applicable law are irreversible, and are not subject to any
security interest, levy, lien or other encumbrance.
3.17 PAYMENTS AND DELIVERIES OUTSIDE THE UNITED STATES. Notwithstanding
anything to the contrary that may be required by
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Section 3.12 or Section 3.13 above, or elsewhere in this Agreement, in the case
of securities and other assets maintained outside the United States and in the
case of payments made outside the United States, Custodian and any sub-custodian
appointed pursuant to this Agreement may receive and deliver such securities or
other assets, and may make such payments, in accordance with the laws,
regulations, customs, procedures and practices applicable in the relevant local
market outside the United States.
3.18 CLEARING CREDIT. Custodian may, in its sole discretion and from
time to time, advance funds to the Trust to facilitate the settlement of a
Portfolio's transactions in the Custody Account of such Portfolio. Any such
advance (a) shall be repayable immediately upon demand made by Custodian, (b)
shall be fully secured as provided in Section 9.3 below, and (c) shall bear
interest at such rate, and be subject to such other terms and conditions, as
Custodian and the Trust may agree.
3.19 ACTIONS NOT REQUIRING PROPER INSTRUCTIONS. Unless otherwise
instructed by the Trust, Custodian shall with respect to all securities and
other assets held for a Portfolio:
(a) Subject to Section 8.4 below, receive into the Custody Account of
such Portfolio any funds or other property, including payments of principal,
interest and dividends, due and payable on or on account of such securities and
other assets;
(b) Deliver securities of such Portfolio to the issuers of such
securities or their agents for the transfer thereof into the name of such
Portfolio, Custodian or any of the nominees referred to in Section 3.20 below;
(c) Endorse for collection, in the name of such Portfolio, checks,
drafts and other negotiable instruments;
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(d) Surrender interim receipts or securities in temporary form for
securities in definitive form;
(e) Execute, as custodian, any necessary declarations or certificates
of ownership under the federal income tax laws of the United States, or the laws
or regulations of any other taxing authority, in connection with the transfer of
such securities or other assets or the receipt of income or other payments with
respect thereto;
(f) Receive and hold for such Portfolio all rights and similar
securities issued with respect to securities or other assets of such Portfolio;
(g) As may be required in the execution of Proper Instructions,
transfer funds from the Custody Account of such Portfolio to any demand deposit
account maintained by Custodian pursuant to Section 3.8 above; and
(h) In general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase and transfer of, and other
dealings in, such securities and other assets.
3.20 REGISTRATION AND TRANSFER OF SECURITIES. All securities held for a
Portfolio that are issuable only in bearer form shall be held by Custodian in
that form, provided that any such securities shall be held in a Securities
Depository or Book-Entry System if eligible therefor. All other securities and
all other assets held for a Portfolio may be registered in the name of (a)
Custodian as agent, (b) any sub-custodian appointed pursuant to this Agreement,
(c) any Securities Depository, or (d) any nominee or agent of any of them. The
Trust shall furnish to Custodian appropriate instruments to enable Custodian to
hold or deliver in proper form for transfer, or to register as in this
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Section 3.20 provided, any securities or other assets delivered to Custodian
which are registered in the name of a Portfolio.
3.21 RECORDS. (a) Custodian shall maintain complete and accurate
records with respect to securities, funds and other assets held for a Portfolio,
including (i) journals or other records of original entry containing an itemized
daily record in detail of all receipts and deliveries of securities and all
receipts and disbursements of funds; (ii) ledgers (or other records) reflecting
(A) securities in transfer, if any, (B) securities in physical possession, (C)
monies and securities borrowed and monies and securities loaned (together with a
record of the collateral therefor and substitutions of such collateral), (D)
dividends and interest received, and (E) dividends receivable and interest
accrued; and (iii) canceled checks and bank records related thereto. Custodian
shall keep such other books and records with respect to securities, funds and
other assets of a Portfolio which are held hereunder as the Trust may reasonably
request.
(b) All such books and records maintained by Custodian for a Portfolio
shall (i) be maintained in a form acceptable to the Trust and in compliance with
rules and regulations of the Securities and Exchange Commission, (ii) be the
property of such Portfolio and at all times during the regular business hours of
Custodian be made available upon request for inspection by duly authorized
officers, employees or agents of the Trust and employees or agents of the
Securities and Exchange Commission, and (iii) if required to be maintained under
the 1940 Act, be preserved for the periods prescribed therein.
