Fixed Income Funds
Limited Maturity Fund
Short Bond Fund
U.S. Treasury Fund
Intermediate Bond Fund
Investment Quality Bond Fund
Total Return Fund
Tax Exempt Funds
Short Duration Tax Exempt Fund
Tax Exempt Bond Fund
Equity Funds
Growth & Income Fund
Market Return Fund
Global Funds
Global Short Bond Fund
Global Fixed Income Fund
International Bond Fund
Global Balanced Fund
International Equity Fund
PROSPECTUS
December 9, 1996
[LOGO]
TABLE OF CONTENTS
Funds in Review 1
Expense Information 4
Financial Highlights 7
Net Asset Value 20
Dividends, Distributions and Taxes 20
Investment Objectives and Policies 22
Investment Practices 32
Management of the Funds 47
Shareholder Services 51
Redemption of Shares 53
How to Purchase Shares 53
Payden & Rygel Investment Group
333 South Grand Avenue
Los Angeles, California 90071
(800) 5-PAYDEN
The Payden & Rygel Investment Group (the "Group") is a professionally
managed, no-load, open-end management investment company. The Group
currently consists of fifteen distinct portfolios with separate investment
objectives (each a "Fund"). Information about the investment objectives
of the Funds, the types of securities in which each Fund may invest, and
applicable investment policies and restrictions, is set forth in this
Prospectus. There can be no assurance that the Funds' investment
objectives will be achieved. Because the market value of each Fund's
investments will change, the net asset value per share of the Funds also
will vary.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Funds. Payden & Rygel (the "Adviser")
serves as investment adviser for each of these Funds. Payden & Rygel has
been in the investment advisory business for 14 years and manages assets of
over $21 billion.
A Statement of Additional Information, dated December 9, 1996, containing
additional information about each Fund, has been filed with the Securities
and Exchange Commission and is incorporated by reference into this
Prospectus. It is available without charge and may be obtained by writing
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).
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, NOR ARE THE SHARES FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY.
This Prospectus should be read and retained for reference to information
about the Funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is December 9, 1996.
FUNDS IN REVIEW
This summary is designed to provide a brief overview of each of the Funds
including their investment objectives. A much more detailed discussion of
each Fund's objectives and investment policies begins on page 22. Page 53
has complete information on how to purchase, redeem and exchange shares.
FUND DESCRIPTIONS
Fixed Income Funds
Each Fixed Income Fund invests in debt obligations which pay principal and
interest in U.S. dollars and are "investment grade" at the time of
purchase. Investment grade means that each security has been rated by at
least one of the established rating agencies in one of its four top
categories (e.g. AAA, AA, A, or BBB by Standard & Poor's Corporation), or
if unrated, is determined by the Adviser to be of comparable quality.
Furthermore, the Total Return Fund may invest up to 25% of its assets in
fixed income securities that are below investment grade and may invest a
portion of its assets in securities which pay principal and interest in
foreign currencies.
The Limited Maturity Fund seeks to earn a total return that, over time, is
greater than that available from money market funds. Each other Fixed
Income Fund invests to earn a high level of total return, consistent with
preservation of capital. No Fund is constrained as to the final maturity
of any single investment. However, the average maturity of its portfolio
is, under normal market conditions, held to the limits discussed below.
The Limited Maturity Fund is aimed at investors seeking more income than
offered from a money market fund and willing to accept some share-price
volatility. The Fund invests primarily in U.S. Treasuries and government
agency securities, money market securities, investment grade corporate debt
and mortgage-backed securities. Average portfolio maturity generally
ranges between four and nine months.
The Short Bond Fund invests primarily in U.S. Treasuries and government
agency securities, money market securities and investment grade corporate
debt and mortgage-backed securities. The Fund maintains a relatively short
average portfolio maturity of no more than three years.
The U.S. Treasury Fund invests primarily in U.S. Treasury bills, notes and
bonds. Most investments mature in less than ten years and average
portfolio maturity is generally less than five years.
The Intermediate Bond Fund invests primarily in intermediate-term fixed-
income securities of the same types as the Limited Maturity Fund. Most
investments mature within ten years. Average portfolio maturity is
generally between three and six years.
The Investment Quality Bond Fund invests in the same type of securities as
the Limited Maturity Fund, but of any maturity. Average portfolio maturity
is generally less than ten years.
The Total Return Fund generally invests in the same types of debt
obligations as the Limited Maturity Fund. In addition, the Total Return
Fund can invest a portion of its assets in foreign bonds denominated in
foreign currencies, and up to 25% of its total assets in non-investment
grade debt. Securities below investment grade, commonly referred to as
"junk bonds", are speculative and subject to greater market fluctuations
and risk of loss of income and principal than higher rated bonds. The Fund
is not constrained with respect to its average maturity.
Tax Exempt Funds
The Short Duration Tax Exempt Fund and the Tax Exempt Bond Fund invest
primarily in debt obligations which are exempt from federal income tax.
Both Funds invest only in investment grade securities.
The Short Duration Tax Exempt Fund is designed for investors seeking tax-
exempt income from short-term debt. The Fund normally maintains an average
portfolio maturity of one to four years.
The Tax Exempt Bond Fund invests primarily in intermediate-term tax-exempt
securities. The Fund normally maintains an average maturity of between
five and ten years.
Equity Funds
The Growth & Income Fund seeks to provide growth of capital and some
current income. The Fund normally invests approximately half of its total
assets in the ten stocks in the Dow Jones Industrial Average with the
highest dividend yields. The remaining assets are invested in securities
intended to replicate the total return of the Standard & Poor's 500 Stock
Price Index (the "S&P 500 Index"), normally Standard & Poor's Depositary
Receipts or additional common stocks.
The Market Return Fund seeks to outperform the S&P 500 Index by investing
in a combination of S&P 500 Index futures contracts and a portfolio of
investment grade fixed income securities.
Global Funds
The objective of the International Equity Fund is long-term capital
appreciation. The objective of each other Global Fund is to realize a high
level of total return consistent with preservation of capital.
The Global Short Bond Fund and the Global Fixed Income Fund invest in U.S.
and foreign debt securities that are rated at the time of purchase in one
of the top two categories by at least one of the established rating
agencies (e.g. AAA or AA by Standard and Poor's Corporation). In order to
hedge foreign currency exposure, the Funds have substantial investment in
foreign currency contracts. The Global Short Bond Fund will normally have
an average portfolio maturity of one to three years. The Global Fixed
Income Fund will normally have an average maturity of no more than ten
years.
The International Bond Fund invests in the same types of debt obligations
as the Global Fixed Income Fund, except they are primarily not denominated
in U.S. dollars. The Fund's average portfolio maturity will not exceed 10
years.
The Global Balanced Fund invests in common stocks, bonds, and money market
instruments of both domestic and foreign issuers. The proportion of
assets invested in each asset class will vary from time to time based upon
the Adviser's determination of expected returns and risks.
The International Equity Fund invests in equity securities (common and
preferred stock) of issuers whose corporate headquarters are outside the
United States ("foreign equities"). Normally, the Fund's assets will be
invested in securities of issuers headquartered in at least five different
countries.
INVESTMENT RISKS AND CONSIDERATIONS
Because each Fixed Income Fund, each Global Fund (other than the
International Equity Fund) and the Market Return Fund invests or may invest
principally in debt securities, the value of its portfolio will generally
vary inversely with changes in interest rates, and each Fund's ability to
achieve its investment objective will depend on the ability of issuers to
pay their debt obligations when due.
The Growth & Income, International Equity, and Global Balanced Funds invest
principally in equity or equity-based securities. Although equity
securities have a history of long-term growth in value, their prices
fluctuate based on changes in the issuer's financial condition and
prospects, and on overall market and economic conditions.
The Total Return, Global Fixed Income, Global Short Bond, Global Balanced
and International Bond Funds will purchase debt obligations that are
payable in foreign currencies. The acquisition of securities issued by
foreign governments and foreign companies and denominated in foreign
currencies involves investment risks that are different in some respects
from those incurred by a fund that invests only in debt obligations of U.S.
governmental entities and domestic companies, including differences in
reporting standards; adverse changes in investment, exchange or tax control
regulations; political instability; changes in exchange rates; greater
portfolio volatility; additional transaction costs; less government
regulation of securities markets, brokers and issuers; possible difficulty
in obtaining and enforcing judgments in foreign courts; and imposition of
restrictions on foreign investments.
INVESTMENT ADVISER AND SUB-ADVISER
Payden & Rygel serves as Adviser to each Fund. The Adviser has retained
Scottish Widows Investment Management as Sub-adviser to the International
Equity Fund and a portion of the Global Balanced Fund.
PURCHASE AND REDEMPTION OF SHARES
Two classes of shares of each Fund are offered through Payden & Rygel
Distributors with no sales charge for either class. The minimum initial
investment is $5,000, and the minimum subsequent investment is $1,000.
Class B Shares are subject to Shareholder Service Plan fees of 0.25% of
average daily net assets. Class A Shares do not participate in the Plan
and do not pay these fees. Shares of each Fund may be exchanged for Class
A or Class B Shares of any other Fund or for the other class of shares of
the Fund.
Shares of each Fund may be redeemed or exchanged without cost at the net
asset value per share of the Fund next determined after receipt of a
request in proper form. The redemption or exchange price may be more or
less than the purchase price.
EXPENSE INFORMATION
All classes of Shares are offered to investors on a no-load basis without
any sales commissions or distribution ("12b-1 plan") charges.
Annual Fund Operating Expenses
(as a percentage of average net assets for the fiscal year ended October
31, 1996 (for Class A Shares) or for the fiscal year ended October 31, 1997
(for Class B Shares) except as otherwise indicated, after reimbursement of
Advisory fees and other expenses)
<TABLE>
Class A Shares Class B Shares
========================= ============================
Total Other Total
Advisory Other Fund Advisory Expenses Fund
FIXED INCOME FUNDS Fees Expenses Expenses Fees (estimated)* Expenses
<S> <C> <C> <C> <C> <C> <C>
Limited Maturity Fund 0.28% 0.02% 0.30% 0.28% 0.27% 0.55%
Short Bond Fund 0.28% 0.12% 0.40% 0.28% 0.37% 0.65%
U.S. Treasury Fund 0.28% 0.17% 0.45% 0.28% 0.42% 0.70%
Intermediate Bond Fund 0.28% 0.17% 0.45% 0.28% 0.42% 0.70%
Investment Quality Bond Fund 0.28% -0.28% 0.00% 0.28% 0.42% 0.70%
Total Return Fund** 0.28% 0.17% 0.45% 0.28% 0.42% 0.70%
TAX EXEMPT FUNDS
Short Duration Tax Exempt Fund 0.32% 0.13% 0.45% 0.32% 0.38% 0.70%
Tax Exempt Bond Fund 0.32% 0.13% 0.45% 0.32% 0.38% 0.70%
EQUITY FUNDS
Growth & Income Fund 0.30% 0.24% 0.54% 0.50% 0.35% 0.85%
Market Return Fund 0.28% -0.28% 0.00% 0.28% 0.42% 0.95%
GLOBAL FUNDS
Global Short Bond Fund** 0.30% 0.15% 0.45% 0.30% 0.40% 0.70%
Global Fixed Income Fund 0.31% 0.22% 0.53% 0.30% 0.65% 0.95%
International Bond Fund 0.35% 0.35% 0.70% 0.30% 0.65% 0.95%
Global Balanced Fund** 0.50% 0.20% 0.70% 0.50% 0.45% 0.95%
International Equity Fund** 0.60% 0.30% 0.90% 0.60% 0.55% 1.15%
</TABLE>
* Includes Shareholder Service Plan fee of 0.25%.
** Annualized estimate for the fiscal year ending October 31, 1997.
The Adviser has guaranteed that, for so long as it acts as investment
adviser to a Fund, the expenses of the Fund, including advisory fees (but
excluding interest, taxes, portfolio transaction expenses, blue sky fees,
12b-1 plan fees [if any such plan is adopted in the future] and
extraordinary expenses) will not exceed the percentage listed below of the
Fund's average daily net assets on an annualized basis. In addition, the
Adviser has voluntarily agreed to temporarily limit each Fund's expense
ratio on an annualized basis through October 31, 1997 (exclusive of
interest, taxes, portfolio transaction expenses, blue sky fees, 12b-1 plan
fees [if any such plan is adopted in the future] and extraordinary
expenses) as listed below. The Adviser has voluntarily agreed to waive
0.20% of its management fee for the Growth & Income Fund through at least
October 31, 1997.
<TABLE>
Class A Shares Class B Shares
==================== ==================
Current Current
Voluntary Voluntary
Expense Expense Expense Expense
FIXED INCOME FUNDS Guarantee Limit Guarantee Limit
<S> <C> <C> <C> <C>
Limited Maturity Fund 0.60% 0.30% 0.85% 0.55%
Short Bond Fund 0.60% 0.40% 0.85% 0.65%
U.S. Treasury Fund 0.60% 0.45% 0.85% 0.70%
Intermediate Bond Fund 0.60% 0.45% 0.85% 0.70%
Investment Quality Bond 0.60% 0.45% 0.85% 0.70%
Fund
Total Return Fund 0.60% 0.45% 0.85% 0.70%
TAX EXEMPT FUNDS
Short Duration Tax Exempt 0.60% 0.45% 0.85% 0.70%
Fund
Tax Exempt Bond Fund 0.60% 0.45% 0.85% 0.70%
EQUITY FUNDS
Growth & Income Fund 0.80% 0.54% 1.05% 0.85%
Market Return Fund 0.60% 0.45% 0.85% 0.70%
GLOBAL FUNDS
Global Short Bond Fund 0.70% 0.45% 0.95% 0.70%
Global Fixed Income Fund 0.70% 0.70% 0.95% 0.95%
International Bond Fund 0.70% 0.70% 0.95% 0.95%
Global Balanced Fund 0.85% 0.70% 0.85% 0.95%
International Equity Fund 1.05% 0.90% 1.30% 1.15%
</TABLE>
Each Fund will reimburse the Adviser for fees foregone or other expenses
paid by it in any fiscal year pursuant to the expense guarantee or
voluntary expense cap at a later date, without interest, 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 voluntary
expense cap (whichever is in effect at the time of reimbursement). No Fund
will be required to repay any unreimbursed amounts to the Adviser upon
termination of its investment management contract with respect to the Fund.
Actual expenses for the Class A Shares of the Funds for the fiscal year
ended October 31, 1996, before reimbursement by the Adviser, were as
follows: Limited Maturity Fund, 0.62%; Short Bond Fund, 0.57%; U.S.
Treasury Fund, 0.78%; Intermediate Bond Fund, 0.58%; Investment Quality
Bond Fund, 0.64%; Short Duration Tax Exempt Fund, 0.70%; Tax Exempt Bond
Fund, 0.61%; Market Return Fund, 4.14%; Global Short Bond Fund, 2.31%;
Global Fixed Income Fund, 0.53%; and International Bond Fund, 0.98%.
Actual expenses for Class A Shares of the Total Return, Global Short Bond,
International Equity, Global Balanced and Growth & Income Funds for the
fiscal year ended October 31, 1997, before reimbursement by the Adviser,
are estimated to be 1.0% of average net assets (annualized). No Class B
Shares were sold during the fiscal year ended October 31, 1996.
The following table illustrates the expenses a shareholder would pay on a
$1,000 investment over various time periods assuming (1) a 5% annual return
and (2) redemption at the end of each time period. As noted above, there
are no Fund redemption fees of any kind.
Expenses Per $1,000 Investment
<TABLE>
Class A Shares Class B Shares
========================= =========================
1 3 5 10 1 3 5 10
FIXED INCOME FUNDS Year Years Years Years Year Years Years Years
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Limited Maturity Fund $3 $11 $19 $42 $6 $18 $31 $71
Short Bond Fund $4 $13 $22 $51 $7 $21 $37 $83
U.S. Treasury Fund $5 $15 $25 $57 $7 $23 $40 $89
Intermediate Bond Fund $5 $15 $25 $57 $7 $23 $40 $89
Investment Quality Bond Fund $5 $15 $25 $57 $7 $23 $40 $89
Total Return Fund $5 $15 $25 $57 $7 $23 $40 $89
TAX EXEMPT FUNDS
Short Duration Tax Exempt Fund $5 $15 $25 $57 $7 $23 $40 $89
Tax Exempt Bond Fund $5 $15 $25 $57 $7 $23 $40 $89
EQUITY FUNDS
Growth & Income Fund $6 $19 $9 $27
Market Return Fund $5 $15 $25 $57 $7 $23
GLOBAL FUNDS
Global Short Bond Fund $5 $15 $7 $23
Global Fixed Income Fund $5 $16 $28 $63 $10 $31
International Bond Fund $7 $22 $39 $87 $10 $31
Global Balanced Fund $7 $22 $10 $31
International Equity Fund $9 $29 $12 $37
</TABLE>
The information in the table is provided for purposes of assisting current
and prospective shareholders in understanding the various costs and
expenses that an investor will bear, directly or indirectly. The
hypothetical annual return of 5% is used for illustrative purposes only and
should not be interpreted as an estimate of any Fund's annual returns, as
there can be no guarantee of any Fund's future performance.
FINANCIAL HIGHLIGHTS
The following financial highlights are included to assist shareholders in
evaluating the performance of the Funds since their commencement of
operations through October 31, 1996. The information set forth in these
tables has been derived from financial statements and financial highlights
audited by Deloitte & Touche LLP, independent auditors, whose report
thereon was unqualified. The information should be read in conjunction
with the Funds' financial statements and notes thereto, which appear in the
1996 Annual Report to Shareholders and the 1996 Semi-Annual Report to
Shareholders incorporated by reference in the Statement of Additional
Information. Class B Shares were not sold during the period, and the Total
Return, Growth & Income, International Equity and Global Balanced Funds
were not open during the period.
PAYDEN & RYGEL
LIMITED MATURITY FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
For the Period
Year Ended Year Ended May 1, 1994 to
October 31, October 31, October 31,
1996 1995 1994 (a)
<S> <C> <C> <C>
Net asset value, beginning of period $10.06 $10.00 $10.00
Income (loss) from investment activities:
Net investment income 0.53 0.56 0.19
Net realized and unrealized gains (losses) ____ 0.07 (0.01)
Total from investment activities 0.53 0.63 0.18
Distributions to shareholders:
From net investment income (0.53) (0.57) (0.18)
Total distributions to shareholders (0.53) (0.57) (0.18)
Net asset value, end of period $10.06 $10.06 $10.00
Total return 5.41% 6.43% 1.84% (b)
Ratios/supplemental data:
Net assets at end of period (000) $50,771 $18,414 $14,248
Ratio of expenses to average net assets 0.30% 0.33% 0.41% (c)
Ratio of net investment income to
average net assets 5.45% 5.59% 4.74% (c)
Ratio of expenses to average net assets
prior to subsidies 0.62% 0.83% 2.92% (c)
Ratio of net investment income to average
net assets prior to subsidies 5.13% 5.09% 2.23% (c)
Portfolio turnover rate 216.68% 166.07% 86.35% (c)
</TABLE>
(a) Period from commencement of operations
(b) Not annualized
(c) Annualized
PAYDEN & RYGEL
SHORT BOND FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
For the Period
Year Ended Year Ended January 1, 1994
October 31, October 31, to October 31,
1996 1995 1994 (a)
<S> <C> <C> <C>
Net asset value, beginning of period $10.04 $9.68 $10.00
Income (loss) from investment activities:
Net investment income 0.54 0.54 0.34
Net realized and unrealized gains (losses) (0.06) 0.36 (0.32)
Total from investment activities 0.48 0.90 0.02
Distributions to shareholders:
From net investment income (0.54) (0.54) (0.34)
From net realized gains (0.01) ____ ____
Total distributions to shareholders (0.55) (0.54) (0.34)
Net asset value, end of period $9.97 $10.04 $9.68
Total return 4.86% 9.56% 0.21% (b)
Ratios/supplemental data:
Net assets at end of period (000) $97,966 $19,157 $2,592
Ratio of expenses to average net assets 0.40% 0.40% 0.48% (c)
Ratio of net investment income to average
net assets 5.67% 5.72% 4.47% (c)
Ratio of expenses to average net assets
prior to subsidies 0.57% 1.03% 4.56% (c)
Ratio of net investment income to average
net assets prior to subsidies 5.50% 5.09% 0.39% (c)
Portfolio turnover rate 212.44% 170.27% 186.85% (c)
</TABLE>
(a) Period from commencement of operations
(b) Not annualized
(c) Annualized
PAYDEN & RYGEL
U.S. TREASURY FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
Year Ended For the Period
October 31, January 1, 1995 to
1996 October 31, 1995 (a)
<S> <C> <C>
Net asset value, beginning of period $10.61 $10.00
Income (loss) from investment activities:
Net investment income 0.58 0.53
Net realized and unrealized gains (losses) (0.04) 0.61
Total from investment activities 0.54 1.14
Distributions to shareholders:
From net investment income (0.58) (0.53)
From net realized gains (0.03)
Total distributions to shareholders (0.61) (0.53)
Net asset value, end of period $10.54 $10.61
Total return 5.20% 11.61% (b)
Ratios/supplemental data:
Net assets at end of period (000) $22,114 $10,894
Ratio of expenses to average net assets 0.45% 0.45% (c)
Ratio of net investment income to average
net assets 5.59% 6.31% (c)
Ratio of expenses to average net assets
prior to subsidies 0.78% 1.84% (c)
Ratio of net investment income to average
net assets prior to subsidies 5.26% 4.92% (c)
Portfolio turnover rate 151.83% 87.10% (c)
</TABLE>
(a) Period from commencement of operations
(b) Not annualized
(c) Annualized
PAYDEN & RYGEL
INTERMEDIATE BOND FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
For the Period
Year Ended Year Ended January 1, 1994
October 31, October 31, to October 31,
1996 1995 1994 (a)
<S> <C> <C> <C>
Net asset value, beginning of period $9.85 $9.30 $10.00
Income (loss) from investment activities:
Net investment income 0.56 0.57 0.35
Net realized and unrealized gains (losses) (0.17) 0.55 (0.70)
Total from investment activities 0.39 1.12 (0.35)
Distributions to shareholders:
From net investment income (0.56) (0.57) (0.35)
From net realized gains (0.08)
Total distributions to shareholders (0.64) (0.57) (0.35)
Net asset value, end of period $9.60 $9.85 $9.30
Total return 4.06% 12.43% -3.52% (b)
Ratios/supplemental data:
Net assets at end of period (000) $52,767 $34,391 $14,312
Ratio of expenses to average net assets 0.45% 0.45% 0.46% (c)
Ratio of net investment income to average
net assets 5.90% 6.10% 5.39% (c)
Ratio of expenses to average net assets
prior to subsidies 0.58% 0.68% 2.03% (c)
Ratio of net investment income to average
net assets prior to subsidies 5.77% 5.87% 3.82% (c)
Portfolio turnover rate 195.63% 189.00% 358.23% (c)
</TABLE>
(a) Period from commencement of operations
(b) Not annualized
(c) Annualized
PAYDEN & RYGEL
INVESTMENT QUALITY BOND FUND (OPPORTUNITY FUND)
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
For the Period
Year Ended Year Ended January 1, 1994
October 31, October 31, to October 31,
1996 1995 1994 (a)
<S> <C> <C> <C>
Net asset value, beginning of period $9.96 $9.09 $10.00
Income (loss) from investment activities:
Net investment income 0.63 0.57 0.37
Net realized and unrealized gains (losses) (0.17) 0.87 (0.91)
Total from investment activities 0.46 1.44 (0.54)
Distributions to shareholders:
From net investment income (0.61) (0.57) (0.37)
Total distributions to shareholders (0.61) (0.57) (0.37)
Net asset value, end of period $9.81 $9.96 $9.09
Total return 4.86% 16.39% -5.49% (b)
Ratios/supplemental data:
Net assets at end of period (000) $32,304 $25,822 $3,030
Ratio of expenses to average net assets 0.00% 0.45% 0.49% (c)
Ratio of net investment income to average
net assets 6.41% 6.20% 5.25% (c)
Ratio of expenses to average net assets
prior to subsidies 0.64% 1.11% 4.52% (c)
Ratio of net investment income to average
net assets prior to subsidies 5.77% 5.55% 1.22% (c)
Portfolio turnover rate 196.78% 252.09% 513.35% (c)
</TABLE>
(a) Period from commencement of operations
(b) Not annualized
(c) Annualized
PAYDEN & RYGEL
SHORT DURATION TAX EXEMPT FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
For the Period
Year Ended Year Ended September 1, 1994
October 31, October 31, to October 31,
1996 1995 1994 (a)
<S> <C> <C> <C>
Net asset value, beginning of period $10.08 $9.93 $10.00
Income (loss) from investment activities:
Net investment income 0.38 0.42 0.04
Net realized and unrealized gains (losses) (0.06) 0.15 (0.07)
Total from investment activities 0.32 0.57 (0.03)
Distributions to shareholders:
From net investment income (0.38) (0.42) (0.04)
From net realized gains (0.01)
Total distributions to shareholders (0.39) (0.42) (0.04)
Net asset value, end of period $10.01 $10.08 $9.93
Total return 3.28% 5.88% -0.35% (b)
Ratios/supplemental data:
Net assets at end of period (000) $36,336 $16,019 $20,150
Ratio of expenses to average net assets 0.45% 0.45% 0.45% (c)
Ratio of net investment income to average
net assets 3.81% 4.12% 3.20% (c)
Ratio of expenses to average net assets
prior to subsidies 0.70% 0.91% 2.87% (c)
Ratio of net investment income to average
net assets prior to subsidies 3.56% 3.66% 0.78% (c)
Portfolio turnover rate 34.72% 79.81% 0.00% (c)
</TABLE>
(a) Period from commencement of operations
(b) Not annualized
(c) Annualized
PAYDEN & RYGEL
TAX EXEMPT BOND FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
For the Period
Year Ended Year Ended December 21, 1993
October 31, October 31, to October 31,
1996 1995 1994 (a)
<S> <C> <C> <C>
Net asset value, beginning of period $9.59 $8.90 $10.00
Income (loss) from investment activities:
Net investment income 0.45 0.46 0.33
Net realized and unrealized gains (losses)(0.12) 0.69 (1.10)
Total from investment activities 0.33 1.15 (0.77)
Distributions to shareholders:
From net investment income (0.45) (0.46) (0.33)
Total distributions to shareholders (0.45) (0.46) (0.33)
Net asset value, end of period $9.47 $9.59 $8.90
Total return 3.52% 13.25% -7.85% (b)
Ratios/supplemental data:
Net assets at end of period (000) $49,862 $40,052 $25,474
Ratio of expenses to average net assets 0.45% 0.45% 0.50% (c)
Ratio of net investment income to average
net assets 4.73% 4.97% 4.47% (c)
Ratio of expenses to average net assets
prior to subsidies 0.61% 0.74% 1.07% (c)
Ratio of net investment income to average
net assets prior to subsidies* 4.57% 4.69% 3.90% (c)
Portfolio turnover rate 23.04% 41.87% 97.53% (c)
</TABLE>
(a) Period from commencement of operations
(b) Not annualized
(c) Annualized
PAYDEN & RYGEL
MARKET RETURN FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
For the period
December 1, 1995
to October 31, 1996 (a)
<S> <C>
Net asset value, beginning of period $10.00
Income (loss) from investment activities:
Net investment income 0.50
Net realized and unrealized gains (losses) 0.86
Total from investment activities 1.36
Distributions to shareholders:
From net investment income (0.50)
Total distributions to shareholders (0.50)
Net asset value, end of period $10.86
Total return 14.06% (b)
Ratios/supplemental data:
Net assets at end of period (000) $5,789
Ratio of expenses to average net assets 0.00% (c)
Ratio of net investment income to average
net assets 5.95% (c)
Ratio of expenses to average net assets
prior to subsidies 4.14% (c)
Ratio of net investment income to average
net assets prior to subsidies 1.81% (c)
Portfolio turnover rate 146.31% (c)
</TABLE>
(a) Period from commencement of operations
(b) Not annualized
(c) Annualized
PAYDEN & RYGEL
GLOBAL SHORT BOND FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
For the period
September 18, 1996
to October 31, 1996 (a)
Net asset value, beginning of period $10.00
Income (loss) from investment activities:
Net investment income 0.05
Net realized and unrealized gains (losses) 0.06
Total from investment activities 0.11
Distributions to shareholders:
From net investment income (0.04)
Total distributions to shareholders (0.04)
Net asset value, end of period $10.07
Total return 1.10% (b)
Ratios/supplemental data:
Net assets at end of period (000) $28,913
Ratio of expenses to average net assets 0.45% (c)
Ratio of net investment income to average
net assets 4.86% (c)
Ratio of expenses to average net assets
prior to subsidies 2.31% (c)
Ratio of net investment income to average
net assets prior to subsidies 3.00% (c)
Portfolio turnover rate 0.00% (c)
(a) Period from commencement of operations
(b) Not annualized
(c) Annualized
PAYDEN & RYGEL
GLOBAL FIXED INCOME FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
Year Ended Year Ended Year Ended
October 30, October 31, October 31,
1996 1995 1994
<S> <C> <C> <C>
Net asset value, beginning of period $10.32 $9.77 $10.62
Income from investment activities:
Net investment income 0.54 0.89 0.44
Net realized and unrealized gains (losses) 0.19 0.53 (0.65)
Total from investment activities 0.73 1.42 (0.21)
Distributions to shareholders:
From net investment income (0.70) (0.87) (0.42)
From net realized gains (0.22)
Total distributions to shareholders (0.70) (0.87) (0.64)
Net asset value, end of period $10.35 $10.32 $9.77
Total return 7.41% 15.10% -2.09%
Ratios/supplemental data:
Net assets at end of period (000) $651,165 $540,041 $430,210
Ratio of expenses to average net assets 0.53% 0.50% 0.55%
Ratio of net investment income to average
net assets 5.67% 8.94% 4.24%
Portfolio turnover rate 175.68% 226.72% 348.12%
</TABLE>
(b) Not annualized
(c) Annualized
PAYDEN & RYGEL
GLOBAL FIXED INCOME FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
For the Period
Year Ended September 1, 1992
October 31, to October 31,
1993 1992 (a)
<S> <C> <C>
Net asset value, beginning of period $9.96 $10.00
Income (loss) from investment activities:
Net investment income 0.46 0.05
Net realized and unrealized gains (losses) 0.69 (0.02)
Total from investment activities 1.15 0.03
Distributions to shareholders:
From net investment income (0.46) (0.05)
In excess of net investment income (0.02)
From net realized gains (0.03)
Total distributions to shareholders (0.49) (0.07)
Net asset value, end of period $10.62 $9.96
Total return 11.88% 0.31% (b)
Ratios/supplemental data:
Net assets at end of period (000) $296,958 $20,097
Ratio of expenses to average net assets 0.70% 0.70% (c)
Ratio of net investment income to average
net assets 4.22% 4.62% (c)
Ratio of expenses to average net assets
prior to subsidies 0.68% 2.29% (c)
Ratio of net investment income to average
net assets prior to subsidies 4.24% 3.03% (c)
Portfolio turnover rate 252.97% 53.98% (c)
</TABLE>
(a) Period from commencement of operations
(b) Not annualized
(c) Annualized
PAYDEN & RYGEL
INTERNATIONAL BOND FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
For the Period
Year Ended April 1, 1995 to
October 31, October 31,
1996 1995 (a)
<S> <C> <C>
Net asset value, beginning of period $10.04 $10.00
Income (loss) from investment activities:
Net investment income 0.03 0.15
Net realized and unrealized gains (losses) 0.42 0.09
Total from investment activities 0.45 0.24
Distributions to shareholders:
From net investment income (0.03) (0.15)
From net realized gains (0.07) (0.04)
In excess of net realized gains (0.01)
Total distributions to shareholders (0.10) (0.20)
Net asset value, end of period $10.39 $10.04
Total return 4.47% 2.43% (b)
Ratios/supplemental data:
Net assets at end of period (000) $18,364 $19,194
Ratio of expenses to average net assets 0.70% 0.70% (c)
Ratio of net investment income to average
net assets 5.61% 5.24% (c)
Ratio of expenses to average net assets
prior to subsidies 0.98% 1.64% (c)
Ratio of net investment income to average
net assets prior to subsidies 5.33% 4.30% (c)
Portfolio turnover rate 216.80% 96.62% (c)
</TABLE>
(a) Period from commencement of operations
(b) Not annualized
(c) Annualized
NET ASSET VALUE
For each class of shares the net asset value per share of each Fund is
determined as of the close of regular trading on the New York Stock
Exchange (normally 4:00 p.m. New York Time) by dividing the difference
between the value of assets and liabilities of the class by the number of
shares of that class outstanding. The net asset value per share of each
class will vary due to differences in expenses charged to each class and
will generally be lower for Class B Shares than for Class A Shares.
