PAYDEN & RYGEL INVESTMENT GROUP
PAYDEN & RYGEL LIMITED MATURITY FUND
PAYDEN & RYGEL SHORT BOND FUND
PAYDEN & RYGEL U.S. TREASURY FUND
PAYDEN & RYGEL INTERMEDIATE BOND FUND
PAYDEN & RYGEL OPPORTUNITY FUND
PAYDEN & RYGEL SHORT DURATION TAX EXEMPT FUND
PAYDEN & RYGEL TAX EXEMPT BOND FUND
PAYDEN & RYGEL GLOBAL FIXED INCOME FUND
PAYDEN & RYGEL INTERNATIONAL BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
February 7, 1996, as supplemented March 29, 1996 and June 12, 1996
The Payden & Rygel Limited Maturity Fund ("Limited Maturity Fund"), Payden
& Rygel Short Bond Fund ("Short Bond Fund"), Payden & Rygel U.S. Treasury
Fund ("Treasury Fund"), Payden & Rygel Intermediate Bond Fund
("Intermediate Fund"), Payden & Rygel Opportunity Fund ("Opportunity
Fund"), Payden & Rygel Short Duration Tax Exempt Fund ("Short Duration
Fund"), Payden & Rygel Tax Exempt Bond Fund ("Tax Exempt Bond Fund"),
Payden & Rygel Global Fixed Income Fund ("Global Fund") and Payden & Rygel
International Bond Fund ("International Fund") are series ("Funds") of
Payden & Rygel Investment Group (the "Group"), a no-load, open-end
management investment company.
This Statement of Additional Information is not a prospectus, and should be
used in conjunction with the Prospectus for the Funds dated February 7,
1996, as supplemented March 29, 1996 and June 12, 1996, which is
incorporated herein by reference. A copy of the Prospectus may be obtained
free of charge from the Group at 333 South Grand Avenue, Los Angeles,
California 90071 (telephone 213/625-1900 or 800/572-9336).
TABLE OF CONTENTS
INVESTMENT OBJECTIVE AND POLICIES........................ 2
FUNDAMENTAL AND OPERATING POLICIES ...................... 31
PORTFOLIO TRANSACTIONS .................................. 34
VALUATION OF PORTFOLIO SECURITIES ....................... 36
FUND PERFORMANCE ........................................ 36
TAXATION ................................................ 39
MANAGEMENT OF THE GROUP ................................. 44
PURCHASES AND REDEMPTIONS ............................... 51
OTHER INFORMATION ....................................... 52
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS........... 57
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and general investment policies of the Funds are
described in the Prospectus. Additional information concerning the
characteristics of certain of the Funds' investments is set forth below.
FIXED INCOME SECURITIES
Securities in which the Fund may invest include but are not limited to
those described below.
U.S. Government Obligations
U.S. Government obligations are debt securities issued by the U.S.
Treasury. They are direct obligations of the U.S. Government and differ
mainly in the lengths of their maturities.
U.S. Government Agency Securities
U.S. Government Agency securities are issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies. These include
securities issued by the Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Bank, Federal Land Banks,
Farmers Home Administration, Banks for Cooperatives, Federal Intermediate
Credit Banks, Federal Financing Bank, Farm Credit Bank, and the Tennessee
Valley Authority. Some of these securities are supported by the full faith
and credit of the U.S. Treasury, and others only by the credit of the
instrumentality, which may include the right of the issuer to borrow from
the Treasury.
Foreign Government Obligations
Foreign government obligations are debt securities issued or guaranteed by
a supranational organization or a foreign sovereign government or one of
its agencies, authorities, instrumentalities or political subdivisions,
including a foreign state, province or municipality.
Bank Obligations
Bank obligations include certificates of deposit, bankers' acceptances, and
other debt obligations. Certificates of deposit are short-term obligations
of commercial banks. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with an international
commercial transaction.
The Funds will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion, or the
equivalent in other currencies, (ii) in the case of U.S. banks, the bank is
a member of the Federal Deposit Insurance Corporation, and (iii) in the
case of foreign banks, the security is, in the opinion of Payden & Rygel,
of an investment quality comparable with other debt securities which may be
purchased by the Fund. These limitations do not prohibit investments in
securities issued by foreign branches of U.S. banks, provided such U.S.
banks meet the foregoing requirements.
Corporate Debt Securities
Investments in U.S. dollar denominated securities of domestic or foreign
issuers are limited to corporate debt securities (corporate bonds,
debentures, notes and other similar corporate debt instruments) which meet
the minimum rating criteria set forth in the Prospectus. The rate of
return or return of principal on some debt obligations may be linked or
indexed to the level of exchange rates between the U.S. dollar and a
foreign currency or currencies.
The Adviser will undertake several measures in seeking to preserve
investors' principal:
- First, the debt securities in which the Funds invest will be
considered "investment-grade"(e.g., rated AAA, AA, A or BBB by
Standard & Poor's Corporation) by at least one of the established
rating agencies, or if not rated, will be determined to be of
comparable quality by the Adviser. However debt investments for
the Global and International Funds must be "high quality" as
discussed in the Prospectus. If the rating of a debt security in
which a Fund has made an investment falls below the investment
grade level, the Fund will discontinue making investments in that
issuer and liquidate any current holdings as soon as the Adviser
determines it is in the best interest of the Fund to do so. In
no event will a Fund hold more than 5% of its net assets in
obligations rated below investment grade. No such obligation
will be rated below BB.
- Second, the Adviser will actively manage the maturity of the
Funds' portfolios in response to expected interest rate
movements. When anticipating a decline in interest rates, the
Adviser will attempt to lengthen the portfolios' maturity to
capitalize on the expected appreciation of such securities. When
interest rates are expected to rise, the Funds will seek to
shorten their portfolios' maturities to protect against the
expected capital depreciation.
- Finally, the Adviser may use interest rate and bond index
futures and options on futures contracts, options on securities,
and interest rate swaps to effect a change in the Funds' exposure
to interest rate changes. These investment techniques involve
certain risks described below.
There is, of course, no guarantee these investment strategies will
accomplish the Funds' objectives. A description of the rating standards
used by Standard & Poor's Corporation, Moody's Investor Services, Inc., and
Fitch Investor Services is set forth in Appendix A to this Statement of
Additional Information. Ratings represent only the opinions of such
organizations of the quality of the securities which they undertake to
rate, are general and are not absolute standards of quality.
Mortgage-Related Securities
Mortgage-related securities are interests in pools of mortgage loans made
to U.S. residential home buyers, including mortgage loans made by savings
and loan institutions, mortgage bankers, commercial banks and others.
Pools of mortgage loans are assembled as securities for sale to investors
by various governmental, government-related and private organizations. The
Funds may also invest in debt securities which are secured with collateral
consisting of U.S. mortgage-related securities, and in other types of U.S.
mortgage-related securities. Under normal circumstances, all debt
securities held by each Fund will be rated "investment grade", at the time
of purchase, by at least one of the established rating agencies (e.g. AAA,
AA, A or BAA by Standard & Poor's Corporation) or, if unrated, will be
determined to be of comparable quality by the Adviser.
U.S. Mortgage Pass-Through Securities. Interests in pools of mortgage-
related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying residential property, refinancing
or foreclosure, net of fees or costs which may be incurred. Some mortgage-
related securities (such as securities issued by the Government National
Mortgage Association) are described as "modified pass-through." These
securities entitle the holder to receive all interest and principal
payments owed on the mortgage pool, net of certain fees, at the scheduled
payment dates regardless of whether or not the mortgagor actually makes the
payment.
The principal governmental guarantor of U.S. mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly
owned United State Government corporation within the Department of Housing
and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the United States Government, the timely payment of
principal and interest on securities issued by institutions approved by
GNMA (such as savings and loan institutions, commercial banks and mortgage
bankers) and backed by pools of mortgages insured by the Federal Housing
Agency or guaranteed by the Veterans Administration.
Government-related guarantors include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). FNMA is a government-sponsored corporation owned entirely by
private stockholders and subject to general regulation by the Secretary of
Housing and Urban Development. FNMA purchases conventional residential
mortgages not insured or guaranteed by any government agency from a list of
approved seller/services which include state and federally chartered
savings and loan associations, mutual savings banks, commercial banks and
credit unions and mortgage bankers. FHLMC is a government-sponsored
corporation created to increase availability of mortgage credit for
residential housing and owned entirely by private stockholders. FHLMC
issues participation certificates which represent interests in conventional
mortgages from FHLMC's national portfolio. Pass-through securities issued
by FNMA and participation certificates issued by FHLMC are guaranteed as to
timely payment of principal and interest by FNMA and FHLMC, respectively,
but are not backed by the full faith and credit of the U.S. Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators or services of the underlying
mortgage loans as well as the guarantors of the mortgage-related
securities. Pools created by such non-governmental issuers generally offer
a higher rate of interest than government and government-related pools
because they lack direct or indirect government or agency guarantees of
payment. However, timely payment of interest and principal of these pools
may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and letters of credit,
issued by governmental entities, private insurers and mortgage poolers.
Such insurance and guarantees and the creditworthiness of the issuers
thereof will be considered in determining whether a mortgage-related
security meets the Fund's investment quality standards. However, there can
be no assurance that private insurers or guarantors will meet their
obligations. In addition, the Funds may buy mortgage-related securities
without insurance or guarantees if through an examination of the loan
experience and practices of the originator/services and poolers the Adviser
determines that the securities meet the Funds' quality standards.
Although the underlying mortgage loans in a pool may have maturities of up
to 30 years, the actual average life of the pool certificates typically
will be substantially less because the mortgages will be subject to normal
principal amortization and may be prepaid prior to maturity. Prepayment
rates vary widely and may be affected by changes in market interest rates.
In periods of falling interest rates, the rate of prepayment tends to
increase, thereby shortening the actual average life of the pool
certificates. Conversely, when interest rates are rising, the rate of
prepayments tends to decrease, thereby lengthening the actual average life
of the certificates. Accordingly, it is not possible to predict accurately
the average life of a particular pool.
Although the market for mortgage pass-through securities is becoming
increasingly liquid, securities issued by certain private organizations may
not be readily marketable. A Fund will not purchase mortgage-related
securities which in the Adviser's opinion are illiquid if, as a result,
more than 15% of the value of the Fund's total assets will be illiquid.
Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Like a bond,
interest and prepaid principal is paid, in most cases, semi-annually. CMOs
may be collateralized by whole mortgage loans, but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed
by GNMA, FHLMC or FNMA.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of
principal received from the pool of underlying mortgages, including
prepayments, is first returned to investors holding the shortest maturity
class. Investors holding the longer maturity classes receive principal
only after the earlier classes have been retired.
Other Mortgage-Related Securities. Other mortgage-related securities
include securities of U.S. or foreign issuers that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage
loans on real property. These other mortgage-related securities may be
equity or debt securities issued by governmental agencies or
instrumentalities or by private originators of, or investors in, mortgage
loans, including savings and loan associations, homebuilders, mortgage
banks, commercial banks, investment banks, partnerships, trusts and special
purpose entities.
Asset Backed Receivables
The Funds may purchase asset-backed securities including, but not limited
to, Certificates for Automobile Receivablessm ("CARSsm") and credit card
receivable securities. CARSsm represent undivided fractional interests in
a trust with assets consisting of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing
these contracts. In addition to the general risks pertaining to all asset-
backed securities, CARSsm are subject to the risks of delayed payments or
losses if the full amounts due on underlying sales contracts are not
realized by the trust due to unanticipated legal or administrative costs of
enforcing the contracts, or due to depreciation, damage or loss of the
vehicles securing the contracts. Credit card receivable securities are
backed by receivables from revolving credit card accounts. Since balances
on revolving credit card accounts are generally paid down more rapidly than
CARSsm, issuers often lengthen the maturity of these securities by
providing for a fixed period during which interest payments are passed
through and principal payments are used to fund the transfer of additional
receivables to the underlying pool. The failure of the underlying
receivables to generate principal payments may therefore shorten the
maturity of these securities. In addition, unlike most other asset-backed
securities, credit card receivable securities are backed by obligations
that are not secured by interests in personal or real property.
Floating Rate and Variable Rate Demand Notes
The Funds may purchase floating rate and variable rate demand notes and
bonds. These securities may have a stated maturity in excess of one year,
but permit a holder to demand payment of principal plus accrued interest
upon a specified number of days notice. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided
by banks. The issuer has a corresponding right, after a given period, to
prepay in its discretion the outstanding principal of the obligation plus
accrued interest upon a specific number of days notice to the holders. The
interest rate of a floating rate instrument may be based on a known lending
rate, such as a bank's prime rate, and is reset whenever such rate is
adjusted. The interest rate on a variable rate demand note is reset at
specified intervals at a market rate.
Each Fund will limit its purchase of securities that bear floating rates
and variable rates of interest to those meeting the rating quality
standards set forth in the Prospectus. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided
by banks. The quality of the underlying creditor or of the bank, as the
case may be, must, as determined by the Adviser under the supervision of
the Board of Trustees, also be equivalent to the quality standards set
forth above. In addition, the Adviser monitors the earning power, cash
flow and other liquidity ratios of the issuers of such obligations, as well
as the creditworthiness of the institution responsible for paying the
principal amount of the obligations under the demand feature.
Obligations with Puts Attached
Each Fund may purchase long-term fixed rate debt obligations that have been
coupled with an option granted by a third party financial institution
allowing the Fund at specified intervals to tender (or "put") such debt
obligations to the institution and receive the face value. These third
party puts are available in many different forms, and may be represented by
custodial receipts or trust certificates and may be combined with other
features such as interest rate swaps. The financial institution granting
the option does not provide credit enhancement. If there is a default on,
or significant downgrading of, the bond or a loss of its tax-exempt status,
the put option will terminate automatically. The risk to the Fund will
then be that of holding a long-term bond.
These investments may require that a Fund pay a tender fee or other fee for
the features provided. In addition, the Fund may acquire "stand-by
commitments" from banks or broker dealers with respect to the securities
held in its portfolios. Under a stand-by commitment, a bank or
broker/dealer agrees to purchase at the Fund's option a specific security
at a specific price on a specific date. The Fund may pay for a stand-by
commitment either separately, in cash, or in the form of a higher price
paid for the security. The Fund will acquire stand-by commitments solely
to facilitate portfolio liquidity.
Repurchase Agreements
For the purpose of maintaining liquidity, each Fund may enter into
repurchase agreements (agreements to purchase U.S. Treasury notes and
bills, subject to the seller's agreement to repurchase them at a specified
time and price) with well-established registered securities dealers or
banks. Repurchase agreements are the economic equivalent of loans by a
Fund. In the event of a bankruptcy or default of any registered dealer or
bank, a Fund could experience costs and delays in liquidating the
underlying securities which are held as collateral, and a Fund might incur
a loss if the value of the collateral declines during this period.
Delayed Delivery Transactions
When delayed delivery purchases are outstanding, a Fund will set aside and
maintain until the settlement date in a segregated account cash, U.S.
Government securities or high grade debt obligations in an amount
sufficient to meet the purchase price. When purchasing a security on a
delayed delivery basis, a Fund assumes the rights and risks of ownership of
the security, including the risk of price and yield fluctuations, and takes
such fluctuations into account when determining its net asset value, but
does not accrue income on the security until delivery. When a Fund sells a
security on a delayed delivery basis, it does not participate in future
gains or losses with respect to the security. If the other party to a
delayed delivery transaction fails to deliver or pay for the securities, a
Fund could miss a favorable price or yield opportunity or could suffer a
loss. A Fund will not invest more than 25% of its total assets in when-
issued and delayed delivery transactions.
Reverse Repurchase Agreements
Each Fund covers its obligations under a reverse repurchase agreement by
maintaining a segregated account comprised of cash, U.S. Government
securities or high-grade debt obligations, maturing no later than the
expiration of the agreement, in an amount (marked-to-market daily) equal to
its obligations under the agreement. Reverse repurchase agreements are the
economic equivalent of borrowing by a Fund, and are entered into by a Fund
to enable it to avoid selling securities to meet redemption requests during
market conditions deemed unfavorable by the Adviser.