3.22 ACCOUNT REPORTS BY CUSTODIAN. Custodian shall furnish the Trust
with a daily activity statement, including a summary of all transfers to or from
the Custody Account of each Portfolio (in the case of securities and other
assets maintained in the United States, on the day following such transfers). At
least
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monthly and from time to time, Custodian shall furnish the Trust with a detailed
statement of the securities, funds and other assets held for each Portfolio
under this Agreement.
3.23 OTHER REPORTS BY CUSTODIAN. Custodian shall provide the Trust with
such reports as the Trust may reasonably request from time to time on the
internal accounting controls and procedures for safeguarding securities which
are employed by Custodian or any sub-custodian appointed pursuant to this
Agreement.
3.24 PROXIES AND OTHER MATERIALS. (a) Unless otherwise instructed by
the Trust, Custodian shall promptly deliver to the Trust all notices of
meetings, proxy materials (other than proxies) and other announcements, which it
receives regarding securities held by it in the Custody Account of a Portfolio.
Whenever Custodian or any of its agents receives a proxy with respect to
securities in the Custody Account of a Portfolio, Custodian shall promptly
request instructions from the Trust on how such securities are to be voted, and
shall give such proxy, or cause it to be given, in accordance with such
instructions. If the Trust timely informs Custodian that the Trust wishes to
vote any such securities in person, Custodian shall promptly seek to have a
legal proxy covering such securities issued to the Trust. Unless otherwise
instructed by the Trust, neither Custodian nor any of its agents shall exercise
any voting rights with respect to securities held hereunder.
(b) Unless otherwise instructed by the Trust, Custodian shall promptly
transmit to the Trust all other written information received by Custodian from
issuers of securities held in the Custody Account of any Portfolio. With respect
to tender or exchange offers for such securities or with respect to other
corporate transactions involving such securities, Custodian shall promptly
transmit to the Trust all written information received by Custodian from the
issuers of such securities or from any party (or its agents) making any such
tender or exchange offer or
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participating in such other corporate transaction. If the Trust, with respect to
such tender or exchange offer or other corporate transaction, desires to take
any action that may be taken by it pursuant to the terms of such offer or other
transaction, the Trust shall notify Custodian (i) in the case of securities
maintained outside the United States, such number of Business Days prior to the
date on which Custodian is to take such action as will allow Custodian to take
such action in the relevant local market for such securities in a timely
fashion, and (ii) in the case of all other securities, at least five Business
Days prior to the date on which Custodian is to take such action.
3.25 CO-OPERATION. Custodian shall cooperate with and supply necessary
information to the entity or entities appointed by the Trust to keep the books
of account of a Portfolio and/or to compute the value of the assets of a
Portfolio.
ARTICLE IV
REDEMPTION OF PORTFOLIO SHARES;
-------------------------------
DIVIDENDS AND OTHER DISTRIBUTIONS
---------------------------------
4.1 TRANSFER OF FUNDS. From such funds as may be available for the
purpose in the Custody Account of a Portfolio, and upon receipt of Proper
Instructions specifying that the funds are required to redeem Shares of such
Portfolio or to pay dividends or other distributions to holders of Shares of
such Portfolio, Custodian shall transfer each amount specified in such Proper
Instructions to such account of such Portfolio or of an agent thereof (other
than Custodian), at such bank, as the Trust may designate therein with respect
to such amount.
4.2 SOLE DUTY OF CUSTODIAN. Custodian's sole obligation with respect to
the redemption of Shares of a Portfolio and the payment of dividends and other
distributions thereon shall be its obligation set forth in Section 4.1 above,
and Custodian shall not be required to make any payments to the various holders
from time
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to time of Shares of a Portfolio nor shall Custodian be responsible for the
payment or distribution by the Trust, or any agent designated in Proper
Instructions given pursuant to Section 4.1 above, of any amount paid by
Custodian to the account of the Trust or such agent in accordance with such
Proper Instructions.