Foreign equity securities are valued based upon the last sale price on the
foreign exchange or market on which they are principally traded as of the
close of the appropriate exchange or, if there have been no sales during
the day, at the last bid prices. Equity securities listed or traded on any
domestic (U.S.) securities exchange are valued at the last sale price or,
if there have been no sales during the day, at the last bid prices.
Securities traded only on the over-the-counter market are valued at the
latest bid prices.
Domestic and foreign fixed income securities and other assets for which
market quotations are readily available (other than obligations with
remaining maturities of 60 days or less) are valued at market value on the
basis of quotes obtained from brokers and dealers or pricing services,
which take into account appropriate factors such as institutional-sized
trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics and other market data.
Certain fixed income securities for which daily market quotations are not
available may be valued, pursuant to guidelines established by the Board of
Trustees, with reference to fixed income securities the prices of which are
more readily obtainable and the durations of which are comparable to the
securities being valued. The Board of Trustees has determined that debt
securities with remaining maturities of 60 days or less will be valued on
an amortized cost basis unless the Adviser determines that such basis does
not represent fair value at the time. Swaps, caps and floors are valued on
the basis of information provided by the institution with which the Fund
entered into the transaction. Non-U.S. dollar securities are translated
into U.S. dollars using the spot exchange rate at the close of the London
market.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends are generally declared and distributed to shareholders monthly
for all Funds except the International Bond, International Equity, Global
Balanced and Growth & Income Funds, which declare and distribute dividends
quarterly. Class B dividends will normally be lower than Class A
dividends. Any net realized capital gains from the sale of portfolio
securities will be distributed no less frequently than once yearly.
Dividend and capital gain distributions of each Fund will be paid in the
form of additional shares of the Fund at the net asset value on the ex-
dividend date unless the shareholder elects to have them paid in cash by
completing an appropriate request form.
Each Fund has elected and intends to qualify annually to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"). As a regulated investment company, each Fund
generally is not be subject to federal income tax on its investment company
taxable income (which includes interest and net short-term capital gains in
excess of any net long-term capital losses) and net capital gain (net long-
term capital gains in excess of the sum of net short-term capital losses
and unexpired capital loss carryovers), if any, that it distributes to
shareholders, provided it distributes each taxable year at least 90% of its
investment company taxable income, including any net interest income
excludable from gross income under section 103(a) of the Code. Each Fund
intends to distribute to its shareholders, at least annually, substantially
all such amounts.
Each of the Short Duration and Tax Exempt Bond Funds anticipates that
substantially all dividends paid by it will be exempt from federal income
taxes; a portion of the dividends may be a tax preference item for purposes
of the alternative minimum tax. Dividends paid by the other Funds, and
distributions paid by all Funds from long-term capital gains, are taxable.
Capital gains distributions are made when a Fund realizes net capital gains
on sales of portfolio securities during the year. Any short-term capital
gains or any taxable interest income will be distributed as a taxable
ordinary dividend distribution. For the Short Duration and Tax Exempt Bond
Funds, realized capital gains or any taxable interest income is not
expected to be a significant or predictable part of investment return.
Sale of any Fund's shares is a taxable event and may result in a capital
gain or loss.
Investment income received from sources within foreign countries may be
subject to foreign income taxes. The U.S. has entered into tax treaties
with many foreign countries which entitle certain investors to a reduced
rate of tax or to certain exemptions from tax. The Funds will operate so
as to qualify for such reduced tax rates or tax exemptions whenever
practicable. The Funds may qualify for and make an election permitted
under section 853 of the Code so that shareholders will be able to claim a
credit or deduction on their Federal income tax returns for, and will be
required to treat as part of the amounts distributed to them, their pro
rata portion of the income taxes paid by the Funds to foreign countries
(which taxes relate primarily to investment income). The shareholders of
the Funds may claim a credit by reason of the Funds' election subject to
certain limitations imposed by Section 904 of the Code. However, no
deduction for foreign taxes may be claimed under the Code by individual
shareholders who do not elect to itemize deductions on their Federal income
tax returns, although such a shareholder may claim a credit for foreign
taxes and in any event will be treated as having taxable income in the
amount of the shareholder's pro rata share of foreign taxes paid by the
Funds. Although the Group intends to meet the requirements of the Code to
"pass through" such taxes, there can be no assurance that the Funds will be
able to do so.
Prior to purchasing shares of a Fund, an investor should carefully consider
the impact of the dividends or capital gains distributions which are
expected to be or have been announced. Any dividends or distributions paid
shortly after a purchase by an investor will have the effect of reducing
the per share net asset value of the investor's shares by the per share
amount of the dividends or distributions.
Distributions may be subject to additional state and local taxes, depending
on each shareholder's particular situation. Shareholders should consult
their own tax advisers with respect to the particular tax consequences to
them of an investment in a Fund. For further discussion of these matters,
please see the Statement of Additional Information.
CAPITALIZATION
The Group was organized as a Massachusetts business trust on January 22,
1992. Its Declaration of Trust authorizes the Board of Trustees to issue
an unlimited number of shares of beneficial interest in the Group and to
classify or reclassify any unissued shares into one or more series or
classes of shares. Pursuant to such authority, the Board of Trustees has
authorized the issuance of fifteen series of shares, all of which are sold
through this prospectus. Each series of shares has two classes, Class A
and Class B. The Board of Trustees may establish additional series or
classes of shares in the future. As of November 30, 1996, the Consuelo
Zobel Alger Foundation held 84% of the outstanding shares of the
International Bond Fund.
VOTING
Shareholders have the right to vote in the election of Trustees and on any
and all matters on which they may be entitled to vote by law or the
provisions of the Declaration of Trust. Shares entitle their holders to
one vote per share (with proportionate voting for fractional shares).
Shareholders will vote in the aggregate and not by series or class except
as otherwise required by law or when the Board of Trustees of the Group
determines that a matter to be voted on affects only the interest of a
particular series or class. Voting rights are not cumulative, and
accordingly the holders of more than 50% of the shares of the Group may
elect all of the Trustees. The Group is not required to hold regular
annual meetings of shareholders and does not intend to do so except when
required by law. The Declaration of Trust provides that the holders of not
less than two-thirds of the outstanding shares of the Group may remove a
person serving as Trustee at a shareholder meeting called by written
request of the holders of not less than 10% of the outstanding shares of
any series.
INVESTMENT OBJECTIVES AND POLICIES
Fixed Income Funds
The Payden & Rygel Fixed Income Funds are designed to seek income and
capital gains where appropriate. The Funds which invest in intermediate
and long-term securities will generally provide capital gain opportunities
during periods of falling interest rates.
No Fixed Income Fund is constrained as to the maximum maturity of its
individual portfolio securities, and the dollar-weighted average maturity
of each Fund's portfolio will be adjusted as market conditions warrant
given the investment outlook of the Adviser. However, the average maturity
objectives of many of the Funds will act to limit the amount of longer term
investments in their portfolios. Average maturity objectives for each Fund
are discussed below. Certain debt securities such as, but not limited to,
mortgage-related securities, collateralized mortgage obligations (CMOs),
asset backed securities and securitized loan receivables, are expected to
be repaid prior to their stated maturity dates. As a result, the effective
maturity of these securities is expected to be shorter than their stated
maturity. For purposes of calculation of weighted average maturity, the
effective maturity of such securities will be used.
A Fund's dollar-weighted average portfolio maturity ("average maturity") is
used as a measure of the potential price movement of the Fund. Dollar
weighting is used because it provides a more accurate indication than a non-
weighted average. For example, assume a Fund holds two Treasury
securities, with 99% invested in a 10-year note and 1% invested in a 30-day
bill. The mathematical average maturity is close to five years, but the
dollar-weighted average maturity is close to ten years. When the Adviser
forecasts a positive environment for bonds, the Funds' average portfolio
maturity will generally be longer than when the Adviser is forecasting a
negative environment for bonds.
Yields on short, intermediate, and long-term debt obligations depend on a
variety of factors, including the general conditions of the money and bond
markets, the size of a particular offering, the maturity of the obligation
and the rating of the issue. Debt obligations with longer maturities tend
to produce higher yields and are generally subject to potentially greater
capital appreciation and depreciation than obligations with shorter
maturities and lower yields. The market prices of debt obligations usually
vary depending upon available yields. An increase in interest rates will
generally reduce the value of such portfolio investments, and a decline in
interest rates will generally increase the value of such portfolio
investments. The ability of a Fund to achieve its investment objective
also depends on the continuing ability of the issuers of the debt
securities in which the Fund invests to meet their obligations for the
payment of interest and principal when due.
The Limited Maturity Fund seeks to earn a total return that, over time, is
greater than that available from money market funds. The Fund invests in
debt obligations of the U.S. Treasury, U.S. government agencies, foreign
and domestic public corporations and mortgage-backed securities. Under
normal conditions, the average portfolio maturity of the Limited Maturity
Fund will range from four to nine months with a maximum average maturity of
one year.
The Short Bond Fund seeks to realize a high level of total return
consistent with preservation of capital. It invests in the same types of
debt obligations as the Limited Maturity Fund. However, the Fund has a
maximum portfolio average maturity of three years. Under normal market
conditions, at least 65% of the net assets of the Fund will be invested in
securities with more than one year to maturity.
The U.S. Treasury Fund seeks to realize a high level of total return
consistent with preservation of capital. It primarily invests in U.S.
Treasury securities guaranteed by the full faith and credit of the United
States Government. The Fund will invest at least 65% of its net assets in
obligations issued by the U.S. Treasury and guaranteed by the full faith
and credit of the U.S. government. In addition, the Fund may invest up to
15% of its total assets in securities issued by U.S. government agencies
and instrumentalities which may or may not be supported by the full faith
and credit of the U.S. government; the Fund will invest in such securities
only when the Adviser is satisfied that the credit risk is minimal. The
Fund will generally invest in U.S. Treasury securities with maturities
ranging from one day to ten years.
The Intermediate Bond Fund seeks to realize a high level of total return
consistent with preservation of capital. It invests in the same types of
debt obligations as the Limited Maturity Fund, with an average portfolio
maturity, under normal market conditions, from three to six years. Under
normal market conditions, at least 65% of the net assets of the Fund will
be invested in securities with more than one year to maturity.
The Investment Quality Bond Fund (formerly called the "Opportunity Fund")
seeks to realize a high level of total return consistent with preservation
of capital. It invests in the same types of debt obligations as the
Limited Maturity Fund, but its average maturity is not constrained. Under
normal market conditions, at least 65% of the net assets of the Fund will
be invested in securities with more than one year to maturity.
The Total Return Fund seeks to realize a high level of total return
consistent with preservation of capital. It invests in fixed income
securities which, in the Adviser's view, have attractive yields and
potential capital gains. The Adviser actively manages the maturity and
duration structure of the portfolio in anticipation of long term trends in
interest rates and inflation. Under normal market conditions, the
portfolio will have exposure to a wide variety of fixed income securities
in all market sectors. Some foreign fixed income securities offer
attractive returns and may be denominated in currencies which appear
relatively weak or are potentially volatile compared to the U.S. dollar.
The Total Return Fund will, when deemed appropriate by the Adviser, hedge
this currency exposure in order to protect the Fund's share price. Like
the Investment Quality Bond Fund, the Total Return Fund is not constrained
with respect to its average portfolio maturity.
Investments of the Total Return Fund will consist of (1) debt obligations
issued or guaranteed by the U.S. Government or its agencies and
instrumentalities; (2) debt obligations issued or guaranteed by a foreign
sovereign government or one of its agencies, authorities,
instrumentalities, or political subdivisions, including foreign states,
provinces or municipalities; (3) debt obligations issued or guaranteed by
supranational organizations such as the World Bank, Asian Development Bank,
European Investment Bank and European Economic Community; (4) debt
obligations of U.S. and foreign banks and bank holding companies; (5) debt
securities and commercial paper issued by U.S. and foreign companies,
including commercial paper indexed to specific foreign currency exchange
rates; (6) U.S. and foreign collateralized mortgage obligations and asset-
backed bonds; (7) non-voting, preferred stock in a corporation which pays a
fixed or variable stream of dividends; (8) convertible bonds or shares of
convertible preferred stock which may be exchanged for a fixed number of
shares of common stock at the purchaser's option; and (9) Brady Bonds and
other emerging market debt.
The Total Return Fund may invest up to 25% of its total assets in debt
rated below investment grade by an established rating agency or, if
unrated, determined by the Adviser to be of comparable quality. The Fund
will not hold any debt obligation rated below B by Standard & Poor's
Corporation or Moody's Investor Service, Inc., or a comparable rating by
another established rating agency, or, if unrated, determined by the
Adviser to be of comparable quality. Securities rated B by Standard &
Poor's Corporation has greater vulnerability to default than higher-rated
securities, but currently has the capacity to meet interest payments and
principal repayments; however, adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay interest and
repay principal. Further information regarding investment ratings is in
the appendix to the Statement of Additional Information.
Tax Exempt Funds
The Short Duration Tax Exempt Fund seeks to earn federal tax free income by
investing in debt obligations that are exempt from federal income tax. It
invests in short and medium term debt securities that are exempt from
federal income tax. Under normal market conditions, it maintains an
average portfolio maturity of one to four years.
The Fund intends to achieve its objective by investing primarily in debt
obligations issued by state and local governments, territories, and
possessions of the U.S., regional government authorities, and their
agencies and instrumentalities, which, in the opinion of bond counsel to
the issuer at the time of original issuance, provide interest income that
is exempt from U.S. federal income taxes. Under normal circumstances, as a
fundamental policy which cannot be changed without shareholder approval, at
least 80% of the Fund's net assets will be invested in tax exempt municipal
debt obligations.
From time to time, the Fund may invest more than 25% of its total assets in
tax exempt debt obligations issued by the state of California and other
governmental authorities, agencies and instrumentalities located in
California. In such event, the Fund's ability to meet its objective may be
subject to political, economic, regulatory or other developments which
constrain the taxing and spending authority of California issuers or
otherwise affect the ability of California issuers to pay interest or repay
principal.
Certain of the municipal debt obligations may pay interest which is exempt
from federal income taxes but is a preference item for purposes of
computing the federal alternative minimum tax. When a regulated investment
company receives such interest, a proportionate share of any exempt-
interest dividend paid by the investment company may be treated as a
preference item to shareholders. The Fund may invest up to 20% of its
total assets in such municipal debt obligations if the Adviser determines
that their purchase is consistent with the Fund's investment objective.
The Fund may, from time to time, invest in securities that are not exempt
from federal income tax. This will be done for temporary defensive
purposes, and will not exceed 20% of the value of the Fund's net assets.
Taxable debt securities will consist of obligations of the U.S. government
and its agencies and instrumentalities, money market funds, bank
obligations and repurchase obligations.
The Tax Exempt Bond Fund seeks to earn federal tax free income by investing
in debt obligations that are exempt from federal income tax. It invests in
the same types of debt obligations as the Short Duration Fund. Although,
the Fund is not constrained as to its average portfolio maturity, it is
normally maintained between five and ten years.
Equity Funds
The Growth & Income Fund seeks to provide growth of capital and some
current income. Under normal market conditions, the Fund invests at least
45% of its total assets in equity securities, such as common and preferred
stocks and securities which are convertible into common stocks, and the
balance of its total assets in equity-based derivative instruments, such as
Standard & Poor's Depositary Receipts ("SPDRs"), stock index futures
contracts, options on stocks and stock indexes, and equity swap contracts.
The portion of the Fund's total assets invested in equity securities will
vary from time to time, depending upon the Adviser's assessment of the
available equity-based derivative investments. The Fund currently
anticipates that under normal market conditions approximately 50% of its
total assets will be invested each year in the ten common stocks included
in the Dow Jones Industrial Average which had the highest dividend rates
during the previous calendar year (as a percentage of their market price at
or about the end of such previous year), and that the balance of its assets
will be invested primarily in SPDRs or a substantial number of additional
common stocks that the Adviser believes would closely replicate the
performance of the S&P 500 Index.
Although the Growth & Income Fund's return will vary principally with
changes in the equity market, the Fund is not an index fund, and changes in
the Fund's net asset value per share will not precisely track changes in
the general market. The Fund earns income through investments in dividend
paying stocks.
During times when the Adviser believes that a temporary defensive posture
is warranted, the Fund may hold part or all of its assets in cash, U.S.
Government and Government agency securities, money market obligations,
short-term corporate debt securities and money market funds, as described
below. When the assets of the Fund are so invested, the Fund may not be
achieving its investment objective.
The Market Return Fund seeks to earn a total return in excess of the S&P
500 Index. The S&P 500 Index is a composite of 500 common stocks, most of
which are listed on the New York Stock Exchange. Standard & Poor's
Corporation, which is not a sponsor of or in any way affiliated with the
Fund, chooses the 500 stocks included in the Index based on market value
and industry diversification. The stocks listed in the S&P 500 Index
comprise approximately 75% of the total market capitalization within the
publicly traded U.S. equity markets.
The Market Return Fund divides its assets between equity-based investments,
such as stock index futures contracts and equity swap contracts, and a
portfolio of fixed income securities. Under normal market conditions, the
fixed income portion of the Market Return Fund will comprise at least 80%
of its total assets. The fixed income portion of the Market Return Fund is
invested in dollar-denominated debt obligations of the U.S. and foreign
governments and their agencies and instrumentalities, foreign and domestic
public corporations and mortgage-backed securities. Any dollar-denominated
obligations of foreign issuers purchased by the Market Return Fund will be
actively traded in the United States as of the purchase date. The average
portfolio maturity of the fixed income portion of the Market Return Fund's
portfolio will be no more than five years. The average portfolio maturity
of the fixed income portion is adjusted according to the Adviser's outlook
on interest rates.
All debt securities held by the Market Return Fund are rated "investment
grade" at the time of purchase by at least one of the established rating
agencies (e.g., AAA, AA, A, or BBB by Standard & Poor's Corporation) or, if
unrated, are determined to be of comparable quality by the Adviser.
Securities rated BBB are considered to have adequate capacity to pay
interest and repay principal, but adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and principal than higher rated bonds. If the rating of a debt
security in which the Market Return Fund has made an investment falls below
the investment grade level, the Fund will discontinue making investments in
that issuer and liquidate any current holdings as soon as the Adviser
determines it is in the best interest of the Fund to do so. In no event
will the Market Return Fund hold more than 5% of its net assets in
obligations rated below investment grade. No such obligation will be rated
below BB by Standard & Poor's Corporation or a comparable rating by another
established rating agency or, if unrated, will be determined to be of
comparable quality by the Adviser. Securities rated BB by Standard &
Poor's Corporation have less near-term vulnerability to default than other
speculative issues, but face major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
Further information regarding investment ratings is in the appendix to the
Statement of Additional Information.
The Adviser believes that investment in stock index futures and equity swap
contracts, when combined with a fixed income portfolio, will permit the
Market Return Fund to earn a total return in excess of the S&P 500 Index at
a lower cost than investing directly in equity securities, while permitting
the equivalent of an investment in a portfolio of equity securities. Index
futures contracts are priced so that sophisticated traders should be
neutral as to whether to employ a strategy of purchasing the stocks which
comprise the index or purchasing the futures contracts. Accordingly,
because of the manner in which S&P Index futures contracts are priced, the
Fund will theoretically outperform the Index if its fixed income assets
earn a total return that is better than money market rates and the expenses
of the Fund. There can be no assurance that the Market Return Fund will
be successful in earning such a total return on its fixed income
investments.
From time to time, the Market Return Fund may reduce its exposure to equity-
based investments and instead may purchase shares of equity mutual funds
which aim to track the S&P 500 Index, Standard & Poor's Depositary
Receipts, or a portfolio of some of the individual stocks which are
included in the S&P 500 Index. Such reductions will occur during periods
of market volatility (when the costs of investing in stock index futures
and equity swap contracts are likely to rise), when for any other reason
the purchase of such securities is less expensive than the cost of other
equity-based investments, or when the cash available for investment in
stock index futures and equity swap contracts is not sufficient to purchase
an instrument with a contract price in the desired amount. During such
periods, the portion of Market Return Fund's assets allocated to fixed
income securities would be reduced.