Illiquid Securities
No Fund may invest more than 15% of the value of its net assets in
securities that at the time of purchase have legal or contractual
restrictions on resale or are otherwise illiquid. The Adviser will monitor
the amount of illiquid securities in each Fund's portfolio, to ensure
compliance with the Fund's investment restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which
have not been registered under the Securities Act are referred to as
private placement or restricted securities and are purchased directly from
the issuer or in the secondary market. Mutual funds do not typically hold
a significant amount of these restricted or other illiquid securities
because of the potential for delays on resale and uncertainty in valuation.
Limitations on resale may have an adverse effect on the marketability of
portfolio securities and the Fund might be unable to dispose of restricted
or other illiquid securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemption requests within seven
days. The Fund might also have to register such restricted securities in
order to dispose of them, resulting in additional expense and delay.
Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act,
including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the
unregistered security can be readily resold or on an issuer's ability to
honor a demand for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain institutions may
not be indicative of the liquidity of such investments. If such securities
are subject to purchase by institutional buyers in accordance with Rule
144A promulgated by the Commission under the Securities Act, the Board of
Trustees may determine that such securities are not illiquid securities
notwithstanding their legal or contractual restrictions on resale. In all
other cases, however, securities subject to restrictions on resale will be
deemed illiquid.
FOREIGN INVESTMENTS
The countries in which each of the Global and International Funds will seek
investments include those listed below. A Fund may not invest in all the
countries listed, and it may invest in other countries as well when such
investments are consistent with the Fund's investment objective and
policies.
<TABLE>
Pacific Basin Western Europe North America
<S> <C> <C>
Australia Austria Canada
Japan Belgium United States
New Zealand Denmark
Finland
France
Germany
Ireland
Italy
Netherlands
Norway
Spain
Sweden
Switzerland
United Kingdom
</TABLE>
Foreign Mortgage-Related Securities. Foreign mortgage-related securities
are interests in pools of mortgage loans made to residential home buyers
domiciled in a foreign country. These include mortgage loans made by trust
and mortgage loan companies, credit unions, chartered banks, and others.
Pools of mortgage loans are assembled as securities for sale to investors
by various governmental, government-related, and private organizations
(e.g., Canada Mortgage and Housing Corporation and First Australian
National Mortgage Acceptance Corporation Limited). The mechanics of these
mortgage-related securities are generally the same as those issued in the
United States. However, foreign mortgage markets may differ materially
from the U.S. mortgage market with respect to matters such as the sizes of
loan pools, pre-payment experience, and maturities of loans.
MUNICIPAL SECURITIES
Each of the Short Duration and Tax Exempt Bond Funds invest primarily in a
non-diversified portfolio of debt obligations issued by state and local
governments, territories and possessions of the U.S., regional government
authorities, and their agencies and instrumentalities which provide
interest income that, in the opinion of bond counsel to the issuer at the
time of original issuance, is exempt from federal income taxes ("municipal
securities"). Municipal securities include both notes (which have
maturities of less than one year) and bonds (which have maturities of one
year or more) that bear fixed or variable rates of interest. Under normal
market conditions, as a fundamental policy which cannot be changed without
shareholder approval, at least 80% of the Fund's assets will be invested in
municipal debt securities.
In general, "municipal securities" debt obligations are issued to obtain
funds for a variety of public purposes, such as the construction, repair,
or improvement of public facilities including airports, bridges, housing,
hospitals, mass transportation, schools, streets, water and sewer works.
Municipal securities may be issued to refinance outstanding obligations as
well as to raise funds for general operating expenses and lending to other
public institutions and facilities.
The two principal classifications of municipal securities are "general
obligation" securities and "revenue" securities. General obligation
securities are secured by the issuer's pledge of its full faith, credit,
and taxing power for the payment of principal and interest.
Characteristics and methods of enforcement of general obligation bonds vary
according to the law applicable to a particular issuer, and the taxes that
can be levied for the payment of debt service may be limited or unlimited
as to rates or amounts of special assessments. Revenue securities are
payable only from the revenues derived from a particular facility, a class
of facilities or, in some cases, from the proceeds of a special excise tax.
Revenue bonds are issued to finance a wide variety of capital projects
including: electric, gas, water, and sewer systems; highways, bridges, and
tunnels; port and airport facilities; colleges and universities; and
hospitals. Although the principal security behind these bonds may vary,
many provide additional security in the form of a debt service reserve fund
the assets of which may be used to make principal and interest payments on
the issuer's obligations. Housing finance authorities have a wide range of
security, including partially or fully insured mortgages, rent subsidized
and collateralized mortgages, and the net revenues from housing or other
public projects. Some authorities are provided further security in the
form of a state's assurance (although without obligation) to make up
deficiencies in the debt service reserve fund.
Both Funds may purchase insured municipal debt in which scheduled payments
of interest and principal are guaranteed by a private, non-governmental or
governmental insurance company. The insurance does not guarantee the
market value of the municipal debt or the value of the shares of a Fund.
The Adviser will undertake several measures in seeking to preserve
investors' principal:
- First, the debt securities in which a Fund invests will be
considered "investment-grade"(e.g., rated AAA, AA, A or BBB by
Standard & Poor's Corporation) at the time of purchase by at
least one of the following rating agencies: Fitch Investor
Services, Moody's Investor Services, Inc. or Standard & Poor's
Corporation, or if not rated, will be determined to be of
comparable quality by the Adviser. If the rating of a municipal
debt security in which the Fund has made an investment falls
below the investment grade level, the Fund will discontinue
making investments in that issuer and liquidate any current
holdings as soon as the Adviser determines it is in the best
interest of the Fund to do so. In no event will a Fund hold more
than 5% of its net assets in obligations rated below investment
grade. No such obligation will be rated below BB.
- Second, the Adviser will actively manage the maturity of a
Fund's portfolio in response to expected interest rate movements.
When anticipating a decline in interest rates, the Adviser will
attempt to lengthen the portfolio's maturity to capitalize on the
expected appreciation of such securities. When interest rates
are expected to rise, both Funds will seek to shorten their
maturities to protect against the expected capital depreciation.
- Finally, the Adviser may use interest rate and municipal
bond index futures and options on futures contracts, options on
securities, and interest rate swaps to effect a change in a
Fund's exposure to interest rate changes. These investment
techniques involve certain risks described below.
There is, of course, no guarantee these investment strategies will
accomplish a Fund's objective. See Appendix A for further information
regarding the ratings referred to above.
Securities of issuers of municipal obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the Bankruptcy Reform Act of 1978. In
addition, the obligations of such issuers may become subject to laws
enacted in the future by Congress, state legislatures of referenda
extending the time for payment of principal or interest, or imposing other
constraints upon enforcement of such obligations or upon the ability of
municipalities to levy taxes. Furthermore, as a result of legislation or
other conditions, the power or ability of any issuer to pay, when due, the
principal of and interest on its municipal obligations may be materially
affected.
Certain of the municipal securities in which the Funds may invest, and
certain of the risks of such investments, are described below.
Moral Obligation Securities
Municipal securities may include "moral obligation" securities which are
usually issued by special purpose public authorities. If the issuer of
moral obligation bonds cannot fulfill its financial responsibilities from
current revenues, it may draw upon a reserve fund, the restoration of which
is a moral commitment but not a legal obligation of the state or
municipality which created the issuer.
Industrial Development and Pollution Control Bonds
Both Funds may invest in tax-exempt industrial development bonds and
pollution control bonds which, in most cases, are revenue bonds and
generally are not payable from the unrestricted revenues of an issuer.
They are issued by or on behalf of public authorities to raise money to
finance privately operated facilities for business, manufacturing, housing,
sport complexes, and pollution control. Consequently, the credit quality
of these securities is dependent upon the ability of the user of the
facilities financed by the bonds and any guarantor to meet its financial
obligations.
Zero Coupon Securities
Both Funds may invest in zero coupon securities which are debt securities
issued or sold at a discount from their face value. These securities do
not entitle the holder to interest payments prior to maturity or a
specified redemption date, when they are redeemed at face value. Zero
coupon securities may also take the form of debt securities that have been
stripped of their unmatured interest coupons, the coupons themselves, and
receipts and certificates representing interests in such stripped
obligations and coupons. The market prices of zero coupon securities tend
to be more sensitive to interest rate changes, and are more volatile, than
interest bearing securities of like maturity. The discount from face value
is amortized over the life of the security and such amortization will
constitute the income earned on the security for accounting and tax
purposes. Even though income is accrued on a current basis, a Fund does
not receive the income currently in cash. Therefore, a Fund may have to
sell other portfolio investments to obtain cash needed to make income
distributions.
Mortgage Backed Securities
Both Funds may invest in municipal debt obligations issued to provide
financing for residential housing mortgages to targeted groups. Payments
made on the underlying mortgages and passed through to a Fund will
represent both regularly scheduled principal and interest payments. A Fund
may also receive additional principal payments representing prepayments of
the underlying mortgages. Investing in such municipal debt obligations
involves special risks and considerations, including the inability to
predict accurately the maturity of a Fund's investments as a result of
prepayments of the underlying mortgages (which may require the Fund to
reinvest principal at lower yields than would otherwise have been
realized), the illiquidity of certain of such securities, and the possible
default by insurers or guarantors supporting the timely payment of interest
and principal.
Municipal Lease Obligations
Both Funds may invest in lease obligations or installment purchase contract
obligations of municipal authorities or entities ("municipal lease
obligations"). Although lease obligations do not constitute general
obligations of the municipality for which its taxing power is pledged, a
lease obligation is ordinarily backed by the municipality's covenant to
budget for, appropriate and make the payments due under the lease
obligation. A Fund may also purchase "certificates of participation",
which are securities issued by a particular municipality or municipal
authority to evidence a proportionate interest in base rental or lease
payments relating to a specific project to be made by the municipality,
agency or authority.
However, certain lease obligations contain "non-appropriation" clauses
which provide that the municipality has no obligation to make lease or
installment purchase payments in any year unless money is appropriated for
such purpose for such year. Although "non-appropriation" lease obligations
are secured by the leased property, disposition of the property in the
event of default and foreclosure might prove difficult. In addition, these
securities represent a relatively new type of financing, and certain lease
obligations may therefore be considered to be illiquid securities.
Both Funds will attempt to minimize the special risks inherent in municipal
lease obligations and certificates of participation by purchasing only
lease obligations which meet the following criteria: (1) rated A or better
by at least one national recognized securities rating organization;
(2) secured by payments from a governmental lessee which has actively traded
debt obligations ; (3) determined by the Adviser to be critical to the
lessee's ability to deliver essential services; and (4) contain legal
features which the Adviser deems appropriate, such as covenants to make
lease payments without the right of offset or counterclaim, requirements
for insurance policies, and adequate debt service reserve funds.
Short-Term Obligations
Both Funds may invest in short-term municipal obligations. These
securities include the following:
Tax Anticipation Notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax
revenues, to be payable from these specific future taxes. They are usually
general obligations of the issuer, secured by the taxing power of the
municipality for the payment of principal and interest when due.
Revenue Anticipation Notes are issued in expectation of receipt of other
kinds of revenue, such as federal revenues available under the Federal
Revenue Sharing Program. They also are usually general obligations of the
issuer.
Bond Anticipation Notes normally are issued to provide interim financing
until long-term financing can be arranged. The long-term bonds then
provide the money for the repayment of the notes.
Construction Loan Notes are sold to provide construction financing for
specific projects. After successful completion and acceptance, many
projects receive permanent financing through the Federal National Mortgage
Association or the Government National Mortgage Association.
Short-Term Discount Notes (tax-exempt commercial paper) are short-term (365
days or less) promissory notes issued by municipalities to supplement their
cash flow.
Floating Rate and Variable Rate Demand Notes
Both Funds may purchase floating rate and variable rate demand notes and
bonds. These securities may have a stated maturity in excess of one year,
but permit a holder to demand payment of principal plus accrued interest
upon a specified number of days notice. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided
by banks. The issuer has a corresponding right, after a given period, to
prepay in its discretion the outstanding principal of the obligation plus
accrued interest upon a specific number of days notice to the holders. The
interest rate of a floating rate instrument may be based on a known lending
rate, such as a bank's prime rate, and is reset whenever such rate is
adjusted. The interest rate on a variable rate demand note is reset at
specified intervals at a market rate.
Each Fund will limit its purchase of municipal securities that bear
floating rates and variable rates of interest to those meeting the rating
quality standards set forth in the Prospectus. Frequently, such
obligations are secured by letters of credit or other credit support
arrangements provided by banks. The quality of the underlying creditor or
of the bank, as the case may be, must, as determined by the Adviser under
the supervision of the Board of Trustees, also be equivalent to the quality
standards set forth above. In addition, the Adviser monitors the earning
power, cash flow and other liquidity ratios of the issuers of such
obligations, as well as the creditworthiness of the institution responsible
for paying the principal amount of the obligations under the demand
feature.
Both Funds may also invest in municipal securities in the form of
"participation interests" in variable rate tax-exempt demand obligations
held by a financial institution, usually a commercial bank. Municipal
participation interests provide the purchaser with an undivided interest in
one or more underlying municipal securities and the right to demand payment
from the institution upon a specified number of days' notice (no more than
seven) of the unpaid principal balance plus accrued interest. In addition,
the municipal participation interests are typically enhanced by an
irrevocable letter of credit or guarantee from such institution. Since a
Fund has an undivided interest in the obligation, it participates equally
with the institution with the exception that the institution normally
retains a fee out of the interest paid for servicing, providing the letter
of credit or guarantee, and issuing the repurchase commitment.
Obligations with Puts Attached
Each Fund may purchase long-term fixed rate municipal debt obligations that
have been coupled with an option granted by a third party financial
institution allowing the Fund at specified intervals to tender (or "put")
such debt obligations to the institution and receive the face value. These
third party puts are available in many different forms, and may be
represented by custodial receipts or trust certificates and may be combined
with other features such as interest rate swaps. The financial institution
granting the option does not provide credit enhancement. If there is a
default on, or significant downgrading of, the bond or a loss of its tax-
exempt status, the put option will terminate automatically. The risk to
the Fund will then be that of holding a long-term bond.
These investments may require that a Fund pay a tender fee or other fee for
the features provided. In addition, a Fund may acquire "stand-by
commitments" from banks or broker dealers with respect to the municipal
securities held in its portfolios. Under a stand-by commitment, a bank or
broker/dealer agrees to purchase at a Fund's option a specific municipal
security at a specific price on a specific date. A Fund may pay for a
stand-by commitment either separately, in cash, or in the form of a higher
price paid for the security. A Fund will acquire stand-by commitments
solely to facilitate portfolio liquidity.
Risks of Investing in California Municipal Debt Obligations
From time to time, each Fund may invest more than 25% of its assets in
obligations issued by the State of California and other governmental
authorities, agencies and instrumentalities located in California. In such
event, investment in a Fund may be subject to greater risk and market
fluctuations than an investment in a portfolio of securities representing a
broader range of investment alternatives. Further, in such event a Fund
will be affected by any political, economic, regulatory or other
developments which constrain the taxing and spending authority of
California issuers to pay interest or repay principal. The following
summary of some of such developments is based upon information derived from
public documents related to securities offerings of California State and
municipal issuers, independent municipal credit reports and historically,
reliable sources, but has not been independently verified by the Fund's
advisor.
California encompasses a relatively large geographic region and has a
wealthy, diverse economy. Its economy is the largest among the 50 states
and one of the largest in the world. The State's population of over 32
million represents over 12% of the total United States population. Total
employment is about 14 million; the fastest growing sectors are expected to
be services, trade and electronics-related manufacturing sectors.
California ended fiscal 1995 with a General Fund operating surplus due to
higher than expected tax receipts which were the result of the improving
economy. State officials estimate that jobs in California grew 2.3% in
1995 as compared to a national jobs growth rate of 1.5%. As a result, the
State's unemployment rate (7.9%) is expected to approximate the nation's
(5.8%) by year-end 1998. Importantly, this job growth was spread among all
12 major metropolitan areas in California. Thirty percent of California
employment is business services, motion pictures, health services and
engineering and management services and these categories rose 6% this past
year. Construction employment picked up last year, but has not retraced
the cumulative losses of 1990-1993. The decline in aerospace employment
continued, albeit at a much slower pace and new orders for cargo jets,
stealth bombers and commercial satellites should help stabilize this sector
in the upcoming year. Job losses are projected for financial services and
the federal government sector.
