PAYDEN & RYGEL INVESTMENT GROUP
PAYDEN & RYGEL MARKET RETURN FUND
STATEMENT OF ADDITIONAL INFORMATION
May 2, 1996, as supplemented June 12, 1996
The Payden & Rygel Market Return Fund (the "Fund") is a series of the
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 Fund dated May 2, 1996, as
supplemented 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 (or by telephone at (213)
625-1900 or (800) 5-PAYDEN (800/572-9336).
TABLE OF CONTENTS
INVESTMENT OBJECTIVES AND POLICIEs...................... 2
FUNDAMENTAL AND OPERATING POLICIES ......................19
PORTFOLIO TRANSACTIONS ..................................22
VALUATION OF PORTFOLIO SECURITIES .......................23
FUND PERFORMANCE ........................................24
TAXATION ................................................26
MANAGEMENT OF THE GROUP .................................31
PURCHASES AND REDEMPTIONS ...............................36
OTHER INFORMATION .......................................37
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS...........41
APPENDIX B - FINANCIAL INFORMATION.......................46
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and general investment policies of the Fund are
described in the Prospectus. Additional information concerning the
characteristics of certain of the Fund's 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.
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 Fund 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 Adviser will undertake several measures in seeking to preserve
investors' principal:
- First, the debt securities in which the 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 established rating agencies, or if not rated,
will be determined to be of comparable quality by the Adviser.
- Second, the Adviser will actively manage the maturity of the
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, the Fund will seek to shorten its
portfolio's 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 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 the Fund's 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
Fund 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.
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. The 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. 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 Fund 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.
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. The Fund will invest
in foreign government obligations rated in one of the two highest rating
categories by an established rating agency (e.g., rated AAA or AA by
Standard & Poor's Corporation). These obligations will be denominated in
U.S. dollars.
Floating Rate and Variable Rate Demand Notes
The Fund 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.
The 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
The 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 the 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, the 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 the
Fund. In the event of a bankruptcy or default of any registered dealer or
bank, the Fund could experience costs and delays in liquidating the
underlying securities which are held as collateral, and the Fund might
incur a loss if the value of the collateral declines during this period.
Delayed Delivery Transactions
When delayed delivery purchases are outstanding, the 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, the 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 the 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,
the Fund could miss a favorable price or yield opportunity or could suffer
a loss. The Fund will not invest more than 25% of its total assets in when-
issued and delayed delivery transactions.
Illiquid Securities
The Fund may not 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 the 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.
OPTIONS AND FUTURES CONTRACTS
The Fund may purchase and sell ("write") both put options and call options
on securities and securities indices, enter into interest rate and index
futures contracts, and purchase and sell futures contracts and options on
such futures contracts ("futures options"). If other types of broad market
options, futures contracts, or futures options are traded in the future,
the 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 the Fund.
Options on Securities or Indices
The 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
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 underlying 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.
The 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 Fund'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 the 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 the 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).
The 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 the Fund is an asset
of the Fund. The premium received for an option written by the 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.
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 the 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 the 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 the 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, the 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 the 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
the 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.
Combinations of Options
As indicated in the Prospectus, the Fund 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.
Futures Contracts and Options on Futures Contracts
The Fund may use interest rate or index futures contracts, as specified in
the Prospectus. An interest rate contract provides for the future sale by
one party and purchase by another party of a specified quantity of a
financial instrument 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 S&P 500 Index, S&P 400 Index and
the Russell 2000 Index. 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 Fund 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.
In addition to the use of equity futures contracts, the Fund may use
futures contracts to hedge against anticipated changes in interest rates
that might adversely affect either the value of the Fund's fixed-income
securities or the price of the fixed-income securities which the Fund
intends to purchase. The 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 the Fund's exposure to interest rate fluctuations,
the 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 the 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 Fund expects to earn
interest income on its initial margin deposits. A futures contract held by
the Fund is valued daily at the official settlement price of the exchange
on which it is traded. Each day the 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 the 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 Fund will mark to market its open
futures positions.
The 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, the Fund realizes a capital loss. Conversely, if an offsetting
sale price is more than the original purchase price, the Fund realizes a
capital gain; if it is less, the Fund realizes a capital loss. The
transaction costs must also be included in these calculations.
Limitations on Use of Futures and Futures Options
The 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, the 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 net amount of its obligations under the futures contract.