Futures index contracts, which will generally be the majority of the Market
Return Fund's equity-based investments, require a small deposit called
"initial margin" at the time of acquisition (the equivalent of a good faith
deposit). This allows the Market Return Fund to invest the balance of its
assets, initially about 95% of the Fund's net assets, in other assets. The
Market Return Fund is required to maintain a segregated account with its
Fund Custodian in an amount which, when added to its initial margin
account, equals the aggregate amount of the Fund's futures contract
liabilities. The debt securities purchased by the Fund will be deposited
in the segregated account for this purpose. The Fund cannot sell these
securities until the futures contracts are sold. Thus the Adviser
anticipates that the Fund will be able to meet its obligations under its
futures contracts regardless of movements in the equity markets.
This strategy creates financial leverage. For each dollar of net assets
the Fund's portfolio contains approximately one dollar in equity market
exposure and one dollar in fixed income exposure. Consequently, the Fund
is affected by price movement in both the equity and fixed income markets.
Historically, short and intermediate term securities have outperformed
money market securities over time. If this historical experience were to
continue in the future, the Adviser believes that the Market Return Fund
would outperform the Index. However, the market value of the fixed income
securities will fluctuate in price as interest rates vary each day. It is
therefore possible that the value of the Fund could fall even when the
equity market is rising in value. In addition, it is possible that both
the bond and equity markets could fall, causing the value of the Fund to
decline by more than the decline in the equity markets. The Adviser will
actively manage the Fund's fixed income investments to attempt to minimize
its risk of loss of value of such investments during periods of falling
bond market prices. The success of this strategy is dependent on the
ability of the Adviser to accurately predict interest rate movements. If
the Adviser's forecast is inaccurate, the return on the Fund may be worse
than if the Adviser had not utilized this strategy. There can be no
assurance that the Fund will achieve its objective.
However, unlike most equity funds, in which much of an investor's return
will typically come from long-term capital gains, most income expected to
be earned by the Market Return Fund will be taxable at ordinary income tax
rates. Due to the tax disadvantage of ordinary income compared to long-
term gains, taxable investors may not deem the Market Return Fund to be as
advantageous as other equity funds after consideration of tax effects.
Taxable investors are advised to consult an income tax adviser prior to
investing in the Fund.
Because of their investment policies, the Market Return and Growth & Income
Funds may or may not be suitable or appropriate for all investors. The
Funds are not money market funds and are not appropriate for those whose
primary objective is stability of principal. The value of the portfolio
securities of the Market Return and Growth & Income Funds will fluctuate
based upon market conditions.
Global Funds
The Payden & Rygel Global Funds offer three fixed-income options, as well
as international equity and balanced options. Investments are primarily
focused on securities from countries rated AAA and AA by at least one of
the rating agencies.
The Global Fixed Income Fund seeks to realize a high level of total return
consistent with preservation of capital. It invests primarily in U.S. and
foreign government notes and bonds and U.S. and foreign corporate debt
securities. The Fund also has substantial investment in foreign currency
contracts in order to hedge foreign currency exposure. Under normal market
conditions, as a fundamental policy which cannot be changed without
shareholder approval, at least 65% of the Global Fixed Income Fund's total
assets are invested in debt securities of issuers located in at least three
countries, one of which may be the United States. The Fund may invest in
securities of issuers in the United States, Canada, Australia, New Zealand,
the countries of Western Europe, and Japan. Under normal circumstances,
its average portfolio maturity will not exceed ten years. Under normal
circumstances, the Fund invests primarily in debt securities that are
considered high quality at the time of purchase (e.g., AAA or AA by
Standard & Poor's Corporation) by at least one of the established rating
agencies. In addition, if the rating of bonds of any country issuing or
regulating securities or currencies in which a Fund has made an investment
is lowered, so that two or more established rating agencies categorize the
investment below AA, the Fund will discontinue making investments in that
country and liquidate any current holdings as soon as the Adviser
determines it is in the best interest of the Fund to do so.
Investments of the Fund will consist of: (1) debt obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities; (2)
debt obligations issued or guaranteed by a foreign sovereign government or
one of its agencies, authorities, instrumentalities or political
subdivisions, including foreign states, provinces or municipalities; (3)
debt obligations issued or guaranteed by supranational organizations such
as the World Bank, Asian Development Bank, European Investment Bank and
European Economic Community; (4) debt obligations of U.S. and foreign banks
and bank holding companies; (5) debt securities and commercial paper issued
by U.S. and foreign companies, including commercial paper indexed to
specific foreign currency exchange rates; and (6) U.S. and foreign
collateralized mortgage obligations and asset-backed bonds.
The Global Short Bond Fund seeks to realize a high level of total return
consistent with preservation of capital. It invests in the same types of
debt obligations as the Global Fixed Income Fund, with an average portfolio
maturity, under normal market conditions, of no more than three years.
The International Bond Fund seeks to realize a high level of total return
consistent with preservation of capital. It invests in the same types of
securities and other investments and has the same high quality credit
guidelines as the Global Fixed Income and Global Short Bond Funds with the
exception that (1) under normal market conditions, as a fundamental policy
which cannot be changed without shareholder approval, at least 65% of the
Fund's total assets are invested in debt securities of issuers located in
at least three countries other than the United States, and (2) the
International Fund invests primarily in securities that are not denominated
in U.S. dollars. The Fund's average portfolio maturity will not exceed ten
years. Under normal market conditions, (1) the Fund invests no more than
35% of its assets in U.S. dollar denominated securities and (2) at least
65% of net assets are invested in securities with more than one year to
maturity. However for temporary defensive or emergency purposes, the Fund
may invest without limit in U.S. debt securities. In addition, the
International Bond Fund generally has more exposure to foreign currency
exchange rates than the Global Fixed Income and Global Short Bond Funds,
which may cause greater share price volatility.
The International Equity Fund seeks to earn long-term capital appreciation.
It invests in equity securities (common and preferred stock) of issuers
organized outside the United States ("foreign equities"). Under normal
market conditions, the International Equity Fund's assets will be invested
in securities of issuers in at least five different countries.
Under normal circumstances, the Fund will invest primarily in the universe
of countries whose long-term government bonds denominated in foreign
currency are rated "investment grade" (for example, rated BBB or above by
Standard & Poor's). The Adviser and Sub-adviser believe that this
restriction will reduce many of the political risk factors associated with
investment in foreign equities. However, the Fund may invest up to 20% of
its assets in the universe of countries whose long-term government bonds
denominated in foreign currencies are rated below investment grade. These
markets are sometimes referred to as "emerging".
In seeking to achieve the Fund's investment objective, the Sub-adviser will
seek to invest in companies that it believes are well managed as evidenced
by the following:
High Quality and Responsive Management which delivers consistent sales
and earnings growth year-in and year-out regardless of the business
environment.
Low Risk Financial Structure including a debt/equity ratio appropriate
to the industry, predictable income streams, top quality working
capital management, and responsible reporting guidelines.
Significant Long-Term Potential for Volume and/or Margin Growth as well
as strong operational cash flow, maintainable earnings per share
profile, and positive trend return on capital and/or equity.
Acknowledged Business Strength as measured by market dominance,
advantageous positioning in the macro/industry cycle, and a strong
record of innovation.
Greater than Average Degree of Control Over Pricing, thereby
maintaining profitability in adverse times and maximizing profitability
during high demand periods.
The Fund's portfolio will normally be comprised of 50-75 stocks. There are
no constraints on the market capitalization of the issuers in which the
Fund may invest. Stocks are purchased for the long-term and turnover tends
to be relatively low.
The Global Balanced Fund seeks to earn long-term capital appreciation. It
allocates its assets among a common stock portfolio, a bond portfolio, and
money market instruments, in proportions which reflect the Adviser's
judgment of the anticipated returns and risks of each asset class. There
are no limitations on the amount of the Fund's assets which may be
allocated to any of the three asset classes (stocks, bonds and money market
instruments).
In estimating the relative attractiveness of each asset class, the Adviser
takes into account various factors. Once expected return and volatility
(risk) estimates are developed for each asset class, the Adviser attempts
to identify apparent imbalances in the relative pricing of common stocks,
bonds and money market instruments compared to risks, using a computer
model. The Global Balanced Fund's allocation among the three asset classes
is then adjusted to take advantage of these perceived imbalances.
The money market and bond allocations will be invested in both dollar and
non-dollar denominated debt securities. Dollar denominated securities will
have the same investment parameters as the Investment Quality Bond Fund.
Non-dollar debt securities will follow the investment guidelines of the
Global Fixed Income Fund. Neither allocation will be restricted as to the
final maturity of a specific investment. However, the money market
allocation will generally have an average maturity of less than one year.
The equity allocation may invest in companies headquartered in both the
United States and foreign countries. At least 65% of the equity allocation
will be invested in issuers located in three or more foreign countries.
The Global Balanced Fund may also invest in futures or options contracts on
stock indexes, foreign currencies and bonds.
Depending on the Adviser's allocation of the Global Balanced Fund's assets
among stocks, bonds and money market instruments, investors in the Fund may
be exposed to the market risk of various combinations of common stocks and
bonds, as well as to the risks associated with specific securities. Stock
market risk is the possibility that stock prices in general will decline
over short or even extended periods. Bond market risk is the potential for
fluctuations in the market value of bonds. Bond prices generally vary
inversely with changes in the level of interest rates. When interest rates
rise, the prices of bonds fall; conversely, when interest rates fall, bond
prices rise. Because the allocation strategy of the Adviser may, at
certain times, result in a portfolio with a primary emphasis on common
stocks, the Global Balanced Fund may from time to time exhibit a level of
volatility which is more consistent with a common stock portfolio than a
balanced portfolio. However, under normal circumstances, the Adviser
expects the volatility of the Global Balanced Fund's total return to be
less than that of a common stock portfolio.
Investors should be aware that the investment results of the Fund depend
not only on the Adviser's and Sub-adviser's selection of specific portfolio
securities, but also upon the Adviser's ability to anticipate correctly the
relative performance and risk of stocks, bonds and money market
instruments. The Fund's investment results would underperform other global
balanced funds, for example, if only a small portion of the Fund's assets
were allocated to stocks during a significant stock market advance, or if a
major portion of its assets were allocated to stocks during a market
decline. Similarly, the Fund's performance could deteriorate if the Fund
were substantially invested in bonds at a time when interest rates
increased.
INVESTMENT PRACTICES
The Adviser and Sub-adviser utilize various investment techniques in
managing each Fund's portfolio, including the following:
U.S. Government and Agency Obligations. Each Fund may invest in
obligations issued by the U.S. Treasury and in securities issued or
guaranteed by U.S. Government sponsored enterprises and federal agencies.
These securities include Treasury bills, which mature in one year or less,
Treasury notes and bonds that mature in 2 to 30 years, and agency issues,
which may have maturities from one day to 40 years. Securities are
generally not callable and normally have interest rates that are fixed for
the life of the security.
Money Market Funds. To maintain liquidity, each Fund may invest in
unaffiliated money market funds. Under normal circumstances, money market
investment of the Short Duration and Tax Exempt Bond Funds will be in
federal tax-free mutual funds. No money market fund investment by a Fund
will be in excess of 3% of the total assets of the money market fund. The
Funds do not anticipate investing more than 15% of their respective net
assets in money market funds. An investment in a money market mutual fund
by a Fund will involve payment by the Fund of its pro rata share of
advisory and administrative fees charged by such money market fund.
Money Market Obligations. Each Fund may invest in U.S. dollar denominated
bank certificates of deposit, bankers acceptances, commercial paper and
other short-term debt obligations of U.S. and foreign issuers, including
U.S. Government and agency obligations. All money market obligations will
be considered high quality, meaning that the security will be rated in one
of the two highest categories for short-term securities by at least two
nationally recognized rating services (or by one if only one rating service
has rated the security) or, if unrated, will be judged to be of equivalent
quality by the Adviser or Sub-adviser.
Corporate Debt Securities. Each Fund other than the Treasury Fund may
invest in U.S. dollar denominated corporate bonds, debentures, notes and
other similar debt instruments of domestic and foreign corporations which,
at the time of purchase, are rated investment grade by at least one of the
established rating agencies or, if unrated, are determined to be of
comparable quality by the Adviser or Sub-adviser. Such obligations may
have interest rates which are fixed, variable or floating. Each Fund may
also purchase long-term debt obligations that have been coupled with an
option allowing the Fund at specified intervals to tender (or "put") such
debt obligations to the issuer and receive an agreed upon amount, usually
face value plus accrued interest.
The Total Return Fund may invest up to 25% of its total assets in debt
rated below investment grade or, if unrated, determined to be of comparable
quality by the Adviser. Lower quality debt securities, commonly referred
to as "junk bonds" are often considered to be speculative and involve a
greater risk of default or price changes due to changes in the issuer's
creditworthiness than higher rated securities. The market prices of these
securities may fluctuate more than investment grade securities and may
decline significantly in periods of general economic difficulty. The
market for such securities may be thinner and less active than for higher-
rated securities, which may adversely affect the prices at which these
securities can be sold and may create difficulty in valuing such
securities. In addition, adverse publicity and investor perceptions about
junk bonds, whether or not based on fundamental analysis, may tend to
decrease the market value and liquidity of such securities. Legislation
has been and could be adopted limiting the use, or tax and other
advantages, of junk bonds, which could adversely affect their value.
Credit ratings evaluate the safety of principal and interest payments of
securities, not their market value. The rating of an issuer is also
heavily weighted by past developments and does not necessarily reflect
probable future conditions. There is frequently a lag between the time a
rating is assigned and the time it is updated. As credit rating agencies
may fail to timely change credit ratings of securities to reflect
subsequent events, the Adviser will also monitor issuers of such
securities.
Mortgage Backed Securities. Each of the Funds other than the Treasury,
Growth & Income and International Equity Funds may invest in obligations
issued to provide financing for U.S. residential housing mortgages. The
Total Return, Global Fixed Income, Global Short Bond, Global Balanced and
International Bond Funds may also invest in foreign mortgage-related
securities. Payments made on the underlying mortgages and passed through
to a Fund will represent both regularly scheduled principal and interest
payments as well as prepayments of principal. Investing in such
obligations involves special risks as a result of prepayments (which may
require the Fund to reinvest the proceeds at a lower rate), the illiquidity
of certain of such securities and the possible default by insurers or
guarantors. The Tax Exempt Funds invest in municipal debt obligations
issued to provide financing for residential housing mortgages to targeted
groups.
Asset Backed Receivables. With the exception of the Treasury, Growth &
Income, and International Equity Funds, each Fund may invest in asset
backed receivables, which represent undivided fractional interests in a
trust with assets consisting of a pool of domestic loans such as motor
vehicle retail installment sales contracts or credit card receivables.
Payments are typically made monthly, consisting of both principal and
interest payments. Asset backed securities may be prepaid prior to
maturity, and hence the actual life of the security cannot be accurately
predicted. During periods of falling interest rates, prepayments may
accelerate, which would require a Fund to reinvest the proceeds at a lower
interest rate. Although generally rated AAA, it is possible that the
securities could become illiquid or experience losses if guarantors or
insurers default.
Repurchase Agreements. For the purpose of maintaining liquidity or
realizing additional income, each Fund may enter into repurchase agreements
(agreements to purchase U.S. Treasury notes and bills, subject to the
seller's agreement to repurchase them at a specified time and price) with
well-established registered securities dealers or banks. Repurchase
agreements are the economic equivalent of loans by a Fund. In the event of
a bankruptcy or default of any such dealer or bank, a 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
held declines during this period.
Reverse Repurchase Agreements. The Total Return and Global Funds may enter
into reverse repurchase agreements (agreements to sell portfolio
securities, subject to such Fund's agreement to repurchase them at a
specified time and price) with well-established registered dealers and
banks. A Fund covers its obligations under a reverse repurchase agreement
by maintaining a segregated account comprised of cash, U.S. Government
securities or high-grade debt obligations, maturing no later than the
expiration of the agreement, in an amount (marked to market daily) equal to
its obligations under the agreement. Reverse repurchase agreements are the
economic equivalent of borrowings by a Fund.
Variable and Floating Rate Securities. Each Fund may invest in variable
and floating rate securities of government and corporate issuers. The
terms of such obligations provide that interest rates are adjusted
periodically based upon some appropriate interest rate adjustment index,
e.g., the Federal Funds rate. The adjustment intervals may be regular, and
range from daily to annually, or may be based on an event such as a change
in the prime rate. Accordingly, although such securities provide some
protection against changes in interest rates, depending on the terms of the
instrument there may be some interval between changes in such rates and
adjustment of the rate paid by the issuer. Any such instruments acquired
by a Fund are rated "high quality" at the time of purchase by at least one
of the established rating agencies or, if not rated, are determined at the
time of purchase to be of comparable quality by the Adviser or Sub-Adviser.
Convertible Securities and Warrants. The Total Return, Growth & Income,
Global Balanced and International Equity Funds may invest in convertible
securities and warrants. Convertible securities, such as convertible
preferred stocks and debentures, may be exchanged for or converted into a
predetermined number of shares of the issuer's common stock at the option
of the holder during a specified time period. Convertible securities
generally pay interest or dividends and provide for participation in the
appreciation of the underlying common stock. Convertible securities
generally provide higher yields than the underlying equity securities, but
generally offer lower yields than non-convertible securities of similar
quality. The value of a convertible security is a function of a variety of
factors, including its yield in comparison with comparable non-convertible
securities, its value if converted into the underlying common stock, and
the credit standing of the issuer.
Warrants give the holder the right to purchase a specified number of shares
of the underlying stock at any time at a fixed price, but do not pay a
fixed dividend. Investment in warrants involve certain risks, including
the possible lack of a liquid market for resale, potential price
fluctuations as a result of speculation or other factors, and the failure
of the price of the underlying security to reach or have reasonable
prospects of reaching a level at which the warrant can be prudently
exercised (in which event the warrant may expire without being exercised,
resulting in a loss of the Fund's entire investment in the warrant). As a
matter of operating policy, the Fund will not invest more than 5% of its
total assets in warrants.
Foreign Government Obligations. Each of the Limited Maturity, Short Bond,
Intermediate, Investment Quality Bond, Total Return, Global Balanced and
Equity Funds may invest in foreign government or supranational obligations
rated at least investment grade at the time of purchase by at least one of
the established rating agencies or, if unrated, determined to be of
comparable quality by the Adviser. Principal and interest will be payable
in U.S. dollars. The Total Return Fund may invest up to 25% of its assets
in debt obligations below investment grade. The Global Fixed Income,
Global Short Bond and International Bond Funds are restricted to investment
in obligations rated at least AA at the time of purchase by at least one of
the rating agencies. Each of the Global Funds may invest in securities
payable in a foreign currency.
Tax Exempt Obligations. The Short Duration and Tax Exempt Bond Funds may
purchase certain tax-exempt obligations listed below:
General Obligation Notes and Bonds. General obligation notes and
bonds are secured by the issuer's pledge of its full faith, credit and
taxing power for the payment of principal and interest.
Revenue Notes and Bonds. These obligations are payable only from the
revenues derived from a particular facility or, in some cases, from
the proceeds of a special excise tax. Revenue notes and bonds are
issued to finance a wide variety of capital projects including
electric, gas, water and sewer systems; highways, bridges and tunnels;
and colleges and universities.
Third Party Puts. Both Funds may purchase long-term fixed rate
municipal debt obligations that have been coupled with an option
granted by a third party financial institution allowing a 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, may be represented by custodial
receipts or trust certificates and may be combined with other features
such as interest rate swaps.
Municipal Lease Obligations and Certificates of Participation. Both
Funds may invest in lease obligations issued by state or local
government authorities to acquire land and a wide variety of equipment
and facilities. These obligations typically are not fully backed by
the municipality's credit, and their interest may become taxable if
the lease is assigned. If funds are not appropriated for the
following year's lease payments, a Fund's only recourse may be to the
leased property securing payment, and disposition of the property
might prove difficult. In addition, as these securities represent a
relatively new type of financing, certain lease obligations may be
considered to be illiquid securities. Certificates of participation
are issued by a particular municipality or municipal authority to
evidence a proportionate interest in base rental or lease payments
relating to a specific project to be made by the municipality or
authority.
Tax Exempt Zero Coupon Securities. The Short Duration and Tax Exempt
Bond Funds may invest in zero coupon securities, which are debt
securities issued or sold at a discount from their face value. These
securities do not entitle the holder to interest payments prior to
maturity or the specified redemption date, but instead are redeemed at
their face value upon maturity. The discount from face value is
amortized over the life of the security, and such amortization will
constitute the income earned on the security for accounting and tax
purposes. Even though income on such securities is accrued on a
current basis, a Fund does not receive such income currently in cash
and may have to sell other portfolio securities to obtain cash needed
to make income distributions. The price volatility of a zero coupon
security is greater than an interest-paying note of identical
maturity.
Equity Securities. Any Equity Fund and the Global Balanced and
International Equity Funds may invest in equity securities, including
common and preferred stocks, convertible securities and warrants. Common
stocks, the most familiar type of equity securities, represent an equity
(ownership) interest in a corporation. Preferred stock, unlike common
stock, offers a stated dividend rate payable from a corporation's earnings,
and also generally has a preference over common stock on the distribution
of a corporation's assets in the event of liquidation of the corporation.
The Market Return and Growth & Income Funds may purchase shares of equity
index mutual funds, which own the stocks included in the S&P 500 Index, and
are intended to closely track the Index. Although such funds generally
have substantial assets and low operating expenses, investment in such a
fund by the Funds will involve a duplication of expenses, as it will
require payment by the Fund of its pro rata share of advisory and
administrative fees charged by the Fund.
Although equity securities have a history of long term growth in value,
their prices fluctuate based on changed in the issuer's financial condition
and prospects and on overall market and economic conditions. In addition,
small companies and new companies often have limited product lines, markets
or financial resources, and may be dependent upon one or few key persons
for management. The securities of such companies may be subject to more
volatile market movements than securities of larger, more established
companies, both because the securities typically are traded in lower volume
and because the issuers typically are more subject to changes in earnings
and prospects.
Standard & Poor's Depositary Receipts. Under normal market conditions, up
to 50% of the total assets of the Growth & Income Fund may be invested in a
combination of SPDRs and equity index mutual funds. However, under the
Investment Company Act of 1940, the Group and its affiliated persons,
including investors holding 5% or more of the outstanding shares of the
Fund and other clients of the Adviser, may not hold in the aggregate more
than 3% of the outstanding SPDRs. SPDRs are shares of a publicly traded
unit investment trust which owns the stocks included in the Standard &
Poor's 500 Index, and changes in the prices of SPDRs track the movement of
the Index relatively closely. SPDRs are subject to the risks of an
investment in a broadly based portfolio of common stocks, including the
risk of declines in the general level of stock prices. They are also
subject to the risks of trading halts due to market conditions or other
reasons that, in the view of the American Stock Exchange, make trading in
SPDRs inadvisable.
SPDR shares trade on the American Stock Exchange at approximately one-tenth
the value of the S&P 500 Index. SPDRs are relatively liquid with an
average daily volume during August, 1996 of 708,000 shares per day.
Because SPDRs exactly replicate the Index, any price movement away from the
value of the underlying stocks is generally quickly eliminated by
professional traders. Thus the Adviser believes that the movement of SPDR
share prices should closely track the movement of the Index.
The administrator of the SPDR program, the American Stock Exchange,
receives a fee to cover its costs of about 0.20% per year. This fee is
deducted from the dividends paid to SPDR investors. Investors in Fund
shares will incur not only the operational costs of the Fund, but will also
incur the expenses deducted by the administrator of the SPDR program.
Delayed Delivery Transactions. Each 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 a 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 a Fund on such purchases until the securities
are delivered; however, the market value of the securities may change prior
to delivery. Neither the Global Fixed Income, Global Short Bond nor the
International Fund will invest more than 25% of its total assets in when-
issued and delayed delivery transactions.
Reserves. Each Fund may establish and maintain reserves when the Adviser
or Sub-adviser determines that such reserves would be desirable for
temporary defensive purposes (for example, during periods of substantial
volatility in interest rates) or to enable it to take advantage of buying
opportunities. A Fund's reserves may be invested in domestic and foreign
money market instruments, including government obligations, commercial
paper and short-term corporate debt issues meeting the quality standards
described above; money market funds, certificates of deposit and bankers'
acceptances of banking institutions described in the Statement of
Additional Information; and repurchase agreements. Although there is no
limit on the percentage of a Fund's assets which may be maintained in such
reserves, under normal circumstances no more than 10% of its total assets
is expected to be maintained in such reserves.
Illiquid Securities. Some debt obligations can be illiquid, meaning that
they may not be sold in the ordinary course of business within seven days
at approximately the price at which they are valued. A Fund will not
invest more than 15% of its net assets in illiquid securities. In
accordance with guidelines established by the Board, the Adviser or Sub-
adviser will determine the liquidity of each investment using various
factors such as (1) the frequency of trades and quotations, (2) the number
of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including
any demand or tender features) and (5) the likelihood of continued
marketability and credit quality of the issuer.
Options and Futures Contracts. Each Fund may purchase and write covered
put and call options on securities and securities indexes, enter into
interest rate and index futures contracts (agreements to take or make
delivery of a specified quantity of financial instruments at a specified
price and date), and purchase and write put and call options on such
futures contracts. Such options and futures contracts are derivative
instruments which may be traded on U.S. or foreign exchanges or with
broker/dealers which maintain markets for options. Each Fund may also
employ combinations of put and call options, including without limitation,
straddles, spreads, collars, and strangles. These techniques are used to
hedge against changes in interest rates, foreign currency exchange rates or
securities prices in order to establish more definitely the effective
return on securities or currencies held or intended to be acquired by a
Fund, to reduce the volatility of the currency exposure associated with
investment in non-U.S. securities, or as an efficient means of adjusting
exposure to the bond and currency markets and not for speculation.
An equity index, such as the S&P 500 Index, is a statistical measure
designed to reflect specified facets of a particular financial or
securities market.
An index futures contract 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.