For the first time in four years, the State's finances on the revenue side
improved. The Legislative Analyst's Office projects that revenues will
grow by 6 percent over the next two years and estimates that the General
Fund balance will reach $300 million by the end of fiscal year 1995-96
rather than the $28 million Finance Department estimate. However, unless
budget imbalances are corrected, the Fund balance will fall to only $10
million in fiscal year 1996-97 and to a negative $280 million in fiscal
year 1997-98 because of major expenditure increases that are required by
existing law. As a result of these major expenditure requirements, total
spending would increase by 7.5 percent annually over the next two years.
California's long-term structural budget problems include expanding
education and prison spending, demands for infrastructure spending and
reductions in federal support for health-care. K-14 spending requirements
are expected to increase 9.4% annually over the next two years, which is
the largest single expenditure in the budget. More prison inmates will
translate to a 10% annual growth in support costs for the Department of
Corrections. Also, existing law requires that welfare grants for the Aid
to Families with Dependent Children and the Supplemental Security
Income/State Supplementary Program be increased in 1996-97.
Further, the State shifted some expenditure responsibilities to local
governments in order to balance its budget, which could impact these other
entities negatively. Major revenue sources for local government are not
expected to attain pre-recession growth levels while the programs they
support such as health, education and public safety are growing at a fast
pace. Any reductions in State aid could exacerbate financial pressures
already experienced by many local governments, particularly counties.
The State must also address the issues of its tax structure and business
climate. Risks to the budget include an economic slowdown, adverse court
rulings as well as changes that the Federal government may make to welfare
and Medi-Cal.
The budget for fiscal year 1995-96 calls for the smallest amount of short-
term debt issuance in years. The Department of Finance estimates cash flow
borrowings will be $2 billion notes issued in April 1996 and maturing by
June 30, 1996. The $4 billion outstanding revenue anticipation warrants
will be repaid from internal borrowable cash resources and no further
borrowing needs are projected for fiscal year 1995-96.
The potential for California's credit ratings to be upgraded from the
current "A1/A" level is minimal. The State's ratings were last changed in
July 1994 when Moody's lowered its rating to "A1" from "Aa" and Standard &
Poor's lowered its rating to "A" from "A+".
On December 6, 1994, Orange County, California filed for bankruptcy
protection under chapter 9 of the U.S. Bankruptcy code, following reports
that the Orange County Invest Pool had suffered significant investment
losses, which caused a liquidity crisis for the Pooled Funds, Orange County
and certain Pool participants. It remains unclear what long-term effect
such action by Orange County and the Pooled Funds may have on the market
for the obligations of Orange County and its related entities.
In September 1995 the state legislature approved legislation permitting
Orange County to use for bankruptcy recovery $820 million over 20 years in
sales taxes previously earmarked for highways, transit and development.
Such legislation also permits the Governor to appoint a trustee to take
over Orange County's financial affairs if the county does not have a full
recovery plan filed with the Bankruptcy Court by May 1996.
Los Angeles County, the nation's largest county, is also experiencing
financial difficulty. In August 1995 the credit rating of the county's
long term bonds was downgraded for the third time since 1992 as a result
of, among other things, severe operating deficits for the county's health
care system. In September 1995, federal and state aid to Los Angeles County
totalling $514 million was pledged, providing a short-term solution to the
County's budget problems. Despite such efforts, the County is facing a
potential budget gap of $1.0 billion in the 1996-97 fiscal year.
Although an improving economy and healthier tax revenues are anticipated,
the political environment and voter initiatives may constrain the State's
financial flexibility. For example, according to the Legislative Analyst's
Office, the passage of Proposition 184 in the November 1994 election
imposed mandatory, lengthy prison sentences on individuals convicted of
three felonies. This is expected to increase prison operating costs by $3
billion annually and increase prison construction costs by $20 billion.
Proposition 98 sets the minimum amount that the state must provide for
California's public K-12 education system and the California Community
Colleges.
Certain of the securities in which the Funds invest may be obligations of
issuers that rely as a source of revenue, in whole or in part, directly or
indirectly, on real property taxes, which are limited by an amendment to
the State Constitution known as "Proposition 13." Briefly, Article XIIIA
of the California Constitution limits to 1% of full cash value the rate of
ad valorem property taxes on real property and generally restricts the
assessed valuation of property to increases of up to two percent per year,
except upon new construction or change of ownership (subject to a number of
exemptions). Taxing entities may, however, raise ad valorem taxes above
the 1% limit to pay debt service on voter-approved bonded indebtedness.
The application of Proposition 62 further limits the ability of California
cities to enact taxes. Proposition 62 seeks to enforce a two-thirds voter
approval for special taxes to include all forms of local government and to
create a new simple-majority requirement for voter approval of general
taxes. While existing transportation sales taxes appear to be protected by
statute of limitations, the future application of Proposition 62 for all
cities and counties is less clear.
Certain securities in which the Funds invest may be obligations of issuers
which rely in whole or in part on state revenues for payment of such
obligations. Such state revenues are affected by economic activity within
the State as well as by an appropriation limit in the State Constitution on
the spending authority of State and local government entities.
The application and interpretation of a number of the foregoing provisions
of the State Constitution and laws are currently and will probably continue
to be the subject of numerous lawsuits in the California courts. It is not
possible to predict the outcome of litigation or the ultimate scope and
impact of such provisions, their implementing legislation and regulations.
However, the outcome of such litigation, legislation and regulations could
substantially impact local property tax collection and the ability of state
agencies, local governments and districts to make future payments on
outstanding debt obligations.
OPTIONS AND FUTURES CONTRACTS
The Funds may purchase and sell ("write") both put options and call options
on securities, securities indices and (in the case of the Global and
International Funds) foreign currencies, enter into interest rate and index
futures contracts and (in the case of the Global and International Funds),
foreign currencies futures contracts, and purchase and sell options on such
futures contracts ("futures options") for hedging purposes. The Global and
International Funds also may purchase and sell foreign currency options for
purposes of increasing exposure to a foreign currency or to shift exposure
to foreign currency fluctuations from one country to another. If other
types of options, futures contracts, or futures options are traded in the
future, a Fund may also use those instruments, provided the Board of
Trustees determines that their use is consistent with the Fund's investment
objectives, and their use is consistent with restrictions applicable to
options and futures contracts currently eligible for use by that Fund.
Options on Securities or Indices
A Fund may purchase and write options on securities and indices. An index
is a statistical measure designed to reflect specified facets of a
particular financial or securities market, a specific group of financial
instruments or securities, or certain economic indicators such as the
Merrill Lynch 1 to 3 year Global Government Bond Index, the JP Morgan
Global Government Bond Index, and the Lehman Brothers Government/Corporate
Index.
An option on a security (or an index) is a contract that gives the holder
of the option, in return for a premium, the right to buy from (in the case
of a call) or sell to (in the case of a put) the writer of the option the
security underlying the option (or the cash value of the index) at a
specified exercise price at any time during the term of the option (in the
case of "American Style" options) or at the expiration of the option (in
the case of "European Style" options). The writer of a call or put option
on a security is obligated upon exercise of the option to deliver the
underlying security upon payment of the exercise price or to pay the
exercise price upon delivery of the underlying security, as the case may
be. The writer of an option on an index is obligated upon exercise of the
option to pay the difference between the cash value of the index and the
exercise price multiplied by a specified multiplier for the index option.
A Fund will write call options and put options only if they are "covered."
In the case of a call option on a security, the option is covered if the
Fund owns the security underlying the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or,
if additional cash consideration is required, cash or cash equivalents in
such amount are placed in a segregated account with the Group's Custodian)
upon conversion or exchange of other securities held by the Fund. A call
option on an index is covered if the Fund maintains with its Custodian cash
or cash equivalents equal to the contract value. A call option is also
covered if the Fund holds a call on the same security or index as the call
written, and the exercise price of the call held is (i) equal to or less
than the exercise price of the call written, or (ii) greater than the
exercise price of the call written, provided the difference is maintained
by the Fund in cash or cash equivalents in a segregated account with its
Custodian. A put option on a security or an index is covered if the Fund
maintains cash or cash equivalents equal to the exercise price in a
segregated account with its Custodian. A put option is also covered if the
Fund holds a put on the same security or index as the put written, and the
exercise price of the put held is (i) equal to or greater than the exercise
price of the put written, or (ii) less than the exercise price of the put
written, provided the difference is maintained by the Fund in cash or cash
equivalents in a segregated account with its Custodian.
If an option written by a Fund expires unexercised, the Fund realizes a
capital gain equal to the premium received at the time the option was
written. If an option purchased by a Fund expires unexercised, the Fund
realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (i.e., of
the type, traded on the same exchange, with respect to the same underlying
security or index, and with the same exercise price and expiration date).
A Fund will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from
writing the option; if it is more, the Fund will realize a capital loss.
If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Fund will realize a capital gain;
if it is less, the Fund will realize a capital loss. The principal factors
affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price of the underlying security
or index in relation to the exercise price of the option, the volatility of
the underlying security or index, and the time remaining until the
expiration date.
The premium paid for a put or call option purchased by a Fund is an asset
of the Fund. The premium received for an option written by a Fund is
recorded as a deferred credit. The value of an option purchased or written
is marked to market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or no
closing price is available, at the mean between the last bid and asked
prices.
Foreign Currency Options
Each of the Global and International Funds may buy or sell put and call
options on foreign currencies. A put or call option on a foreign currency
gives the purchaser of the option the right to sell or purchase a foreign
currency at the exercise price until the option expires. Each Fund will
use foreign currency options separately or in combination to control
currency volatility. Among the strategies employed to control currency
volatility is an option collar. An option collar involves the purchase of
a put option and the simultaneous sale of a call option on the same
currency with the same expiration date but with different exercise (or
"strike") prices. Generally, the put option will have an out-of-the-money
strike price, while the call option will have either an at-the-money strike
price or an in-the-money strike price. Currency options traded on U.S. or
other exchanges may be subject to position limits which may limit the
ability of a Fund to reduce foreign currency risk using such options.
Combinations of Options
As indicated in the Prospectus, the Funds may employ certain combinations
of put and call options. A "straddle" involves the purchase of a put and
call option on the same security with the same exercise prices and
expiration dates. A "strangle" involves the purchase of a put option and a
call option on the same security with the same expiration dates but
different exercise prices. A "collar" involves the purchase of a put
option and the sale of a call option on the same security with the same
expiration dates but different exercise prices. A "spread" involves the
sale of a put option and the purchase of a call option on the same security
with the same or different expiration dates and different exercise prices.
Risks Associated with Options on Securities and Indices
Several risks are associated with transactions in options on securities and
indices. For example, significant differences between the securities and
options markets could result in an imperfect correlation between those
markets, causing a given transaction not to achieve its objectives. A
decision as to whether, when and how to use options involves the exercise
of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected
events.
There can be no assurance that a liquid market will exist when a Fund seeks
to close out an option position. Among the possible reasons for the
absence of a liquid secondary market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions
imposed by an exchange; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of
options or underlying securities; (iv) interruption of the normal
operations of an exchange; (v) inadequacy of the facilities of an exchange
or the Options Clearing Corporation to handle current trading volume; or
(vi) a decision by an exchange to discontinue the trading of options or a
particular class or series of options (in which event the secondary market
on that exchange or in that class or series of options could cease to
exist, although outstanding options on that exchange that had been issued
by the Options Clearing Corporation as a result of trades on that exchange
would generally continue to be exercisable in accordance with their terms).
If a Fund were unable to close out an option that it had purchased on a
security, it would have to exercise the option in order to realize any
profit. If a Fund were unable to close out a covered call option that it
had written on a security, it would not be able to sell the underlying
security unless the option expired without exercise. As the writer of a
covered call option, a Fund forgoes, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the call option above the sum of the premium and the exercise
price of the call.
If trading were suspended in an option purchased by a Fund, the Fund would
not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it has purchased.
Except to the extent that a call option on an index written by a Fund is
covered by an option on the same index purchased by the Fund, movements in
the index may result in a loss to the Fund; however, such losses may be
mitigated by changes in the value of the Fund's securities during the
period the option was outstanding.
Futures Contracts and Options on Futures Contracts
The Funds may use interest rate, foreign currency or index futures
contracts, as specified in the Prospectus. An interest rate or foreign
currency contract provides for the future sale by one party and purchase by
another party of a specified quantity of a financial instrument or foreign
currency at a specified price and time. A futures contract on an index is
an agreement pursuant to which two parties agree to take or make delivery
of an amount of cash equal to the difference between the value of the index
at the close of the last trading day of the contract and the price at which
the index contract was originally written. Although the value of an index
might be a function of the value of certain specified securities, no
physical delivery of these securities is made.
A public market exists in futures contracts covering several indices as
well as a number of financial instruments and foreign currencies, including
U.S. Treasury bonds, U.S. Treasury notes, GNMA Certificates, three-month
U.S. Treasury bills, 90-day commercial paper, bank certificates of deposit,
Eurodollar certificates of deposit, the Australian dollar, the Canadian
dollar, the British pound, the German mark, the Japanese yen, the Swiss
franc and certain multi-national currencies such as the European Currency
Unit ("ECU"). Other futures contracts are likely to be developed and
traded in the future. The Fund will only enter into futures contracts and
futures options which are standardized and traded on a U.S. or foreign
exchange, board of trade, or similar entity, or quoted on an automated
quotation system.
The Funds may also purchase and write call and put options on futures
contracts. Futures options possess many of the same characteristics as
options on securities and indices. A futures option gives the holder the
right, in return for the premium paid, to assume a long position (call) or
short position (put) in a futures contract at a specified exercise price at
any time during the period of the option. Upon exercise of a call option,
the holder acquires a long position in the futures contract and the writer
is assigned the opposite short position. In the case of a put option, the
opposite is true.
As long as required by regulatory authorities the Funds will use futures
contracts and futures options for hedging purposes and not for speculation
and will comply with applicable regulations of the Commodity Futures
Trading Corporation which limit trading of futures contracts (See
"Limitations on the Use of Futures and Options"). For example, a Fund
might use futures contracts to hedge against anticipated changes in
interest rates that might adversely affect either the value of the Fund's
securities or the price of the securities which the Fund intends to
purchase. A Fund's hedging activities may include sales of futures
contracts as an offset against the effect of expected increases in interest
rates, and purchases of futures contracts as an offset against the effect
of expected declines in interest rates. Although other techniques could be
used to reduce a Fund's exposure to interest rate fluctuations, a Fund may
be able to hedge its exposure more effectively and at a lower cost by using
futures contracts and futures options.
When a purchase or sale of a futures contract is made by a Fund, the Fund
is required to deposit with its Custodian (or futures commission merchant,
if legally permitted) a specified amount of cash or U.S. Government
securities ("initial margin"). The margin required for a futures contract
is set by the exchange on which the contract is traded and may be modified
during the term of the contract. The initial margin is in the nature of a
performance bond or good faith deposit on the futures contract which is
returned to the Fund upon termination of the contract, assuming all
contractual obligations have been satisfied. The Funds expect to earn
interest income on their initial margin deposits. A futures contract held
by a Fund is valued daily at the official settlement price of the exchange
on which it is traded. Each day a Fund pays or receives cash, called
"variation margin," equal to the daily change in value of the futures
contract. This process is known as "marking to market." Variation margin
does not represent a borrowing or loan by a Fund but is instead a
settlement between the Fund and the futures commission merchant of the
amount one would owe the other if the futures contract expired. In
computing daily net asset value, the Funds will mark to market their open
futures positions.
Each Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin
deposits will vary depending on the nature of the underlying futures
contract (and the related initial margin requirements), the current market
value of the option, and other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts
(contracts traded on the same exchange, on the same underlying security or
index, and with the same delivery month). If an offsetting purchase price
is less than the original sale price, the Fund realizes a capital gain; if
it is more, a Fund realizes a capital loss. Conversely, if an offsetting
sale price is more than the original purchase price, a Fund realizes a
capital gains; if it is less, a Fund realizes a capital loss. The
transaction costs must also be included in these calculations.