Alternatively, the 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, the 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 net amount of its obligations under the contract. Alternatively, the
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, the 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, the 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, the 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, the 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," the 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 on equity
indexes and the use of futures contracts and futures options. 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 a futures contract or
option and in the equity market or fixed income securities. 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 transaction 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 financial instruments 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 purchase futures contracts or 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
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
the 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 the 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
or indices as well as exchange-traded options. Certain risks are specific
to dealer options. While the 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, the 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 the 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 Fund will seek to enter into dealer options only with dealers
which 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 the 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 Fund may be unable to liquidate a dealer option. With respect
to options written by the Fund, the inability to enter into a closing
transaction may result in material losses to the Fund. For example, since
the 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 Securities and Exchange Commission has taken the position
that many purchased dealer options and the assets used to secure written
dealer options are illiquid securities. The 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 Securities and Exchange
Commission changes its position on the liquidity of dealer options on
securities, currencies or indices, the Funds will change their treatment of
such instruments accordingly.
BORROWING
The 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, the
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 the 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 Fund 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.
Market Characteristics
The Trust expects that most foreign securities in which the Fund invests
will be actively traded in the United States at the time they are
purchased. However, on occasion they may 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 Fund's
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.
The value of the Fund's portfolio positions may also be adversely impacted
by delays in the Fund's 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 the 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 the Fund. The Fund intends to sell such bonds prior
to the interest payment date in order to avoid withholding.
Costs
The expense ratios of the Fund (before reimbursement by the Adviser
pursuant to the expense limitation described in the Prospectus under
"Management of the Funds -- Expense Guarantee") is 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.
THE CALCULATION OF DURATION
One common measure of the price volatility of a fixed income security is
duration, a weighted average term-to-maturity of the present value of a
security's cash flows. As it is a weighted term-to-maturity, duration is
generally measured in years and can vary from zero to the time-to-maturity
of the security. Duration is a complex formula that utilizes each cash flow
and the market yield of the security. Bonds of the same maturity can have
different durations if they have different coupon rates or yields.
For securities which pay periodic coupons and have a relatively short
maturity, duration tends to approximate the time to maturity. As the
maturity of the bond extends, the duration also extends but at a slower
rate. For example, the duration of a 2-year security can be about 1.8
years; the duration of a 30-year bond will be roughly 10 to 11 years.
However, the duration of any security that pays interest only at maturity
is the time to maturity. Thus a 30-year zero coupon bond has a duration of
30 years.
If the duration of the security is divided by the sum of one plus its
yield, the resultant number is called the modified duration of the
security. Modified duration is important to portfolio managers as it is
used to determine the sensitivity of the security to changes in interest
rates. For small changes in yield, the price of a security, as a
percentage of its initial price, will move inversely to the yield change by
an amount equal to the modified duration times the yield change. The
market price of a security with a modified duration of ten years will
change twice as much as a security with a with a five year duration.
Modified duration is a much better indicator of price volatility than time
to maturity. For example, the times to maturity for a 30 year bond and a
30 year zero coupon security are both 30 years. A portfolio manager using
average maturity to judge price volatility would expect to see no
difference in portfolio impact from these two securities (given equal
yield). However, the zero coupon bond will experience a percentage price
change roughly three times greater than the 30 year bond. The impact on a
portfolio is so vastly different that average maturity is no longer used as
a portfolio management tool, but has been replaced by duration.
FUNDAMENTAL AND OPERATING POLICIES
The Fund has adopted the investment restrictions described below.
Fundamental policies of the 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, the 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, equity and
reverse equity swap transactions and delayed delivery transactions
covered by segregated accounts are not considered to be borrowings). As
an operating policy, the Fund will not borrow amounts exceeding 33% of
total assets valued at market (including reverse repurchase agreements
and delayed delivery transactions).
(2) Commodities. Purchase or sell commodities or commodity contracts,
except that the Fund may enter into equity and financial futures
contracts and options on such futures contracts.
(3) Loans. Make loans, except that the Fund may (i) purchase money
market securities and enter into repurchase agreements, and (ii) acquire
bonds, debentures, notes and other debt securities.
(4) Margin. Purchase securities on margin, except that the Fund may (i)
use short-term credit necessary for clearance of purchases of portfolio
securities, and (ii) 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. This restriction shall not prohibit the Fund
from engaging in options, futures and foreign currency transactions.