An interest rate futures contract provides for the delivery by one party
and the purchase by another party of a specified quantity of a financial
instrument at a specified future date and price. Although the value of a
futures contract may be a function of the value of certain specified
securities, no physical delivery of these securities is made. Such futures
contracts are derivative instruments which may be traded on U.S. exchanges
or with broker-dealers which maintain futures markets. Upon entering into
a futures contract, the Fund will be required to deposit with its custodian
in a segregated account in the name of its futures broker a specified
amount of cash or securities. This amount is known as "initial margin",
and is in the nature of a performance bond or good faith deposit on the
contract which is returned to the Fund upon termination of the contract,
assuming all contractual obligations have been satisfied. Subsequent
payments, called "variation margin" to and from the broker, will be made on
a daily basis as the price of the index fluctuates, making the position in
the futures contract more or less valuable, a process known as "marking to
market".
The following chart summarized the types of futures transactions in which
the Funds may engage:
Types of Contracts
Other
Interest Security Stock
Rate Indices Index Currency Securities
Fixed Income Funds Yes Yes No No Yes
(except Total Return)
Total Return Fund Yes Yes No Yes Yes
Market Return Fund Yes Yes Yes No Yes
Growth & Income Fund No Yes Yes No Yes
Global Fixed Income, Global Yes Yes No Yes Yes
Short Bond,
International Bond Funds
Global Balanced Fund Yes Yes Yes Yes Yes
International Equity Fund No Yes Yes Yes Yes
Non-Hedging Strategic Transactions. In addition to the hedging transactions
referred to above, each of the Funds may enter into options and futures
transactions to enhance potential gain in circumstances where hedging is
not involved. A Fund's net loss exposure resulting from transactions
entered into for such purposes will not exceed 2% of the Fund's net assets
at any one time and, to the extent necessary, the Fund will close out
transactions in order to comply with this limitation. Such transactions
are subject to the limitations described under "Options and Futures
Contracts" and to the same types of risks as described above under "Options
and Futures Contracts."
Interest Rate and Currency Swaps. For hedging purposes, each of the Total
Return and Global Funds may enter into interest rate and currency swap
transactions and purchase or sell interest rate caps and floors. An
interest rate or currency swap is a derivative instrument which involves an
agreement between a Fund and another party to exchange payments calculated
as if they were interest on a fictitious ("notional") principal amount
(e.g., an exchange of floating rate payments by one party for fixed rate
payments by the other). An interest rate cap or floor is a derivative
instrument which entitles the purchaser, in exchange for a premium, to
receive payments of interest on a notional principal amount from the seller
of the cap or floor, to the extent that a specified reference rate exceeds
or falls below a predetermined level.
A Fund usually enters into such transactions on a "net" basis, with the
Fund receiving or paying, as the case may be, only the net amount of the
two payment streams. The net amount of the excess, if any, of a Fund's
obligations over its entitlements with respect to each swap is accrued on a
daily basis, and an amount of cash or high-quality liquid securities having
an aggregate net asset value at least equal to the accrued excess is
maintained in a segregated account by the Group's Custodian. If a Fund
enters into a swap on other than a net basis, or sells caps or floors, the
Fund maintains a segregated account in the full amount accrued on a daily
basis of the Fund's obligations with respect to the transaction. Such
segregated accounts are maintained in accordance with applicable
regulations of the Securities and Exchange Commission.
Equity Swap Contracts. Each Equity Fund and the Global Balanced Fund may
enter into equity swap transactions. An equity swap is a derivative
instrument which involves an agreement between a 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, such as the three-month London Interbank Offered Rate, and
receive the total return (price change plus dividends) of a specified
equity index (such as the S&P 500 Index). If the total return on the
equity index is negative for the contract period, the Fund will pay its
counterparty the amount of the loss in the value of the notional amount
plus interest at the floating rate. From time to time, the Fund may wish
to cancel an equity swap contract in order to reduce its equity exposure.
Although the swap contract may be sold back to the Fund's counterparty, it
may be more advantageous to enter into a swap contract in which the Fund
would reduce its equity exposure by agreeing to receive a floating rate of
interest and pay the change in the index. This is sometimes called a
"reverse equity swap contract" and would only be entered into to reduce
equity exposure. The Funds will not use reverse swap contracts to short
the equity market.
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, if any, of the Fund's
obligations over its entitlements with respect to each swap is accrued on a
daily basis, and an amount of cash or high-quality liquid securities having
an aggregate net asset value at least equal to the accrued excess is
maintained in a segregated account by the Group's Custodian. If the Fund
enters into a swap on other than a net basis, the Fund maintains a
segregated account in the full amount accrued on a daily basis of the
Fund's obligations with respect to the transaction. Such segregated
accounts are maintained in accordance with applicable regulations of the
Securities and Exchange Commission.
Depository Receipts. The Equity, Global Balanced and International Equity
Funds may invest in foreign issuers through sponsored American Depository
Receipts ("ADRs"), European Depository Receipts ("EDRs") and Global
Depository Receipts ("GDRs"). Generally an ADR is a dollar-denominated
security issued by a U.S. bank or trust company which represents, and may
be converted into, the underlying security that is issued by a foreign
company. Generally, an EDR represents a similar securities arrangement but
is issued by a European bank, while GDRs are issued by a depository. ADRs,
EDRs and GDRs may be denominated in a currency different from the
underlying securities into which they may be converted. Typically, ADRs,
in registered form, are designed for issuance in U.S. securities markets
and EDRs, in bearer form, are designed for issuance in European securities
markets.
ADRs may be sponsored by the foreign issuer or may be unsponsored.
Unsponsored ADRs are organized independently and without the cooperation of
the foreign issuer of the underlying securities; as a result, available
information regarding the issuer may not be as current as for sponsored
ADRs, and the prices of unsponsored ADRs may be more volatile than if they
were sponsored by the issuers of the underlying securities.
Country Funds. Subject to the provisions of the 1940 Act, the Global
Balanced and International Equity Funds may invest in the shares of
investment companies that invest in specified foreign markets. Several
foreign governments permit investments by non-residents in their markets
only through participation in certain investment companies specifically
organized to participate in such markets. The Global Balanced and
International Equity Funds may also invest a portion of its assets in unit
trusts and country funds that invest in foreign markets that are smaller
than those in which the Funds would ordinarily invest directly.
Investments in such pooled vehicles should enhance the geographical
diversification of the portfolio's assets, thereby reducing the risks
associated with investing in certain smaller foreign markets. Investments
by the Global Balanced and International Equity Funds in such vehicles
should also provide increased liquidity and lower transaction costs than
are normally associated with direct investment in such markets. However,
an investment in a country fund by a Fund will involve payment by the Fund
of its pro rata share of advisory and administrative fees charged by such
country fund. At the present time, each of the Global Balanced and
International Equity Funds intend to limit its investments in these
vehicles, together with its investments in other investment companies, to
no more than 10% of its total assets.
Foreign Currency Transactions. Each of the Total Return and Global Funds
normally conducts its foreign currency exchange transactions either on a
spot (cash) basis at the spot rate prevailing in the foreign currencies or
on a forward basis. Under normal circumstances, the Adviser expects that
the Funds will enter into forward currency contracts (contracts to purchase
or sell a specified currency at a specified future date and price). No
Fund will generally enter into a forward contract with a term of greater
than one year. Although forward contracts are used primarily to protect
the Funds from adverse currency movements, they may also be used to
increase exposure to a currency, and involve the risk that anticipated
currency movements will not be accurately predicted and a Fund's total
return will be adversely affected as a result. No Fund enters into forward
currency contracts for speculative purposes. Open positions in forward
contracts are covered by the segregation with the Group's Custodian of
cash, U.S. Government securities or other high grade debt obligations and
are marked-to-market daily.
ADDITIONAL RISK FACTORS
Diversification
There is no guarantee that any Fund will accomplish its objective. In
addition, as the Adviser may from time to time invest a large percentage of
each Fund's assets in securities of a limited number of issuers, each Fund,
except the International Equity Fund, has been classified as "non-
diversified". By current SEC definition, a diversified fund has, with
respect to at least 75% of its total assets, no more than 5% of its total
assets invested in the securities of one issuer, plus cash, Government
securities, and securities of other investment companies. Accordingly,
each Fund may be more susceptible to risks associated with a single
economic, political or regulatory occurrence than a diversified investment
company. However, each Fund intends to qualify as a "regulated investment
company" under the Internal Revenue Code, and therefore will be subject to
diversification limits requiring that, as of the close of each fiscal
quarter, (i) no more than 25% of its total assets may be invested in the
securities of a single issuer (other than U.S. Government securities), and
(ii) with respect to 50% of its total assets, no more than 5% of such
assets may be invested in the securities of a single issuer (other than
U.S. Government securities) or invested in more than 10% of the outstanding
voting securities of a single issuer.
Swaps
No Fund enters into any swap, cap or floor transaction unless the unsecured
senior debt or the claims paying ability of the other party to the
transaction is rated at least "high quality" at the time of purchase (e.g.
AAA or AA by Standard & Poor's Corporation) by at least one of the
established rating agencies. The swap market has grown substantially in
recent years, with a large number of banks and investment banking firms
acting both as principals and agents utilizing standard swap documentation,
and the Adviser has determined that the swap market has become relatively
liquid. Swap transactions do not involve the delivery of securities or
other underlying assets or principal, and the risk of loss with respect to
such transactions is limited to the net amount of payments that a Fund is
contractually obligated to make or receive. Caps and floors are more
recent innovations for which standardized documentation has not yet been
developed and, accordingly, they are less liquid than swaps. A Fund will
not enter into an interest rate or currency swap transaction at any time
that the aggregate amount of its net obligations under such transactions
exceeds 10% of its total assets. The aggregate purchase price of caps and
floors held by a Fund may not exceed 5% of its total assets at the time of
purchase, and they are considered by the Fund to be illiquid assets; it may
sell caps and floors without limitation other than the segregated account
requirement described above.
The use of swaps, caps and floors is a highly specialized activity which
involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If the Adviser's forecast
of market values, interest rates, currency rates of exchange and other
applicable factors is incorrect, the investment performance of a Fund will
diminish compared with the performance that could have been achieved if
these investment techniques were not used. Moreover, even if the Adviser's
forecasts are correct, a Fund's swap position may correlate imperfectly
with the asset or liability being hedged. In addition, in the event of a
default by the other party to the transaction, a Fund might incur a loss.
Debt Obligations
Each of the Funds (other than the Growth & Income and International Equity
Funds) invests primarily in debt obligations. Because of its investment
policies, each such Fund may or may not be suitable or appropriate for all
investors. The Funds are not money market funds and are not appropriate
for those whose primary objective is stability of principal. The value of
the portfolio securities of each Fund will fluctuate based upon market
conditions.
Under normal circumstances, all debt securities held by a Fund are rated
"investment grade" at the time of purchase by at least one of the
established rating agencies (e.g., AAA, AA, A or BBB by Standard & Poor's
Corporation) or, if unrated, are determined to be of comparable quality by
the Adviser. Securities rated BBB are considered to have adequate capacity
to pay interest and repay principal, but adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to
pay interest and principal than higher rated bonds. In addition, the Total
Return Fund may invest up to 25% of its assets in debt rated below
investment grade, or in unrated securities determined by the Adviser to be
of comparable quality. Lower quality debt securities are often considered
to be speculative and involve a greater risk of default or price changes
due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than investment grade securities and
may decline significantly in periods of general economic difficulty.
Further information regarding investment ratings is in the appendix to the
Statement of Additional Information.
Foreign Investments
Each of the Funds (other than the U.S. Treasury, Short Duration Tax Exempt
and Tax Exempt Bond Funds) may invest in securities of foreign issuers, and
the Global Funds invest principally in such securities. In addition, the
Total Return Fund and the Global Funds may invest in securities that are
denominated in foreign currencies. Investments in foreign bond and equity
securities present opportunities for both increased benefits and risks as
compared to investments in the U.S. securities market.
Securities markets in different countries may offer enhanced
diversification of investors' portfolios because of differences in
economic, financial, political and social factors. The Global Funds allow
investors to diversify their portfolios by investing in various companies
and economies outside of the U.S., thereby taking advantage of these
differences. However, investing in securities of foreign issuers involves
certain risks and considerations not typically associated with investing in
securities of U.S. issuers. These risks may include less publicly
available information and less governmental regulation and supervision of
foreign stock exchanges, brokers and issuers. Foreign issuers are not
usually subject to uniform accounting, auditing and financial reporting
standards, practices and requirements. Securities of foreign issuers are
subject to the possibility of expropriation, nationalization, confiscatory
taxation, adverse changes in investment or exchange control regulation,
political instability and restrictions in the flow of international
capital. Securities of some foreign issuers are less liquid and their
prices more volatile than the securities of U.S. companies. In addition,
the time period for settlement of transactions in foreign securities may be
longer than domestic securities. It may also be more difficult to obtain
and enforce judgments against foreign entities.
The International Equity, Global Balanced and Total Return Funds may invest
a portion of their assets in securities of issuers organized in emerging
markets, which may include developing countries or countries with new or
developing capital markets. The considerations noted above are generally
intensified for these investments. These countries may have relatively
unstable governments, economies based on only a few industries, and
securities markets that trade a small number of securities. Securities of
issuers located in these countries tend to have volatile prices and may
offer significant potential for loss as well as gain.
Investing in the debt obligations of supranational organizations involves
additional risks and considerations. Such organizations' debt obligations
are generally not guaranteed by their member governments, and payment
depends on the willingness and ability of their member governments to
support their obligations. Continued support of a supranational
organization by its government members is subject to a variety of
political, economic and other factors, as well as the financial performance
of the organization.
Changes in foreign exchange rates will affect the value of the securities
held in certain of the Global Funds either beneficially or adversely.
Fluctuations in foreign currency exchange rates will also affect the value
of dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, distributed to
shareholders. Some foreign fixed income markets offering attractive returns
may be denominated in currencies which appear relatively weak or are
potentially volatile compared to the U.S. dollar. The Global Fixed Income,
Global Short Bond, Global Balanced and International Bond Funds will, when
deemed appropriate by the Adviser, hedge this currency exposure in order to
protect the Funds' share price.
The International Equity and Global Balanced Funds are expected to incur
operating expenses which are higher than those of mutual funds investing
exclusively in U.S. equity securities, since expenses such as brokerage
commissions and custodial fees related to foreign investments are usually
higher than those associated with investments in U.S. securities. In
addition, dividends and interest from foreign securities may be subject to
foreign withholding taxes. See "Dividends, Distributions and Taxes."
If the U.S. government were to impose any restrictions, through taxation or
other means, on foreign investments by U.S. investors such as those to be
made through the Global Funds, the Board of Trustees will promptly review
the policies of the Funds to determine whether significant changes in their
portfolios are appropriate.
The Adviser undertakes several measures in seeking to preserve investors'
principal in the Global Fixed Income, Global Short Bond and International
Bond Funds. First, the debt securities or currencies in which each Fund
invests are issued by or under the regulation of countries the bonds of
which are rated at the time of purchase in the top two tiers of the ratings
issued by Moody's Investor Services, Inc. or Standard & Poor's Corporation.
If the rating of bonds of any country issuing or regulating securities or
currencies in which any such Fund has made an investment falls below such
level, the Fund will discontinue making investments in that country and
liquidate any current holdings as soon as the Adviser determines it is in
the best interest of the Funds to do so.
Second, under normal circumstances the debt securities in which the Global
Fixed Income, Global Short Bond, Global Balanced and International Bond
Funds invest are considered "high quality" at the time of purchase (e.g.,
rated AAA or AA by Standard & Poor's Corporation) by at least one of the
established rating agencies, or if not rated are determined to be of
comparable quality by the Adviser.
Third, the Adviser actively manages the maturity of the Global and
International Bond Funds' portfolios in response to expected interest rate
movements. When anticipating a decline in interest rates, the Adviser
attempts to lengthen the portfolios' maturities to capitalize on the
expected appreciation of such securities. When interest rates are expected
to rise, each Fund seeks to shorten its maturity to protect against the
expected capital depreciation.
Finally, the Adviser employs a variety of investment techniques to control
the Global Fixed Income, Global Short Bond, Global Balanced and
International Bond Funds' exposure to foreign currency exchange risks. An
increase in value of a foreign currency relative to the U.S. dollar (the
"weakening" of the dollar) increases the U.S. dollar value of securities
denominated in that foreign currency. Conversely, a decline in the value
of a foreign currency relative to the U.S. dollar (the "strengthening" of
the dollar) causes a decline in the U.S. dollar value of these securities.
The Adviser seeks to use combinations of forward foreign currency
contracts, foreign currency futures contracts and options on futures
contracts, options on foreign currencies, and currency swap agreements to
offset the impacts of such movements. The Global Fixed Income and Global
Short Bond Funds will generally hedge a greater proportion of their foreign
currency exchange risk than the International Bond and Global Balanced
Funds. These investment techniques involve certain risks described under
"Investment Practices" above.
Options and Futures Contracts
Transactions in securities options, futures contracts and options on
futures contracts involve a variety of risks, including the inability to
close out a position because of the lack of a liquid market and, in the
case of futures transactions, lack of correlation between price movements
in the hedging vehicle and the portfolio assets being hedged. No more than
5% of a Fund's total assets will be committed to initial margin deposits
and premiums on futures contracts and options on futures contracts. Each
Fund covers its obligations with respect to such futures contracts and
options by maintaining assets sufficient (together with its margin
deposits) to meet such obligations; depending on the nature of the contract
or option, this cover is in the form of liquid assets, put or call options,
the underlying instruments which are the subject of the contract or option,
or a long or short position in the contract which is the subject of an
option. Options and futures transactions can be highly volatile and could
result in reduction of a Fund's total return, and a Fund's attempt to use
such instruments for hedging purposes may not be successful. The aggregate
market value of a Fund's portfolio securities and foreign currencies
covering put options on securities and currencies written by the Fund will
not exceed 50% of its net assets.
OTHER INVESTMENT POLICIES
Each Fund's investment program and policies are subject to further
restrictions and risks which are described in the Statement of Additional
Information. Each Fund's investment objective is fundamental and,
therefore, may not be changed without obtaining shareholder approval. A
Fund's other investment policies and practices may be changed without
shareholder approval unless otherwise specified as fundamental policies.
Fundamental Investment Policies. As a matter of fundamental policy, a Fund
will not (1) purchase a security of any issuer if, as a result, with
respect to 50% of the Fund's total assets, more than 10% of the outstanding
voting securities of the issuer would be held by the Fund (other than
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities); (2) borrow money except for temporary, extraordinary or
emergency purposes or for the clearance of transactions in amounts not
exceeding 30% of its total assets valued at market (For this purpose,
reverse repurchase agreements and delayed delivery transactions covered by
segregated accounts as described above are not considered to be
borrowings,); or (3) in any manner transfer as collateral for indebtedness
any security of the Fund except in connection with permissible borrowings.
In addition, the Growth & Income and Market Return Funds will not purchase
any security which would cause 25% or more of the value of the Fund's total
assets at the time of purchase to be invested in the securities of any one
or more issuers conducting their principal business activities in the same
industry, provided that (1) there is no limitation with respect to U.S.
Government obligations and repurchase obligations secured by such
obligations, (2) wholly owned finance companies will be considered to be in
the industries of their parents, (3) SPDRs will be divided according to
the industries of their underlying common stocks, and (4) utilities will be
divided according to their services (for example, gas, gas transmission,
electric and telephone will each be considered a separate industry). Each
foreign government and supranational organization is considered to be an
industry.
Other Investment Policies. As a matter of operating policy, a Fund will
not (1) purchase a security of any one issuer if, as a result, (a) more
than 15% of the value of its net assets would be invested in illiquid
securities, including repurchase agreements which do not provide for
payment within seven days or other securities which are not readily
marketable; or (b) with respect to the Fixed Income Funds, Global Short
Bond, Global Fixed Income and International Bond Funds, more than 5% of the
value of the Fund's total assets would be invested in the securities of
unseasoned issuers which at the time of purchase have been in operation for
less than three years, including predecessors and unconditional guarantors;
or (2) purchase additional securities when borrowings exceed 5% of the
Fund's total assets. In addition, the Limited Maturity, Short Bond,
Intermediate, Investment Quality Bond and Total Return Funds will not
purchase any security which would cause 25% or more of the value of the
Fund's total assets at the time of purchase to be invested in the
securities of any one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no limitation
with respect to U.S. Government obligations and repurchase obligations
secured by such obligations, (b) wholly owned finance companies will be
considered to be in the industries of their parents, and (c) utilities
will be divided according to their services (for example, gas, gas
transmission, electric and telephone will each be considered a separate
industry). Each foreign government and supranational organization is
considered to be an industry.
Portfolio Turnover. Securities may be sold without regard to the length of
time held. The portfolio turnover of each Fund may be higher than that of
other mutual funds with less aggressive trading strategies, which would, in
turn, increase each Fund's transaction costs. No Fund can accurately
predict its future annual portfolio turnover rate; however, although it
could vary substantially, it will generally not exceed 300% for the Global
and International Bond Funds, 100% for the Growth & Income and
International Equity Funds, and 200% for the other Funds. To the extent
that short-term trading results in the realization of short-term capital
gains, shareholders will be taxed on such gains at ordinary income tax
rates.
MANAGEMENT OF THE FUNDS
The business of the Group is managed under the direction of its Board of
Trustees, which establishes the Group's policies and supervises and reviews
the management of the Funds. Information about the Trustees and the
Group's executive officers may be found in the Statement of Additional
Information.
INVESTMENT ADVISER
Payden & Rygel serves as investment adviser to the Funds pursuant to an
investment management contract with the Group. The Adviser is an
investment counseling firm founded in 1983, and currently has over $20
billion of assets under management. Payden & Rygel's address is 333 South
Grand Avenue, Los Angeles, California 90071. It is registered as an
investment adviser with the Securities and Exchange Commission and as a
commodity trading adviser with the Commodity Futures Trading Commission.
The Adviser manages the investment and reinvestment of the assets of the
Funds and reviews, supervises and administers all investments. Several
teams, each responsible for a group of Funds are responsible for the day-to-
day management of the Funds subject to the supervision of the Adviser's
Chief Investment Officer and/or Head of Trading and broad investment
parameters established by the Adviser's Global Investment Policy Committee.
John Isaacson is an Executive Vice President and the Chief Investment
Officer of Payden & Rygel. He joined the Company in 1988 and has 25 years
of experience in the investment business. Scott King is an Executive Vice
President and the Head of Trading at Payden & Rygel. He was one of the
original members of the Company when it was founded in 1983 and has over 17
years of investment experience. Mr. Isaacson and Mr. King are the co-heads
of Payden & Rygel's Global Investment Policy Committee that is responsible
for defining the broad investment parameters of the Funds, including
overall duration positions, types of strategies to be employed, and range
of securities acceptable for investment.
Each of the teams analyzes investment opportunities and strategies, and
makes portfolio management decisions (subject to prior review of
significant decisions) by the Global Investment Policy Committee, and
applies them to portfolios. The strategy teams and the Funds for which
they are responsible are the Tax Exempt Group (Short Duration Tax Exempt
Fund and Tax Exempt Bond Fund); the Global Group (Global Fixed Income
Fund, International Bond Fund and Global Short Bond Fund); the Short
Maturity Group (Limited Maturity Fund, Short Bond Fund, U.S. Treasury Fund,
Market Return Fund, and Intermediate Bond Fund); the Bond Strategy Group
(Investment Quality Bond Fund and Total Return Fund); and the Equity
Strategy Group (Growth & Income Fund and Global Balanced Fund).
The Adviser receives a monthly fee from each Fund at the following annual
rates: the Limited Maturity, Short Bond, Treasury, Intermediate,
Investment Quality Bond, Total Return and Market Return Funds, 0.28% for
the first $1 billion of each Fund's average daily net assets and 0.25% of
each Fund's net assets above $1 billion; the Short Duration and Tax Exempt
Bond Funds, 0.32% for the first $500 million of each Fund's average daily
net assets, 0.28% for the next $500 million and 0.25% of average daily net
assets above $1 billion; the Global Short Bond, Global Fixed Income and
International Bond Funds, 0.30% of the first $2 billion of each Fund's
average daily net assets, and 0.25% of average daily net assets above $2
billion; the International Equity Fund, 0.60% of the first $1 billion of
average daily net assets of the portfolio and 0.45% thereafter; the Global
Balanced Fund, 0.50% of the first $1 billion of average daily net assets of
the portfolio and 0.40% thereafter; the Growth & Income Fund, 0.50% for the
first $2 billion of the Fund's average daily net assets and 0.30% of the
Fund's net assets above $2 billion.
For the fiscal year which ended October 31, 1996, the Adviser earned a fee
from each Fund as follows: Limited Maturity, Short Bond, Treasury,
Intermediate, Investment Quality Bond and Market Return Funds, 0.28%; Short
Duration Tax Exempt and Tax Exempt Funds, 0.32%; Global Short Bond Fund,
0.30%; Global Fixed Income Fund 0.31%; International Bond Fund, 0.35%. The
other Funds were not open during this period.
THE SUB-ADVISER
For the International Equity and Global Balanced Funds, the Adviser has
entered into a sub-advisory agreement with Scottish Widows Investment
Management, appointing the latter as sub-investment manager and delegating
to Scottish Widows the day-to-day management responsibilities for the
International Equity Fund and a portion of the Global Balanced Fund. The
Adviser continuously monitors and evaluates the performance of Scottish
Widows.
Scottish Widows, located at 15 Dalkeith Road, Edinburgh, Scotland, United
Kingdom EH16 5BU, is a wholly owned subsidiary of Scottish Widows' Fund and
Life Assurance Society ("Scottish Widows Group"), a mutual company
chartered in 1815. Scottish Widows Group has assets under management of
over $34 billion as of December 31, 1995. Scottish Widows has been
managing UK equities since the early 1900's, U.S. equities since the
1950's, Japan and Southeast Asia equities since the 1960's and their
experience in continental European equities dates back to the mid-1970's.
Investment decisions are made by an account management team headed by Mr.
Kenneth A. Anderson. Mr. Anderson joined Scottish Widows in 1988 and has
managed a variety of international equity portfolios during this time. He
was appointed an Investment Director of the firm in 1995.