Limitations on Use of Futures and Futures Options
A Fund will not enter into a futures contract or futures option contract
if, immediately thereafter, the aggregate initial margin deposits relating
to such positions plus premiums paid by it for open futures option
positions, less the amount by which any such options are "in-the-money,"
would exceed 5% of the Fund's total assets. A call option is "in-the-
money" if the value of the futures contract that is the subject of the
option exceeds the exercise price. A put option is "in-the-money" if the
exercise price exceeds the value of the futures contract that is the
subject of the option.
When purchasing a futures contract, a Fund will maintain with its Custodian
(and mark to market on a daily basis) cash, U.S. Government securities, or
other highly liquid debt securities that, when added to the amounts
deposited with a futures commission merchant as margin, are equal to the
market value of the futures contract. Alternatively, a Fund may "cover"
its position by purchasing a put option on the same futures contract with a
strike price as high or higher than the price of the contract held by the
Fund.
When selling a futures contract, a Fund will maintain with its Custodian
(and mark to market on a daily basis) liquid assets that, when added to the
amount deposited with a futures commission merchant as margin, are equal to
the market value of the instruments underlying the contract.
Alternatively, a Fund may "cover" its position by owning the instruments
underlying the contract (or, in the case of an index futures contract, a
portfolio with a volatility substantially similar to that of the index on
which the futures contract is based), or by holding a call option
permitting the Fund to purchase the same futures contract at a price no
higher than the price of the contract written by the Fund (or at a higher
price if the difference is maintained in liquid assets with the Fund's
Custodian).
When selling a call option on a futures contract, a Fund will maintain with
its custodian (and mark to market on a daily basis) cash, U.S. Government
securities, or other highly liquid debt securities that, when added to the
amounts deposited with a futures commission merchant as margin, equal the
total market value of the futures contract underlying the call option.
Alternatively, a Fund may cover its position by entering into a long
position in the same futures contract at a price no higher than the strike
price of the call option, by owning the instruments underlying the futures
contract, or by holding a separate call option permitting the Fund to
purchase the same futures contract at a price not higher than the strike
price of the call option sold by the Fund.
When selling a put option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, or other highly liquid debt securities that equal the purchase
price of the futures contract, less any margin on deposit. Alternatively,
a Fund may cover the position either by entering into a short position in
the same futures contract, or by owning a separate put option permitting it
to sell the same futures contract so long as the strike price of the
purchased put option is the same or higher than the strike price of the put
option sold by the Fund.
In order to comply with applicable regulations of the Commodity Futures
Trading Commission ("CFTC") for exemption from the definition of a
"commodity pool," each Fund is limited in its futures trading activities
to: (1) positions which constitute "bona fide hedging" positions within
the meaning and intent of applicable CFTC rules, and (2) other positions
for the establishment of which the aggregate initial margin and premiums
(less the amount by which such options are "in-the-money") do not exceed 5%
of the Fund's net assets (after taking into account unrealized gains and
unrealized losses on any contracts it has entered into).
The requirements for qualification as a regulated investment company also
may limit the extent to which the Funds may enter into futures, futures
options or forward contracts. See "Taxation."
Risks Associated with Futures and Futures Options
There are several risks associated with the use of futures contracts and
futures options as hedging techniques. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in the
futures contract. There can be no guarantee that there will be a
correlation between price movements in the hedging vehicle and in the Fund
securities being hedged. In addition, there are significant differences
between the securities and futures markets that could result in an
imperfect correlation between the markets, causing a given hedge not to
achieve its objectives. The degree of imperfection of correlation depends
on circumstances such as variations in speculative market demand for
futures and futures options on securities, including technical influences
in futures trading and futures options, and differences between the
financial instruments being hedged and the instruments underlying the
standard contracts available for trading in such respects as interest rate
levels, maturities, and creditworthiness of issuers. A decision as to
whether, when and how to hedge involves the exercise of skill and judgment,
and even a well-conceived hedge may be unsuccessful to some degree because
of market behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
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 the current trading session. Once the daily limit has been reached in a
futures contract subject to the limit, no more trades may be made on that
day at a price beyond that limit. The daily limit governs only price
movements during a particular trading day and therefore does not limit
potential losses, because the limit may work to prevent the liquidation of
unfavorable positions. For example, futures prices have occasionally moved
to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of positions and subjecting
some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when a
Fund seeks to close out a futures contract or a futures option position, in
which event the Fund would remain obligated to meet margin requirements
until the position is closed. In addition, many of the contracts discussed
above are relatively new instruments without a significant trading history.
As a result, there can be no assurance that an active secondary market will
develop or continue to exist.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in futures contracts or options, the Fund could experience
delays and losses in liquidating open positions purchased or sold through
the broker, and incur a loss of all or part of its margin deposits with the
broker.
Dealer Options
The Funds may engage in transactions involving dealer options on
securities, currencies or indices as well as exchange-traded options.
Certain risks are specific to dealer options. While a Fund would look to a
clearing corporation to exercise exchange-traded options, if a Fund were to
purchase a dealer option it would rely on the dealer from whom it purchased
the option to perform if the option were exercised. Failure by the dealer
to do so would result in the loss of the premium paid by the Fund as well
as loss of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options may not. Consequently, a Fund may generally be able to
realize the value of a dealer option it has purchased only by exercising or
reselling the option to the dealer who issued it. Similarly, when a Fund
writes a dealer option, the Fund may generally be able to close out the
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to whom the Fund originally wrote the option.
While the Funds will seek to enter into dealer options only with dealers
who will agree to and which are expected to be capable of entering into
closing transactions with the Fund, there can be no assurance that the Fund
will be able to liquidate a dealer option at a favorable price at any time
prior to expiration. Unless a Fund, as a covered dealer call option
writer, is able to effect a closing purchase transaction, it will not be
able to liquidate securities (or other assets) used as cover until the
option expires or is exercised. In the event of insolvency of the other
party, the Funds may be unable to liquidate a dealer option. With respect
to options written by a Fund, the inability to enter into a closing
transaction may result in material losses to the Fund. For example, since
a Fund must maintain a secured position with respect to any call option on
security it writes, the Fund may not sell the assets which it has
segregated to secure the position while it is obligated under the option.
This requirement may impair the Fund's ability to sell portfolio securities
at a time when such sale might be advantageous.
The Staff of the SEC has taken the position that many purchased dealer
options and the assets used to secure written dealer options are illiquid
securities. A Fund may treat the cover used for these written dealer
options as liquid if the dealer agrees that the Fund may repurchase the
dealer option it has written for a maximum price to be calculated by a
predetermined formula. In such cases, the dealer option would be
considered illiquid only to the extent the maximum purchase price under the
formula exceeds the intrinsic value of the option. Accordingly, the Funds
will treat certain dealer options as subject to the Funds' limitation on
illiquid securities. If the SEC changes its position on the liquidity of
dealer options on securities, currencies or indices, the Funds will change
their treatment of such instruments accordingly.
INTEREST RATE AND CURRENCY SWAPS
Interest Rate Swaps
As indicated in the Prospectus, an interest rate swap is a contract between
two entities ("counterparties") to exchange interest payments (of the same
currency) between the parties. In the most common interest rate swap
structure, one counterparty agrees to make floating rate payments to the
other counterparty, which in turn makes fixed rate payments to the first
counterparty. Interest payments are determined by applying the respective
interest rates to an agreed upon amount, referred to as the "notional
principal amount." In most such transactions, the floating rate payments
are tied to the London Interbank Offered Rate, which is the offered rate
for short-term eurodollar deposits between major international banks. As
there is no exchange of principal amounts, an interest rate swap is not an
investment or a borrowing.
Cross-Currency Swaps
A cross-currency swap is a contract between two counterparties to exchange
interest and principal payments in different currencies. A cross-currency
swap normally has an exchange of principal at maturity (the final
exchange); an exchange of principal at the start of the swap (the initial
exchange) is optional. An initial exchange of notional principal amounts
at the spot exchange rate serves the same function as a spot transaction in
the foreign exchange market (for an immediate exchange of foreign exchange
risk). An exchange at maturity of notional principal amounts at the spot
exchange rate serves the same function as a forward transaction in the
foreign exchange market (for a future transfer of foreign exchange risk).
The currency swap market convention is to use the spot rate rather than the
forward rate for the exchange at maturity. The economic difference is
realized through the coupon exchanges over the life of the swap. In
contrast to single currency interest rate swaps, cross-currency swaps
involve both interest rate risk and foreign exchange risk.
Swap Options
Each of the Global and International Funds may invest in swap options. A
swap option is a contract that gives a counterparty the right (but not the
obligation) to enter into a new swap agreement or to shorten, extend,
cancel or otherwise change an existing swap agreement, at some designated
future time on specified terms. It is different from a forward swap, which
is a commitment to enter into a swap that starts at some future date with
specified rates. A swap option may be structured European-style
(exercisable on the pre specified date) or American-style (exercisable
during a designated period). The right pursuant to a swap option must be
exercised by the right holder. The buyer of the right to pay fixed
pursuant to a swap option is said to own a put. The buyer of the right to
receive fixed pursuant to a swap option is said to own a call.
Caps and Floors
Each of the Global and International Funds may also invest in interest rate
caps and floors. An interest rate cap is a right to receive periodic cash
payments over the life of the cap equal to the difference between any
higher actual level of interest rates in the future and a specified strike
(or "cap") level. The cap buyer purchases protection for a floating rate
move above the strike. An interest rate floor is the right to receive
periodic cash payments over the life of the floor equal to the difference
between any lower actual level of interest rates in the future and a
specified strike (or "floor") level. The floor buyer purchases protection
for a floating rate move below the strike. The strikes are typically based
on the three-month LIBOR (although other indices are available) and are
measured quarterly. Rights arising pursuant to both caps and floors are
exercised automatically if the strike is in the money. Caps and floors
eliminate the risk that the buyer fails to exercise an in-the-money option.
Risks Associated With Swaps
The risks associated with interest rate and currency swaps and interest
rate caps and floors are similar to those described above with respect to
dealer options. In connection with such transactions, a Fund relies on the
other party to the transaction to perform its obligations pursuant to the
underlying agreement. If there were a default by the other party to the
transaction, the Fund would have contractual remedies pursuant to the
agreement, but could incur delays in obtaining the expected benefit of the
transaction or loss of such benefit. In the event of insolvency of the
other party, the Fund might be unable to obtain its expected benefit. In
addition, while each Fund will seek to enter into such transactions only
with parties which are capable of entering into closing transactions with
the Fund, there can be no assurance that a Fund will be able to close out
such a transaction with the other party, or obtain an offsetting position
with any other party, at any time prior to the end of the term of the
underlying agreement. This may impair a Fund's ability to enter into other
transactions at a time when doing so might be advantageous.
FOREIGN CURRENCY TRANSACTIONS
Precise matching of the amount of forward currency contracts and the value
of the Global and International Fund's securities denominated in such
currencies will not generally be possible, since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward
contract is entered into and the date it matures. Prediction of short-term
currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain. Under
certain circumstances, a Fund may commit a substantial portion of its
assets to the consummation of these contracts. Neither Fund will enter
into such forward contracts or maintain a net exposure to such contracts
where the consummation of the contracts would obligate the Fund to deliver
an amount of foreign currency in excess of the value of the Fund's
portfolio securities or other assets denominated in that currency. Under
normal circumstances, consideration of the prospect for currency parities
will be incorporated into the longer term investment decisions made with
regard to overall diversification strategies. However, the Adviser
believes that it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of a Fund will
be served by doing so.
At the maturity of a forward contract, a Fund may either sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase,
on the same maturity date, the same amount of the foreign currency.
It may be necessary for a Fund to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market value
of the security is less than the amount of foreign currency the Fund is
obligated to deliver and if a decision is made to sell the security and
make delivery of the foreign currency. Conversely, it may be necessary to
sell on the spot market some of the foreign currency received upon the sale
of the portfolio security if its market value exceeds the amount of foreign
currency the Fund is obligated to deliver.
If a Fund retains a portfolio security and engages in an off-setting
transaction, the Fund will incur a gain or a loss to the extent that there
has been movement in forward contract prices. If the Fund engages in an
offsetting transaction, it may subsequently enter into a new forward
contract to sell the foreign currency. Should forward prices decline
during the period between the date the Fund enters into a forward contract
for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Fund will
realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Fund will suffer a loss to the extent the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
Each Fund's dealings in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, each
Fund reserves the right to enter into forward foreign currency contracts
for different purposes and under different circumstances. Use of forward
currency contracts to hedge against a decline in the value of a currency
does not eliminate fluctuations in the underlying prices of the securities.
Additionally, although such contracts tend to minimize the risk of loss due
to a decline in the value of the hedged currency, they also tend to limit
any potential gain which might result from an increase in the value of that
currency.
Although each Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. Foreign exchange dealers do not charge a fee for
conversion, but they do realize a profit based on the difference (the
"spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a Fund
at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
LENDING OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, each Fund may lend
securities with a value of up to 33% of its total assets to broker-dealers,
institutional investors or other persons. Each loan will be secured by
collateral which is maintained at no less than 100% of the value of the
securities loaned by "marking to market" daily. A Fund will have the right
to call each loan and obtain the securities on five business days' notice
or, in connection with securities trading on foreign markets, within a
longer period of time which coincides with the normal settlement period for
purchases and sales of such securities in such foreign markets. Loans will
only be made to persons deemed by the Adviser to be of good standing in
accordance with standards approved by the Board of Trustees and will not be
made unless, in the judgment of the Adviser, the consideration to be earned
from such loans would justify the risk.
BORROWING
Each Fund may borrow for temporary, extraordinary or emergency purposes, or
for the clearance of transactions. The Investment Company Act of 1940 (the
"1940 Act") requires each 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 300% asset coverage
should decline as a result of market fluctuations or other reasons, a Fund
may be required to sell some of its portfolio holdings within three days to
reduce the debt and restore the 300% asset coverage, even though it may be
disadvantageous from an investment standpoint to sell securities at that
time. To avoid the potential leveraging effects of a Fund's borrowings,
additional investments will not be made while borrowings are in excess of
5% of the Fund's total assets. Money borrowed will be subject to interest
costs which may or may not be recovered by appreciation of the securities
purchased. The Funds also may be required to maintain minimum average
balances in connection with any such borrowings or to pay a commitment or
other fee to maintain a line of credit, either of which would increase the
cost of borrowing over the stated interest rate.
RISKS OF FOREIGN INVESTING
There are special risks in investing in any foreign securities in addition
to those relating to investments in U.S. securities.
Political and Economic Factors
Individual foreign economies of certain countries may differ favorably or
unfavorably from the United States' economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency, diversification and balance of payments position. The
internal politics of certain foreign countries may not be as stable as
those of the United States.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could include
restrictions on foreign investment, nationalization, expropriation of goods
or imposition of taxes, and could have a significant effect on market
prices of securities and payment of interest. The economies of many
foreign countries are heavily dependent upon international trade and are
accordingly affected by the trade policies and economic conditions of their
trading partners. Enactment by these trading partners of protectionist
trade legislation could have a significant adverse effect upon the
securities markets of such countries.
Currency Fluctuations
To the extent that a Fund invests in securities denominated in foreign
currencies, a change in the value of any such currency against the U.S.
dollar will result in a corresponding change in the U.S. dollar value of
the Fund's assets denominated in that currency. Such changes will also
affect the Fund's income. The value of a Fund's assets may also be
affected significantly by currency restrictions and exchange control
regulations enacted from time to time.
Market Characteristics
The Group expects that most foreign securities in which the Funds invest
will be purchased in over-the-counter markets or on bond exchanges located
in the countries in which the principal offices of the issuers of the
various securities are located, if that is the best available market.
Foreign bond markets may be more volatile than those in the United States.