(6) Assets Invested in Any Issuer. Purchase a security if, as a result,
with respect to 50% of the value of the 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 the 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 the 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) Senior Securities. Issue senior securities, except that the Fund may
borrow money as permitted by restriction (1) above. This restriction shall
not prohibit the Fund from engaging in options, futures, and foreign
currency transactions.
(12) Concentration. Invest 25% or more of the market value of its total
assets in the securities of issuers in any one particular industry. This
restriction shall not prohibit the Fund from investing in securities of the
U.S. Government or its agencies or instrumentalities, or engaging in
options, futures, swaps and foreign currency transactions.
OPERATING POLICIES
As a matter of operating policy, the 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 the 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).
STATE UNDERTAKINGS
In order to permit the sale of shares of the Fund 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 the
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 Ohio Department of Commerce that (i) the
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), and (ii)
the Fund will not invest any assets in the securities of other investment
companies except by purchase in the open market where no commission or
profit to a sponsor or dealer results from the purchase other than the
customary broker's commission, or except when the purchase is part of a
plan of merger, consolidation, reorganization or acquisition.
The Group has undertaken to the Arkansas Securities Department that (i) as
a matter of operating policy, the Fund will not invest more than 10% of its
total assets in the securities of issuers which it is restricted from
selling to the public without registration, other than restricted
securities eligible for resale pursuant to Rule 144A under the Securities
Act of 1933, and (ii) except for hedging purposes, the Fund will invest no
more than 5% of its total assets in premiums on securities options,
including without limitation puts, calls, straddles, spreads and any
combination thereof.
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 the 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 the 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 on securities and futures contracts and options on
futures contracts for the Fund and buys and sells such securities, futures
and options for the Fund 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 the 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 the 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 Fund 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 Fund generally will be. The turnover rate of the 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. Swap transactions do not affect the
calculation of portfolio turnover.
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 Fund.
VALUATION OF PORTFOLIO SECURITIES
Debt 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.
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. Futures and options contracts will be valued using the closing
price from the exchange on which they are traded. 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 U.S. corporate bonds, U.S. government 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
the Fund are determined as of such times for the purpose of computing the
Fund's net asset value. 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 Fund may quote its performance in various ways. All performance
information supplied by the Fund in advertising is historical and is not
intended to indicate future returns. The 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 the Fund may be compared to various unmanaged
indices (such as the S&P 500 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, the 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 the 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 Fund, 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 the 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/All Taxable, which
is reported in the Donoghue's Money Fund Report, covers over 772 taxable
money market funds. The Fund may quote its fund number, Quotron number and
CUSIP number or quote its current portfolio manager or any member of Payden
& Rygel's market strategy group.
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
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 the 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 the 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.
In addition to average annual total returns, the 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 and capital
(including capital gains and changes in share price) 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
The 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, the
Fund must, among other things, (a) derive in each taxable year at least 90%
of its gross income from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income (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 (the "Short-Short Test"); (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 ability of the Fund to satisfy the requirements of the Qualifying
Income Test, the Short-Short Test and the Diversification Test may depend
on the manner in which the Fund's swap transactions are classified, the
characterization of the income derived from such transactions, and the
identity of the issuers of the swap agreements. While the Fund believes
that its gross income (including any income from swap transactions) and
assets (including any swap agreements) should satisfy these Tests, no
definitive guidance currently exists with respect to the treatment under
the Code of swap transactions by regulated investment companies.
Development of such guidance in the future by the Internal Revenue Service
could require changes in the operations of the Fund. In addition, if for
any reason the Fund were not to qualify as a regulated investment company,
it would become taxable on its income, which would adversely impact its
total return to shareholders.
As a regulated investment company, the 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 seven years)
designated by the Fund as capital gain dividends, if any, that it
distributes to shareholders. The Fund intends to distribute to its
shareholders substantially all of its investment company taxable income
monthly and any net capital gains annually. In addition, amounts not
distributed by the 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, the 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 the 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 Fund intends to make its distributions
in accordance with the calendar year distribution requirement.
Distributions
Dividends paid out of the Fund's investment company taxable income 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 the 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 the 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.
Options, Futures and Forward Transactions
Many of the futures contracts, options on futures contracts and forward
contracts used by the Fund 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 the 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.