ARTICLE V
SEGREGATED ACCOUNTS
-------------------
Upon receipt of Proper Instructions to do so, Custodian shall establish
and maintain a segregated account or accounts for and on behalf of any
Portfolio, into which account or accounts may be transferred funds and/or
securities, including securities maintained in a Securities Depository:
(a) in accordance with the provisions of any agreement among the Trust,
Custodian and a securities broker-dealer (or any futures commission merchant),
relating to compliance with the rules of The Options Clearing Corporation or of
any registered national securities exchange (or the Commodity Futures Trading
Commission or any registered contract market), or of any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions of such Portfolio,
(b) for purposes of segregating funds or securities in connection with
securities options purchased or written by such Portfolio or in connection with
financial futures contracts (or options thereon) purchased or sold by such
Portfolio,
(c) which constitute collateral for loans of securities made by such
Portfolio,
(d) for purposes of compliance by such Portfolio with requirements
under the 1940 Act for the maintenance of segregated accounts by registered
management investment companies in connection with reverse repurchase
agreements, when-issued, delayed
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delivery and firm commitment transactions, and short sales of securities, and
(e) for other proper purposes, but only upon receipt of Proper
Instructions, specifying the purpose or purposes of such segregated account and
certifying such purposes to be proper purposes of such Portfolio.
ARTICLE VI
CERTAIN REPURCHASE TRANSACTIONS
-------------------------------
6.1 TRANSACTIONS. If and to the extent that the necessary funds and
securities of a Portfolio have been entrusted to it under this Agreement, and
subject to Custodian's right to foreclose upon and liquidate collateral pledged
to it pursuant to Section 9.3 below, Custodian, as agent of such Portfolio,
shall from time to time (and unless the Trust gives it Proper Instructions to do
otherwise) make from the Custody Account of such Portfolio the transfers of
funds and deliveries of securities which such Portfolio is required to make
pursuant to the Master Repurchase Agreement and shall receive for the Custody
Account of such Portfolio the transfers of funds and deliveries of securities
which the seller under the Master Repurchase Agreement is required to make
pursuant thereto. Custodian shall make and receive all such transfers and
deliveries pursuant to, and subject to the terms and conditions of, the Master
Repurchase Agreement.
6.2 COLLATERAL. Custodian shall daily mark to market the securities
purchased under the Master Repurchase Agreement and held in the Custody Account
of a Portfolio, and shall give to the seller thereunder any such notice as may
be required thereby in connection with such mark-to-market.
6.3 EVENTS OF DEFAULT. Custodian shall promptly notify the Trust of any
event of default under the Master Repurchase Agreement
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(as such term "event of default" is defined therein) of which it has actual
knowledge.
6.4 MASTER REPURCHASE AGREEMENT. Custodian hereby acknowledges its
receipt from the Trust of a copy of the Master Repurchase Agreement. The Trust
shall provide Custodian, prior to the effectiveness thereof, with a copy of any
amendment to the Master Repurchase Agreement.
ARTICLE VII
CERTAIN SECURITIES LENDING TRANSACTIONS
---------------------------------------
7.1 TRANSACTIONS. If and to the extent that the necessary funds and
securities of a Portfolio have been entrusted to it under this Agreement, and
subject to Custodian's right to foreclose upon and liquidate collateral pledged
to it pursuant to Section 9.3 below, Custodian, as agent of such Portfolio,
shall from time to time (and unless the Trust gives it Proper Instructions to do
otherwise) make from the Custody Account of such Portfolio the transfers of
funds and deliveries of securities which such Portfolio is required to make
pursuant to the Master Securities Loan Agreement and shall receive for the
Custody Account of such Portfolio the transfers of funds and deliveries of
securities which the borrower under the Master Securities Loan Agreement is
required to make pursuant thereto. Custodian shall make and receive all such
transfers and deliveries pursuant to, and subject to the terms and conditions
of, the Master Securities Loan Agreement.
7.2 COLLATERAL. Custodian shall daily mark to market, in the manner
provided for in the Master Securities Loan Agreement, all loans of securities
which may from time to time be outstanding thereunder.
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7.3 DEFAULTS. Custodian shall promptly notify the Trust of any default
under the Master Securities Loan Agreement (as such term "default" is defined
therein) of which it has actual knowledge.
7.4 MASTER SECURITIES LOAN AGREEMENT. Custodian hereby acknowledges its
receipt from the Trust of a copy of the Master Securities Loan Agreement. The
Trust shall provide Custodian, prior to the effectiveness thereof, with a copy
of any amendment to the Master Securities Loan Agreement.
ARTICLE VIII
CONCERNING THE CUSTODIAN
------------------------
8.1 STANDARD OF CARE. Custodian shall be held to the exercise of
reasonable care in carrying out its obligations under this Agreement, and shall
be without liability to any Portfolio or the Trust for any loss, damage, cost,
expense (including attorneys' fees and disbursements), liability or claim which
does not arise from willful misfeasance, bad faith or negligence on the part of
Custodian. Custodian shall be entitled to rely on and may act upon advice of
counsel in all matters, and shall be without liability for any action reasonably
taken or omitted pursuant to such advice. In no event shall Custodian be liable
for special, incidental or consequential damages, even if Custodian has been
advised of the possibility of such damages, or be liable in any manner
whatsoever for any action taken or omitted upon instructions from the Trust or
any agent of the Trust.