The Adviser pays the Sub-Adviser a monthly sub-advisory fee for the
International Equity Fund and Global Balanced Fund at an annual rate equal
to 0.40% of the first $1 billion of average daily net assets of the
portfolio and 0.30% of average daily net assets above $1 billion. In the
case of the Global Balanced Fund fees are based on the average daily net
assets allocated to the Sub-adviser by the Adviser. It is important to
note that the sub-investment management fee does not represent a separate
or additional charge or assessment against the Funds.
ADMINISTRATOR AND TRANSFER AGENT
Treasury Plus, Inc., a wholly owned subsidiary of the Adviser serves as the
Administrator to the Funds pursuant to a management and administration
contract with the Group. The Administrator's address is 333 South Grand
Avenue, Los Angeles, California 90071. The Administrator provides
administrative services to each Fund, including administrative and clerical
functions, certain shareholder servicing functions and supervision of the
services rendered to the Fund by other persons.
Investors Fiduciary Trust Company, a Missouri trust company located at 127
West 10th Street, Kansas City, Missouri, 64105, provides accounting,
dividend disbursing and transfer agency services to the Fund pursuant to
fund accounting and transfer agency contracts with the Group.
For providing administrative services to the Group, the Administrator
receives a monthly fee at the annual rate of 0.06% of the daily net assets
of the Group. Investors Fiduciary Trust Company receives fees for fund
accounting services and dividend disbursing and transfer agency services.
Certain out-of-pocket expenses are also reimbursed at actual cost.
Advisory and administrative fees generally will be charged to each class of
shares based upon the assets of that class. Expenses attributable to a
single class of shares will be charged to that class.
DISTRIBUTOR
Shares of the Funds are distributed through Payden & Rygel Distributors, a
wholly owned subsidiary of Payden & Rygel located at the same address. The
Distributor is a broker-dealer registered with the Securities and Exchange
Commission and is a member of the National Association of Securities
Dealers, Inc.
SHAREHOLDER SERVICE PLAN
The Board of Trustees has adopted a Shareholder Service Plan with respect
to Class B shares of the Funds and of the other portfolios of the Group.
Under the Plan, the Class B shares of the Funds pay the Distributor an
annual fee of up to 0.25% of the average net assets of the Funds
attributable to the Class B shares for services provided by the
Distributor, broker-dealers and other service organizations to the
beneficial owners of Class B shares. Such support services include
establishing and maintaining accounts and records relating to clients;
assisting clients in processing purchase, exchange and redemption requests
and account designations; preparing tax reports and forms; forwarding
shareholder communications from the Funds; and responding to client
inquiries concerning their investments.
Services provided under the Shareholder Service Plan are not primarily
intended to result in the sale or distribution of Class B Shares of the
Funds. The Plan is a "compensation" plan, which means that the fees paid
to the broker-dealers and other service organizations for services rendered
are payable even if the amounts paid exceed their actual expenses. If in
any month the Distributor is due more fees for shareholder services than
are immediately payable because of the expense limitations under the Plan,
the unpaid amount is carried forward from month to month while the Plan is
in effect until such time when it may be paid. However, no carried forward
amount will be payable beyond the fiscal year in which the amount was
incurred, and no interest, carrying or other finance charge is borne by the
Class B Shares with respect to any amount carried forward.
PERFORMANCE INFORMATION
The Funds may, from time to time, include the yield and total return for
shares in advertisements or reports to shareholders or prospective
investors. Yield and total return are calculated separately for Class A
and Class B Shares. Yield will be quoted using the SEC definition, which is
the annualized net investment income per share during a particular 30-day
(or one month) period. Quotations of average annual total return will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in a Fund over specified periods.
OFFERING
Copies of the Group's 1996 Annual Report to Shareholders are available
without charge by writing or calling the Group at the address and phone
number listed in the front of this prospectus.
No dealer, sales representative or other person has been authorized to give
any information or to make any representations, other than those contained
in this Prospectus, in connection with the offer contained herein, and, if
given or made, such other information or representations may not be relied
upon as having been authorized by the Group or the Distributor. This
Prospectus does not constitute an offer by the Group or the Distributor to
sell, or a solicitation of an offer to buy, any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make
such offer in such jurisdiction.
SHAREHOLDER SERVICES
TAX-SHELTERED RETIREMENT PLANS
The Funds accept purchases of shares by tax-sheltered retirement plans such
as IRAs, rollover IRAs, Keogh or corporate profit sharing plans, Simplified
Employee Pension plans and 401(k) plans. Please call a Fund Representative
to receive a retirement package which includes a special application for
tax-sheltered accounts.
EXCHANGE PRIVILEGE
The Group currently consists of fifteen investment portfolios with varying
investment objectives or policies, and other investment portfolios may be
created. Shares of a Fund may be exchanged for Class A or Class B shares
of any of the other investment portfolios of the Group Exchanges are made
on the basis of the net asset values of the portfolios involved.
Because an exchange is considered a redemption and purchase of shares, the
shareholder may realize a gain or loss for federal income tax purposes.
Before making an exchange into another investment portfolio, a shareholder
should obtain and review a current prospectus of the investment portfolio
into which the shareholder wishes to transfer. When exchanging shares into
another investment portfolio, shareholders should be aware that, among
other significant differences, the portfolios may have different dividend
payment dates, minimum initial investments and minimum additional
investments. Exchanges will be effected upon receipt of written
instructions signed by all account owners. In addition, shareholders who
complete the telephone privilege authorization portion of the Account
Registration Form may effect exchanges from a Fund into another class of
the Fund or an identically registered account in one of the other available
portfolios by a telephone call to the Distributor at (213) 625-1900 or
(800) 5-PAYDEN (800-572-9336).
The Exchange Privilege may be modified or discontinued by the Group at any
time upon 60 days' notice to shareholders. The Group also reserves the
right to limit the number of exchanges a shareholder may make in any year
to avoid excessive Fund expenses. The Exchange Privilege is only available
in states where the exchange may be legally made.
TELEPHONE PRIVILEGE
Shareholders may exchange or redeem shares by telephone if they have
elected this option on the Account Registration Form. During periods of
drastic economic or market changes, it is possible that the telephone
exchange privilege may be difficult to implement. In this event,
shareholders should follow the other exchange and redemption procedures
discussed in this prospectus.
Shareholders should realize that by electing the telephone privilege they
may be giving up a measure of security that they may have if they were to
exchange or redeem their shares in writing. The Group will employ
procedures designed to provide reasonable assurance that instructions
communicated by telephone, telegraph or wire communication are genuine and,
if it does not do so, it may be liable for any losses due to unauthorized
or fraudulent instructions. The Group reserves the right to refuse a
telephone, telegraph or wire communication exchange or redemption request
if it believes that the person making the request is not authorized by the
investor to make the request. Neither the Group nor its agents will be
liable for any loss, liability or cost which results from acting upon
instructions of a person reasonably believed to be a shareholder with
respect to the telephone, telegraph or wire communication privilege.
CHECKWRITING CAPABILITY
Free checkwriting is available for investors of the Limited Maturity Fund
only. To obtain checks, call a Fund Representative for a signature card.
Complete and return it to the Fund. To pay the check, shares are redeemed
from your Fund account at the net asset value per share computed on the day
the check is presented to the Fund for payment. It is important to note
that the Limited Maturity Fund is not a money market fund and its net asset
value per share will vary daily. An investor may incur a taxable capital
gain or loss on the shares redeemed each time a check is paid. A
transaction fee of $2.00 per check will be charged to the account if the
investor has total assets in all series of the Group of less than $25,000.
Checks received by the Fund are credited to the account on the day
received. A fee of $20.00 may be imposed on the account if a check is
returned because it fails to meet the Fund's checkwriting criteria or if
there are insufficient funds in the account. The Fund reserves the right
to modify or terminate the checkwriting privilege upon 30 days prior
written notice to shareholders.
REDEMPTION OF SHARES
Each Fund will redeem its shares at the net asset value next determined
following receipt of the request in proper form. Redemptions may be made
in writing, by calling the Distributor at (800) 5-PAYDEN, by telegraph or
by other wire communication. No charge is made for redemptions. Shares
redeemed may be worth more or less than the purchase price of the shares,
depending on the market value of the investment securities held by the
Funds at the time of redemption.
Redemption requests in writing or by telegraph or other wire communications
should be directed to the Group at 333 South Grand Avenue, Attn.: Fund
Distributor, Los Angeles, California 90071. Payment for redemption of
recently purchased shares will be delayed until the Fund is advised that
the purchase check has been honored, which may take up to 15 days after
receipt of the check. If the proceeds of a written request are to be paid
to a person other than the record owner of the shares or are to be sent to
an address other than the address of record, the signature on the request
must be guaranteed by a commercial bank, a trust company or another
eligible guarantor institution. A signature guarantee may be rejected if
it is believed to be not genuine or if there is any reason to believe that
the transaction is improper. Payment of the redemption price will
ordinarily be wired to the shareholder's bank or mailed to the shareholder
address of record one business day after receipt of the request, but may
take up to seven days for the International Equity and Global Balanced
Funds. Telephone redemptions may be difficult to implement during periods
of drastic economic or market changes, which may result in an unusually
high volume of telephone calls.
A Fund may suspend the right of redemption or postpone the payment date at
times when the New York Stock Exchange is closed or during certain other
periods as permitted under the federal securities laws.
HOW TO PURCHASE SHARES
Shares of the Funds may be purchased at net asset value without a sales
charge. The minimum initial investment is $5,000, and the minimum
subsequent investment is $1,000. An account may be opened by calling the
Distributor at (213) 625-1900 or (800) 5-PAYDEN. If you wish to open a tax-
sheltered retirement plan such as an IRA, a special application form must
be completed. Please be sure to ask for an IRA information kit.
Transaction fees may be charged for the purchase and/or sale of shares
through a broker.
INITIAL INVESTMENT
By Check - all Funds
- - Complete Application
- - Make check payable to the Fund and mail with application to:
Payden & Rygel Investment Group
333 South Grand Avenue
Los Angeles, CA 90071
By Federal Funds Wire
- - Complete application and mail to:
Payden & Rygel Investment Group
333 South Grand Avenue
Los Angeles, CA 90071
- - Wire Funds as follows when application has been processed:
The Boston Safe Deposit and Trust Company
ABA 011001234
A/C #115762
Mutual Funds #6630
Credit to (name of Payden & Rygel Fund here)
For Account of (insert your account name here)
Note: Shares cannot be purchased until a properly completed application is
received by the Group.
Shares of the Funds are purchased at the net asset value per share for each
class next determined after receipt by the Distributor of an order to
purchase shares in proper form. Purchase orders will be accepted only on
days on which the Funds and the Custodian are open for business, as defined
below.
All Funds are "open for business" on each day the New York Stock Exchange
is open for trading, which excludes the following holidays: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
ADDITIONAL INVESTMENTS
Additional investments may be made at any time (minimum investment $1,000)
at net asset value by check or by calling the Distributor and wiring
federal funds to the Custodian as described above.
OTHER PURCHASE INFORMATION
Purchases of each Fund's shares will be made in full and fractional shares.
Certificates for shares will not be issued. The Group reserves the right,
in its sole discretion, to suspend the offering of shares of any Fund or to
reject purchase orders when, in the judgment of its management, such
suspension or rejection is in the best interest of the Fund; and to redeem
shares if information provided in the client application proves to be
incorrect in any material manner.
Investment Adviser
Payden & Rygel
333 South Grand Avenue
Los Angeles, California 90071
Sub-Adviser
Scottish Widows Investment Management Limited
15 Dalkeith Road
Edinburgh, Scotland
United Kingdom EH16 5BU
Administrator
Treasury Plus, Inc.
333 South Grand Avenue
Los Angeles, California 90071
Distributor
Payden & Rygel Distributors
333 South Grand Avenue
Los Angeles, California 90071
Custodian
The Boston Safe Deposit and Trust Company
One Boston Place
Boston, Massachusetts 02109
Transfer Agent
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
Auditors
Deloitte & Touche LLP
1700 Courthouse Plaza Northeast
Dayton, Ohio 45402
Counsel
Paul, Hastings, Janofsky and Walker LLP
555 South Flower Street
Los Angeles, California 90071
December 9, 1996
PAYDEN & RYGEL INVESTMENT GROUP
PAYDEN & RYGEL LIMITED MATURITY FUND
PAYDEN & RYGEL SHORT BOND FUND
PAYDEN & RYGEL U.S. TREASURY FUND
PAYDEN & RYGEL INTERMEDIATE BOND FUND
PAYDEN & RYGEL INVESTMENT QUALITY BOND FUND
PAYDEN & RYGEL TOTAL RETURN FUND
PAYDEN & RYGEL SHORT DURATION TAX EXEMPT FUND
PAYDEN & RYGEL TAX EXEMPT BOND FUND
PAYDEN & RYGEL GROWTH & INCOME FUND
PAYDEN & RYGEL MARKET RETURN FUND
PAYDEN & RYGEL GLOBAL SHORT BOND FUND
PAYDEN & RYGEL GLOBAL FIXED INCOME FUND
PAYDEN & RYGEL INTERNATIONAL BOND FUND
PAYDEN & RYGEL GLOBAL BALANCED FUND
PAYDEN & RYGEL INTERNATIONAL EQUITY FUND
STATEMENT OF ADDITIONAL INFORMATION
December 9, 1996
The Payden & Rygel Limited Maturity Fund ("Limited Maturity Fund"), Payden
& Rygel Short Bond Fund ("Short Bond Fund"), Payden & Rygel U.S. Treasury
Fund ("Treasury Fund"), Payden & Rygel Intermediate Bond Fund
("Intermediate Fund"), Payden & Rygel Investment Quality Bond Fund
("Investment Quality Bond Fund"), Payden & Rygel Total Return Fund ("Total
Return Fund"), Payden & Rygel Short Duration Tax Exempt Fund ("Short
Duration Fund"), Payden & Rygel Tax Exempt Bond Fund ("Tax Exempt Bond
Fund"), Payden & Rygel Growth & Income Fund ("Growth & Income Fund"),
Payden & Rygel Market Return Fund ("Market Return Fund"), Payden & Rygel
Global Short Bond Fund ("Global Short Bond Fund"), Payden & Rygel Global
Fixed Income Fund ("Global Fixed Income Fund"), Payden & Rygel
International Bond Fund ("International Bond Fund"), Payden & Rygel Global
Balanced Fund ("Global Balanced Fund") and Payden & Rygel International
Equity Fund ("International Equity Fund") are series ("Funds") of Payden &
Rygel Investment Group (the "Group"), a no-load, open-end management
investment company.
This Statement of Additional Information is not a prospectus, and should be
used in conjunction with the Prospectus for the Funds dated December 9,
1996, which is incorporated herein by reference. A copy of the Prospectus
may be obtained free of charge from the Group at 333 South Grand Avenue,
Los Angeles, California 90071 (telephone 213/625-1900 or 800/572-9336).
TABLE OF CONTENTS
INVESTMENT OBJECTIVE AND POLICIES 1
FUNDAMENTAL AND OPERATING POLICIES 34
PORTFOLIO TRANSACTIONS 37
VALUATION OF PORTFOLIO SECURITIES 39
FUND PERFORMANCE 39
TAXATION 42
MANAGEMENT OF THE GROUP 48
PURCHASES AND REDEMPTIONS 54
OTHER INFORMATION 55
APPENDIX A - DESCRIPTION OF SECURITIES RATINGS 61
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and general investment policies of the Funds are
described in the Prospectus. Additional information concerning the
characteristics of certain of the Funds' investments is set forth below.
EQUITY SECURITIES
Preferred Stocks
Preferred stock, unlike common stock, offers a stated dividend rate payable
from a corporation's earnings. Such preferred stock dividends may be
cumulative or non-cumulative, participating, or auction rate. If interest
rates rise, the fixed dividend on preferred stocks may be less attractive,
causing the price of preferred stocks to decline. Preferred stock may have
mandatory sinking fund provisions, as well as call/redemption provisions
prior to maturity, a negative feature when interest rates decline.
Dividends on some preferred stock may be "cumulative," requiring all or a
portion of prior unpaid dividends to be paid. Preferred stock also
generally has a preference over common stock on the distribution of a
corporation's assets in the event of liquidation of the corporation, and
may be "participating," which means that it may be entitled to a dividend
exceeding the stated dividend in certain cases. The rights of preferred
stocks on the distribution of a corporation's assets in the event of a
liquidation are generally subordinate to the rights associated with a
corporation's debt securities.
American Depository Receipts
American Depository Receipt ("ADRs") may be listed on a national securities
exchange or may trade in the over-the-counter market. ADR prices are
denominated in United States dollars; the underlying security may be
denominated in a foreign currency, and may be subject to foreign government
taxes which would reduce the yield on such securities.
Convertible Securities
A convertible security is a fixed income security (a bond or preferred
stock) which may be converted at a stated price within a specified period
of time into a certain quantity of the common stock of the same or a
different issuer. Convertible securities are senior to common stocks in an
issuer's capital structure, but are usually subordinated to similar non-
convertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from common stock but lower than
that afforded by a similar non-convertible security), a convertible
security also affords an investor the opportunity, through its conversion
feature, to participate in the capital appreciation attendant upon a market
price advance in the convertible security's underlying common stock.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities
of comparable maturity and quality that do not have a conversion privilege)
and its "conversion value" (the security's worth, at market value, if
converted into the underlying common stock). The credit standing of the
issuer and other factors may also affect the investment value of a
convertible security. The conversion value of a convertible security is
determined by the market price of the underlying common stock. If the
conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. To
the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion table.
Like other debt securities, the market value of convertible debt securities
tends to vary inversely with the level of interest rates. The value of the
security declines as interest rates increase and increases as interest
rates decline. Although under normal market conditions longer term
securities have greater yields than do shorter term securities of similar
quality, they are subject to greater price fluctuations. Fluctuations in
the value of the Fund's investments will be reflected in its net asset
value per share. A convertible security may be subject to redemption at
the option of the issuer at a price established in the instrument governing
the convertible security. If a convertible security held by the Fund is
called for redemption, the Fund will be required to permit the issuer to
redeem the security, convert it into the underlying common stock or sell it
to a third party.
FIXED INCOME SECURITIES
Securities in which the Funds may invest include but are not limited to
those described below.
U.S. Government Obligations
U.S. Government obligations are debt securities issued by the U.S.
Treasury. They are direct obligations of the U.S. Government and differ
mainly in the lengths of their maturities.
U.S. Government Agency Securities
U.S. Government Agency securities are issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies. These include
securities issued by the Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Bank, Federal Land Banks,
Farmers Home Administration, Banks for Cooperatives, Federal Intermediate
Credit Banks, Federal Financing Bank, Farm Credit Bank, and the Tennessee
Valley Authority. Some of these securities are supported by the full faith
and credit of the U.S. Treasury, and others only by the credit of the
instrumentality, which may include the right of the issuer to borrow from
the Treasury.
Foreign Government Obligations
Foreign government obligations are debt securities issued or guaranteed by
a supranational organization or a foreign sovereign government or one of
its agencies, authorities, instrumentalities or political subdivisions,
including a foreign state, province or municipality.
Bank Obligations
Bank obligations include certificates of deposit, bankers' acceptances, and
other debt obligations. Certificates of deposit are short-term obligations
of commercial banks. A bankers' acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with an international
commercial transaction.
The Funds will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion, or the
equivalent in other currencies, (ii) in the case of U.S. banks, the bank is
a member of the Federal Deposit Insurance Corporation, and (iii) in the
case of foreign banks, the security is, in the opinion of Payden & Rygel,
of an investment quality comparable with other debt securities which may be
purchased by the Fund. These limitations do not prohibit investments in
securities issued by foreign branches of U.S. banks, provided such U.S.
banks meet the foregoing requirements.
Corporate Debt Securities
Investments in U.S. dollar denominated securities of domestic or foreign
issuers are limited to corporate debt securities (corporate bonds,
debentures, notes and other similar corporate debt instruments) which meet
the minimum rating criteria set forth in the Prospectus. The rate of
return or return of principal on some debt obligations may be linked or
indexed to the level of exchange rates between the U.S. dollar and a
foreign currency or currencies.
The Adviser will undertake several measures in seeking to preserve
investors' principal:
First, the debt securities in which the Funds invest will be
considered "investment-grade"(e.g., rated AAA, AA, A or BBB by
Standard & Poor's Corporation) by at least one of the established
rating agencies, or if not rated, will be determined to be of
comparable quality by the Adviser (except for the portion of the
Total Return Fund's assets which may be invested in debt
securities below investment grade). However debt investments for
the Global and International Funds must be "high quality" as
discussed in the Prospectus. If the rating of a debt security in
which a Fund has made an investment falls below the investment
grade level (or below the B level for the Total Return Fund), the
Fund will discontinue making investments in that issuer and
liquidate any current holdings as soon as the Adviser determines
it is in the best interest of the Fund to do so. Except for the
Total Return Fund no Fund will hold more than 5% of its net
assets in obligations rated below investment grade, and no such
obligation will be rated below BB.
Second, the Adviser will actively manage the maturity of the
Funds' portfolios in response to expected interest rate
movements. When anticipating a decline in interest rates, the
Adviser will attempt to lengthen the portfolios' maturity to
capitalize on the expected appreciation of such securities. When
interest rates are expected to rise, the Funds will seek to
shorten their portfolios' maturities to protect against the
expected capital depreciation.
Finally, the Adviser may use interest rate and bond index
futures and options on futures contracts, options on securities,
and interest rate swaps to effect a change in the Funds' exposure
to interest rate changes. These investment techniques involve
certain risks described below.
There is, of course, no guarantee these investment strategies will
accomplish the Funds' objectives. A description of the rating standards
used by Standard & Poor's Corporation, Moody's Investor Services, Inc., and
Fitch Investor Services is set forth in Appendix A to this Statement of
Additional Information. Ratings represent only the opinions of such
organizations of the quality of the securities which they undertake to
rate, are general and are not absolute standards of quality.
Mortgage-Related Securities
Mortgage-related securities are interests in pools of mortgage loans made
to U.S. residential home buyers, including mortgage loans made by savings
and loan institutions, mortgage bankers, commercial banks and others.
Pools of mortgage loans are assembled as securities for sale to investors
by various governmental, government-related and private organizations. The
Funds may also invest in debt securities which are secured with collateral
consisting of U.S. mortgage-related securities, and in other types of U.S.
mortgage-related securities. Under normal circumstances, all debt
securities held by each Fund (with the exception of the Total Return Fund)
will be rated "investment grade", at the time of purchase, by at least one
of the established rating agencies (e.g. AAA, AA, A or BAA by Standard &
Poor's Corporation) or, if unrated, will be determined to be of comparable
quality by the Adviser. The Growth & Income and International Equity Funds
do not invest in these 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. A Fund will not purchase mortgage-related
securities which in the Adviser's opinion are illiquid if, as a result,
more than 15% of the value of the Fund's total assets will be illiquid.
Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Like a bond,
interest and prepaid principal is paid, in most cases, semi-annually. CMOs
may be collateralized by whole mortgage loans, but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed
by GNMA, FHLMC or FNMA.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of
principal received from the pool of underlying mortgages, including
prepayments, is first returned to investors holding the shortest maturity
class. Investors holding the longer maturity classes receive principal
only after the earlier classes have been retired.
Other Mortgage-Related Securities. Other mortgage-related securities
include securities of U.S. or foreign issuers that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage
loans on real property. These other mortgage-related securities may be
equity or debt securities issued by governmental agencies or
instrumentalities or by private originators of, or investors in, mortgage
loans, including savings and loan associations, homebuilders, mortgage
banks, commercial banks, investment banks, partnerships, trusts and special
purpose entities.
Asset Backed Receivables
The Funds may purchase asset-backed securities including, but not limited
to, Certificates for Automobile Receivables-SM- ("CARS-SM-") and credit
card receivable securities. CARS-SM- 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, CARS-SM- 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
CARS-SM-, issuers often lengthen the maturity of these securities by
providing for a fixed period during which interest payments are passed
through and principal payments are used to fund the transfer of additional
receivables to the underlying pool. The failure of the underlying
receivables to generate principal payments may therefore shorten the
maturity of these securities. In addition, unlike most other asset-backed
securities, credit card receivable securities are backed by obligations
that are not secured by interests in personal or real property. The Growth
& Income and International Equity Funds do not invest in these securities.
Floating Rate and Variable Rate Demand Notes
The Funds may purchase floating rate and variable rate demand notes and
bonds. These securities may have a stated maturity in excess of one year,
but permit a holder to demand payment of principal plus accrued interest
upon a specified number of days notice. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided
by banks. The issuer has a corresponding right, after a given period, to
prepay in its discretion the outstanding principal of the obligation plus
accrued interest upon a specific number of days notice to the holders. The
interest rate of a floating rate instrument may be based on a known lending
rate, such as a bank's prime rate, and is reset whenever such rate is
adjusted. The interest rate on a variable rate demand note is reset at
specified intervals at a market rate.
Each Fund will limit its purchase of securities that bear floating rates
and variable rates of interest to those meeting the rating quality
standards set forth in the Prospectus. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided
by banks. The quality of the underlying creditor or of the bank, as the
case may be, must, as determined by the Adviser under the supervision of
the Board of Trustees, also be equivalent to the quality standards set
forth above. In addition, the Adviser monitors the earning power, cash
flow and other liquidity ratios of the issuers of such obligations, as well
as the creditworthiness of the institution responsible for paying the
principal amount of the obligations under the demand feature.
Obligations with Puts Attached
Each Fund may purchase long-term fixed rate debt obligations that have been
coupled with an option granted by a third party financial institution
allowing the Fund at specified intervals to tender (or "put") such debt
obligations to the institution and receive the face value. These third
party puts are available in many different forms, and may be represented by
custodial receipts or trust certificates and may be combined with other
features such as interest rate swaps. The financial institution granting
the option does not provide credit enhancement. If there is a default on,
or significant downgrading of, the bond or a loss of its tax-exempt status,
the put option will terminate automatically. The risk to the Fund will
then be that of holding a long-term bond.
These investments may require that a Fund pay a tender fee or other fee for
the features provided. In addition, the Fund may acquire "stand-by
commitments" from banks or broker dealers with respect to the securities
held in its portfolios. Under a stand-by commitment, a bank or
broker/dealer agrees to purchase at the Fund's option a specific security
at a specific price on a specific date. The Fund may pay for a stand-by
commitment either separately, in cash, or in the form of a higher price
paid for the security. The Fund will acquire stand-by commitments solely
to facilitate portfolio liquidity. The Growth & Income and International
Equity Funds do not invest in these securities.