Certain transactions in futures, options, and forward contracts undertaken
by the Fund, may result in "straddles" for U.S. federal income tax
purposes. The straddle rules may affect the character of gains (or losses)
realized by the Fund. In addition, losses realized by the Fund on
positions that are part of a straddle may be deferred under the straddle
rules, rather than being taken into account in calculating the 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 the Fund are not entirely
clear. The transactions may increase the amount of short-term capital gain
realized by the Fund which is taxed as ordinary income when distributed to
shareholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections,
the amount, character and timing of the recognition of gains or losses from
the affected straddle positions will be determined under rules that vary
according to the election(s) made. The rules applicable under certain of
the elections 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 futures, options 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 the Fund will be able to engage in transactions in options,
futures contracts or forward contracts.
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 the 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 the 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 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. The 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 the 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 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.
The 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.
Sales of Shares
Upon disposition of shares of the 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
The 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.
Income received by the 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 Fund 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 the 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 the Fund's taxable year whether the foreign taxes paid by the Fund
will "pass-through" for that year.
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 the 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.
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). The 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 the 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 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)
J. Clayburn La Force Trustee Dean Emeritus, The John E.
P.O. Box 1009 Anderson Graduate School
Pauma Valley, CA 92061 of 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. Trustee President and Chief
2601 South Figueroa Executive Officer,
Street Automobile Club of
Los Angeles, CA 90007 Southern California
Dennis C. Poulsen Trustee President and Chief
3900 South Workman Executive Officer, Rose
Mill Road Hills Company
Whittier, CA 90601
Stender E. Sweeney Trustee Private investor since
1465 San Pasqual Street 1994; previously Vice
Pasadena, CA 91106 President, Finance, Times
Mirror Company
W.D. Hilton, Jr. Trustee Managing Trustee, NGC
310 East Interstate 30, Settlement Trust;
Suite 285 previously Chief Financial
Garland, TX 75043 Officer, 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.
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 Estimated Total
Benefits Annual Compensation
Aggregate Accrued as Benefits from Trust and
Compensation Part of Trust Upon Trust Complex
from Trust Expenses Retirement Paid to 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. McKernon, Jr. $12,000 None N/A $12,000 (9*)
</TABLE>
*Indicates total number of funds in "trust complex", all of which are
series of the Trust.
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
Vice President 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 April 30, 1996, its staff consisted of 75 employees, 18 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 $2.6 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 Fund 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 the 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 the Fund and of its shares with the SEC,
registering the Trust as a broker or dealer and qualifying the shares of
the 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 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 any excess
to the extent required by such regulations. 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.
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 Fund in
connection with the performance of the Agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation
for services or a loss resulting from willful misfeasance, bad faith or
gross negligence 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 the Fund until June 14, 1996 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 the 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 the 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.
The Adviser makes certain payments to broker-dealers in connection with the
Fund's participation in no-transaction-fee mutual fund programs sponsored
by such broker-dealers. These payments are not obligations of the Fund.
Due to the expense cap imposed on the Fund, the Adviser has not received
any fees for the period from commencement of Fund operations through March
31, 1996. During such period, absent such expense cap, the Adviser would
have received fees of $1,312.
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. During the
period from commencement of Fund operations through March 31, 1996,
Treasury Plus was paid $281.
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. During the period from commencement of Fund operations
through March 31, 1996, IFTC was paid $3,257.
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.
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 Fund, 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 Fund 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 the Fund, and other expenses associated with
performing services as distributor of the Fund's shares. The 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, the 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 the 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.
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 Fund reserves 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.
Due to the relatively high cost of maintaining smaller accounts, the 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.
The Fund redeems 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. The
Fund reserves the right to pay any redemption price exceeding this amount
in whole or in part by a distribution in kind of readily marketable
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.
OTHER INFORMATION
CAPITALIZATION
The 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 Fund 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 Equity Return Fund. Each series other than the Fund offers Class
B shares as well as Class A shares. 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 Fund's 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 of shares of the Fund are $30,926. These expenses
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.
As of April 19, 1996, the following persons were known to hold more than 5%
of the outstanding shares of the Fund: Joan A. Payden, Los Angeles,
California 90071, 42.6%; Teague Family Trust, Palos Verdes, California,
90274, 20.0%; Thomas Wertheimer, Santa Monica, California, 90402, 10.0%.
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration of Trust disclaims liability of the shareholders of the 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 the 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 the 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.
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 the 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 series 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 Fund 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 Fund. 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 the Fund; hold and disburse portfolio securities and other
assets on behalf of the Fund; collect and make disbursements of money on
behalf of the Fund; and receive all income and other payments and
distributions on account of the Fund's portfolio securities.