While growing in volume, they usually have substantially less volume than
U.S. markets, and the Funds' portfolio securities may be less liquid and
more volatile than U.S. Government securities. Moreover, settlement
practices for transactions in foreign markets may differ from those in
United States markets, and may include delays beyond periods customary in
the United States.
Transactions in options on securities, futures contracts and futures
options may not be regulated as effectively on foreign exchanges as similar
transactions in the United States, and may not involve clearing mechanisms
and related guarantees. The value of such positions also could be
adversely affected by the imposition of different exercise terms and
procedures and margin requirements than in the United States. Foreign
security trading practices, including those involving securities settlement
where Fund assets may be released prior to payment, may expose a Fund to
increased risk in the event of a failed trade or the insolvency of a
foreign broker-dealer.
The value of the Funds' portfolio positions may also be adversely impacted
by delays in the Funds' ability to act upon economic events occurring in
foreign markets during non-business hours in the United States.
Legal and Regulatory Matters
Certain foreign countries may have less supervision of securities markets,
brokers and issuers of securities, and less financial information available
to issuers, than is available in the United States.
Taxes
The interest payable on certain of a Fund's foreign portfolio securities
may be subject to foreign withholding taxes, thus reducing the net amount
of income available for distribution to the Fund's shareholders. A
shareholder otherwise subject to United States federal income taxes may,
subject to certain limitations, be entitled to claim a credit or deduction
for U.S. federal income tax purposes for his proportionate share of such
foreign taxes paid by a Fund. The Funds intend to sell such bonds prior to
the interest payment date in order to avoid withholding.
Costs
The expense ratios of Funds investing in foreign securities (before
reimbursement by the Adviser pursuant to the expense limitation described
in the Prospectus under "Management of the Funds -- Expense Guarantee") are
likely to be higher than those of investment companies investing in
domestic securities, since the cost of maintaining the custody of foreign
securities is higher.
AVERAGE MATURITY CALCULATIONS
The portfolio average maturity of each Fund will be computed by weighting
the maturity of each security in the Fund's portfolio by the market value
of that security. For securities which have put dates, reset dates, or
trade based on average maturity, the put date, reset date or average
maturity will be used instead of the final maturity date for the average
maturity calculation. Average maturity is normally used when trading
mortgage backed securities and asset backed securities.
FUNDAMENTAL AND OPERATING POLICIES
The Funds have adopted the investment restrictions described below.
Fundamental policies of a Fund may not be changed without the approval of
the lesser of (1) 67% of the Fund's shares present at a meeting of
shareholders if the holders of more than 50% of the outstanding shares are
present in person or by proxy or (2) more than 50% of the Fund's
outstanding shares. Operating policies are subject to change by the Board
of Trustees without shareholder approval. Any investment restriction which
involves a maximum percentage of securities or assets will not be
considered to be violated unless an excess occurs immediately after, and is
caused by, an acquisition of securities or assets of, or borrowings by, the
Fund.
FUNDAMENTAL POLICIES
As a matter of fundamental policy, a Fund may not:
(1) Borrowing. Borrow money, except as a temporary measure for
extraordinary or emergency purposes or for the clearance of transactions,
and then only in amounts not exceeding 30% of its total assets valued at
market (for this purpose, reverse repurchase agreements and delayed
delivery transactions covered by segregated accounts are not considered to
be borrowings).
(2) Commodities. Purchase or sell commodities or commodity contracts,
except that (i) a Fund other than the Treasury Fund may enter into
financial and currency futures contracts and options on such futures
contracts, (ii) a Fund other than the Treasury, Short Duration and Tax
Exempt Bond Fund may enter into forward foreign currency exchange contracts
(the Funds do not consider such contracts to be commodities), and (iii) a
Fund other than the Treasury Fund may invest in instruments which have the
characteristics of both futures contracts and securities.
(3) Loans. Make loans, except that (I) a Fund may purchase money market
securities and enter into repurchase agreements, (ii) a Fund may acquire
bonds, debentures, notes and other debt securities, and (iii) a Fund other
than the Treasury Fund may lend portfolio securities in an amount not to
exceed 30% of its total assets (with the value of all loan collateral being
"marked to market" daily at no less than 100% of the loan amount).
(4) Margin. Purchase securities on margin, except that (I) a Fund may use
short-term credit necessary for clearance of purchases of portfolio
securities, and (ii) a Fund other than the Treasury Fund may make margin
deposits in connection with futures contracts and options on futures
contracts.
(5) Mortgaging. Mortgage, pledge, hypothecate or in any manner transfer
any security owned by a Fund as security for indebtedness, except as may be
necessary in connection with permissible borrowings and then only in
amounts not exceeding 30% of the Fund's total assets valued at market at
the time of the borrowing.
(6) Assets Invested in Any Issuer. Purchase a security if, as a result,
with respect to 50% of the value of a Fund's total assets, more than 5% of
the value of its total assets would be invested in the securities of any
one issuer (other than obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities).
(7) Share Ownership of Any Issuer. Purchase a security if, as a result,
with respect to 50% of the value of a Fund's total assets, more than 10% of
the outstanding voting securities of any issuer would be held by the Fund
(other than obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities).
(8) Real Estate. Purchase or sell real estate (although it may purchase
securities secured by real estate partnerships or interests therein, or
issued by companies or investment trusts which invest in real estate or
interests therein) or real estate limited partnership interests.
(9) Short Sales. Effect short sales of securities.
(10) Underwriting. Underwrite securities issued by other persons, except
to the extent that a Fund may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in connection with the purchase and
sale of its portfolio securities in the ordinary course of pursuing its
investment program.
(11) Global Diversification. Under normal market conditions, neither the
Global Fund nor the International Fund may invest less than 65% of the
Fund's assets in debt securities of issuers located in at least three
countries (one of which may be the United States for the Global Fund).
OPERATING POLICIES
As a matter of operating policy, a Fund may not:
(1) Control of Portfolio Companies. Invest in companies for the purpose of
exercising management or control.
(2) Illiquid Securities. Purchase a security if, as a result of such
purchase, more than 15% of the value of the Fund's net assets would be
invested in illiquid securities or other securities that are not readily
marketable, including repurchase agreements which do not provide for
payment within seven days. For this purpose, restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933
may be determined to be liquid.
(3) Investment Companies. Purchase securities of open-end or closed-end
investment companies except in compliance with the 1940 Act.
(4) Oil and Gas Programs. Purchase participations or other direct
interests in oil, gas, or other mineral exploration or development programs
or leases.
(5) Options. Invest in puts, calls, or any combination thereof, except
that a Fund may invest in or commit its assets to purchasing and selling
call and put options to the extent permitted by the Prospectus and
Statement of Additional Information.
(6) Ownership of Portfolio Securities by Officers and Directors. Purchase
or retain the securities of any issuer if any officers and Trustees of the
Group and of the Adviser who own beneficially more than 0.5% of the
outstanding securities of such issuer, together own beneficially more than
5% of such securities.
(7) Unseasoned Issuers. Purchase a security (other than obligations issued
or guaranteed by the U.S. Government or any foreign government, their
agencies or instrumentalities) if, as a result, more than 5% of the value
of the Fund's total assets would be invested in the securities of issuers
which at the time of purchase had been in operation for less than three
years (for this purpose, the period of operation of any issuer will include
the period of operation of any predecessor or unconditional guarantor of
such security).
(8) Restricted Securities. Neither the Global Fund, the International
Fund, the Short Duration Fund nor the Bond Fund may invest more than 10% of
its total assets in the securities of issuers which are restricted as to
disposition, other than restricted securities eligible for resale pursuant
to Rule 144A under the Securities Act of 1933.
(9) The Treasury Fund will not borrow amounts exceeding 33% of total assets
valued at market (including reverse repurchase agreements and delayed
delivery transactions).
STATE UNDERTAKINGS
In order to permit the sale of shares of the Funds in certain states, the
Board of Trustees may adopt restrictions on investment policies more
restrictive than those described above. Should the Trustees determine that
any such more restrictive policy is no longer in the best interests of a
Fund or its shareholders, the Trustees may revoke such policy and the Trust
may cease offering shares of the Fund in the state involved. Moreover, if
the state involved no longer requires any such restrictive policy, the
Trustees may revoke it.
The Group has undertaken to the State of Arkansas that no more than 5% of
the total assets of the Limited Maturity Fund will be invested in premiums
on securities options including, without limitation, puts, calls,
straddles, spreads and any combination thereof.
The Group has undertaken to the Ohio Department of Commerce that no Fund
will not invest more than 15% of its total assets in the securities of
issuers which together with any predecessors have a record of less than
three years continuous operation or securities of issuers which are
restricted as to disposition (including without limitation securities
issued pursuant to rule 144A under the Securities Act of 1933).
The Group has undertaken to the Texas State Securities Board and the
Arizona Corporation Commission that each of the Global and International
Funds will limit its investments in warrants to no more than 5% of the
Fund's net assets and, of this 5%, no more than 2% will be invested in
warrants which are not listed on the New York Stock Exchange or the
American Stock Exchange; provided, however, that for the purposes of this
limitation, warrants acquired in units or attached to other securities will
be deemed to be without value.
PORTFOLIO TRANSACTIONS
There is generally no stated commission in the case of fixed-income
securities, which are traded in the over-the-counter markets, but the price
paid by a Fund usually includes an undisclosed dealer commission or mark-
up. In underwritten offerings, the price paid by a Fund includes a
disclosed, fixed commission or discount retained by the underwriter or
dealer. Agency transactions involve the payment by a Fund of negotiated
brokerage commissions. Such commissions vary among different brokers.
Also, a particular broker may charge different commissions according to
such factors as the difficulty and size of the transaction. Transactions
in foreign securities involve commissions which are generally higher than
those in the United States.
The Adviser places all orders for the purchase and sale of portfolio
securities, options and futures contracts for the Funds and buys and sells
such securities, options and futures for the Funds through a substantial
number of brokers and dealers. In so doing, the Adviser seeks the best
execution available. In seeking the most favorable execution, the Adviser
considers all factors it deems relevant, including, by way of illustration,
price, the size of the transaction, the nature of the market for the
security, the amount of the commission, the timing of the transaction
taking into account market prices and trends, the reputation, experience
and financial stability of the broker-dealer involved and the quality of
service rendered by the broker-dealer in other transactions.
Some securities considered for investment by a Fund's portfolio may also be
appropriate for other clients served by the Adviser. If a purchase or sale
of securities consistent with the investment policies of a Fund is
considered at or about the same time as a similar transaction for one or
more other clients served by the Adviser, transactions in such securities
will be allocated among the Fund and other clients in a manner deemed fair
and reasonable by the Adviser. Although there is no specified formula for
allocating such transactions, the various allocation methods used by the
Adviser, and the results of such allocations, are subject to periodic
review by the Board of Trustees.
The Adviser manages the Funds without regard generally to restrictions on
portfolio turnover, except those imposed on its ability to engage in short-
term trading by provisions of the federal tax laws (see "Taxation").
Trading in fixed-income securities does not generally involve the payment
of brokerage commissions, but does involve indirect transaction costs. The
higher the rate of portfolio turnover, the higher these transaction costs
borne by the Funds generally will be. The turnover rate of a Fund is
calculated by dividing (a) the lesser of purchases or sales of portfolio
securities for a particular fiscal year by (b) the monthly average of the
value of the portfolio securities owned by the Fund during the fiscal year.
In calculating the rate of portfolio turnover, all securities, including
options, whose maturities or expiration dates at the time of acquisition
were one year or less, are excluded. Interest rate and currency swap, cap
and floor transactions do not affect the calculation of portfolio turnover.
During the fiscal year ended October 31, 1992, 1993 and 1994, the Global
Fund paid brokerage commissions of $736, $14,955 and $2,973, respectively.
During the fiscal year ended October 31, 1995, the Tax Exempt Bond Fund
paid brokerage commissions of $2,300. No other commissions were paid
during the Group's last three fiscal years.
The Board of Trustees will periodically review the Adviser's performance of
its responsibilities in connection with the placement of portfolio
transactions on behalf of the Funds.
VALUATION OF PORTFOLIO SECURITIES
Fixed Income securities are valued on the basis of valuations furnished by
a pricing service which utilizes both dealer-supplied valuations and
electronic data processing techniques. Such techniques take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon
quoted prices or exchange or over-the-counter prices, since such valuations
are believed to reflect more accurately the fair value of such securities.
Foreign securities are valued at the closing bid price in the principal
market where they are traded, or, if closing prices are unavailable, at the
last traded bid price available prior to the time a fund's net asset value
is determined. Foreign security prices that cannot be obtained by the
quotation services are priced individually by the pricing service using
dealer-supplied quotations. Short-term obligations that mature in 60 days
or less are valued at amortized cost, which constitutes fair value as
determined by the Board of Trustees. All other securities and other assets
are appraised at their fair value as determined in good faith under
consistently applied procedures established by and under the general
supervision of the Board of Trustees.
Generally, trading in corporate bonds, U.S. government securities, foreign
securities, money market instruments and repurchase agreements, is
substantially completed each day at various times prior to the close of
regular trading on the New York Stock Exchange. The values of any such
securities held by a Fund are determined as of such times for the purpose
of computing the Fund's net asset value. Foreign currency exchange rates
are also generally determined prior to the close of the New York Stock
Exchange. If an extraordinary event that is expected to affect the value
of a portfolio security materially occurs after the close of an exchange on
which that security is traded, then the security will be valued at fair
value as determined in good faith under procedures established by and under
the general supervision of the Board of Trustees.
FUND PERFORMANCE
The Funds may quote their performance in various ways. All performance
information supplied by a Fund in advertising is historical and is not
intended to indicate future returns. A Fund's share price, yield and total
returns fluctuate in response to market conditions and other factors, and
the value of Fund shares when redeemed may be more or less than their
original cost.
Performance information for a Fund may be compared to various unmanaged
indices (such as the Lehman Brothers Municipal Bond Index) or indices
prepared by Lipper Analytical Services and other entities or organizations
which track the performance of investment companies or investment advisers.
Comparisons may also be made to indices or data in publications such as The
Bond Buyer, Forbes, Barron's, The Wall Street Journal, The New York Times,
and Business Week. For example, a Fund may quote Morningstar, Inc. in its
advertising materials. Morningstar, Inc. is a mutual fund rating service
that rates mutual funds on the basis of risk-adjusted performance.
Rankings that compare the performance a Fund to other funds in appropriate
categories over specific periods of time may also be quoted in advertising.
Unmanaged indices generally do not reflect deductions for administrative
and management costs and expenses. Payden & Rygel may also report to
shareholders or to the public in advertisements concerning the performance
of Payden & Rygel as adviser to clients other than the Funds, and on the
comparative performance or standing of Payden & Rygel in relation to other
money managers. Such comparative information may be compiled or provided
by independent rating services or other organizations.
Information regarding a Fund may also be included in newsletters or other
general communications by Payden & Rygel to advisory clients and potential
clients. These publications principally contain information regarding
market and economic trends and other general matters of interest to
investors, such as: principles of investing which, among other things
includes asset allocation, model portfolios, diversification, risk
tolerance and goal setting, saving for college or other goals or charitable
giving; long-term economic or market trends; historical studies of gold,
other commodities, equities, fixed income securities and statistical market
indices; new investment theories or techniques; economic and/or political
trends in foreign countries and their impact on the United States;
municipal bond market fundamentals and trends; corporate financing trends
and other factors that may impact corporate debt; and housing trends and
other economic factors that may impact mortgage rates and lending activity.
In addition, Payden & Rygel may quote financial or business publications
and periodicals as they relate to fund management, investment philosophy
and investment techniques. Materials may also include discussions
regarding Payden & Rygel's asset allocation services and other Payden &
Rygel funds, products and services.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical
returns of the capital markets in the United States, including common
stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury
bills and the U.S. rate of inflation (based on the Consumer Price Index)
and a combination of various capital markets. The Group may use the long-
term performance of these capital markets in order to demonstrate general
long-term risk-versus-reward investment scenarios or the value of a
hypothetical investment in any of these capital markets. The performance
of these capital markets is based on the returns of several different
indices. Ibbotson calculates total returns in the same method as the
Group. Performance comparisons could also include the value of a
hypothetical investment in any of the capital markets.