Repurchase Agreements
For the purpose of maintaining liquidity, each Fund may enter into
repurchase agreements (agreements to purchase U.S. Treasury notes and
bills, subject to the seller's agreement to repurchase them at a specified
time and price) with well-established registered securities dealers or
banks. Repurchase agreements are the economic equivalent of loans by a
Fund. In the event of a bankruptcy or default of any registered dealer or
bank, a Fund could experience costs and delays in liquidating the
underlying securities which are held as collateral, and a Fund might incur
a loss if the value of the collateral declines during this period.
Delayed Delivery Transactions
When delayed delivery purchases are outstanding, a Fund will set aside and
maintain until the settlement date in a segregated account cash, U.S.
Government securities or high grade debt obligations in an amount
sufficient to meet the purchase price. When purchasing a security on a
delayed delivery basis, a Fund assumes the rights and risks of ownership of
the security, including the risk of price and yield fluctuations, and takes
such fluctuations into account when determining its net asset value, but
does not accrue income on the security until delivery. When a Fund sells a
security on a delayed delivery basis, it does not participate in future
gains or losses with respect to the security. If the other party to a
delayed delivery transaction fails to deliver or pay for the securities, a
Fund could miss a favorable price or yield opportunity or could suffer a
loss. A Fund will not invest more than 25% of its total assets in when-
issued and delayed delivery transactions.
Reverse Repurchase Agreements
Each Fund covers its obligations under a reverse repurchase agreement by
maintaining a segregated account comprised of cash, U.S. Government
securities or high-grade debt obligations, maturing no later than the
expiration of the agreement, in an amount (marked-to-market daily) equal to
its obligations under the agreement. Reverse repurchase agreements are the
economic equivalent of borrowing by a Fund, and are entered into by a Fund
to enable it to avoid selling securities to meet redemption requests during
market conditions deemed unfavorable by the Adviser.
Illiquid Securities
No Fund may invest more than 15% of the value of its net assets in
securities that at the time of purchase have legal or contractual
restrictions on resale or are otherwise illiquid. The Adviser will monitor
the amount of illiquid securities in each Fund's portfolio, to ensure
compliance with the Fund's investment restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which
have not been registered under the Securities Act are referred to as
private placement or restricted securities and are purchased directly from
the issuer or in the secondary market. Mutual funds do not typically hold
a significant amount of these restricted or other illiquid securities
because of the potential for delays on resale and uncertainty in valuation.
Limitations on resale may have an adverse effect on the marketability of
portfolio securities and the Fund might be unable to dispose of restricted
or other illiquid securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemption requests within seven
days. The Fund might also have to register such restricted securities in
order to dispose of them, resulting in additional expense and delay.
Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act,
including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the
unregistered security can be readily resold or on an issuer's ability to
honor a demand for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain institutions may
not be indicative of the liquidity of such investments. If such securities
are subject to purchase by institutional buyers in accordance with Rule
144A promulgated by the Commission under the Securities Act, the Board of
Trustees may determine that such securities are not illiquid securities
notwithstanding their legal or contractual restrictions on resale. In all
other cases, however, securities subject to restrictions on resale will be
deemed illiquid.
FOREIGN INVESTMENTS
The countries in which each of the Global Short Bond, Global Fixed Income,
Global Balanced and International Bond Funds will seek investments
currently primarily include those listed below. A Fund may not invest in
all the countries listed, and it may invest in other countries as well when
such investments are consistent with the Fund's investment objective and
policies.
Pacific Basin Western Europe North America
Australia Austria Canada
Japan Belgium United States
New Zealand Denmark
Finland
France
Germany
Ireland
Italy
Netherlands
Norway
Spain
Sweden
Switzerland
United Kingdom
The International Equity Fund may invest as much as 20% of total assets in
countries whose long-term bonds are rated below investment grade.
Foreign Mortgage-Related Securities
Foreign mortgage-related securities are interests in pools of mortgage
loans made to residential home buyers domiciled in a foreign country.
These include mortgage loans made by trust and mortgage loan companies,
credit unions, chartered banks, and others. Pools of mortgage loans are
assembled as securities for sale to investors by various governmental,
government-related, and private organizations (e.g., Canada Mortgage and
Housing Corporation and First Australian National Mortgage Acceptance
Corporation Limited). The mechanics of these mortgage-related securities
are generally the same as those issued in the United States. However,
foreign mortgage markets may differ materially from the U.S. mortgage
market with respect to matters such as the sizes of loan pools, pre-payment
experience, and maturities of loans.
Brady Bonds
In March, 1989, then Treasury Secretary Brady announced a new strategy for
dealing with a debt crisis in many emerging markets. The Brady Plan
comprised debt and debt service reduction for the debtor nations in
exchange for International Monetary Fund ("IMF") - based economic reform.
The Plan broke with previous debt restructuring efforts by recognizing that
many debtor nations would not be able to repay their creditors in full.
Under the Brady framework, creditor banks agreed to reduce their claims in
exchange for new bonds which have credit enhancements.
To date seven countries have completed Brady packages: Mexico, Venezuela,
Uruguay, Costa Rica, the Philippines, Argentina, and Nigeria. Brazil is in
the process of securing wide creditor approvals for a Brady Plan. Other
possible candidates for a Brady Plan in the near future include Ecuador,
the Dominican Republic, Panama, and Poland. Not all major emerging market
debt is the result of Brady restructuring - Chile and Morocco have elected
to service their rescheduled commercial bank debt as a demonstration of
their commitment to pay their debt in full. Columbia and Hungary avoided
formal debt rescheduling through voluntary refinancings by their bank
creditors.
A Brady package may involve interest reduction features in the form of Par
Bonds and Front-Loaded Interest Reduction Bonds ("FLIRBs"). Par Bonds are
exchanged for existing debt at face value, but the interest rate is cut and
fixed at a below market rate. Par Bonds generally mature in 25-30 years
from the date of issuance and credit enhancements generally include
collateral for principal (U.S. Treasury zero coupon bonds) and several
interest coupons. Mexican, Venezuelan, and Nigerian Par Bonds include
separable "value recovery rights" based on future oil export volumes and
international oil prices on a given date. This may entitle the bond holder
to additional payments if oil exports earnings grow in real terms beyond
agreed-on futures levels. FLIRBs have low fixed interest rate coupons in
the beginning that step up gradually over 5 to 7 years to market levels.
This feature is the cause of the bonds common name - "step up bonds". The
step-up bond's principal is not collateralized and interest collateral
remains in place only until the coupon "steps up" to market levels. Step-
ups are typically 15 to 17 year maturities.
A Brady package may involve principal reduction. Debt principal is reduced
by a negotiated discount, but the coupon floats at a market level of LIBOR
+ 13/16%. Discount bonds also have U.S. Treasury zero coupon bonds as the
collateral for principal and interest payments. Discount bonds typically
have 30-year maturities, and have been accepted at 30-35% discounts from
the original debt face value which they replaced.
A Brady package may involve additional lending, in the form of New Money
and Debt Conversion Bonds ("DCBs"). The creditor agrees to provide new
loans (via New Money Bonds) in return for the right to transform existing
bank loans into DCBs. The amount of New Money Bonds is calculated as an
agreed upon percentage of the banks' existing loan exposure subject to
conversion to DCBs. New Money Bonds and DCBs generally have floating
coupons of LIBOR + 7/8% and 15-18 year amortization schedules. There is no
collateral.
MUNICIPAL SECURITIES
Each of the Short Duration and Tax Exempt Bond Funds invest primarily in a
non-diversified portfolio of debt obligations issued by state and local
governments, territories and possessions of the U.S., regional government
authorities, and their agencies and instrumentalities which provide
interest income that, in the opinion of bond counsel to the issuer at the
time of original issuance, is exempt from federal income taxes ("municipal
securities"). Municipal securities include both notes (which have
maturities of less than one year) and bonds (which have maturities of one
year or more) that bear fixed or variable rates of interest. Under normal
market conditions, as a fundamental policy which cannot be changed without
shareholder approval, at least 80% of the Fund's assets will be invested in
municipal debt securities.
In general, "municipal securities" debt obligations are issued to obtain
funds for a variety of public purposes, such as the construction, repair,
or improvement of public facilities including airports, bridges, housing,
hospitals, mass transportation, schools, streets, water and sewer works.
Municipal securities may be issued to refinance outstanding obligations as
well as to raise funds for general operating expenses and lending to other
public institutions and facilities.
The two principal classifications of municipal securities are "general
obligation" securities and "revenue" securities. General obligation
securities are secured by the issuer's pledge of its full faith, credit,
and taxing power for the payment of principal and interest.
Characteristics and methods of enforcement of general obligation bonds vary
according to the law applicable to a particular issuer, and the taxes that
can be levied for the payment of debt service may be limited or unlimited
as to rates or amounts of special assessments. Revenue securities are
payable only from the revenues derived from a particular facility, a class
of facilities or, in some cases, from the proceeds of a special excise tax.
Revenue bonds are issued to finance a wide variety of capital projects
including: electric, gas, water, and sewer systems; highways, bridges, and
tunnels; port and airport facilities; colleges and universities; and
hospitals. Although the principal security behind these bonds may vary,
many provide additional security in the form of a debt service reserve fund
the assets of which may be used to make principal and interest payments on
the issuer's obligations. Housing finance authorities have a wide range of
security, including partially or fully insured mortgages, rent subsidized
and collateralized mortgages, and the net revenues from housing or other
public projects. Some authorities are provided further security in the
form of a state's assurance (although without obligation) to make up
deficiencies in the debt service reserve fund.
Both Funds may purchase insured municipal debt in which scheduled payments
of interest and principal are guaranteed by a private, non-governmental or
governmental insurance company. The insurance does not guarantee the
market value of the municipal debt or the value of the shares of a Fund.
The Adviser will undertake several measures in seeking to preserve
investors' principal:
First, the debt securities in which a Fund invests will be
considered "investment-grade"(e.g., rated AAA, AA, A or BBB by
Standard & Poor's Corporation) at the time of purchase by at
least one of the following rating agencies: Fitch Investor
Services, Moody's Investor Services, Inc. or Standard & Poor's
Corporation, or if not rated, will be determined to be of
comparable quality by the Adviser. If the rating of a municipal
debt security in which the Fund has made an investment falls
below the investment grade level, the Fund will discontinue
making investments in that issuer and liquidate any current
holdings as soon as the Adviser determines it is in the best
interest of the Fund to do so. In no event will a Fund hold more
than 5% of its net assets in obligations rated below investment
grade. No such obligation will be rated below BB.
Second, the Adviser will actively manage the maturity of a
Fund's portfolio in response to expected interest rate movements.
When anticipating a decline in interest rates, the Adviser will
attempt to lengthen the portfolio's maturity to capitalize on the
expected appreciation of such securities. When interest rates
are expected to rise, both Funds will seek to shorten their
maturities to protect against the expected capital depreciation.
Finally, the Adviser may use interest rate and municipal
bond index futures and options on futures contracts, options on
securities, and interest rate swaps to effect a change in a
Fund's exposure to interest rate changes. These investment
techniques involve certain risks described below.
There is, of course, no guarantee these investment strategies will
accomplish a Fund's objective. See Appendix A for further information
regarding the ratings referred to above.
Securities of issuers of municipal obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the Bankruptcy Reform Act of 1978. In
addition, the obligations of such issuers may become subject to laws
enacted in the future by Congress, state legislatures of referenda
extending the time for payment of principal or interest, or imposing other
constraints upon enforcement of such obligations or upon the ability of
municipalities to levy taxes. Furthermore, as a result of legislation or
other conditions, the power or ability of any issuer to pay, when due, the
principal of and interest on its municipal obligations may be materially
affected.
Certain of the municipal securities in which the Funds may invest, and
certain of the risks of such investments, are described below.
Moral Obligation Securities
Municipal securities may include "moral obligation" securities which are
usually issued by special purpose public authorities. If the issuer of
moral obligation bonds cannot fulfill its financial responsibilities from
current revenues, it may draw upon a reserve fund, the restoration of which
is a moral commitment but not a legal obligation of the state or
municipality which created the issuer.
Industrial Development and Pollution Control Bonds
Both Funds may invest in tax-exempt industrial development bonds and
pollution control bonds which, in most cases, are revenue bonds and
generally are not payable from the unrestricted revenues of an issuer.
They are issued by or on behalf of public authorities to raise money to
finance privately operated facilities for business, manufacturing, housing,
sport complexes, and pollution control. Consequently, the credit quality
of these securities is dependent upon the ability of the user of the
facilities financed by the bonds and any guarantor to meet its financial
obligations.
Zero Coupon Securities
Both Funds may invest in zero coupon securities which are debt securities
issued or sold at a discount from their face value. These securities do
not entitle the holder to interest payments prior to maturity or a
specified redemption date, when they are redeemed at face value. Zero
coupon securities may also take the form of debt securities that have been
stripped of their unmatured interest coupons, the coupons themselves, and
receipts and certificates representing interests in such stripped
obligations and coupons. The market prices of zero coupon securities tend
to be more sensitive to interest rate changes, and are more volatile, than
interest bearing securities of like maturity. The discount from face value
is amortized over the life of the security and such amortization will
constitute the income earned on the security for accounting and tax
purposes. Even though income is accrued on a current basis, a Fund does
not receive the income currently in cash. Therefore, a Fund may have to
sell other portfolio investments to obtain cash needed to make income
distributions.
Mortgage Backed Securities
Both Funds may invest in municipal debt obligations issued to provide
financing for residential housing mortgages to targeted groups. Payments
made on the underlying mortgages and passed through to a Fund will
represent both regularly scheduled principal and interest payments. A Fund
may also receive additional principal payments representing prepayments of
the underlying mortgages. Investing in such municipal debt obligations
involves special risks and considerations, including the inability to
predict accurately the maturity of a Fund's investments as a result of
prepayments of the underlying mortgages (which may require the Fund to
reinvest principal at lower yields than would otherwise have been
realized), the illiquidity of certain of such securities, and the possible
default by insurers or guarantors supporting the timely payment of interest
and principal.
Municipal Lease Obligations
Both Funds may invest in lease obligations or installment purchase contract
obligations of municipal authorities or entities ("municipal lease
obligations"). Although lease obligations do not constitute general
obligations of the municipality for which its taxing power is pledged, a
lease obligation is ordinarily backed by the municipality's covenant to
budget for, appropriate and make the payments due under the lease
obligation. A Fund may also purchase "certificates of participation",
which are securities issued by a particular municipality or municipal
authority to evidence a proportionate interest in base rental or lease
payments relating to a specific project to be made by the municipality,
agency or authority.
However, certain lease obligations contain "non-appropriation" clauses
which provide that the municipality has no obligation to make lease or
installment purchase payments in any year unless money is appropriated for
such purpose for such year. Although "non-appropriation" lease obligations
are secured by the leased property, disposition of the property in the
event of default and foreclosure might prove difficult. In addition, these
securities represent a relatively new type of financing, and certain lease
obligations may therefore be considered to be illiquid securities.
Both Funds will attempt to minimize the special risks inherent in municipal
lease obligations and certificates of participation by purchasing only
lease obligations which meet the following criteria: (1) rated A or better
by at least one national recognized securities rating organization; (2)
secured by payments from a governmental lessee which has actively traded
debt obligations; (3) determined by the Adviser to be critical to the
lessee's ability to deliver essential services; and (4) contain legal
features which the Adviser deems appropriate, such as covenants to make
lease payments without the right of offset or counterclaim, requirements
for insurance policies, and adequate debt service reserve funds.
Short-Term Obligations
Both Funds may invest in short-term municipal obligations. These
securities include the following:
Tax Anticipation Notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax
revenues, to be payable from these specific future taxes. They are usually
general obligations of the issuer, secured by the taxing power of the
municipality for the payment of principal and interest when due.
Revenue Anticipation Notes are issued in expectation of receipt of other
kinds of revenue, such as federal revenues available under the Federal
Revenue Sharing Program. They also are usually general obligations of the
issuer.
Bond Anticipation Notes normally are issued to provide interim financing
until long-term financing can be arranged. The long-term bonds then
provide the money for the repayment of the notes.
Construction Loan Notes are sold to provide construction financing for
specific projects. After successful completion and acceptance, many
projects receive permanent financing through the Federal National Mortgage
Association or the Government National Mortgage Association.
Short-Term Discount Notes (tax-exempt commercial paper) are short-term (365
days or less) promissory notes issued by municipalities to supplement their
cash flow.
Floating Rate and Variable Rate Demand Notes
Both Funds may purchase floating rate and variable rate demand notes and
bonds. These securities may have a stated maturity in excess of one year,
but permit a holder to demand payment of principal plus accrued interest
upon a specified number of days notice. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided
by banks. The issuer has a corresponding right, after a given period, to
prepay in its discretion the outstanding principal of the obligation plus
accrued interest upon a specific number of days notice to the holders. The
interest rate of a floating rate instrument may be based on a known lending
rate, such as a bank's prime rate, and is reset whenever such rate is
adjusted. The interest rate on a variable rate demand note is reset at
specified intervals at a market rate.
Each Fund will limit its purchase of municipal securities that bear
floating rates and variable rates of interest to those meeting the rating
quality standards set forth in the Prospectus. Frequently, such
obligations are secured by letters of credit or other credit support
arrangements provided by banks. The quality of the underlying creditor or
of the bank, as the case may be, must, as determined by the Adviser under
the supervision of the Board of Trustees, also be equivalent to the quality
standards set forth above. In addition, the Adviser monitors the earning
power, cash flow and other liquidity ratios of the issuers of such
obligations, as well as the creditworthiness of the institution responsible
for paying the principal amount of the obligations under the demand
feature.
Both Funds may also invest in municipal securities in the form of
"participation interests" in variable rate tax-exempt demand obligations
held by a financial institution, usually a commercial bank. Municipal
participation interests provide the purchaser with an undivided interest in
one or more underlying municipal securities and the right to demand payment
from the institution upon a specified number of days' notice (no more than
seven) of the unpaid principal balance plus accrued interest. In addition,
the municipal participation interests are typically enhanced by an
irrevocable letter of credit or guarantee from such institution. Since a
Fund has an undivided interest in the obligation, it participates equally
with the institution with the exception that the institution normally
retains a fee out of the interest paid for servicing, providing the letter
of credit or guarantee, and issuing the repurchase commitment.
Obligations with Puts Attached
Each Fund may purchase long-term fixed rate municipal debt obligations that
have been coupled with an option granted by a third party financial
institution allowing the Fund at specified intervals to tender (or "put")
such debt obligations to the institution and receive the face value. These
third party puts are available in many different forms, and may be
represented by custodial receipts or trust certificates and may be combined
with other features such as interest rate swaps. The financial institution
granting the option does not provide credit enhancement. If there is a
default on, or significant downgrading of, the bond or a loss of its tax-
exempt status, the put option will terminate automatically. The risk to
the Fund will then be that of holding a long-term bond.
These investments may require that a Fund pay a tender fee or other fee for
the features provided. In addition, a Fund may acquire "stand-by
commitments" from banks or broker dealers with respect to the municipal
securities held in its portfolios. Under a stand-by commitment, a bank or
broker/dealer agrees to purchase at a Fund's option a specific municipal
security at a specific price on a specific date. A Fund may pay for a
stand-by commitment either separately, in cash, or in the form of a higher
price paid for the security. A Fund will acquire stand-by commitments
solely to facilitate portfolio liquidity.
Risks of Investing in California Municipal Debt Obligations
From time to time, each Fund may invest more than 25% of its assets in
obligations issued by the State of California and other governmental
authorities, agencies and instrumentalities located in California. In such
event, investment in a Fund may be subject to greater risk and market
fluctuations than an investment in a portfolio of securities representing a
broader range of investment alternatives. Further, in such event a Fund
will be affected by any political, economic, regulatory or other
developments which constrain the taxing and spending authority of
California issuers to pay interest or repay principal. The following
summary of some of such developments is based upon information derived from
public documents related to securities offerings of California State and
municipal issuers, independent municipal credit reports and historically
reliable sources, but has not been independently verified by the Fund's
advisor.
California encompasses a relatively large geographic region and has a
wealthy, diverse economy. Its economy is the largest among the 50 states
and one of the largest in the world. The State's population of over 32
million represents over 12% of the total United States population. Total
employment is about 14 million; the fastest growing sectors are expected to
be services, trade and electronics-related manufacturing sectors.
California ended fiscal 1995 with a General Fund operating surplus due to
higher than expected tax receipts which were the result of the improving
economy. State officials estimate that jobs in California grew 2.3% in
1995 as compared to a national jobs growth rate of 1.5%. As a result, the
State's unemployment rate (7.9%) is expected to approximate the nation's
(5.8%) by year-end 1998. Importantly, this job growth was spread among all
12 major metropolitan areas in California. Thirty percent of California
employment is business services, motion pictures, health services and
engineering and management services and these categories rose 6% this past
year. Construction employment picked up last year, but has not retraced
the cumulative losses of 1990-1993. The decline in aerospace employment
continued, albeit at a much slower pace and new orders for cargo jets,
stealth bombers and commercial satellites should help stabilize this sector
in the upcoming year. Job losses are projected for financial services and
the federal government sector.
The State's finances on the revenue side have improved. The Legislative
Analyst's Office projects that revenues will grow by 6 percent in both the
current and upcoming fiscal years. The bulk of the increase is due to
higher expected income tax receipts. The Office projects that the General
Fund balance should increase from a 0.5% of the budget to nearly 2% over
the course of the next fiscal year. This closely balanced budget depends
on a variety of federal and state policies in order to be realized.
California's long-term structural budget problems include expanding
education and prison spending, demands for infrastructure spending and
reductions in federal support for health-care. K-14 spending requirements
are expected to increase 9.4% annually over the next two years, which is
the largest single expenditure in the budget. More prison inmates will
translate to a 10% annual growth in support costs for the Department of
Corrections. Also, existing law requires that welfare grants for the Aid
to Families with Dependent Children and the Supplemental Security
Income/State Supplementary Program be increased in 1996-97.
Further, the State shifted some expenditure responsibilities to local
governments in order to balance its budget, which could impact these other
entities negatively. Major revenue sources for local government are not
expected to attain pre-recession growth levels while the programs they
support such as health, education and public safety are growing at a fast
pace. Any reductions in State aid could exacerbate financial pressures
already experienced by many local governments, particularly counties.
The State must also address the issues of its tax structure and business
climate. The Governor's tax cut proposal in fiscal year 1997 would have
major economic and fiscal implications. Risks to the budget also include
an economic slowdown.
The State has reduced its use of short-term debt financing to the lowest
level in years. The $4 billion outstanding revenue anticipation warrants
were repaid from internal borrowable cash resources. In the 1996-97
budget, debt financing was reduced to only include the issuance of $3
billion revenue anticipation notes, which was significant improvement from
the $7 billion outstanding short-term debt in prior years.
Because of the State's continuing budget problems, the rating on the
State's general obligation bonds was downgraded in July 1994 from Aa to A1
by Moody's, from A+ to A by Standard & Poor's and from AA to A by Fitch
Investors Service, Inc. All three rating agencies expressed uncertainty
about the State's ability to balance its budget by 1996. However, in
February 1996, citing California's improving economy and budget situation,
Fitch raised its rating from A to A+.
On December 6, 1994 Orange County (California) became the largest
municipality in the United States to file for protection under Federal
bankruptcy laws. The filing stemmed from approximately $1.7 billion in
losses suffered by the County's investment pool due to investments in high
risk "derivative" securities. In September 1995 the state legislature
approved legislation permitting Orange County to use for bankruptcy
recovery $820 million over 20 years in sales taxes previously earmarked for
highways, transit and development. In June 1996 the County completed an
$880 million bond offering secured by real property owned by the County.
On June 12, 1996, the County emerged from bankruptcy protection.
Los Angeles County, the nation's largest county, is also experiencing
financial difficulty. In August 1995 the credit rating of the county's
long term bonds was downgraded for the third time since 1992 as a result
of, among other things, severe operating deficits for the county's health
care system. In September 1995, federal and state aid to Los Angeles County
totaling $514 million was pledged, providing a short-term solution to the
County's budget problems. Despite such efforts, the County is facing a
potential budget gap of $1.0 billion in the 1996-97 fiscal year.
Although an improving economy and healthier tax revenues are anticipated,
the political environment and voter initiatives may constrain the State's
financial flexibility. For example, the passage of Proposition 184 in the
November 1994 election imposed mandatory, lengthy prison sentences on
individuals convicted of three felonies. According to the Legislative
Analyst's Office, this is expected to increase prison operating costs by $3
billion annually and increase prison construction costs by $20 billion.
Proposition 98 sets the minimum amount that the state must provide for
California's public K-12 education system and the California Community
Colleges.
Certain of the securities in which the Funds invest may be obligations of
issuers that rely as a source of revenue, in whole or in part, directly or
indirectly, on real property taxes, which are limited by an amendment to
the State Constitution known as "Proposition 13." Briefly, Article XIIIA
of the California Constitution limits to 1% of full cash value the rate of
ad valorem property taxes on real property and generally restricts the
assessed valuation of property to increases of up to two percent per year,
except upon new construction or change of ownership (subject to a number of
exemptions). Taxing entities may, however, raise ad valorem taxes above
the 1% limit to pay debt service on voter-approved bonded indebtedness.
The application of Proposition 62 further limits the ability of California
cities to enact taxes. Proposition 62 seeks to enforce a two-thirds voter
approval for special taxes to include all forms of local government and to
create a new simple-majority requirement for voter approval of general
taxes. In September 1995 the California Supreme Court upheld the
constitutionality of Proposition 62, creating uncertainty as to the
legality of certain local taxes enacted by non-charter cities in California
without voter approval. It is not possible to predict the impact of the
decision.
Certain securities in which the Funds invest may be obligations of issuers
which rely in whole or in part on state revenues for payment of such
obligations. Such state revenues are affected by economic activity within
the State as well as by an appropriation limit in the State Constitution on
the spending authority of State and local government entities.
The application and interpretation of a number of the foregoing provisions
of the State Constitution and laws are currently and will probably continue
to be the subject of numerous lawsuits in the California courts. It is not
possible to predict the outcome of litigation or the ultimate scope and
impact of such provisions, their implementing legislation and regulations.
However, the outcome of such litigation, legislation and regulations could
substantially impact local property tax collection and the ability of state
agencies, local governments and districts to make future payments on
outstanding debt obligations.