INDEPENDENT AUDITORS
Deloitte & Touche serves as the independent auditors for the Fund.
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.
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.
FINANCIAL STATEMENTS
The Fund's unaudited financial statements for the period from commencement
of operations through March 31, 1996 are set forth in Appendix B.
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.
APPENDIX B
UNAUDITED FINANCIAL STATEMENTS
PAYDEN & RYGEL INVESTMENT GROUP
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1996
(Unaudited)
<TABLE>
Market Return Fund
==================
<S> <C>
ASSETS:
Investments, at value (cost $2,463,628) $2,394,353
Interest receivable 27,164
Unamortized organization costs (Note 4) 36,900
Deferred expense subsidy (Note 5) 32,201
Prepaid expenses 13,312
---------
Total Assets 2,503,931
---------
LIABILITIES:
Payable to Payden & Rygel (Note 5) 65,687
Payable for open futures contracts 12,250
Accrued expenses:
Investment advisory fees 1,312
Administration fees 281
Other expenses 15,486
---------
Total Liabilities 95,016
---------
NET ASSETS:
Paid in capital 2,434,240
Undistributed net investment income 1,433
Accumulated net realized gains (losses) from investments 6,192
Accumulated net realized gains (losses) from futures contracts 32,149
Net unrealized appreciation (depreciation) from investments (69,275)
Net unrealized appreciation (depreciation) from open futures
contracts 4,175
----------
NET ASSETS $2,408,915
==========
Outstanding shares of beneficial interest 235,919
==========
NET ASSET VALUE - offering and
redemption price per share $10.21
==========
</TABLE>
See notes to financial statements.
PAYDEN & RYGEL INVESTMENT GROUP
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
Market Return Fund
------------------
For the period
December 1, 1995
to March 31, 1996 (a)
=====================
<S> <C>
INVESTMENT INCOME:
Interest $26,184
----------
Total Income 26,184
----------
EXPENSES:
Investment advisory fees (Note 5) 1,312
Administration fees (Note 5) 281
Custodian and accounting fees (Note 5) 3,257
Legal and audit fees 7,773
Organization expenses (Note 4) 2,501
Trustees' fees and expenses 57
Transfer agent fees (Note 5) 3,701
Registration and filing fees 10,807
Printing costs 2,437
Other 428
Expense subsidy (Note 5) (32,201)
---------
Total Expenses 353
---------
Net Investment Income 25,831
---------
REALIZED AND UNREALIZED GAINS (LOSSES):
Net realized gains (losses) from investments 6,192
Net realized gains (losses) from futures contracts 32,149
Change in net unrealized appreciation (depreciation) from
investments (69,275)
Change in net unrealized appreciation (depreciation) from
futures contracts 4,175
--------
Net realized and unrealized gains (losses) (26,759)
--------
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS ($928)
========
</TABLE>
- ----------
(a) Period from commencement of operations
See notes to financial statements.
PAYDEN & RYGEL INVESTMENT GROUP
STATEMENT OF CHANGES IN NET ASSETS
(Unaudited)
<TABLE>
Market Return Fund
------------------
For the period
December 1, 1995
to March 31, 1996 (a)
=====================
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income $25,831
Net realized gains (losses) 38,341
Change in net unrealized appreciation (depreciation) (65,100)
---------
Change in net assets resulting from operations (928)
---------
DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net investment income (24,398)
--------
Change in net assets from distributions to shareholders (24,398)
--------
FROM CAPITAL TRANSACTIONS:
Proceeds from shares sold 2,482,184
Reinvestment of distributions 24,241
Cost of shares redeemed (72,185)
---------
Change in net assets from capital transactions 2,434,240
----------
Total Increase in Net Assets 2,408,915
NET ASSETS:
Beginning of period 0
---------
End of period $2,408,915
---------
STATEMENT OF SHARES OUTSTANDING:
Outstanding shares at beginning of period 0
---------
Shares sold 240,260
Shares issued in reinvestment of distributions 2,365
Shares redeemed (6,705)
---------
Change in shares outstanding 235,919
---------
Outstanding shares at end of period 235,919
=========
</TABLE>
- ---------
(a) Period from commencement of operations
See notes to financial statements.