If appropriate, the Group may compare the performance of a Fund or the
performance of securities in which a Fund may invest to averages published
by IBC USA (Publications, Inc.). These averages assume reinvestment of
distributions. The IBC/Donoghue's Money Fund Averages -TM-/All Taxable,
which is reported in the Donoghue's Money Fund Report -Registered Trademark-
, covers over 772 taxable money market funds. The Fund may quote its fund
number, Quotron -TM- number and CUSIP number or quote its current portfolio
manager or any member of Payden & Rygel's market strategy group.
Yield Calculations
Yields for each class of shares of a Fund used in advertising are computed
by dividing the interest income of the class for a given 30-day or one
month period, net of expenses allocable to the class, by the average number
of shares of the class entitled to receive dividends during the period,
dividing this figure by the class' net asset value per share at the end of
the period and annualizing the result (assuming compounding of income) in
order to arrive at an annual percentage rate. Income is calculated for
purposes of yield quotations in accordance with standardized methods
applicable to bond funds. In general, interest income is reduced with
respect to bonds trading at a premium over their par value by subtracting a
portion of the premium from income on a daily basis, and is increased with
respect to bonds trading at a discount by adding a portion of the discount
to daily income. For a Fund's investments denominated in foreign
currencies, income and expenses are calculated first in their respective
currencies, and converted to U.S. dollars either when they are actually
converted or at the end of the period, whichever is earlier. Capital gains
and losses are generally excluded from the calculation, as are gains and
losses from currency exchange rate fluctuations.
Because yield accounting methods differ from the methods used for other
accounting purposes, the Fund's yield may not equal its distribution rate
or income reported in the Fund's financial statements.
Total Return Calculations
Total returns quoted in advertising with respect to a class of shares of
the Fund reflect all aspects of a Fund's return, including the effect of
reinvesting dividends and capital gain distributions, and any change in the
class' net asset value per share over the period. Average annual total
returns for each class are calculated by determining the growth or decline
in value of a hypothetical historical investment in that class of shares of
a Fund over a stated period, and then calculating the annually compounded
percentage rate that would have produced the same result if the rate of
growth or decline in value had been constant over the period. For example,
a cumulative return of 100% over ten years would result from an average
annual total return of 7.18%, which is the steady annual total return that
would equal 100% growth on a compounded basis in ten years. While average
annual total returns are a convenient means of comparing investment
alternatives, investors should realize that a Fund's performance is not
constant over time, but changes from year to year, and that average annual
total returns represent averaged figures as opposed to the actual year-to-
year performance of the Fund.
For Class A Shares, the one-year and since inception total return for each
of the funds through October 31, 1995 were as follows: Limited Maturity,
6.43% and 5.51%; Short Bond, 9.56% and 5.23%; Intermediate Bond, 12.43% and
4.54%; Opportunity, 16.39% and 5.34%; Short Duration, 5.88% and 4.70%; Tax
Exempt Bond, 13.25% and 2.32%; U.S. Treasury, 14.10% and 14.10%; Global,
15.10% and 7.70%; and International, 4.19% and 4.19%; and all returns are
annualized. The inception dates for the Funds are Limited Maturity, May 1,
1994; Short Bond, Intermediate and Opportunity, December 31, 1993; U.S.
Treasury, December 31, 1994; Short Duration, September 1, 1994; Tax Exempt
Bond, December 21, 1993; Global, September 1, 1992; International, April 3,
1995.
In addition to average annual total returns, a Fund may quote unaveraged or
cumulative total returns for each class of shares reflecting the simple
change in value of an investment over a stated period of time. Average
annual and cumulative total returns may be quoted as a percentage or as a
dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period. Total
returns may be broken down into their components of income, capital
(including capital gains and changes in share price) and currency returns
in order to illustrate the relationship of these factors and their
contributions to total return. Total returns, yields and other performance
information maybe quoted numerically, or in a table, graph or similar
illustration.
TAXATION
Each Fund intends to qualify annually and has elected 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, a 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 (including gains from
options, futures and forward contracts) derived with respect to its
business of investing in such stock, securities or currencies ("Qualifying
Income Test"); (b) derive in each taxable year less than 30% of its gross
income from the sale or other disposition of certain assets held less than
three months, namely (1) stocks or securities, (2) options, futures, or
forward contracts (other than those on foreign currencies), and (3) foreign
currencies (or options, futures, and forward contracts on foreign
currencies) not directly related to its business of investing in stocks or
securities; (c) diversify its holdings so that, at the end of each quarter
of the taxable year, (i) at least 50% of the market value of a Fund's
assets is represented by cash, 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 a Fund's total
assets and 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 of any one issuer (other than U.S. Government securities or the
securities of other regulated investment companies) (the "Diversification
Test"); and (d) distribute at least 90% of its investment company taxable
income (which includes dividends, interest and net short-term capital gains
in excess of any net long-term capital losses) each taxable year. The
Treasury Department is authorized to promulgate regulations under which
gains from foreign currencies (and options, futures, and forward contracts
on foreign currency) would constitute qualifying income for purposes of the
Qualifying Income Test only if such gains are directly relating to
investing in stocks or securities. To date, such regulations have not been
issued.
In addition, no definitive guidance currently exists with respect to the
classification of interest rate swaps and cross-currency swaps as
securities or foreign currencies for purposes of certain of the tests
described above. Accordingly, to avoid the possibility of disqualification
as a regulated investment company, a Fund will limit its positions in swaps
to transactions for the purpose of hedging against either interest rate or
currency fluctuation risks, and will treat swaps as excluded assets for
purposes of determining compliance with the Diversification Test.
As a regulated investment company, a Fund will not be subject to U.S.
federal income tax on its investment company taxable income and net capital
gains (any net long-term capital gains in excess of the sum of net short-
term capital losses and capital loss carryovers from the prior eight
years) designated by the Fund as capital gain dividends, if any, that it
distributes to shareholders. Each Fund intends to distribute to its
shareholders substantially all of its investment company taxable income
monthly and any net capital gains annually. Investment company taxable
income or net capital gains not distributed by a Fund on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To avoid the tax, a Fund must distribute
during each calendar year an amount at least equal to the sum of (1) 98% of
its ordinary income (with adjustments) for the calendar year and foreign
currency gains or losses for the twelve month period ending on October 31
of the calendar year, (2) at least 98% of its capital gains in excess of
its capital losses (and adjusted for certain ordinary losses) for the
twelve month period ending on October 31 of the calendar year, and (3) all
ordinary income and capital gains for previous years that were not
distributed during such years. A distribution will be treated as paid on
December 31 of the calendar year if it is declared by the Fund in October,
November, or December of that year to shareholders of record on a date in
such a month and paid by a Fund during January of the following year. Such
distributions will be taxable to shareholders (other than those not subject
to federal income tax) in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are
received. To avoid application of the excise tax, the Funds intend to make
their distributions in accordance with the calendar year distribution
requirement.
Distributions
The Short Duration and Tax Exempt Bond Funds intend to qualify to pay
"exempt-interest" dividends to its shareholders, who may exclude those
dividends from their gross income for federal income tax purposes. In
order to be able to pay those dividends, a Fund must satisfy the additional
requirement that, at the close of each quarter of its taxable year, at
least 50% of the value of its total assets must consist of obligations the
interest on which is excludable from gross income under section 103(a) of
the Code.
With the exception of the Short Duration and Tax Exempt Bond Funds,
dividends paid out of a Fund's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. Distributions received
by tax-exempt shareholders will not be subject to federal income tax to the
extent permitted under the applicable tax exemption.
Dividends paid by a Fund generally are not expected to qualify for the
deduction for dividends received by corporations. Distributions of net
capital gains, if any, are taxable as long-term capital gains, regardless
of how long the shareholder has held a Fund's shares and are not eligible
for the dividends received deduction. The tax treatment of dividends and
distributions will be the same whether a shareholder reinvests them in
additional shares or elects to receive them in cash.
Hedging Transactions
Many of the options, futures contracts and forward contracts used by the
Funds are "section 1256 contracts." Any gains or losses on section 1256
contracts are generally considered 60% long-term and 40% short-term capital
gains or losses ("60/40"). Also, section 1256 contracts held by a Fund at
the end of each taxable year (and, for purposes of the 4% excise tax, on
certain other dates as prescribed under the Code) are "marked to market"
with the result that unrealized gains or losses are treated as though they
were realized and the resulting gain or loss is treated as ordinary or
60/40 gain or loss, depending on the circumstances.
Generally, the hedging transactions and certain other transactions in
options, futures and forward contracts undertaken by a 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 a Fund. In addition,
losses realized by a 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 investment company taxable income or net capital gain for
the taxable year in which such losses are realized. Because only a few
regulations implementing the straddle rules have been promulgated, the tax
consequences of transactions in options, futures and forward contracts to a
Fund are not entirely clear. The transactions may increase the amount of
short-term capital gain realized by a Fund which is taxed as ordinary
income when distributed to shareholders.
Each Fund may make one or more of the elections available under the Code
which are applicable to straddles. If a 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 operate to accelerate the recognition of gains or losses from
the affected straddle positions.
Because application of 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 must be
distributed to shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
The 30% limit on gains from the disposition of certain options, futures,
and forward contracts held less than three months and the qualifying income
and diversification requirements applicable to the Fund's assets may limit
the extent to which a Fund will be able to engage in transactions in
options, futures contracts or forward contracts.
Sales of Shares
Upon disposition of shares of a Fund (whether by redemption, sale or
exchange), a shareholder will realize a gain or loss. Such gain or loss
will be capital gain or loss if the shares are capital assets in the
shareholder's hands, and will be long-term or short-term generally
depending upon the shareholder's holding period for the shares. Any loss
realized on a disposition will be disallowed by "wash sale" rules to the
extent the shares disposed of are replaced within a period of 61 days
beginning 30 days before and ending 30 days after the disposition. 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
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 capital gain
dividends received by the shareholder with respect to such shares.
Backup Withholding
A Fund may be required to withhold for U.S. federal income taxes 31% of all
taxable distributions 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 Internal Revenue Service
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 withholding is not an additional tax. Any
amounts withheld may be credited against the shareholder's U.S. federal tax
liability.
Foreign Investments
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund amortizes or accrues premiums or
discounts, accrues interest or other receivables or accrues expenses or
other liabilities denominated in a foreign currency and the time the Fund
actually collects such receivables or pays such liabilities generally are
treated as ordinary income or loss. Similarly, on disposition of debt
securities denominated in a foreign currency and on disposition of certain
futures contracts, forward contracts and options, gains or losses
attributable to fluctuations in the value of the foreign currency between
the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These gains and
losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the U.S. may reduce or eliminate
such taxes. In addition, the Adviser intends to manage the Funds with the
intention of minimizing foreign taxation in cases where it is deemed
prudent to do so. If more than 50% of the value of a Fund's total assets
at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible to elect to "pass-through" to the
Fund's shareholders the amount of foreign income and similar taxes paid by
the Fund. If this election is made, a shareholder generally subject to tax
will be required to include in gross income (in addition to taxable
dividends actually received) his pro rata share of the foreign income taxes
paid by the Fund, and may be entitled either to deduct (as an itemized
deduction) his or her pro rata share of foreign taxes in computing his
taxable income or to use it (subject to limitations) as a foreign tax
credit against his or her U.S. federal income tax liability. No deduction
for foreign taxes may be claimed by a shareholder who does not itemize
deductions. Each shareholder will be notified within 60 days after the
close of a Fund's taxable year whether the foreign taxes paid by the Fund
will "pass-through" for that year. Absent the Fund making the election to
"pass through" the foreign source income and foreign taxes, none of the
distributions may be treated as foreign source income for purposes of the
foreign tax credit calculation.
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax attributable to his or her total
foreign source taxable income. For this purpose, if the pass-through
election is made, the source of a Fund's income will flow through to
shareholders of the Fund. With respect to such election, gains from the
sale of securities will be treated as derived from U.S. sources. The
limitation on the foreign tax credit is applied separately to foreign
source passive income, and to certain other types of income. Shareholders
may be unable to claim a credit for the full amount of their proportionate
share of the foreign taxes paid by the Fund. The foreign tax credit is
modified for purposes of the Federal alternative minimum tax and can be
used to offset only 90% of the alternative minimum tax imposed on
corporations and individuals and foreign taxes generally are not deductible
in computing alternative minimum taxable income.
Certain Debt Securities
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Fund may be
treated as debt securities that are issued originally at a discount.
Generally, the amount of the original issue discount ("OID") is treated as
interest income and is included in income over the term of the debt
security, even though payment of that amount is not received until a later
time, usually when the debt security matures. A portion of the OID
includable in income with respect to certain high-yield corporate debt
securities may be treated as a dividend for Federal income tax purposes.
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Fund in the
secondary market may be treated as having market discount. Generally, any
gain recognized on the disposition of, and any partial payment of principal
on, a debt security having market discount issued after July 18, 1984 is
treated as ordinary income to the extent the gain, or principal payment,
does not exceed the "accrued market discount" on such debt security.
Market discount generally accrues in equal daily installments. A Fund may
make one or more of the elections applicable to debt securities having
market discount, which could affect the character and timing of recognition
of income.
Some of the debt securities (with a fixed maturity date of one year or less
from the date of issuance) that may be acquired by a Fund may be treated as
having an acquisition discount, or OID in the case of certain types of debt
securities. Generally, the Fund will be required to include the
acquisition discount, or OID, in income ratably over the term of the debt
security, even though payment of that amount is not received until a later
time, usually when the debt security matures. The Fund may make one or
more of the elections applicable to debt securities having acquisition
discount, or OID, which could affect the character and timing of
recognition of income.
A Fund generally will be required to distribute dividends to shareholders
representing discount on debt securities that is currently includable in
income, even though cash representing such income may not have been
received by the Fund. Cash to pay such dividends may be obtained from
sales proceeds of securities held by the Fund.
Other Taxes
Distributions also may be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Under the
laws of various states, distributions of investment company taxable income
generally are taxable to shareholders even though all or a substantial
portion of such distributions may be derived from interest on certain
Federal obligations which, if the interest were received directly by a
resident of such state, would be exempt from such state's income tax
("qualifying Federal obligations"). However, some states may exempt all or
a portion of such distributions from income tax to the extent the
shareholder is able to establish that the distribution is derived from
qualifying Federal obligations. Moreover, for state income tax purposes,
interest on some Federal obligations generally is not exempt from taxation,
whether received directly by a shareholder or through distributions of
investment company taxable income (for example, interest on Federal
National Mortgage Association Certificates and Government National Mortgage
Association Certificates). Each Fund will provide information annually to
shareholders indicating the amount and percentage of the Fund's dividend
distribution which is attributable to interest on Federal obligations, and
will indicate to the extent possible from what types of Federal obligations
such dividends are derived. Shareholders are advised to consult their own
tax advisers with respect to the particular tax consequences to them of an
investment in a Fund.
MANAGEMENT OF THE GROUP
TRUSTEES AND OFFICERS
The Trustees and officers of the Group are as set forth below. Unless
otherwise indicated, the address of all persons below is 333 South Grand
Avenue, Los Angeles, California 90071.
Board of Trustees:
<TABLE>
Position with Principal Occupations
Name the Group During Past Five Years
<S> <C> <C>
* Joan A. Payden(1) Chairman of the President, Payden & Rygel
Board,
President,
Trustee
* Lynda L. Faber Trustee Senior Vice President,
Payden & Rygel
* John Paul Isaacson Trustee Executive Vice President,
Payden & Rygel
* Christopher N. Orndorff Trustee Vice President, Payden &
Rygel (since 1990);
previously Second Vice
President, The Northern
Trust Company
J. Clayburn La Force Trustee Dean Emeritus, The John E.
P.O. Box 1009 Anderson Graduate School of
Pauma Valley, CA 92061 Management at University of
California, Los Angeles;
Director, The Timken Company
(since February, 1994);
Trustee for PIC
Institutional Growth
Portfolio, PIC Institutional
Balanced Portfolio and PIC
Small Capital Portfolio
(since June, 1992)
Thomas McKernon, Jr. (1) Trustee President and Chief
2601 South Figueroa Executive Officer,
Street Automobile Club of Southern
Los Angeles, CA 90007 California
Dennis C. Poulsen Trustee President and Chief
3900 South Workman Mill Executive Officer, Rose
Road Hills Company
Whittier, CA 90601
Stender E. Sweeney Trustee Private Investor since 1994;
Times Mirror Square previously Vice President,
Fifth Floor Finance, Times Mirror
Los Angeles, CA 90053 Company
W.D. Hilton, Jr. Trustee Managing Trustee, NGC
310 East Interstate 30, Settlement Trust; previously
Suite 285 Chief Financial Officer,
Garland, TX 75043 Texas Association of School
Boards and Board Member,
First Greenville National
Bank
</TABLE>
* An "interested person" of the Group, as defined in the 1940 Act.