OPTIONS AND FUTURES CONTRACTS
The Funds may purchase and sell ("write") both put options and call options
on securities, securities indices and (in the case of the Total Return and
Global Funds) foreign currencies, enter into interest rate and index
futures contracts and (in the case of the Total Return and Global Funds),
foreign currencies futures contracts, and purchase and sell options on such
futures contracts ("futures options"). If other types of options, futures
contracts, or futures options are traded in the future, a Fund may also use
those instruments, provided the Board of Trustees determines that their use
is consistent with the Fund's investment objectives, and their use is
consistent with restrictions applicable to options and futures contracts
currently eligible for use by that Fund.
Options on Securities or Indices
A Fund may purchase and write options on securities and indices. An index
is a statistical measure designed to reflect specified facets of a
particular financial or securities market, a specific group of financial
instruments or securities, or certain economic indicators such as the
Merrill Lynch 1 to 3 year Global Government Bond Index, the JP Morgan
Global Government Bond Index, and the Lehman Brothers Government/Corporate
Index.
An option on a security (or an index) is a contract that gives the holder
of the option, in return for a premium, the right to buy from (in the case
of a call) or sell to (in the case of a put) the writer of the option the
security underlying the option (or the cash value of the index) at a
specified exercise price at any time during the term of the option (in the
case of "American Style" options) or at the expiration of the option (in
the case of "European Style" options). The writer of a call or put option
on a security is obligated upon exercise of the option to deliver the
underlying security upon payment of the exercise price or to pay the
exercise price upon delivery of the underlying security, as the case may
be. The writer of an option on an index is obligated upon exercise of the
option to pay the difference between the cash value of the index and the
exercise price multiplied by a specified multiplier for the index option.
A Fund will write call options and put options only if they are "covered."
In the case of a call option on a security, the option is covered if the
Fund owns the security underlying the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or,
if additional cash consideration is required, cash or cash equivalents in
such amount are placed in a segregated account with the Group's Custodian)
upon conversion or exchange of other securities held by the Fund. A call
option on an index is covered if the Fund maintains with its Custodian cash
or cash equivalents equal to the contract value. A call option is also
covered if the Fund holds a call on the same security or index as the call
written, and the exercise price of the call held is (i) equal to or less
than the exercise price of the call written, or (ii) greater than the
exercise price of the call written, provided the difference is maintained
by the Fund in cash or cash equivalents in a segregated account with its
Custodian. A put option on a security or an index is covered if the Fund
maintains cash or cash equivalents equal to the exercise price in a
segregated account with its Custodian. A put option is also covered if the
Fund holds a put on the same security or index as the put written, and the
exercise price of the put held is (i) equal to or greater than the exercise
price of the put written, or (ii) less than the exercise price of the put
written, provided the difference is maintained by the Fund in cash or cash
equivalents in a segregated account with its Custodian.
If an option written by a Fund expires unexercised, the Fund realizes a
capital gain equal to the premium received at the time the option was
written. If an option purchased by a Fund expires unexercised, the Fund
realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (i.e., of
the type, traded on the same exchange, with respect to the same underlying
security or index, and with the same exercise price and expiration date).
A Fund will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from
writing the option; if it is more, the Fund will realize a capital loss.
If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Fund will realize a capital gain;
if it is less, the Fund will realize a capital loss. The principal factors
affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price of the underlying security
or index in relation to the exercise price of the option, the volatility of
the underlying security or index, and the time remaining until the
expiration date.
The premium paid for a put or call option purchased by a Fund is an asset
of the Fund. The premium received for an option written by a Fund is
recorded as a deferred credit. The value of an option purchased or written
is marked to market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or no
closing price is available, at the mean between the last bid and asked
prices.
Foreign Currency Options
Each of the Total Return and Global Funds may buy or sell put and call
options on foreign currencies. A put or call option on a foreign currency
gives the purchaser of the option the right to sell or purchase a foreign
currency at the exercise price until the option expires. Each Fund will
use foreign currency options separately or in combination to control
currency volatility. Among the strategies employed to control currency
volatility is an option collar. An option collar involves the purchase of
a put option and the simultaneous sale of a call option on the same
currency with the same expiration date but with different exercise (or
"strike") prices. Generally, the put option will have an out-of-the-money
strike price, while the call option will have either an at-the-money strike
price or an in-the-money strike price. Currency options traded on U.S. or
other exchanges may be subject to position limits which may limit the
ability of a Fund to reduce foreign currency risk using such options.
Combinations of Options
As indicated in the Prospectus, the Funds may employ certain combinations
of put and call options. A "straddle" involves the purchase of a put and
call option on the same security with the same exercise prices and
expiration dates. A "strangle" involves the purchase of a put option and a
call option on the same security with the same expiration dates but
different exercise prices. A "collar" involves the purchase of a put
option and the sale of a call option on the same security with the same
expiration dates but different exercise prices. A "spread" involves the
sale of a put option and the purchase of a call option on the same security
with the same or different expiration dates and different exercise prices.
Risks Associated with Options
Several risks are associated with transactions in options on securities,
indices and currencies. For example, significant differences between the
securities and options markets could result in an imperfect correlation
between those markets, causing a given transaction not to achieve its
objectives. A decision as to whether, when and how to use options involves
the exercise of skill and judgment, and even a well-conceived transaction
may be unsuccessful to some degree because of market behavior or unexpected
events.
There can be no assurance that a liquid market will exist when a Fund seeks
to close out an option position. Among the possible reasons for the
absence of a liquid secondary market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions
imposed by an exchange; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of
options or underlying securities; (iv) interruption of the normal
operations of an exchange; (v) inadequacy of the facilities of an exchange
or the Options Clearing Corporation to handle current trading volume; or
(vi) a decision by an exchange to discontinue the trading of options or a
particular class or series of options (in which event the secondary market
on that exchange or in that class or series of options could cease to
exist, although outstanding options on that exchange that had been issued
by the Options Clearing Corporation as a result of trades on that exchange
would generally continue to be exercisable in accordance with their terms).
If a Fund were unable to close out an option that it had purchased on a
security, it would have to exercise the option in order to realize any
profit. If a Fund were unable to close out a covered call option that it
had written on a security, it would not be able to sell the underlying
security unless the option expired without exercise. As the writer of a
covered call option, a Fund forgoes, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the call option above the sum of the premium and the exercise
price of the call.
If trading were suspended in an option purchased by a Fund, the Fund would
not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it has purchased.
Except to the extent that a call option on a security, currency or index
written by a Fund is covered by an option on the same security, currency or
index purchased by the Fund, movements in the index may result in a loss to
the Fund; however, such losses may be mitigated by changes in the value of
the Fund's securities during the period the option was outstanding.
Futures Contracts and Options on Futures Contracts
The Funds may use interest rate, foreign currency or index futures
contracts, as specified in the Prospectus. An interest rate or foreign
currency contract provides for the future sale by one party and purchase by
another party of a specified quantity of a financial instrument or foreign
currency at a specified price and time. A futures contract on an index is
an agreement pursuant to which two parties agree to take or make delivery
of an amount of cash equal to the difference between the value of the index
at the close of the last trading day of the contract and the price at which
the index contract was originally written. Although the value of an index
might be a function of the value of certain specified securities, no
physical delivery of these securities is made.
A public market exists in futures contracts covering several indices as
well as a number of financial instruments and foreign currencies, including
U.S. Treasury bonds, U.S. Treasury notes, GNMA Certificates, three-month
U.S. Treasury bills, 90-day commercial paper, bank certificates of deposit,
Eurodollar certificates of deposit, the Australian dollar, the Canadian
dollar, the British pound, the German mark, the Japanese yen, the Swiss
franc and certain multi-national currencies such as the European Currency
Unit ("ECU"). Other futures contracts are likely to be developed and
traded in the future. The Fund will only enter into futures contracts and
futures options which are standardized and traded on a U.S. or foreign
exchange, board of trade, or similar entity, or quoted on an automated
quotation system.
The Funds may also purchase and write call and put options on futures
contracts. Futures options possess many of the same characteristics as
options on securities and indices. A futures option gives the holder the
right, in return for the premium paid, to assume a long position (call) or
short position (put) in a futures contract at a specified exercise price at
any time during the period of the option. Upon exercise of a call option,
the holder acquires a long position in the futures contract and the writer
is assigned the opposite short position. In the case of a put option, the
opposite is true.
As long as required by regulatory authorities the Funds will use futures
contracts and futures options for hedging purposes and not for speculation
and will comply with applicable regulations of the Commodity Futures
Trading Corporation which limit trading of futures contracts (See
"Limitations on the Use of Futures and Options"). For example, a Fund
might use futures contracts to hedge against anticipated changes in
interest rates that might adversely affect either the value of the Fund's
securities or the price of the securities which the Fund intends to
purchase. A Fund's hedging activities may include sales of futures
contracts as an offset against the effect of expected increases in interest
rates, and purchases of futures contracts as an offset against the effect
of expected declines in interest rates. Although other techniques could be
used to reduce a Fund's exposure to interest rate fluctuations, a Fund may
be able to hedge its exposure more effectively and at a lower cost by using
futures contracts and futures options.
When a purchase or sale of a futures contract is made by a Fund, the Fund
is required to deposit with its Custodian (or futures commission merchant,
if legally permitted) a specified amount of cash or U.S. Government
securities ("initial margin"). The margin required for a futures contract
is set by the exchange on which the contract is traded and may be modified
during the term of the contract. The initial margin is in the nature of a
performance bond or good faith deposit on the futures contract which is
returned to the Fund upon termination of the contract, assuming all
contractual obligations have been satisfied. The Funds expect to earn
interest income on their initial margin deposits. A futures contract held
by a Fund is valued daily at the official settlement price of the exchange
on which it is traded. Each day a Fund pays or receives cash, called
"variation margin," equal to the daily change in value of the futures
contract. This process is known as "marking to market." Variation margin
does not represent a borrowing or loan by a Fund but is instead a
settlement between the Fund and the futures commission merchant of the
amount one would owe the other if the futures contract expired. In
computing daily net asset value, the Funds will mark to market their open
futures positions.
Each Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin
deposits will vary depending on the nature of the underlying futures
contract (and the related initial margin requirements), the current market
value of the option, and other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts
(contracts traded on the same exchange, on the same underlying security or
index, and with the same delivery month). If an offsetting purchase price
is less than the original sale price, the Fund realizes a capital gain; if
it is more, a Fund realizes a capital loss. Conversely, if an offsetting
sale price is more than the original purchase price, a Fund realizes a
capital gains; if it is less, a Fund realizes a capital loss. The
transaction costs must also be included in these calculations.
Limitations on Use of Futures and Futures Options
A Fund will not enter into a futures contract or futures option contract
if, immediately thereafter, the aggregate initial margin deposits relating
to such positions plus premiums paid by it for open futures option
positions, less the amount by which any such options are "in-the-money,"
would exceed 5% of the Fund's total assets. A call option is "in-the-
money" if the value of the futures contract that is the subject of the
option exceeds the exercise price. A put option is "in-the-money" if the
exercise price exceeds the value of the futures contract that is the
subject of the option.
When purchasing a futures contract, a Fund will maintain with its Custodian
(and mark to market on a daily basis) cash, U.S. Government securities, or
other liquid securities that, when added to the amounts deposited with a
futures commission merchant as margin, are equal to the market value of the
futures contract. Alternatively, a Fund may "cover" its position by
purchasing a put option on the same futures contract with a strike price as
high or higher than the price of the contract held by the Fund.
When selling a futures contract, a Fund will maintain with its Custodian
(and mark to market on a daily basis) liquid assets that, when added to the
amount deposited with a futures commission merchant as margin, are equal to
the market value of the instruments underlying the contract.
Alternatively, a Fund may "cover" its position by owning the instruments
underlying the contract (or, in the case of an index futures contract, a
portfolio with a volatility substantially similar to that of the index on
which the futures contract is based), or by holding a call option
permitting the Fund to purchase the same futures contract at a price no
higher than the price of the contract written by the Fund (or at a higher
price if the difference is maintained in liquid assets with the Fund's
Custodian).
When selling a call option on a futures contract, a Fund will maintain with
its custodian (and mark to market on a daily basis) cash, U.S. Government
securities, or other liquid securities that, when added to the amounts
deposited with a futures commission merchant as margin, equal the total
market value of the futures contract underlying the call option.
Alternatively, a Fund may cover its position by entering into a long
position in the same futures contract at a price no higher than the strike
price of the call option, by owning the instruments underlying the futures
contract, or by holding a separate call option permitting the Fund to
purchase the same futures contract at a price not higher than the strike
price of the call option sold by the Fund.
When selling a put option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, or other liquid securities that equal the purchase price of the
futures contract, less any margin on deposit. Alternatively, a Fund may
cover the position either by entering into a short position in the same
futures contract, or by owning a separate put option permitting it to sell
the same futures contract so long as the strike price of the purchased put
option is the same or higher than the strike price of the put option sold
by the Fund.
In order to comply with applicable regulations of the Commodity Futures
Trading Commission ("CFTC") for exemption from the definition of a
"commodity pool," each Fund is limited in its futures trading activities
to: (1) positions which constitute "bona fide hedging" positions within
the meaning and intent of applicable CFTC rules, and (2) other positions
for the establishment of which the aggregate initial margin and premiums
(less the amount by which such options are "in-the-money") do not exceed 5%
of the Fund's net assets (after taking into account unrealized gains and
unrealized losses on any contracts it has entered into).
The requirements for qualification as a regulated investment company also
may limit the extent to which the Funds may enter into futures, futures
options or forward contracts. See "Taxation."
Risks Associated with Futures and Futures Options
There are several risks associated with the use of futures contracts and
futures options as hedging techniques. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in the
futures contract. There can be no guarantee that there will be a
correlation between price movements in the hedging vehicle and in the Fund
securities being hedged. In addition, there are significant differences
between the securities and futures markets that could result in an
imperfect correlation between the markets, causing a given hedge not to
achieve its objectives. The degree of imperfection of correlation depends
on circumstances such as variations in speculative market demand for
futures and futures options on securities, including technical influences
in futures trading and futures options, and differences between the
financial instruments being hedged and the instruments underlying the
standard contracts available for trading in such respects as interest rate
levels, maturities, and creditworthiness of issuers. A decision as to
whether, when and how to hedge involves the exercise of skill and judgment,
and even a well-conceived hedge may be unsuccessful to some degree because
of market behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end
of the current trading session. Once the daily limit has been reached in a
futures contract subject to the limit, no more trades may be made on that
day at a price beyond that limit. The daily limit governs only price
movements during a particular trading day and therefore does not limit
potential losses, because the limit may work to prevent the liquidation of
unfavorable positions. For example, futures prices have occasionally moved
to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of positions and subjecting
some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when a
Fund seeks to close out a futures contract or a futures option position, in
which event the Fund would remain obligated to meet margin requirements
until the position is closed. In addition, many of the contracts discussed
above are relatively new instruments without a significant trading history.
As a result, there can be no assurance that an active secondary market will
develop or continue to exist.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in futures contracts or options, the Fund could experience
delays and losses in liquidating open positions purchased or sold through
the broker, and incur a loss of all or part of its margin deposits with the
broker.
Dealer Options
The Funds may engage in transactions involving dealer options on
securities, currencies or indices as well as exchange-traded options.
Certain risks are specific to dealer options. While a Fund would look to a
clearing corporation to exercise exchange-traded options, if a Fund were to
purchase a dealer option it would rely on the dealer from whom it purchased
the option to perform if the option were exercised. Failure by the dealer
to do so would result in the loss of the premium paid by the Fund as well
as loss of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options may not. Consequently, a Fund may generally be able to
realize the value of a dealer option it has purchased only by exercising or
reselling the option to the dealer who issued it. Similarly, when a Fund
writes a dealer option, the Fund may generally be able to close out the
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to whom the Fund originally wrote the option.
While the Funds will seek to enter into dealer options only with dealers
who will agree to and which are expected to be capable of entering into
closing transactions with the Fund, there can be no assurance that the Fund
will be able to liquidate a dealer option at a favorable price at any time
prior to expiration. Unless a Fund, as a covered dealer call option
writer, is able to effect a closing purchase transaction, it will not be
able to liquidate securities (or other assets) used as cover until the
option expires or is exercised. In the event of insolvency of the other
party, the Funds may be unable to liquidate a dealer option. With respect
to options written by a Fund, the inability to enter into a closing
transaction may result in material losses to the Fund. For example, since
a Fund must maintain a secured position with respect to any call option on
security it writes, the Fund may not sell the assets which it has
segregated to secure the position while it is obligated under the option.
This requirement may impair the Fund's ability to sell portfolio securities
at a time when such sale might be advantageous.
The Staff of the SEC has taken the position that many purchased dealer
options and the assets used to secure written dealer options are illiquid
securities. A Fund may treat the cover used for these written dealer
options as liquid if the dealer agrees that the Fund may repurchase the
dealer option it has written for a maximum price to be calculated by a
predetermined formula. In such cases, the dealer option would be
considered illiquid only to the extent the maximum purchase price under the
formula exceeds the intrinsic value of the option. Accordingly, the Funds
will treat certain dealer options as subject to the Funds' limitation on
illiquid securities. If the SEC changes its position on the liquidity of
dealer options on securities, currencies or indices, the Funds will change
their treatment of such instruments accordingly.
INTEREST RATE AND CURRENCY SWAPS
Interest Rate Swaps
As indicated in the Prospectus, an interest rate swap is a contract between
two entities ("counterparties") to exchange interest payments (of the same
currency) between the parties. In the most common interest rate swap
structure, one counterparty agrees to make floating rate payments to the
other counterparty, which in turn makes fixed rate payments to the first
counterparty. Interest payments are determined by applying the respective
interest rates to an agreed upon amount, referred to as the "notional
principal amount." In most such transactions, the floating rate payments
are tied to the London Interbank Offered Rate, which is the offered rate
for short-term eurodollar deposits between major international banks. As
there is no exchange of principal amounts, an interest rate swap is not an
investment or a borrowing.
Cross-Currency Swaps
A cross-currency swap is a contract between two counterparties to exchange
interest and principal payments in different currencies. A cross-currency
swap normally has an exchange of principal at maturity (the final
exchange); an exchange of principal at the start of the swap (the initial
exchange) is optional. An initial exchange of notional principal amounts
at the spot exchange rate serves the same function as a spot transaction in
the foreign exchange market (for an immediate exchange of foreign exchange
risk). An exchange at maturity of notional principal amounts at the spot
exchange rate serves the same function as a forward transaction in the
foreign exchange market (for a future transfer of foreign exchange risk).
The currency swap market convention is to use the spot rate rather than the
forward rate for the exchange at maturity. The economic difference is
realized through the coupon exchanges over the life of the swap. In
contrast to single currency interest rate swaps, cross-currency swaps
involve both interest rate risk and foreign exchange risk.
Swap Options
Each of the Total Return and Global Funds may invest in swap options. A
swap option is a contract that gives a counterparty the right (but not the
obligation) to enter into a new swap agreement or to shorten, extend,
cancel or otherwise change an existing swap agreement, at some designated
future time on specified terms. It is different from a forward swap, which
is a commitment to enter into a swap that starts at some future date with
specified rates. A swap option may be structured European-style
(exercisable on the pre specified date) or American-style (exercisable
during a designated period). The right pursuant to a swap option must be
exercised by the right holder. The buyer of the right to pay fixed
pursuant to a swap option is said to own a put. The buyer of the right to
receive fixed pursuant to a swap option is said to own a call.
Caps and Floors
Each of the Total Return and Global Funds may also invest in interest rate
caps and floors. An interest rate cap is a right to receive periodic cash
payments over the life of the cap equal to the difference between any
higher actual level of interest rates in the future and a specified strike
(or "cap") level. The cap buyer purchases protection for a floating rate
move above the strike. An interest rate floor is the right to receive
periodic cash payments over the life of the floor equal to the difference
between any lower actual level of interest rates in the future and a
specified strike (or "floor") level. The floor buyer purchases protection
for a floating rate move below the strike. The strikes are typically based
on the three-month LIBOR (although other indices are available) and are
measured quarterly. Rights arising pursuant to both caps and floors are
exercised automatically if the strike is in the money. Caps and floors
eliminate the risk that the buyer fails to exercise an in-the-money option.
Risks Associated With Swaps
The risks associated with interest rate and currency swaps and interest
rate caps and floors are similar to those described above with respect to
dealer options. In connection with such transactions, a Fund relies on the
other party to the transaction to perform its obligations pursuant to the
underlying agreement. If there were a default by the other party to the
transaction, the Fund would have contractual remedies pursuant to the
agreement, but could incur delays in obtaining the expected benefit of the
transaction or loss of such benefit. In the event of insolvency of the
other party, the Fund might be unable to obtain its expected benefit. In
addition, while each Fund will seek to enter into such transactions only
with parties which are capable of entering into closing transactions with
the Fund, there can be no assurance that a Fund will be able to close out
such a transaction with the other party, or obtain an offsetting position
with any other party, at any time prior to the end of the term of the
underlying agreement. This may impair a Fund's ability to enter into other
transactions at a time when doing so might be advantageous.
FOREIGN CURRENCY TRANSACTIONS
Precise matching of the amount of forward currency contracts and the value
of the Total Return and Global Funds' securities denominated in such
currencies will not generally be possible, since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward
contract is entered into and the date it matures. Prediction of short-term
currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain. Under
certain circumstances, a Fund may commit a substantial portion of its
assets to the consummation of these contracts. No Fund will enter into
such forward contracts or maintain a net exposure to such contracts where
the consummation of the contracts would obligate the Fund to deliver an
amount of foreign currency in excess of the value of the Fund's portfolio
securities or other assets denominated in that currency. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, the Adviser believes that it
is important to have the flexibility to enter into such forward contracts
when it determines that the best interests of a Fund will be served by
doing so.
At the maturity of a forward contract, a Fund may either sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase,
on the same maturity date, the same amount of the foreign currency.
It may be necessary for a Fund to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market value
of the security is less than the amount of foreign currency the Fund is
obligated to deliver and if a decision is made to sell the security and
make delivery of the foreign currency. Conversely, it may be necessary to
sell on the spot market some of the foreign currency received upon the sale
of the portfolio security if its market value exceeds the amount of foreign
currency the Fund is obligated to deliver.
If a Fund retains a portfolio security and engages in an off-setting
transaction, the Fund will incur a gain or a loss to the extent that there
has been movement in forward contract prices. If the Fund engages in an
offsetting transaction, it may subsequently enter into a new forward
contract to sell the foreign currency. Should forward prices decline
during the period between the date the Fund enters into a forward contract
for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Fund will
realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Fund will suffer a loss to the extent the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
Each Fund's dealings in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, each
Fund reserves the right to enter into forward foreign currency contracts
for different purposes and under different circumstances. Use of forward
currency contracts to hedge against a decline in the value of a currency
does not eliminate fluctuations in the underlying prices of the securities.
Additionally, although such contracts tend to minimize the risk of loss due
to a decline in the value of the hedged currency, they also tend to limit
any potential gain which might result from an increase in the value of that
currency.
Although each Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. Foreign exchange dealers do not charge a fee for
conversion, but they do realize a profit based on the difference (the
"spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a Fund
at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
LENDING OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, each Fund may lend
securities with a value of up to 33% of its total assets to broker-dealers,
institutional investors or other persons. Each loan will be secured by
collateral which is maintained at no less than 100% of the value of the
securities loaned by "marking to market" daily. A Fund will have the right
to call each loan and obtain the securities on five business days' notice
or, in connection with securities trading on foreign markets, within a
longer period of time which coincides with the normal settlement period for
purchases and sales of such securities in such foreign markets. Loans will
only be made to persons deemed by the Adviser to be of good standing in
accordance with standards approved by the Board of Trustees and will not be
made unless, in the judgment of the Adviser, the consideration to be earned
from such loans would justify the risk.
BORROWING
Each Fund may borrow for temporary, extraordinary or emergency purposes, or
for the clearance of transactions. The Investment Company Act of 1940 (the
"1940 Act") requires each Fund to maintain continuous asset coverage (that
is, total assets including borrowings, less liabilities exclusive of
borrowings) of 300% of the amount borrowed. If the 300% asset coverage
should decline as a result of market fluctuations or other reasons, a Fund
may be required to sell some of its portfolio holdings within three days to
reduce the debt and restore the 300% asset coverage, even though it may be
disadvantageous from an investment standpoint to sell securities at that
time. To avoid the potential leveraging effects of a Fund's borrowings,
additional investments will not be made while borrowings are in excess of
5% of the Fund's total assets. Money borrowed will be subject to interest
costs which may or may not be recovered by appreciation of the securities
purchased. The Funds also may be required to maintain minimum average
balances in connection with any such borrowings or to pay a commitment or
other fee to maintain a line of credit, either of which would increase the
cost of borrowing over the stated interest rate.
RISKS OF FOREIGN INVESTING
There are special risks in investing in any foreign securities in addition
to those relating to investments in U.S. securities.
Political and Economic Factors
Individual foreign economies of certain countries may differ favorably or
unfavorably from the United States' economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency, diversification and balance of payments position. The
internal politics of certain foreign countries may not be as stable as
those of the United States.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could include
restrictions on foreign investment, nationalization, expropriation of goods
or imposition of taxes, and could have a significant effect on market
prices of securities and payment of interest. The economies of many
foreign countries are heavily dependent upon international trade and are
accordingly affected by the trade policies and economic conditions of their
trading partners. Enactment by these trading partners of protectionist
trade legislation could have a significant adverse effect upon the
securities markets of such countries.
Currency Fluctuations
To the extent that a Fund invests in securities denominated in foreign
currencies, a change in the value of any such currency against the U.S.
dollar will result in a corresponding change in the U.S. dollar value of
the Fund's assets denominated in that currency. Such changes will also
affect the Fund's income. The value of a Fund's assets may also be
affected significantly by currency restrictions and exchange control
regulations enacted from time to time.
Market Characteristics
The Group expects that most foreign securities in which the Funds invest
will be purchased in over-the-counter markets or on bond exchanges located
in the countries in which the principal offices of the issuers of the
various securities are located, if that is the best available market.
Foreign bond markets may be more volatile than those in the United States.