8.2 ACTUAL COLLECTION REQUIRED. Custodian shall not be liable for, or
considered to be the custodian of, any funds belonging to a Portfolio or any
money represented by a check, draft or other instrument for the payment of
money, until Custodian or its agents actually receive such funds or collect on
such instrument.
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8.3 NO RESPONSIBILITY FOR TITLE, ETC. So long as and to the extent that
it is in the exercise of reasonable care, Custodian shall not be responsible for
the title, validity or genuineness of any assets or evidence of title thereto
received or delivered by it or its agents.
8.4 LIMITATION ON DUTY TO COLLECT. Custodian shall promptly notify the
Trust whenever any money or property due and payable from or on account of any
securities or other assets held hereunder for a Portfolio is not timely received
by it. Custodian shall not, however, be required to enforce collection, by legal
means or otherwise, of any such money or other property not paid when due, but
shall receive the proceeds of such collections as may be effected by it or its
agents in the ordinary course of Custodian's custody and safekeeping business or
of the custody and safekeeping business of such agents.
8.5 EXPRESS DUTIES ONLY. Custodian shall have no duties or obligations
whatsoever except such duties and obligations as are specifically set forth in
this Agreement, and no covenant or obligation shall be implied in this Agreement
against Custodian. Custodian shall have no discretion whatsoever with respect to
the management, disposition or investment of the Custody Account of any
Portfolio and is not a fiduciary to any Portfolio or the Trust. In particular,
Custodian shall not be under any obligation at any time to monitor or to take
any other action with respect to compliance by any Portfolio or the Trust with
the 1940 Act, the provisions of the Trust's trust instruments and by-laws, or
any Portfolio's investment objectives, policies and limitations as in effect
from time to time.
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ARTICLE IX
INDEMNIFICATION
---------------
9.1 INDEMNIFICATION. Each Portfolio shall indemnify and hold harmless
Custodian, any sub-custodian appointed pursuant to this Agreement and any
nominee of any of them, from and against any loss, damages, cost, expense
(including attorneys' fees and disbursements), liability (including, without
limitation, liability arising under the Securities Act of 1933, the Securities
Exchange Act of 1934, the 1940 Act, and any federal, state or foreign securities
and/or banking laws) or claim arising directly or indirectly (a) from the fact
that securities or other assets in the Custody Account of such Portfolio are
registered in the name of any such nominee, or (b) from any action or inaction,
with respect to such Portfolio, by Custodian or such sub-custodian or nominee
(i) at the request or direction of or in reliance on the advice of the Trust or
any of its agents, or (ii) upon Proper Instructions, or (c) generally, from the
performance of its obligations under this Agreement with respect to such
Portfolio, provided that Custodian, any such sub-custodian or any nominee of any
of them shall not be indemnified and held harmless from and against any such
loss, damage, cost, expense, liability or claim arising from willful
misfeasance, bad faith or negligence on the part of Custodian or any such
sub-custodian or nominee.
9.2 INDEMNITY TO BE PROVIDED. If the Trust requests Custodian to take
any action with respect to securities or other assets of a Portfolio, which may,
in the opinion of Custodian, result in Custodian or its nominee becoming liable
for the payment of money or incurring liability of some other form, Custodian
shall not be required to take such action until such Portfolio shall have
provided indemnity therefor to Custodian in an amount and form satisfactory to
Custodian.
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9.3 SECURITY. As security for the payment of any present or future
obligation or liability of any kind which a Portfolio may have to Custodian with
respect to or in connection with the Custody Account of such Portfolio or this
Agreement, or which such Portfolio may otherwise have to Custodian, the Trust
hereby pledges to Custodian all securities, funds and other assets of every kind
which are in such Custody Account or otherwise held for such Portfolio pursuant
to this Agreement, and hereby grants to Custodian a lien, right of set-off and
continuing security interest in such securities, funds and other assets.
ARTICLE X
FORCE MAJEURE
-------------
Custodian shall not be liable for any failure or delay in performance
of its obligations under this Agreement arising out of or caused, directly or
indirectly, by circumstances beyond its reasonable control, including, without
limitation, acts of God; earthquakes; fires; floods; wars; civil or military
disturbances; sabotage; strikes; epidemics; riots; power failures; computer
failure and any such circumstances beyond its reasonable control as may cause
interruption, loss or malfunction of utility, transportation, computer (hardware
or software) or telephone communication service; accidents; labor disputes; acts
of civil or military authority; actions by any governmental authority, de jure
or de facto; or inability to obtain labor, material, equipment or
transportation.