PAYDEN & RYGEL INVESTMENT GROUP
MARKET RETURN FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1996
(Unaudited)
<TABLE>
Shares or
Principal Amount Security Description Market Value
U.S. Treasury Notes (87.4%):
<S> <C> <C>
85,000 5.50%, 7/31/97(b) $84,863
115,000 5.63%, 1/31/98(b) 114,683
275,000 6.38%, 7/15/99(b) 278,000
630,000 7.50%, 2/15/05(b) 675,461
340,000 6.50%, 5/15/05(b) 341,836
610,000 6.13%, 7/31/00(b) 609,890
----------
Total U.S. Treasury Notes 2,104,733
----------
U.S. Treasury Bonds (2.9%):
75,000 6.25%, 8/15/23(b) 69,328
---------
Total U.S. Treasury Bonds 69,328
---------
Investment Companies (9.1%):
1,500,000 S&P 500 Depository Receipt 97,031
123,261 Prairie U.S. Government Securities
Cash Management Fund 123,261
---------
Total Investment Companies 220,292
---------
Total (Cost - $2,463,628)(a) (99.4%) 2,394,353
=========
</TABLE>
- ---------
Percentages indicated are based on net assets of $2,408,915.
(a) Represents cost for federal income tax purposes and differs from value
by net unrealized depreciation of securities as follows:
Unrealized appreciation $0
Unrealized depreciation (69,275)
----------
Net unrealized depreciation ($69,275)
----------
(b) A portion of the security is held by the custodian in a segregated
account as collateral for open futures contracts.
At March 31, 1996, the Fund's open futures contracts were as follows:
<TABLE>
# of Expiration Notional Current
Contracts Contract Type Date Amount Market Value
- --------- ------------- ---------- -------- ------------
<S> <C> <C> <C> <C>
7 S&P 500 6/20/96 $2,275,200 $2,279,375
</TABLE>
See notes to financial statements.
PAYDEN & RYGEL INVESTMENT GROUP
MARKET RETURN FUND
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(Unaudited)
1. Organization
Payden & Rygel Market Return Fund (the Equity Market Tracking Fund
prior to February 7, 1996) (the "Fund") is a non-diversified series of
Payden & Rygel Investment Group ("the Group"), a Massachusetts business
trust organized on January 22, 1992. The Group is registered under the
Investment Company Act of 1940, as amended, as an open-end management
investment company. The objective of the Fund is to provide a total return
in excess of the Standard & Poor's 500 Stock Index. To achieve this
objective, the Fund invests primarily in equity based investments, such as
stock index futures contracts and equity swap contracts, as well as in
fixed income securities; however, there can be no assurance that the Fund's
investment objectives will be achieved. The Fund offers both Class A and
Class B shares; however, as of March 31, 1996 there have been no Class B
shares issued. Class B shares are subject to certain fees under a
shareholder service plan (the "Plan"); Class A shares do not participate in
the Plan. Both classes of shares have identical rights and privileges
except with respect to the shareholder service fees borne by Class B and
voting rights on matters affecting a single class. The Group is authorized
to issue an unlimited number of shares of each class which are units of
beneficial interest with a par value of $.001 per share.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed
by the Fund:
Securities Valuation
Portfolio securities are valued on the basis of quotations obtained
from dealers or from a pricing service with consideration of such factors
as institutional-sized trading in similar groups of securities, quality,
yield, coupon rate, maturity, type of issue, trading characteristics and
other market data. Options, futures, swaps and other similar assets are
valued at the last available bid price in the case of listed securities or
on the basis of information provided by brokers in the case of other
securities. Securities for which market quotations are not readily
available are valued at fair value as determined in good faith pursuant to
guidelines established by the Board of Trustees. Debt securities with
remaining maturities of sixty days or less are valued on an amortized cost
basis unless Payden & Rygel (the "Adviser") determines that such basis does
not represent fair value.
Investment Transactions and Related Income
Investment transactions are accounted for on the date the security is
purchased or sold (trade date). Interest income is recognized on the
accrual basis. All premiums or original issue discounts are amortized or
accreted for both financial statement and tax reporting purposes as
required by Federal income tax regulations. Dividend income is recorded on
the ex-dividend date. Realized gains or losses on investment transactions
are determined on the identified cost basis.
Repurchase Agreements
The 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
equivalent of loans by the Fund. With respect to such agreements, it is
the Fund's policy to take possession of the underlying securities and, on a
daily basis, mark-to-market such securities to ensure that the value,
including accrued interest, is at least equal to the amount to be repaid to
the Fund under each agreement.