(1) Ms. Payden is a Director of the Automobile Club of Southern
California, of which Mr. McKernon is President and Chief Executive
Officer.
Trustees other than those affiliated with the Adviser receive an annual
retainer of $10,000, plus $1,500 for each Board of Trustees meeting
attended and reimbursement of related expenses. The following table sets
forth the aggregate compensation paid by the Trust for the fiscal year
ended October 31, 1995, to the Trustees who are not affiliated with the
Adviser and the aggregate compensation paid to such Trustees for services
on the Trust's Board and that of all other funds in the Trust Complex (as
defined in Schedule 14A under the Securities Exchange Act of 1934):
<TABLE>
Pension or
Retirement Total
Benefits Estimated Compensation
Accrued as Annual from Trust and
Aggregate Part of Benefits Trust Complex
Compensation Trust Upon Paid to
Name from Trust Expenses Retirement Trustee
<S> <C> <C> <C> <C>
Dennis Poulsen $12,000 None N/A $12,000 (9*)
James Clayburn La Force $12,000 None N/A $12,000 (9*)
Stender Sweeney $11,000 None N/A $11,000 (9*)
W.D. Hilton $12,000 None N/A $12,000 (9*)
Thomas V. McKernan, Jr. $12,000 None N/A $12,000 (9*)
</TABLE>
* Indicates total number of Funds in Trust Complex.
Officers:
<TABLE>
Position with Principal Occupations
Name the Group During Past Five Years
<S> <C> <C>
Lynn M. Bowker Vice President, Vice President &
Treasurer Treasurer, Payden & Rygel
Scott A. King Executive Executive Vice President,
Vice President Payden & Rygel
David L. Wagner Vice President Portfolio Manager, Payden
& Rygel
Steven D. Persky Vice President, Vice President, Payden &
Assistant Secretary Rygel (since 1991);
previously Chief
Financial Officer,
Endless Pools, Inc. and
Vice President, Salomon
Brothers
Carole Trist Secretary Manager, Mutual Fund
Operations, Payden &
Rygel (since 1991);
previously Audit Manager
at Independent Insurance
Auditing Services
</TABLE>
ADVISER
Payden & Rygel was founded in 1983 as an independent investment counseling
organization specializing in the management of short term fixed income
securities. The firm is owned by Joan Payden and several other employees.
As of December 31, 1995, its staff consisted of 70 employees, 23 of whom
either have advanced degrees and/or are Chartered Financial Analysts. As
of such date, it had over 200 clients, including pension funds, endowments,
credit unions, foundations, corporate cash accounts and individuals, and
managed total assets of approximately $20 billion, with about $2.3 billion
invested globally.
The Adviser's focus is the management of fixed income securities in both
the domestic and global markets. These include securities that have
absolute or average maturities out to five years with a bias toward very
high quality and liquidity. Portfolios are actively managed according to
client approved guidelines and benchmarks. Payden & Rygel also utilizes
futures and options strategies, primarily as defensive measures to control
interest rate and currency volatility.
The Adviser provides investment management services to the Funds pursuant
to an Investment Management Agreement with the Trust dated as of June 24,
1992 as amended on June 14, 1994 with respect to Class B shares of the
Group. The Agreement provides that the Adviser will pay all expenses
incurred in connection with managing the ordinary course of a Fund's
business, except the following expenses, which are paid by each Fund: (i)
the fees and expenses incurred by a Fund in connection with the management
of the investment and reinvestment of the Fund's assets; (ii) the fees and
expenses of Trustees who are not affiliated persons of the Adviser; (iii)
the fees and expenses of the Trust's Custodian, Transfer Agent, Fund
Accounting Agent and Administrator; (iv) the charges and expenses of legal
counsel and independent accountants for the Trust; (v) brokers' commissions
and any issue or transfer taxes chargeable to a Fund in connection with its
securities and futures transactions; (vi) all taxes and corporate fees
payable by a Fund to federal, state or other governmental agencies; (vii)
the fees of any trade associations of which the Trust may be a member;
(viii) the cost of fidelity bonds and trustees and officers errors and
omission insurance; (ix) the fees and expenses involved in registering and
maintaining registration of a Fund and of its shares with the SEC,
registering the Trust as a broker or dealer and qualifying the shares of a
Fund under state securities laws, including the preparation and printing of
the Trust's registration statements, prospectuses and statements of
additional information for filing under federal and state securities laws
for such purposes; (x) communications expenses with respect to investor
services and all expenses of shareholders' and trustees' meetings and of
preparing, printing and mailing reports to shareholders in the amount
necessary for distribution to the shareholders; (xi) litigation and
indemnification expenses and other extraordinary expenses not incurred in
the ordinary course of the Trust's business, and (xii) any expenses assumed
by the Trust pursuant to a plan of distribution adopted in conformity with
Rule 12b-1 under the 1940 Act.
The Adviser has agreed that if in any fiscal year the expenses borne by a
Fund exceed the applicable expense limitations imposed by the securities
regulations of any state in which shares of such Fund are registered or
qualified for sale to the public, it will reimburse the Fund for any excess
to the extent required by such regulations. The Administrator will bear a
portion of this reimbursement obligation. Unless otherwise required by law
such reimbursement would be accrued and paid on the same basis that the
advisory fees are accrued and paid by the Fund. To the Trust's knowledge,
the only state expense limitation in effect on the date of this Statement
of Additional Information is that of California, which requires the Adviser
to reimburse the Fund for advisory fees to the extent that certain expenses
exceed 2-1/2% of average annual net assets up to $30,000,000, 2% of the
next $70 million of average net assets, and 1-1/2% of average net assets in
excess of $100,000,000.
Fees earned by the Adviser during the last three fiscal years ended October
31, are shown below.
<TABLE>
Fiscal Year Ending October 31
1993 1994 1995
<S> <C> <C> <C>
Limited Maturity $ * $ 7,360 $ 44,030
Short Bond * 4,974 27,936
U.S. Treasury * * 13,233
Intermediate Bond * 14,006 71,012
Opportunity * 5,115 23,790
Short Duration * 6,145 51,350
Tax Exempt Bond * 60,945 99,303
Global 523,973 1,216,816 1,533,836
International * * 25,948
</TABLE>
* Fund had not commenced operations
The Agreement provides that the Adviser will not be liable for any error of
judgment or mistake of law or for any loss suffered by the Funds 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 in the performance of the Adviser's duties or from
reckless disregard by the Adviser of its duties and obligations thereunder.
Unless earlier terminated as described below, the Agreement will continue
in effect with respect to each Fund until June 14, 1995 and thereafter for
successive annual periods, subject to annual approval by the Board of
Trustees (or by a majority of the outstanding voting shares of each Fund as
defined in the 1940 Act) and by a majority of the Trustees who are not
interested persons of any party to the Agreement by vote cast in person at
a meeting called for such purpose. The Agreement terminates upon
assignment and may be terminated with respect to a Fund without penalty on
60 days' written notice at the option of either party thereto or by the
vote of the shareholders of the Fund.
ADMINISTRATOR, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT
Treasury Plus, Incorporated, a wholly owned subsidiary of the Adviser
serves as Administrator to the Fund. Under its Administration Agreement
with the Group, the Administrator has agreed to prepare periodic reports to
regulatory authorities, maintain financial accounts and records of the
Fund, transmit communications by the Fund to shareholders of record, make
periodic reports to the Board of Trustees regarding Fund operations, and
overview the work of the fund accountant and transfer agent.
Investors Fiduciary Trust Company ("IFTC") provides fund accounting and
transfer agency services to the Group. IFTC calculates daily expense
accruals and net asset value per share of the Funds, issues and redeems
Fund shares, maintains shareholder accounts and prepares annual investor
tax statements.
The liability provisions of the Group's agreements with Treasury Plus and
IFTC are similar to those of the Investment Management Agreement discussed
above. In addition, the Group has agreed to indemnify IFTC against certain
liabilities. The respective agreements may be terminated by either party
on 90 days notice.
The Administrator has agreed that, if in any fiscal year the expenses borne
by the Fund exceed the applicable expense limitations imposed by the
securities regulations of any state in which shares of the Fund are
registered or qualified for sale to the public, it will reimburse the Fund
for a portion of such excess expenses, which portion is determined by
multiplying the excess expenses by the ratio of (i) the fees respecting the
Fund otherwise payable to the Administrator pursuant to its agreement with
the Trust, to (ii) the aggregate fees respecting the Fund otherwise payable
to the Administrator pursuant to its agreement and to the Adviser pursuant
to its Investment Management Agreement with the Trust.
During the last three fiscal years, the Administrator was paid the amounts
listed below.
<TABLE>
Fiscal Year Ending October 31
1993 1994 1995
<S> <C> <C> <C>
Limited Maturity $ * $ 2,250 $ 12,864
Short Bond * 1,572 7,884
U.S. Treasury * * 4,476
Intermediate Bond * 4,317 20,487
Opportunity * 1,600 6,731
Short Duration * 1,610 14,771
Tax Exempt Bond * 16,708 25,275
Global 183,400 353,701 386,974
International * * 5,469
</TABLE>
* Fund had not commenced operations
DISTRIBUTOR
Payden & Rygel Distributors, 333 South Grand Avenue, Los Angeles,
California 90071, acts as Distributor to the Group pursuant to a
Distribution Agreement with the Group dated as of June 24, 1992, as
amended. The Distributor has agreed to use its best efforts to effect
sales of shares of the Funds, but is not obligated to sell any specified
number of shares. The Distribution Agreement contains provisions with
respect to renewal and termination similar to those in the Investment
Management Agreement described above. Pursuant to the Agreement, the Trust
has agreed to indemnify the Distributor to the extent permitted by
applicable law against certain liabilities under the Securities Act of
1933.
No compensation is payable by the Funds to the Distributor for its
distribution services. The Distributor pays for the personnel involved in
accepting orders for purchase and redemption of Fund shares, expenses
incurred in connection with the printing of Prospectuses and Statements of
Additional Information (other than those sent to existing shareholders),
sales literature, advertising and other communications used in the public
offering of shares of a Fund, and other expenses associated with performing
services as distributor of the Funds' shares. Each Fund pays the expenses
of issuance, registration and transfer of its shares, including filing fees
and legal fees.
SHAREHOLDER SERVICE PLAN
Pursuant to the Shareholder Service Plan, each Fund will pay the
Distributor for expenses incurred in connection with non-distribution
shareholder services provided by the Distributor to securities broker-
dealers and other securities professionals ("Service Organizations") with
respect to Class B shares of a Fund, and to the beneficial owners of such
shares, and for fees paid by the Distributor to such Service Organizations
for the provision of support services to their clients who are beneficial
owners of Class B shares ("Clients").
Support services provided pursuant to the Shareholder Service Plan include
(a) establishing and maintaining accounts and records relating to Clients
who invest in Class B shares; (b) aggregating and processing purchase,
exchange and redemption requests for Class B shares from Clients and
placing net purchase and redemption orders with respect to such shares; (c)
investing, or causing to be invested, the assets of Clients' accounts in
Class B shares pursuant to specific or pre-authorized instructions; (d)
processing dividend and distribution payments from the Group on behalf of
Clients; (e) providing information periodically to Clients showing their
positions in Class B shares; (f) arranging for bank wires; (g) responding
to Client inquiries relating to the services performed by Service
Organizations; (h) providing sub-accounting services with respect to Class
B shares beneficially owned by Clients or the information to the Group
necessary for sub-accounting services; (i) preparing any necessary tax
reports or forms on behalf of Clients; (j) if required by law, forwarding
shareholder communications from a Fund to Clients; and (k) assisting
Clients in changing dividend options, account designations and addresses.
The Shareholder Service Plan continues in effect from year to year,
provided that each such continuance is approved at least annually by a vote
of the Board of Trustees of the Group, including a majority of the Trustees
who have no direct or indirect financial interest in the operation of the
Plan or in any agreement related to the Plan (the "Independent Trustees"),
cast in person at a meeting called for the purpose of voting on such
continuance. The Plan may be amended at any time by the Board of Trustees,
provided that any material amendments of the terms of the Plan will become
effective only upon the approval by a majority of the Board and a majority
of the Independent Trustees pursuant to a vote cast in person at a meeting
called for the purpose of voting on the Plan.
No Plan fees were paid for any Fund during the fiscal year ended October
31, 1995.
PURCHASES AND REDEMPTIONS
Certain managed account clients of the Adviser may purchase shares of the
Fund. To avoid the imposition of duplicative fees, the Adviser may be
required to make adjustments in the management fees charged separately by
the Adviser to these clients to offset the generally higher level of
management fees and expenses resulting from a client's investment in the
Fund.
The Funds reserve the right to suspend or postpone redemptions during any
period when: (a) trading on the New York Stock Exchange is restricted, as
determined by the Securities and Exchange Commission, or that Exchange is
closed for other than customary weekend and holiday closings; (b) the
Securities and Exchange Commission has by order permitted such suspension;
or (c) an emergency, as determined by the Securities and Exchange
Commission, exists, making disposal of portfolio securities or valuation of
net assets of the Fund not reasonably practicable.
Each Fund will redeem shares solely in cash up to the lesser of $250,000 or
1% of its net assets during any 90-day period for any one shareholder.
Each Fund reserves the right to pay any redemption price exceeding this
amount in whole or in part by a distribution in kind of securities held by
the Fund in lieu of cash. It is highly unlikely that shares would ever be
redeemed in kind. If shares are redeemed in kind, however, the redeeming
shareholder would incur transaction costs upon the disposition of the
securities received in the distribution.
Due to the relatively high cost of maintaining smaller accounts, each Fund
reserves the right to redeem shares in any account for their then-current
value (which will be promptly be paid to the investor) if at any time, due
to shareholder redemption, the shares in the Fund account do not have a
value of at least $5,000. An investor will be notified that the value of
his account is less than the minimum and allowed at least 30 days to bring
the value of the account up to at least $5,000 before the redemption is
processed. The Declaration of Trust also authorizes the Funds to redeem
shares under certain other circumstances as may be specified by the Board
of Trustees
OTHER INFORMATION
CAPITALIZATION
Each Fund is a series of Payden & Rygel Investment Group, an open-end
management investment company organized as a Massachusetts business trust
in January 1992 (initially called P&R Investment Trust). The
capitalization of the Funds consists solely of an unlimited number of
shares of beneficial interest. The Board of Trustees has currently
authorized ten series of shares: Global Fixed Income Fund, Global
Opportunity Fund, Short Duration Tax Exempt Fund, Tax Exempt Bond Fund,
Limited Maturity Fund, Short Bond Fund, Intermediate Bond Fund,
Opportunity Fund, U.S. Treasury Fund, and Market Return Fund. The Board of
Trustees may establish additional funds (with different investment
objectives and fundamental policies) and additional classes of shares at
any time in the future. Establishment and offering of additional
portfolios will not alter the rights of the Funds' shareholders. Shares do
not have preemptive rights or subscription rights. In liquidation of a
Fund, each shareholder is entitled to receive their pro rata share of the
assets of the Fund.
Expenses incurred by the Group in connection with its organization and the
initial public offering are being reimbursed to the Adviser, subject to the
expense limitation described in the Prospectus under "Management of the
Funds -- Expense Guarantee", and amortized on a straight line basis over a
period of five years. Expenses incurred in the organization of
subsequently offered series of the Group will be charged to those series
and will be amortized on a straight line basis over a period of not less
than five years.