ARTICLE XI
REPRESENTATIONS AND WARRANTIES
------------------------------
11.1 REPRESENTATIONS WITH RESPECT TO PORTFOLIOS. The Trust represents
and warrants that (a) it has all necessary power and authority to perform the
obligations hereunder of each Portfolio, (b) the execution and delivery by it of
this Agreement, and the performance by it of the obligations hereunder of each
Portfolio,
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have been duly authorized by all necessary action and will not violate any law,
regulation, charter, by-law, or other instrument, restriction or provision
applicable to it or such Portfolio or by which it or such Portfolio, or their
respective assets, may be bound, and (c) this Agreement constitutes a legal,
valid and binding obligation of each Portfolio, enforceable against it in
accordance with its terms.
11.2 REPRESENTATIONS OF CUSTODIAN. Custodian represents and warrants
that (a) it has all necessary power and authority to perform its obligations
hereunder, (b) the execution and delivery by it of this Agreement, and the
performance by it of its obligations hereunder, have been duly authorized by all
necessary action and will not violate any law, regulation, charter, by-law, or
other instrument, restriction or provision applicable to it or by which it or
its assets may be bound, and (c) this Agreement constitutes a legal, valid and
binding obligation of it, enforceable against it in accordance with its terms.
ARTICLE XII
COMPENSATION OF CUSTODIAN
-------------------------
Each Portfolio shall pay Custodian such fees and charges as are set
forth in Exhibit E hereto, as such Exhibit E may from time to time be revised by
Custodian upon 14 days' prior written notice to the Trust. Any annual fee or
other charges payable by a Portfolio shall be paid monthly by automatic
deduction from funds available therefor in the Custody Account of such
Portfolio, or, if there are no such funds, upon presentation of an invoice
therefor. Out-of-pocket expenses incurred by Custodian in the performance of its
services hereunder for any Portfolio and all other proper charges and
disbursements of the Custody Account of such Portfolio shall be charged to such
Custody Account by Custodian and paid in the same manner as the annual fee and
other charges referred to in this Article XII.
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ARTICLE XIII
TAXES
-----
13.1 TAXES PAYABLE BY PORTFOLIOS. Any and all taxes, including any
interest and penalties with respect thereto, which may be levied or assessed
under present or future laws or in respect of the Custody Account of any
Portfolio or any income thereof shall be charged to such Custody Account by
Custodian and paid in the same manner as the annual fee and other charges
referred to in Article XII above.
13.2 TAX RECLAIMS. Upon the written request of the Trust, Custodian
shall exercise, on behalf of any Portfolio, any tax reclaim rights of such
Portfolio which arise in connection with foreign securities in the Custody
Account of such Portfolio.
ARTICLE XIV
AUTHORIZED PERSONS; NOTICES
---------------------------
14.1 AUTHORIZED PERSONS. Custodian may rely upon and act in accordance
with any notice, confirmation, instruction or other communication which is
reasonably believed by Custodian to have been given or signed on behalf of the
Trust by one of the Authorized Persons designated by the Trust in Exhibit B
hereto, as it may from time to time be revised. The Trust may revise Exhibit B
hereto at any time by notice in writing to Custodian given in accordance with
Section 14.4 below, but no revision of Exhibit B hereto shall be effective until
Custodian actually receives such notice.
14.2 INVESTMENT ADVISERS. Custodian may also rely upon and act in
accordance with any Written or Oral Instructions given with respect to a
Portfolio which are reasonably believed by Custodian to have been given or
signed by one of the persons designated from time to time by any of the
investment advisers of such Portfolio
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who are specified in Exhibit C hereto (if any) as it may from time to time be
revised. The Trust may revise Exhibit C hereto at any time by notice in writing
to Custodian given in accordance with Section 14.4 below, and each investment
adviser specified in Exhibit C hereto (if any) may at any time by like notice
designate an Authorized Person or remove an Authorized Person previously
designated by it, but no revision of Exhibit C hereto (if any) and no
designation or removal by such investment adviser shall be effective until
Custodian actually receives such notice.