Options Transactions
When the Fund writes a covered call or put option, an amount equal to
the premium received is included in the Fund's statement of assets and
liabilities as a liability. The amount of the liability is subsequently
marked-to-market to reflect the current market value of the option. If an
option expires on its stipulated expiration date or if the Fund enters into
a closing purchase transaction, a gain or loss is realized. If a written
call option is exercised, a gain or loss is realized for the sale of the
underlying security and the proceeds from the sale are increased by the
premium originally received. If a written put option is exercised, the
cost of the security acquired is decreased by the premium originally
received.
When the Fund purchases a call or put option, an amount equal to the
premium paid is included in the Fund's statement of assets and liabilities
as an investment, and is subsequently marked-to-market to reflect the
current market value of the option. If an option expires on the stipulated
expiration date or if the Fund enters into a closing sale transaction, a
gain or loss is realized. If the Fund exercises a call option, the cost of
the security acquired is increased by the premium paid for the call. If
the Fund exercises a put option, a gain or loss is realized from the sale
of the underlying security, and the proceeds from such sale are decreased
by the premium originally paid. Written and purchased options are non-
income producing securities.
The options techniques utilized are to hedge against changes in
interest rates or securities prices in order to establish more definitely
the effective return on securities held or intended to be acquired by the
Fund or as an efficient means of adjusting exposure to the bond and equity
markets and not for speculation.
Futures Contracts
The Fund may purchase or sell futures contracts and options on futures
contracts which provide for the future sale by one party and purchase by
another party of a specified quantity of a financial instrument at a fixed
price on a future date. Upon entering into such a contract, the Fund is
required to deposit and maintain as collateral such initial margin as
required by the exchange on which the contract is traded. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
equal to the daily fluctuations in the value of the contract. Such
receipts or payments are known as variation margin and are recorded as
unrealized gains or losses by the Fund. When the contract is closed, the
Fund records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the time
it was closed. The Fund invests in futures contracts to hedge against
anticipated future changes in interest rates or security prices. The
potential risk to the Fund is that the change in value of the underlying
securities may not correlate to the change in value of the contracts.
The Fund may invest in stock index futures contracts which are 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. Variation margin accounting
procedures as discussed above apply to these index futures contracts. The
Fund invests in these futures contacts, combined with a fixed income
portfolio, to permit the Fund to meet its objectives at a lower cost than
investing directly in equity securities, while permitting the equivalent of
an investment in a portfolio of equity securities. The potential risk to
the Fund is that the change in value of the underlying index may not
correlate to the change in value of the contracts.
Equity Swap Contracts
The Fund may enter into equity swap transactions which involve an
agreement between the Fund and another party to exchange payments
calculated as if they were interest on a fictitious ("notional") principal
amount. The Fund will typically pay a floating rate of interest and
receive the total return of a specified equity index. The Fund usually
enters into such transactions on a "net" basis, with the Fund receiving or
paying, as the case may be, only the net amounts of the two payment
streams. The net amount of the excess or deficiency, if any, of the Fund's
obligations over its entitlements with respect to each swap is accrued on a
daily basis and is recorded as an unrealized gain or loss by the Fund.
The Fund invests in these swap transactions to permit the Fund to meet
its objectives at a lower cost than investing directly in equity
securities, while permitting the equivalent of an investment in a portfolio
of equity securities. The potential risk to the Fund is that the swap
position may correlate imperfectly with the markets or the asset or
liability being hedged.
Delayed Delivery Transactions
The Fund may purchase securities on a when issued or delayed delivery
basis and sell securities on a delayed delivery basis. These transactions
involve a commitment by the Fund to purchase or sell securities for a
predetermined price or yield with payment and delivery taking place more
than seven days in the future, or after a period longer than the customary
settlement period for that type of security. No interest will be earned by
the Fund on such purchases until the securities are delivered; however, the
market value may change prior to delivery. There were no such commitments
included in the Fund's schedules of portfolio investments at March 31,
1996.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date.
Dividends from net investment income are declared and paid monthly, and net
realized gains on investments, if any, are declared and distributed at
least annually. All distributions are paid in the form of additional
shares unless cash payment is requested.
Distributions to shareholders are determined in accordance with income
tax regulations which may differ from generally accepted accounting
principles.
Federal Income Taxes
It is the policy of the Fund to meet the requirements for
qualification as a regulated investment company as defined in applicable
sections of the Internal Revenue Code (the "Code"), and to make
distributions of net investment income and net realized gains sufficient to
relieve it from all Federal income or excise taxes. Accordingly, no
provision for Federal income or excise tax is necessary.