PRINCIPAL SHAREHOLDERS
As of January 31, 1996 , the following persons were known to hold of record
more than 5% of the outstanding shares of the Short Bond Fund: Rick
Hoffman and Jesse H. Bechtold, Seaboard Corporation Health Benefits Trust,
Shawnee Mission, KS 66201, 9.1%; Casa De Las Campanas, Los Angeles, CA
91101, 13.4%; Center Theatre Group, Los Angeles, CA 90012, 14.9%; San Diego
Electrical Health and Welfare Plan, San Diego, CA 92194, 13.9%; Southern
California Presbyterian Homes, Glendale, CA 91202, 15.7%.
As of January 31, 1996 , the following persons were known to hold of record
more than 5% of the outstanding shares of the Intermediate Bond Fund:
North Hills Passavent Hospital, Philadelphia, PA 19182, 18.1%; Children's
Memorial Hospital, Chicago, IL 60675, 17.2%; Augustana College, Rock
Island, IL 61201, 10.3%; Best Products Co. Pension Plan, Richmond, VA
23260, 11.5%; Rose Hills Memorial Park, Calabasas, CA 91302, 8.2%; San
Diego Electrical Pension Plan, San Diego, CA 92194, 12.4%. .
As of January 31, 1996 , the following persons were known to hold of record
more than 5% of the outstanding shares of the Opportunity Fund: Best
Products Co. Pension Plan, Richmond, VA 23260, 6.2%; Southern California
Presbyterian Homes, Glendale, CA 91202, 17.6%; USSF Foundation, McLean, VA
22101, 7.1%; World Cup USA, 1994, Inc., Los Angeles, CA 90067, 27.0%.
As of January 31, 1996 , the following persons were known to hold of record
more than 5% of the outstanding shares of the Limited Maturity Fund:
Foundation to Assist California Teachers, Pasadena, CA 91101, 55.8%;
University of Washington, Chicago, IL 60607, 8.9%; San Diego Electrical
Health and Welfare Plan, San Diego, CA 92194, 8.7%.
As of January 31, 1996, the following persons were known to hold of record
more than 5% of the outstanding shares of the Bond Fund: Eugene Kleiner,
Menlo Park, CA 94025, 18.0%; Thomas and Elinor Wertheimer, Santa Monica CA
90402, 13.3%.
As of January 31, 1996, the following persons were known to hold of record
more than 5% of the outstanding shares of the Short Duration Fund: Lynne
K. Wasserman, Beverly Hills, CA 90210, 5.2%; Thomas and Elinor Wertheimer,
Santa Monica, CA 90402, 10.2%; Casey Wasserman, Los Angeles, CA 90069,
17.3%; Diane Von Furstenberg, New Milford, CT 06766, 9.8%; Carol Ann Leif,
Beverly Hills, CA 91210, 23.9%.
As of January 31, 1996, the following persons were known to hold of record
more than 5% of the outstanding shares of the U.S. Treasury Fund: Leonard
C. Horvitz, Moreland Hills, OH 44022; Carol Ann Leif, Beverly Hills, CA
90210, 16.1%; Casey Wasserman, Beverly Hills, CA 22.4%; Diane Von
Furstenberg, New Milford, CT 06776, 8.9%; Lynne K. Wasserman, Beverly
Hills, CA 90210, 5.6%.
As of January 31, 1996, the following persons were known to hold of record
more than 5% of the outstanding shares of the Fixed Income Fund: Public
Service Electric & Gas Co. Pension Plan Trust, Bankers Trust Co., Trustee,
Jersey City, NJ 07302, 11.8%; SSM Health Care System, Pittsburgh, PA
15230, 9.6%; UniHealth America, Burbank, CA 91505, 5.9%; Sheinberg Family
Trust, Beverly Hills, CA 90210, 6.5%.
As of January 31, 1996, the following persons were known to hold of record
more than 5% of the outstanding shares of the International Fund: Consuelo
Zobel Alger Foundation, Honolulu, HI 96805, 61.0%; Fleetwood Retirement
Plan, Riverside, CA 92513, 28.2%; JMR Partnership, Santa Monica, CA 90405,
5.4%; Rose Hills Memorial Park, First Interstate Bank, Trustee, Calabasas,
CA 91302, 5.3%.
The Fund has no information regarding the beneficial ownership of such
shares. As of such date, the officers and directors of the Group as a
group owned less than 1% of the outstanding shares of the Funds (except for
the Short Duration and U.S. Treasury Funds, of which they own 4% and 3%
respectively).
DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of a Fund. However, the
Declaration of Trust disclaims liability of the shareholders of a Fund for
acts or obligations of the Group, which are binding only on the assets and
property of the Fund, and requires that notice of the disclaimer be given
in each contract or obligation entered into or executed by a Fund or the
Trustees. The Declaration of Trust provides for indemnification out of
Fund property for all loss and expense of any shareholder held personally
liable for the obligations of a Fund. The risk of a shareholder incurring
financial loss on account of shareholder liability is limited to
circumstances in which a Fund itself would be unable to meet its
obligations and thus should be considered remote.
The Declaration of Trust provides further that no officer or Trustee of the
Group will be personally liable for any obligations of the Group, nor will
any officer or Trustee be personally liable to the Group or its
shareholders except by reason of his own bad faith, willful misfeasance,
gross negligence in the performance of his duties or reckless disregard of
his obligations and duties. With these exceptions, the Declaration of
Trust provides that a Trustee or officer of the Group is entitled to be
indemnified against all liabilities and expenses, including reasonable
accountants' and counsel fees, incurred by the Trustee or officer in
connection with the defense or disposition of any proceeding in which he
may be involved or with which he may be threatened by reason of his being
or having been a Trustee or officer.
CLASS B SHARES
The Group has obtained from the Securities and Exchange Commission certain
exemptions from the provisions of the 1940 Act necessary to establish two
series of shares. As a condition to such exemptions, the Group has agreed
that Class A and Class B shares will be identical in all respects except as
follows: (a) the designation of each class of shares of a Fund; (b) the
exclusive right of Class B shares to vote on matters related to the
Shareholder Service Plan; (c) the impact of the disproportionate payments
made under the Plan; (d) the incremental transfer agency costs
attributable to the Class B Shares of the Fund; (e) printing and postage
expenses related to preparing and distributing materials such as
shareholder reports, prospectuses, and proxy statements to current
shareholders of a specific class; (f) Securities and Exchange Commission
registration fees incurred by a class of shares; (g) the expense of
administrative personnel and services required to support the shareholders
of a specific class; (h) trustees' fees or expenses incurred as a result
of issues relating to one class of shares; (i) accounting expenses
relating solely to one class of shares; (j) state blue sky registration
fees incurred by one class of shares; (k) litigation or other legal
expenses relating solely to one class of shares; and (l) any other
incremental expenses subsequently identified that should be properly
allocated to one or more classes of shares that are approved by the
Securities and Exchange Commission.
The Group and the Adviser have represented that they have adequate
facilities in place to ensure implementation of the methodology and
procedures for calculating the net asset value and dividends and
distributions of the two classes of shares and the proper allocation of
expenses between the two classes of shares, and this representation must be
concurred with annually by an independent examiner. In addition, the Board
of Trustees must monitor each Fund for the existence of any material
conflicts between the interests of the two classes of shares, and must take
such action as is reasonably necessary to eliminate any such conflicts that
may develop. If a conflict arises, the Adviser and Distributor must remedy
the conflict at their own cost.
VOTING
Shareholders of the Funds and any other series of the Group will vote in
the aggregate and not by series or class except as otherwise required by
law or when the Board of Trustees determines that the matter to be voted
upon affects only the interests of the shareholders of a particular series
or class of shares. Pursuant to Rule 18f-2 under the 1940 Act, the
approval of an investment advisory agreement or any change in a fundamental
policy would be acted upon separately by the series affected. Matters such
as ratification of the independent public accountants and election of
Trustees are not subject to separate voting requirements and may be acted
upon by shareholders of the Group voting without regard to series or class.
CUSTODIAN
The First National Bank of Chicago serves as Custodian for the assets of
the Funds. The Custodian's address is One First National Plaza, Chicago,
Illinois 60670. Under its Custodian Agreement with the Group, the
Custodian has agreed among other things to maintain a separate account in
the name of each Fund; hold and disburse portfolio securities and other
assets on behalf of the Funds; collect and make disbursements of money on
behalf of the Funds; and receive all income and other payments and
distributions on account of each Fund's portfolio securities.
Pursuant to rules adopted under the 1940 Act, the Funds may maintain
foreign securities and cash in the custody of certain eligible foreign
banks and securities depositories. Selection of these foreign custodial
institutions is made by the Board of Trustees following a consideration of
a number of factors, including (but not limited to) the reliability and
financial stability of the institution; the ability of the institution to
perform capably custodial services for the Funds; the reputation of the
institution in its national market; the political and economic stability of
the country in which the institution is located; and risks of
nationalization or expropriation of Fund assets. The Board of Trustees
reviews annually the continuance of foreign custodial arrangements for the
Funds. No assurance can be given that the Trustees' appraisal of the risks
in connection with foreign custodial arrangements will always be correct or
that expropriation, nationalization, freezes, or confiscation of assets
that would impact assets of the Portfolio will not occur, and shareholders
bear the risk of losses arising from these or other events.
INDEPENDENT AUDITORS
Deloitte & Touche LLP serves as the independent auditors for the Funds.
Deloitte & Touche provides audit and tax return preparation services to the
Group. The independent auditors' address is 1700 Courthouse Plaza
Northeast, Dayton, Ohio 45402-1788.
COUNSEL
Paul, Hastings, Janofsky & Walker pass upon certain legal matters in
connection with the shares offered by the Group, and also act as Counsel to
the Group. Counsel's address is 555 South Flower Street, 22nd Floor, Los
Angeles, California 90071. Paul, Hastings, Janofsky & Walker also acts as
counsel to the Adviser and the Distributor.
LICENSE AGREEMENT
The Adviser has entered into a non-exclusive License Agreement with the
Group which permits the Group to use the name "Payden & Rygel". The
Adviser has the right to require the Group to cease using the name at such
time as the Adviser is no longer employed as investment manager to the
Group.
FINANCIAL STATEMENTS
The Funds' 1995 Annual Reports to Shareholders accompany this Statement of
Additional Information. The financial statements in such Annual Report are
incorporated in this Statement of Additional Information by reference.
Such financial statements have been audited by the Fund's independent
auditors, Deloitte & Touche LLP, whose report thereon also appears in such
Annual Report and is incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such reports
given upon their authority as experts in accounting and auditing.
Additional copies of the Funds' 1995 Annual Report to Shareholders may be
obtained at no charge by writing or telephoning the Group at the address or
number on the front page of this Statement of Additional Information.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not contain
all the information included in the Group's registration statement filed
with the Securities and Exchange Commission under the Securities Act of
1933 with respect to the securities offered hereby, certain portions of
which have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The registration statement, including
the exhibits filed therewith, may be examined at the offices of the
Securities and Exchange Commission in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents referred to are not necessarily complete, and,
in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference.
APPENDIX A
DESCRIPTION OF RATINGS
The following paragraphs summarize the descriptions for the ratings
referred to in the Prospectus and Statement of Additional Information.
Moody's Investors Service, Inc.
The purpose of Moody's ratings is to provide investors with a single system
of gradation by which the relative investment qualities of bonds may be
rated.
Bonds
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge". Interest payments are protected by a large or
by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements, may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa: Bonds rated Baa are considered as medium grade obligations.
They are neither highly protected nor poorly secured. Interest payments
and security appear adequate for the present but certain protective
elements may appear lacking or unreliable.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2, and
3 in each generic rating classification from Aa through B in its bond
rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-
range ranking; and modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
Commercial Paper
Prime-1: Issuers rated Prime-1 (or related supporting institutions)
have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: (a) leading market positions in well
established industries;(b) high rates of return on funds employed; (c)
Conservative capitalization structures with moderate reliance on debt and
annual asset protection; (d) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and (e) well
established access to a range of financial markets and assured sources of
alternate liquidity.
Standard & Poor's Corporation
A Standard & Poor's debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors,
insurers, or lessees. The ratings are based on current information
furnished by the issuer or obtained by Standard & Poor's from other sources
it considers reliable. Standard & Poor's does not perform any audit in
connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings are based, in varying degrees, on the
following considerations: (a) likelihood of default-capacity and
willingness of the obligor as to the timely payment of interest and
repayment of principal in accordance with the terms of the obligation; (b)
nature of and provisions of the obligation; and (c) protection afforded by,
and relative position of, the obligation in the event of bankruptcy and
other laws affecting creditors' rights.
Bonds
AAA: Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the higher rated issues only in small
degree.
A: 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.
BBB: Debt rated BBB is considered to have adequate capacity to pay
interest and repay principal. Adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and principal than higher rated bonds.
The Standard & Poor's ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within the major
rating categories.
Commercial Paper
A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with
a plus (+) sign designation.
Fitch Ratings
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The
ratings represent Fitch's assessment of the issuer's ability to meet the
obligations of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and
prospective financial condition and operating performance of the issuer and
any guarantor, as well as the economic and political environment that might
affect the issuer's future financial strength and credit quality. Fitch
ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guarantees unless otherwise indicated.
Bonds
AAA: Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated "F-1 +".
A: Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Debt rated BBB is considered to be of satisfactory credit
quality. Ability to pay interest and principal is adequate. Adverse
changes in economic conditions and circumstances are more likely to impair
timely payment than higher rated bonds.
Commercial Paper
F-1: Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment. Those issues regarded as having the
strongest degree of assurance of repayment are denoted
with a plus (+) sign designation.
IBCA, Limited
IBCA analyzes credit quality of short term debt (maturities of one year or
less).
A: An issuer of impeccable financial condition, with a consistent
record of above average performance.
B: An issuer with a sound risk profile and without significant
problems. The issuer's performance has generally been in line with or
better than that of its peers.
C: An issuer which has an adequate risk profile but possesses one or
more troublesome aspects, giving rise to the possibility of risk
developing, or which has generally failed to perform in line with its
peers.
In addition, ratings of "A/B" and "B/C" may be assigned.
Thompson Bank Watch
Thompson Bank Watch ratings are based upon a qualitative and quantitative
analysis of all segments of the organization, including holding company and
operating subsidiaries.
Issuer Ratings
Thompson Bank Watch assigns only one Issuer Rating to each company, based
on consolidated financials. While the rating is blended to be equally
applicable to all operating entities of the organization, there may, in
certain cases, be more liquidity and/or credit risk associated with doing
business with one segment of the company as opposed to another (i.e.,
holding company vs. subsidiary).
Bank Watch Issuer Ratings are not merely an assessment of the likelihood of
receiving payment of principal and interest on a timely basis. It is also
important to recognize that the ratings incorporate our opinion of the
vulnerability of the company to adverse developments, which may impact the
market's perception of the company, thereby affecting the marketability of
its securities.
Bank Watch Issuer Ratings are assigned using an intermediate time horizon.
Rating Definitions
A: Company possesses an exceptionally strong balance sheet and
earnings record, translating into an excellent reputation and very good
access to its natural money markets. If weakness or vulnerability exists
in any aspect of the company's business, it is entirely mitigated by the
strengths of the organization.
A/B: Company is financially very solid with a favorable track record
and no readily apparent weakness. Its overall risk profile, while low, is
not quite as favorable as for companies in the highest rating category.
B: A strong company with a solid financial record and well received
by its natural money markets. Some minor weaknesses may exist, but any
deviation from the company's historical performance levels should be both
limited and short-lived. The likelihood of a problem developing is small,
yet slightly greater than for a higher-rated company.
B/C: Company is clearly viewed as a good credit. While some
shortcomings are apparent, they are not serious and/or are quite manageable
in the short-term.
C: Company is inherently a sound credit with no serious deficiencies,
but financials reveal at least one fundamental area of concern that
prevents a higher rating. Company may recently have experienced a period
of difficulty, but those pressures should not be long-term in nature. The
company's ability to absorb a surprise, however, is less than that for
organizations with better operating records.