14.3 ORAL INSTRUCTIONS. Custodian may rely upon and act in accordance
with Oral Instructions. All Oral Instructions shall be confirmed to Custodian in
Written Instructions. However, if Written Instructions confirming Oral
Instructions are not received by Custodian prior to a transaction, it shall in
no way affect the validity of the transaction authorized by such Oral
Instructions or the authorization given by an Authorized Person to effect such
transaction. Custodian shall incur no liability to any Portfolio or the Trust in
acting upon Oral Instructions. To the extent such Oral Instructions vary from
any confirming Written Instructions, Custodian shall advise the Trust of such
variance but unless confirming Written Instructions are timely received, such
Oral Instructions shall govern.
14.4 ADDRESSES FOR NOTICES. Unless otherwise specified herein, all
demands, notices, instructions, and other communications to be given hereunder
shall be sent, delivered or given to the recipient at the address, or the
relevant telephone number, set forth after its name hereinbelow:
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IF TO THE TRUST:
THE COVENTRY GROUP
for [INSERT NAME OF PORTFOLIO]
c/o Bisys Fund Services
3435 Stelzer Road (Ste 1000)
Columbus, OH 43219
Attention: Frank Deutchki
Telephone: (614) 470-8889
Facsimile: (614) 470-8739
WITH A COPY TO:
KENSINGTON INVESTMENT GROUP
4 Orinda Way (Ste 220D)
Orinda, CA 94563
Attention: John Kramer
Telephone: (925) 253-2949
Facsimile: (925) 253-9878
IF TO CUSTODIAN:
CUSTODIAL TRUST COMPANY
101 Carnegie Center
Princeton, New Jersey 08540-6231
Attention: Vice President - Trust Operations
Telephone: (609) 951-2320
Facsimile: (609) 951-2327
or at such other address as either party hereto shall have provided to the other
by notice given in accordance with this Section 14.4. Writing shall include
transmissions by or through teletype, facsimile, central processing unit
connection, on-line terminal and magnetic tape.
14.5 REMOTE CLEARANCE. With the prior consent in writing of Custodian,
the Trust may give Remote Clearance Instructions (as defined hereinbelow) and
Bulk Input Instructions (as defined hereinbelow) for the receipt, delivery or
transfer of securities, provided that such Instructions are given in accordance
with the procedures prescribed by Custodian from time to time as to content of
instructions and their manner and timeliness of delivery by the
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Trust. Custodian shall be entitled to conclusively assume that all Remote
Clearance Instructions and Bulk Input Instructions have been given by an
Authorized Person, and Custodian is hereby irrevocably authorized to act in
accordance therewith. For purposes of this Agreement, "Remote Clearance
Instructions" means instructions that are input directly via a remote terminal
which is located on the premises of the Trust, or of an investment adviser named
in Exhibit C hereto, and is linked to Custodian; and "Bulk Input Instructions"
means instructions that are input by bulk input computer tape delivered to
Custodian by messenger or transmitted to it via such transmission mechanism as
the Trust and Custodian shall from time to time agree upon.
ARTICLE XV
TERMINATION
-----------
Either party hereto may terminate this Agreement with respect to one or
more of the Portfolios by giving to the other party a notice in writing
specifying the date of such termination, which shall be not less than sixty (60)
days after the date of the giving of such notice. Upon the date set forth in
such notice this Agreement shall terminate with respect to each Portfolio
specified in such notice, and Custodian shall, upon receipt of a notice of
acceptance by the successor custodian, on that date (a) deliver directly to the
successor custodian or its agents all securities (other than securities held in
a Book-Entry System or Securities Depository) and other assets then owned by
such Portfolio and held by Custodian as custodian, and (b) transfer any
securities held in a Book-Entry System or Securities Depository to an account of
or for the benefit of such Portfolio, provided that such Portfolio shall have
paid to Custodian all fees, expenses and other amounts to the payment or
reimbursement of which it shall then be entitled.
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ARTICLE XVI
LIMITATION OF LIABILITIES
-------------------------
To the extent that the trustees of the Trust are regarded as entering
into this Agreement, they do so only as trustees of the Trust and not
individually. The obligations under this Agreement of the Trust or any Portfolio
shall not be binding upon any trustee, officer or employee of the Trust
individually, or upon any holder of Shares individually, but shall be binding
only upon the assets and property of such Portfolio. Such trustees, officers,
employees and holders, when acting in such capacities, shall not be personally
liable under this Agreement, and Custodian shall look solely to the assets and
property of each Portfolio for the performance of this Agreement with respect to
such Portfolio and the payment of any claim against such Portfolio under this
Agreement.