The Fund files a tax return annually using tax accounting methods
required under provisions of the Code which may differ from generally
accepted accounting principles, the basis on which these financial
statements are prepared. The differences arise primarily from the
treatment of futures contracts and the deferral of certain losses under
Federal income tax regulations. Accordingly, the amount of net investment
income and net realized gains or losses reported in these financial
statements may differ from that reported in the Fund's tax return and,
consequently, the character of distributions to shareholders reported in
the financial highlights may differ from that reported to shareholders for
Federal income tax purposes.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.
Other
Shared expenses incurred by the Group are allocated among the series
of the Group on the basis of relative net assets. Series-specific expenses
are charges to each series as incurred. Fund expenses not specific to any
class will be allocated between the classes based upon net assets of each
class.
3. Purchases and Sales of Investments
Purchases and sales of investments (excluding short-term investments)
for the period from December 1, 1995 (commencement of operations) to March
31, 1996 were $237,897 and $146,113, respectively.
Purchases and sales of long term U.S. Government Securities for the
period from December 1, 1995 (commencement of operations) to March 31, 1996
were $2,712,588 and $467,323, respectively.
The Fund had no activity in written options for the period from
December 1, 1995 (commencement of operations) to March 31, 1996.
4. Unamortized Organization Costs
The expenses incurred in connection with the organization and
registration of the Fund are $39,401. These expenses are being reimbursed
to the Adviser and amortized on a straight-line basis over a period not
exceeding five years. As of March 31, 1996, $2,501 of organization costs
have been amortized.
5. Related Party Transactions
Investment advisory services are provided to the Fund by Payden &
Rygel. Under the terms of the investment advisory agreement, the Adviser
is entitled to receive fees monthly, computed on the average daily net
assets of the Fund at an annualized rate. The rate for the Market Return
Fund is .28% on net assets up to $1 billion, decreasing to .25% on net
assets over $1 billion.
The Adviser has agreed to limit the Fund's total expenses, including
advisory fees, to .45% of the Fund's average daily net assets on an
annualized basis through October 31, 1996 (exclusive of interest, taxes,
brokerage commissions, blue sky fees, 12b-1 fees [if any such plan is
adopted in the future] and extraordinary expenses). (From January 1, 1996
through June 30, 1996, the Adviser has agreed to limit the Fund's total
expenses, including advisory fees, to 0.0% of the average daily net assets
on an annualized basis.) The Fund remains liable to the Adviser for
expenses subsidized in any fiscal year, so long as such reimbursement will
not cause the annual expense ratio for the year in which it is made to
exceed the amount of the expense guarantee or expense cap (whichever is in
effect at the time of reimbursement). As of March 31, 1996, the Adviser
had subsidized the $32,201 for the Fund.
The Adviser has incurred certain expenses in connection with the
offering of multiple class shares that will be charged to the Group upon
the initial sale of Class B shares to the public. Such expenses,
approximately $41,000 as of March 31, 1996, will be allocated to all series
of the Group that offer Class B shares on the basis of relative net assets
at the time of the initial sale of Class B shares, and will be prorated
between the classes on the basis of eligible net assets of each class over
a twelve month period.
Payden & Rygel Distributors, a subsidiary of Payden & Rygel, serves as
the distributor for the Fund and is not entitled to receive any fees from
the Group under the distribution agreement.
Treasury Plus, Inc., a subsidiary of Payden & Rygel, serves as
administrator to the Fund. Under the terms of the administration
agreement, Treasury Plus, Inc. receives fees monthly, computed on the
average daily net assets of the Fund at an annualized rate of .06%.
Investors Fiduciary Trust Company ("IFTC") serves as transfer agent to
the Fund. Under the terms of the transfer agency agreement, IFTC is
entitled to receive fees based upon a specified amount per shareholder with
a specified minimum-per-Fund amount and surcharges, plus certain out-of-
pocket expenses. IFTC also serves as fund accountant. Under the terms of
the fund accounting agreement, IFTC receives fees based on specified
minimum-per-Group amounts, plus certain out-of-pocket expenses.
Certain officers and/or trustees of the Group are affiliated with
Payden & Rygel, Payden & Rygel Distributors and/or Treasury Plus, Inc.
Such officers and trustees receive no fees from the Fund for serving as
officers and/or trustees of the Group.