ARTICLE XVII
MISCELLANEOUS
-------------
17.1 BUSINESS DAYS. Nothing contained in this Agreement shall require
Custodian to perform any function or duty on a day other than a Business Day.
17.2 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York, without regard to the
conflict of law principles thereof.
17.3 REFERENCES TO CUSTODIAN. The Trust shall not circulate any printed
matter which contains any reference to Custodian without the prior written
approval of Custodian, excepting printed matter contained in the prospectus or
statement of additional information for a Portfolio and such other printed
matter as merely identifies Custodian as custodian for a Portfolio. The Trust
shall submit printed matter requiring approval to Custodian in draft
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form, allowing sufficient time for review by Custodian and its counsel prior to
any deadline for printing.
17.4 NO WAIVER. No failure by either party hereto to exercise, and no
delay by such party in exercising, any right hereunder shall operate as a waiver
thereof. The exercise by either party hereto of any right hereunder shall not
preclude the exercise of any other right, and the remedies provided herein are
cumulative and not exclusive of any remedies provided at law or in equity.
17.5 AMENDMENTS. This Agreement cannot be changed orally and, except as
otherwise provided herein with respect to the Exhibits attached hereto, no
amendment to this Agreement shall be effective unless evidenced by an instrument
in writing executed by the parties hereto.
17.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, and by the parties hereto on separate counterparts, each of which
shall be deemed an original but all of which together shall constitute but one
and the same instrument.
17.7 SEVERABILITY. If any provision of this Agreement shall be invalid,
illegal or unenforceable in any respect under any applicable law, the validity,
legality and enforceability of the remaining provisions shall not be affected or
impaired thereby.
17.8 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns; provided, however, that this Agreement shall not be assignable by
either party hereto without the written consent of the other party. Any
purported assignment in violation of this Section 17.8 shall be void.
17.9 JURISDICTION. Any suit, action or proceeding with respect to this
Agreement may be brought in the Supreme Court of the State
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of New York, County of New York, or in the United States District Court for the
Southern District of New York, and the parties hereto hereby submit to the
non-exclusive jurisdiction of such courts for the purpose of any such suit,
action or proceeding, and hereby waive for such purpose any other preferential
jurisdiction by reason of their present or future domicile or otherwise.
17.10 HEADINGS. The headings of sections in this Agreement are for
convenience of reference only and shall not affect the meaning or construction
of any provision of this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its representative
thereunto duly authorized, all as of the day and year first above written.
THE COVENTRY GROUP for each of the
KENSINGTON INVESTMENT GROUP
series identified on Exhibit A
hereto
By:
------------------------------
Name:
Title:
CUSTODIAL TRUST COMPANY
By:
------------------------------
Name:
Title:
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<PAGE> 38
EXHIBIT A
PORTFOLIOS
----------
- KENSINGTON STRATEGIC REALTY FUND
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<PAGE> 39
EXHIBIT B
AUTHORIZED PERSONS
------------------
Set forth below are the names and specimen signatures of the persons
authorized by the Trust to administer the Custody Accounts of the Portfolios.
Name Signature
- --------------------------------- ---------------------------------
- --------------------------------- ---------------------------------
- --------------------------------- ---------------------------------
- --------------------------------- ---------------------------------
- --------------------------------- ---------------------------------
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<PAGE> 40
EXHIBIT C
INVESTMENT ADVISERS
-------------------
ALL PORTFOLIOS
- --------------
KENSINGTON INVESTMENT GROUP,INC.
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<PAGE> 41
EXHIBIT D
APPROVED FOREIGN SUB-CUSTODIANS AND SECURITIES DEPOSITORIES
-----------------------------------------------------------
KENSINGTON STRATEGIC REALTY FUND
Foreign Sub-custodian Country(ies) Securities Depositories
- --------------------- ------------ -----------------------
None None None
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<PAGE> 42
EXHIBIT E
CUSTODY FEES AND TRANSACTION CHARGES
------------------------------------
DOMESTIC FEES. Each Portfolio shall pay Custodian the following fees
for assets maintained by such Portfolio in the United States ("Domestic Assets")
and charges for transactions by such Portfolio in the United States, all such
fees and charges to be payable monthly (for purposes only of calculating and
levying such fees and charges, all assets and transactions in any tri-party
custody account that Custodian may maintain for such Portfolio shall be deemed
to be, or to have occurred, in the Custody Account):
(1) an annual fee of the greater of 0.015% (1.5 basis points) per annum
of the value of the Domestic Assets in the Custody Account of such Portfolio or
$5,000, any such percentage fee to be based upon the total market value of such
Domestic Assets as determined on the last Business Day of the month for which
such fee is charged;
(2) a transaction charge of $12 for each receive or deliver of
book-entry securities into or from the Custody Account of such Portfolio (but
not for any such receive or deliver of book-entry securities loaned by such
Portfolio or constituting collateral for a loan of securities, or any such
receive or deliver in a repurchase transaction representing (a) a cash sweep
investment for such Portfolio's account or (b) the investment by such Portfolio
of cash collateral for a loan of securities);
(3) a transaction charge of $25 for each receive or deliver into or
from such Portfolio's Custody Account of securities in physical form;
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(4) a transaction charge for each repurchase transaction in the Custody
Account of such Portfolio which represents a cash sweep investment for such
Portfolio's account, computed on the basis of a 360-day year and for the actual
number of days such repurchase transaction is outstanding at a rate of 0.10%
(ten basis points) per annum on the amount of the purchase price paid by such
Portfolio in such repurchase transaction;
(5) an administrative fee for each purchase in the Custody Account of
such Portfolio of shares or other interests in a money market or other fund,
which purchase represents a cash sweep investment for such Portfolio's account,
computed for each day that there is a positive balance in such fund to equal
1/365th of 0.10% (ten basis points) on the amount of such positive balance for
such day;
(6) a charge of $8 for each "free" transfer of funds from the Custody
Account of such Portfolio;
(7) a charge of $5 for each check written by Custodian to make a
payment from such Portfolio's Custody Account; and
(8) a service charge for each holding of securities or other assets of
such Portfolio that are sold by way of private placement or in such other manner
as to require services by Custodian which in its reasonable judgment are
materially in excess of those ordinarily required for the holding of publicly
traded securities in the United States.
INTERNATIONAL FEES. Each Portfolio shall pay Custodian fees for assets
maintained by such Portfolio outside the United States ("Foreign Assets") and
charges for transactions by such Portfolio outside the United States (including,
without limitation, charges for funds transfers and tax reclaims) in accordance
with such schedule of fees and charges for each country in which Foreign Assets
of such Portfolio are held as Custodian shall from time to
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time provide to the Trust. Any asset-based fee shall be based upon the total
market value of the applicable Foreign Assets as determined on the last Business
Day of the month for which such fee is charged.
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<PAGE> 1
[DECHERT PRICE & RHOADS LETTERHEAD]
September 8, 1999
The Coventry Group
3435 Stelzer Road
Columbus, OH 43219
Re: The Coventry Group - Kensington Strategic Realty Fund
Dear Sirs:
We have acted as counsel for The Coventry Group ("Registrant")
and its series, Kensington Strategic Realty Fund ("Fund"), and are familiar with
Registrant's registration statement with respect to the Fund under the
Investment Company Act of 1940, as amended, and with the registration statement
relating to its shares under the Securities Act of 1933, as amended
(collectively, "Registration Statement"). Registrant is organized as a business
trust under the laws of Massachusetts.
We have examined Registrant's Declaration of Trust and other
materials relating to the authorization and issuance of shares of beneficial
interest of Registrant, Post-Effective Amendment No. 61 to the Registration
Statement and such other documents and matters as we have deemed necessary to
enable us to give this opinion.
Based upon the foregoing, we are of the opinion that the
Fund's shares proposed to be sold pursuant to Post-Effective Amendment No. 61 to
the Registration Statement, when it is made effective by the Securities and
Exchange Commission, will have been validly authorized and, when sold in
accordance with the terms of such Amendment and the requirements of applicable
federal and state law and delivered by Registrant against receipt of the net
asset value of the shares of the Fund and its classes of shares, as described in
Post-Effective Amendment No. 61 to the Registration Statement, will have been
legally and validly issued and will be fully paid and non-assessable by
Registrant.
<PAGE> 2
The Coventry Group
September 8, 1999
Page 2
We hereby consent to the filing of this opinion as an exhibit
to Post-Effective Amendment No. 61 to the Registration Statement, to be filed
with the Securities and Exchange Commission in connection with the continuous
offering of the Fund's shares of beneficial interest, as indicated above, and to
references to our firm, as counsel to Registrant, in the Fund's prospectus and
Statement of Additional Information to be dated as of the effective date of
Post-Effective Amendment No. 61 to the Registration Statement and in any revised
or amended versions thereof, until such time as we revoke such consent.
Very truly yours,
/s/ Dechert Price & Rhoads