While growing in volume, they usually have substantially less volume than
U.S. markets, and the Funds' portfolio securities may be less liquid and
more volatile than U.S. Government securities. Moreover, settlement
practices for transactions in foreign markets may differ from those in
United States markets, and may include delays beyond periods customary in
the United States.
Transactions in options on securities, futures contracts and futures
options may not be regulated as effectively on foreign exchanges as similar
transactions in the United States, and may not involve clearing mechanisms
and related guarantees. The value of such positions also could be
adversely affected by the imposition of different exercise terms and
procedures and margin requirements than in the United States. Foreign
security trading practices, including those involving securities settlement
where Fund assets may be released prior to payment, may expose a Fund to
increased risk in the event of a failed trade or the insolvency of a
foreign broker-dealer.
The value of the Funds' portfolio positions may also be adversely impacted
by delays in the Funds' ability to act upon economic events occurring in
foreign markets during non-business hours in the United States.
Legal and Regulatory Matters
Certain foreign countries may have less supervision of securities markets,
brokers and issuers of securities, and less financial information available
to issuers, than is available in the United States.
Taxes
The interest payable on certain of a Fund's foreign portfolio securities
may be subject to foreign withholding taxes, thus reducing the net amount
of income available for distribution to the Fund's shareholders. A
shareholder otherwise subject to United States federal income taxes may,
subject to certain limitations, be entitled to claim a credit or deduction
for U.S. federal income tax purposes for his proportionate share of such
foreign taxes paid by a Fund. The Funds intend to sell such bonds prior to
the interest payment date in order to avoid withholding.
Costs
The expense ratios of Funds investing in foreign securities (before
reimbursement by the Adviser pursuant to the expense limitation described
in the Prospectus under "Management of the Funds -- Expense Guarantee") are
likely to be higher than those of investment companies investing in
domestic securities, since the cost of maintaining the custody of foreign
securities is higher.
Emerging Markets Investments
Investments by the Funds in securities issued by the governments of
emerging or developing countries, and of countries within those countries,
involve greater risks than other foreign investments. Investments in
emerging or developing markets involve exposure to economic and legal
structures that are generally less diverse and mature (and in some cases
the absence of developed legal structures governing private and foreign
investments and private property), and to political systems which can be
expected to have less stability, than those of more developed countries.
The risks of investment in such countries may include matters such as
relatively unstable governments, higher degrees of government involvement
in the economy, the absence until recently of capital market structures or
market-oriented economies, economies based on only a few industries,
securities markets which trade only a small number of securities,
restrictions on foreign investment in stocks, and significant foreign
currency devaluations and fluctuations.
Emerging markets can be substantially more volatile than both U.S. and more
developed foreign markets. Such volatility may be exacerbated by
illiquidity. The average daily trading volume in all of the emerging
markets combined is a small fraction of the average daily volume of the
U.S. market. Small trading volumes may result in a Fund being forced to
purchase securities at a substantially higher priced than the current
market, or to sell securities at much lower prices than the current market.
AVERAGE MATURITY AND DURATION CALCULATIONS
Average Maturity
The portfolio average maturity of each Fund will be computed by weighting
the maturity of each security in the Fund's portfolio by the market value
of that security. For securities which have put dates, reset dates, or
trade based on average maturity, the put date, reset date or average
maturity will be used instead of the final maturity date for the average
maturity calculation. Average maturity is normally used when trading
mortgage backed securities and asset backed securities.
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.
FUNDAMENTAL AND OPERATING POLICIES
The Funds have adopted the investment restrictions described below.
Fundamental policies of a Fund may not be changed without the approval of
the lesser of (1) 67% of the Fund's shares present at a meeting of
shareholders if the holders of more than 50% of the outstanding shares are
present in person or by proxy or (2) more than 50% of the Fund's
outstanding shares. Operating policies are subject to change by the Board
of Trustees without shareholder approval. Any investment restriction which
involves a maximum percentage of securities or assets will not be
considered to be violated unless an excess occurs immediately after, and is
caused by, an acquisition of securities or assets of, or borrowings by, the
Fund.
FUNDAMENTAL POLICIES
As a matter of fundamental policy, a Fund may not:
(1) Borrowing. Borrow money, except as a temporary measure for
extraordinary or emergency purposes or for the clearance of transactions,
and then only in amounts not exceeding 30% of its total assets valued at
market (for this purpose, reverse repurchase agreements and delayed
delivery transactions covered by segregated accounts are not considered to
be borrowings).
(2) Commodities. Purchase or sell commodities or commodity contracts,
except that (i) a Fund other than the Treasury Fund may enter into
financial and currency futures contracts and options on such futures
contracts, (ii) a Fund other than the Treasury, Short Duration and Tax
Exempt Bond Fund may enter into forward foreign currency exchange contracts
(the Funds do not consider such contracts to be commodities), and (iii) a
Fund other than the Treasury Fund may invest in instruments which have the
characteristics of both futures contracts and securities.
(3) Loans. Make loans, except that (I) a Fund may purchase money market
securities and enter into repurchase agreements, (ii) a Fund may acquire
bonds, debentures, notes and other debt securities, and (iii) a Fund other
than the Treasury Fund may lend portfolio securities in an amount not to
exceed 30% of its total assets (with the value of all loan collateral being
"marked to market" daily at no less than 100% of the loan amount).
(4) Margin. Purchase securities on margin, except that (I) a Fund may use
short-term credit necessary for clearance of purchases of portfolio
securities, and (ii) a Fund other than the Treasury Fund may make margin
deposits in connection with futures contracts and options on futures
contracts.
(5) Mortgaging. Mortgage, pledge, hypothecate or in any manner transfer
any security owned by a Fund as security for indebtedness, except as may be
necessary in connection with permissible borrowings and then only in
amounts not exceeding 30% of the Fund's total assets valued at market at
the time of the borrowing.
(6) Assets Invested in Any Issuer. Purchase a security if, as a result,
with respect to 50% of the value of a Fund's total assets, more than 5% of
the value of its total assets would be invested in the securities of any
one issuer (other than obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities).
(7) Share Ownership of Any Issuer. Purchase a security if, as a result,
with respect to 50% of the value of a Fund's total assets, more than 10% of
the outstanding voting securities of any issuer would be held by the Fund
(other than obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities).
(8) Real Estate. Purchase or sell real estate (although it may purchase
securities secured by real estate partnerships or interests therein, or
issued by companies or investment trusts which invest in real estate or
interests therein) or real estate limited partnership interests.
(9) Short Sales. Effect short sales of securities.
(10) Underwriting. Underwrite securities issued by other persons, except
to the extent that a Fund may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in connection with the purchase and
sale of its portfolio securities in the ordinary course of pursuing its
investment program.
(11) Global Diversification. Under normal market conditions, each of the
Global Fixed Income, Global Short Bond and International Bond Funds may not
invest less than 65% of the Fund's assets in debt securities of issuers
located in at least three countries (one of which may be the United States
for the Global Funds). Under normal market conditions, no less than 65% of
the International Equity Fund's assets will be invested in equity
securities of companies which are headquartered in at least three foreign
countries.
OPERATING POLICIES
As a matter of operating policy, a Fund may not:
(1) Control of Portfolio Companies. Invest in companies for the purpose of
exercising management or control.
(2) Illiquid Securities. Purchase a security if, as a result of such
purchase, more than 15% of the value of the Fund's net assets would be
invested in illiquid securities or other securities that are not readily
marketable, including repurchase agreements which do not provide for
payment within seven days. For this purpose, restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933
may be determined to be liquid.
(3) Investment Companies. Purchase securities of open-end or closed-end
investment companies except in compliance with the 1940 Act.
(4) Oil and Gas Programs. Purchase participations or other direct
interests in oil, gas, or other mineral exploration or development programs
or leases.
(5) Options. Invest in puts, calls, or any combination thereof, except
that a Fund may invest in or commit its assets to purchasing and selling
call and put options to the extent permitted by the Prospectus and
Statement of Additional Information.
(6) Ownership of Portfolio Securities by Officers and Directors. Purchase
or retain the securities of any issuer if any officers and Trustees of the
Group and of the Adviser who own beneficially more than 0.5% of the
outstanding securities of such issuer, together own beneficially more than
5% of such securities.
(7) Unseasoned Issuers. Purchase a security (other than obligations issued
or guaranteed by the U.S. Government or any foreign government, their
agencies or instrumentalities) if, as a result, more than 5% of the value
of the Fund's total assets would be invested in the securities of issuers
which at the time of purchase had been in operation for less than three
years (for this purpose, the period of operation of any issuer will include
the period of operation of any predecessor or unconditional guarantor of
such security).
(8) Restricted Securities. Neither the Global Fixed Income, Global Short
Bond or International Bond Funds may invest more than 10% of its total
assets in the securities of issuers which are restricted as to disposition,
other than restricted securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933.
(9) The Treasury Fund will not borrow amounts exceeding 33% of total assets
valued at market (including reverse repurchase agreements and delayed
delivery transactions).
STATE UNDERTAKINGS
In order to permit the sale of shares of the Funds in certain states, the
Board of Trustees may adopt restrictions on investment policies more
restrictive than those described above. Should the Trustees determine that
any such more restrictive policy is no longer in the best interests of a
Fund or its shareholders, the Trustees may revoke such policy and the Trust
may cease offering shares of the Fund in the state involved. Moreover, if
the state involved no longer requires any such restrictive policy, the
Trustees may revoke it.
The Group has undertaken to the State of Arkansas that (i) no more than 5%
of the total assets of the Limited Maturity Fund will be invested in
premiums on securities options including, without limitation, puts, calls,
straddles, spreads and any combination thereof, (ii) no Fund will not
purchase securities of issuers which the company is restricted from selling
to the public without registration under the Securities act of 1933 if by
reason thereof the value of its aggregate investment in such classes of
securities will exceed 10% of its total assets, and (iii) except for
hedging purposes, the Market Return and Global Short Bond Funds will not
invest more than 5% of the Fund's total assets in premiums on securities
options, including without limitation puts, calls, straddles, spreads and
any combination thereof.
The Group has undertaken to the Ohio Department of Commerce that (i) no
Fund will 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), (ii)
neither the Market Return Fund not the Growth & Income Fund will 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, and (iii) the Market Return Fund and Growth
& Income Fund will each limit its investments in securities of issuers if,
as to 75% of the assets of the Group at the time of purchase, more than 10%
of the voting securities of an issuer would be held by the Group, in
compliance with Rule 1301:6-3-09 (E) (8) of the Ohio Administrative Code.
The Group has undertaken to the Texas State Securities Board and the
Arizona Corporation Commission that each of the Global Fixed Income, Global
Short Bond and International Bond Funds will limit its investments in
warrants to no more than 5% of the Fund's net assets and, of this 5%, no
more than 2% will be invested in warrants which are not listed on the New
York Stock Exchange or the American Stock Exchange; provided, however, that
for the purposes of this limitation, warrants acquired in units or attached
to other securities will be deemed to be without value.
PORTFOLIO TRANSACTIONS
The Funds pay commissions to brokers in connection with the purchase and
sale of equity securities, options and futures contracts. There is
generally no stated commission in the case of fixed-income securities,
which are traded in the over-the-counter markets, but the price paid by a
Fund usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by a Fund includes a disclosed,
fixed commission or discount retained by the underwriter or dealer. Agency
transactions involve the payment by a Fund of negotiated brokerage
commissions. Such commissions vary among different brokers. Also, a
particular broker may charge different commissions according to such
factors as the difficulty and size of the transaction. Transactions in
foreign securities involve commissions which are generally higher than
those in the United States.
The Adviser places all orders for the purchase and sale of portfolio
securities, options and futures contracts for the Funds and buys and sells
such securities, options and futures for the Funds through a substantial
number of brokers and dealers. In so doing, the Adviser seeks the best
execution available. In seeking the most favorable execution, the Adviser
considers all factors it deems relevant, including, by way of illustration,
price, the size of the transaction, the nature of the market for the
security, the amount of the commission, the timing of the transaction
taking into account market prices and trends, the reputation, experience
and financial stability of the broker-dealer involved and the quality of
service rendered by the broker-dealer in other transactions.
Some securities considered for investment by a Fund's portfolio may also be
appropriate for other clients served by the Adviser. If a purchase or sale
of securities consistent with the investment policies of a Fund is
considered at or about the same time as a similar transaction for one or
more other clients served by the Adviser, transactions in such securities
will be allocated among the Fund and other clients in a manner deemed fair
and reasonable by the Adviser. Although there is no specified formula for
allocating such transactions, the various allocation methods used by the
Adviser, and the results of such allocations, are subject to periodic
review by the Board of Trustees.
The Adviser manages the Funds without regard generally to restrictions on
portfolio turnover, except those imposed on its ability to engage in short-
term trading by provisions of the federal tax laws (see "Taxation").
Trading in fixed-income securities does not generally involve the payment
of brokerage commissions, but does involve indirect transaction costs. The
higher the rate of portfolio turnover, the higher these transaction costs
borne by the Funds generally will be. The turnover rate of a Fund is
calculated by dividing (a) the lesser of purchases or sales of portfolio
securities for a particular fiscal year by (b) the monthly average of the
value of the portfolio securities owned by the Fund during the fiscal year.
In calculating the rate of portfolio turnover, all securities, including
options, whose maturities or expiration dates at the time of acquisition
were one year or less, are excluded. Interest rate and currency swap, cap
and floor transactions do not affect the calculation of portfolio turnover.
The only Funds which paid brokerage commissions during the last three
fiscal years are noted below:
Fiscal Year Ended October 31
================================
1994 1995 1996
Investment Quality Bond Fund $ 0 $ 0 $5,980
Short Duration Tax Exempt Fund 0 0 760
Tax Exempt Bond Fund 0 2,300 5,760
Market Return Fund 0 0 13,894
Global Fixed Income Fund 2,973 40 300
Fund
The Board of Trustees will periodically review the Adviser's performance of
its responsibilities in connection with the placement of portfolio
transactions on behalf of the Funds.
VALUATION OF PORTFOLIO SECURITIES
Equity securities for which the primary market is the U.S. are valued at
last sale price or, if no sale has occurred, at the closing bid price.
Equity securities for which the primary market is outside the U.S. are
valued using the official closing price or the last sale price in the
principal market where they are traded. If the last sale price (on the
local exchange is unavailable, the last evaluated quote or last bid price
is normally used.
Fixed income securities are valued on the basis of valuations furnished by
a pricing service which utilizes both dealer-supplied valuations and
electronic data processing techniques. Such techniques take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon
quoted prices or exchange or over-the-counter prices, since such valuations
are believed to reflect more accurately the fair value of such securities.
Foreign securities are valued at the closing bid price in the principal
market where they are traded, or, if closing prices are unavailable, at the
last traded bid price available prior to the time a fund's net asset value
is determined. Foreign security prices that cannot be obtained by the
quotation services are priced individually by the pricing service using
dealer-supplied quotations. Short-term obligations that mature in 60 days
or less are valued at amortized cost, which constitutes fair value as
determined by the Board of Trustees. All other securities and other assets
are appraised at their fair value as determined in good faith under
consistently applied procedures established by and under the general
supervision of the Board of Trustees.
Generally, trading in corporate bonds, U.S. government securities, foreign
securities, money market instruments and repurchase agreements, is
substantially completed each day at various times prior to the close of
regular trading on the New York Stock Exchange. The values of any such
securities held by a Fund are determined as of such times for the purpose
of computing the Fund's net asset value. Foreign currency exchange rates
are also generally determined prior to the close of the New York Stock
Exchange. If an extraordinary event that is expected to affect the value
of a portfolio security materially occurs after the close of an exchange on
which that security is traded, then the security will be valued at fair
value as determined in good faith under procedures established by and under
the general supervision of the Board of Trustees.
FUND PERFORMANCE
The Funds may quote their performance in various ways. All performance
information supplied by a Fund in advertising is historical and is not
intended to indicate future returns. A Fund's share price, yield and total
returns fluctuate in response to market conditions and other factors, and
the value of Fund shares when redeemed may be more or less than their
original cost.
Performance information for a Fund may be compared to various unmanaged
indices (such as the Lehman Brothers Municipal Bond Index) or indices
prepared by Lipper Analytical Services and other entities or organizations
which track the performance of investment companies or investment advisers.
Comparisons may also be made to indices or data in publications such as The
Bond Buyer, Forbes, Barron's, The Wall Street Journal, The New York Times,
and Business Week. For example, a Fund may quote Morningstar, Inc. in its
advertising materials. Morningstar, Inc. is a mutual fund rating service
that rates mutual funds on the basis of risk-adjusted performance.
Rankings that compare the performance a Fund to other funds in appropriate
categories over specific periods of time may also be quoted in advertising.
Unmanaged indices generally do not reflect deductions for administrative
and management costs and expenses. Payden & Rygel may also report to
shareholders or to the public in advertisements concerning the performance
of Payden & Rygel as adviser to clients other than the Funds, and on the
comparative performance or standing of Payden & Rygel in relation to other
money managers. Such comparative information may be compiled or provided
by independent rating services or other organizations.
Information regarding a Fund may also be included in newsletters or other
general communications by Payden & Rygel to advisory clients and potential
clients. These publications principally contain information regarding
market and economic trends and other general matters of interest to
investors, such as: principles of investing which, among other things
includes asset allocation, model portfolios, diversification, risk
tolerance and goal setting, saving for college or other goals or charitable
giving; long-term economic or market trends; historical studies of gold,
other commodities, equities, fixed income securities and statistical market
indices; new investment theories or techniques; economic and/or political
trends in foreign countries and their impact on the United States;
municipal bond market fundamentals and trends; corporate financing trends
and other factors that may impact corporate debt; and housing trends and
other economic factors that may impact mortgage rates and lending activity.
In addition, Payden & Rygel may quote financial or business publications
and periodicals as they relate to fund management, investment philosophy
and investment techniques. Materials may also include discussions
regarding Payden & Rygel's asset allocation services and other Payden &
Rygel funds, products and services.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical
returns of the capital markets in the United States, including common
stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury
bills and the U.S. rate of inflation (based on the Consumer Price Index)
and a combination of various capital markets. The Group may use the long-
term performance of these capital markets in order to demonstrate general
long-term risk-versus-reward investment scenarios or the value of a
hypothetical investment in any of these capital markets. The performance
of these capital markets is based on the returns of several different
indices. Ibbotson calculates total returns in the same method as the
Group. Performance comparisons could also include the value of a
hypothetical investment in any of the capital markets.
If appropriate, the Group may compare the performance of a Fund or the
performance of securities in which a Fund may invest to averages published
by IBC USA (Publications, Inc.). These averages assume reinvestment of
distributions. The IBC/Donoghue's Money Fund Averages-TM-/All Taxable,
which is reported in the Donoghue's Money Fund Report-Registered Trademark-
, covers over 772 taxable money market funds. The Fund may quote its fund
number, Quotron-TM- number and CUSIP number or quote its current portfolio
manager or any member of Payden & Rygel's market strategy group.
Yield Calculations
Yields for each class of shares of a Fund used in advertising are computed
by dividing the interest income of the class for a given 30-day or one
month period, net of expenses allocable to the class, by the average number
of shares of the class entitled to receive dividends during the period,
dividing this figure by the class' net asset value per share at the end of
the period and annualizing the result (assuming compounding of income) in
order to arrive at an annual percentage rate. Income is calculated for
purposes of yield quotations in accordance with standardized methods
applicable to bond funds. In general, interest income is reduced with
respect to bonds trading at a premium over their par value by subtracting a
portion of the premium from income on a daily basis, and is increased with
respect to bonds trading at a discount by adding a portion of the discount
to daily income. For a Fund's investments denominated in foreign
currencies, income and expenses are calculated first in their respective
currencies, and converted to U.S. dollars either when they are actually
converted or at the end of the period, whichever is earlier. Capital gains
and losses are generally excluded from the calculation, as are gains and
losses from currency exchange rate fluctuations.
Because yield accounting methods differ from the methods used for other
accounting purposes, the Fund's yield may not equal its distribution rate
or income reported in the Fund's financial statements.
Total Return Calculations
Total returns quoted in advertising with respect to a class of shares of
the Fund reflect all aspects of a Fund's return, including the effect of
reinvesting dividends and capital gain distributions, and any change in the
class' net asset value per share over the period. Average annual total
returns for each class are calculated by determining the growth or decline
in value of a hypothetical historical investment in that class of shares of
a Fund over a stated period, and then calculating the annually compounded
percentage rate that would have produced the same result if the rate of
growth or decline in value had been constant over the period. For example,
a cumulative return of 100% over ten years would result from an average
annual total return of 7.18%, which is the steady annual total return that
would equal 100% growth on a compounded basis in ten years. While average
annual total returns are a convenient means of comparing investment
alternatives, investors should realize that a Fund's performance is not
constant over time, but changes from year to year, and that average annual
total returns represent averaged figures as opposed to the actual year-to-
year performance of the Fund.
For Class A Shares, the one-year and since inception total return for each
of the funds through October 31, 1996 were as follows:
Annualized
Return
Since
1 Year Inception Inception Date
Limited Maturity Fund 5.42% 5.47% May 1, 1994
Short Bond Fund 4.88% 5.10% January 1, 1994
U.S. Treasury Fund 5.22% 9.15% January 1, 1995
Intermediate Bond Fund 4.07% 4.37% January 1, 1994
Investment Quality Bond Fund 4.89% 5.17% January 1, 1994
Short Duration Tax Exempt Fund 3.29% 4.04% September 1, 1994
Tax Exempt Bond Fund 3.53% 2.74% December 21, 1993
Market Return Fund 14.06%* December 1, 1995
Global Short Bond Fund 1.10%* September 18, 1996
Global Fixed Income Fund 7.43% 7.63% September 1, 1992
International Bond Fund 4.48% 4.36% April 1, 1995
* Unnannualized
In addition to average annual total returns, a Fund may quote unaveraged or
cumulative total returns for each class of shares reflecting the simple
change in value of an investment over a stated period of time. Average
annual and cumulative total returns may be quoted as a percentage or as a
dollar amount, and may be calculated for a single investment, a series of
investments, and/or a series of redemptions, over any time period. Total
returns may be broken down into their components of income, capital
(including capital gains and changes in share price) and currency returns
in order to illustrate the relationship of these factors and their
contributions to total return. Total returns, yields and other performance
information maybe quoted numerically, or in a table, graph or similar
illustration.
TAXATION
Each Fund intends to qualify annually and has elected to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"). To qualify as a regulated investment company, a Fund
must, among other things, (a) derive in each taxable year at least 90% of
its gross income from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income (including gains from
options, futures and forward contracts) derived with respect to its
business of investing in such stock, securities or currencies ("Qualifying
Income Test"); (b) derive in each taxable year less than 30% of its gross
income from the sale or other disposition of certain assets held less than
three months, namely (1) stocks or securities, (2) options, futures, or
forward contracts (other than those on foreign currencies), and (3) foreign
currencies (or options, futures, and forward contracts on foreign
currencies) not directly related to its business of investing in stocks or
securities; (c) diversify its holdings so that, at the end of each quarter
of the taxable year, (i) at least 50% of the market value of a Fund's
assets is represented by cash, U.S. Government securities, the securities
of other regulated investment companies and other securities, with such
other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of a Fund's total
assets and 10% of the outstanding voting securities of such issuer, and
(ii) not more than 25% of the value of its total assets is invested in the
securities of any one issuer (other than U.S. Government securities or the
securities of other regulated investment companies) (the "Diversification
Test"); and (d) distribute at least 90% of its investment company taxable
income (which includes dividends, interest and net short-term capital gains
in excess of any net long-term capital losses) each taxable year. The
Treasury Department is authorized to promulgate regulations under which
gains from foreign currencies (and options, futures, and forward contracts
on foreign currency) would constitute qualifying income for purposes of the
Qualifying Income Test only if such gains are directly relating to
investing in stocks or securities. To date, such regulations have not been
issued.
In addition, no definitive guidance currently exists with respect to the
classification of interest rate swaps and cross-currency swaps as
securities or foreign currencies for purposes of certain of the tests
described above. Accordingly, to avoid the possibility of disqualification
as a regulated investment company, a Fund will limit its positions in swaps
to transactions for the purpose of hedging against either interest rate or
currency fluctuation risks, and will treat swaps as excluded assets for
purposes of determining compliance with the Diversification Test.
As a regulated investment company, a Fund will not be subject to U.S.
federal income tax on its investment company taxable income and net capital
gains (any net long-term capital gains in excess of the sum of net short-
term capital losses and capital loss carryovers from the prior eight
years) designated by the Fund as capital gain dividends, if any, that it
distributes to shareholders. Each Fund intends to distribute to its
shareholders substantially all of its investment company taxable income
monthly and any net capital gains annually. Investment company taxable
income or net capital gains not distributed by a Fund on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To avoid the tax, a Fund must distribute
during each calendar year an amount at least equal to the sum of (1) 98% of
its ordinary income (with adjustments) for the calendar year and foreign
currency gains or losses for the twelve month period ending on October 31
of the calendar year, (2) at least 98% of its capital gains in excess of
its capital losses (and adjusted for certain ordinary losses) for the
twelve month period ending on October 31 of the calendar year, and (3) all
ordinary income and capital gains for previous years that were not
distributed during such years. A distribution will be treated as paid on
December 31 of the calendar year if it is declared by the Fund in October,
November, or December of that year to shareholders of record on a date in
such a month and paid by a Fund during January of the following year. Such
distributions will be taxable to shareholders (other than those not subject
to federal income tax) in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are
received. To avoid application of the excise tax, the Funds intend to make
their distributions in accordance with the calendar year distribution
requirement.
Distributions
The Short Duration and Tax Exempt Bond Funds intend to qualify to pay
"exempt-interest" dividends to its shareholders, who may exclude those
dividends from their gross income for federal income tax purposes. In
order to be able to pay those dividends, a Fund must satisfy the additional
requirement that, at the close of each quarter of its taxable year, at
least 50% of the value of its total assets must consist of obligations the
interest on which is excludable from gross income under section 103(a) of
the Code.
With the exception of the Short Duration and Tax Exempt Bond Funds,
dividends paid out of a Fund's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. Distributions received
by tax-exempt shareholders will not be subject to federal income tax to the
extent permitted under the applicable tax exemption.
Dividends paid by a Fund generally are not expected to qualify for the
deduction for dividends received by corporations. Distributions of net
capital gains, if any, are taxable as long-term capital gains, regardless
of how long the shareholder has held a Fund's shares and are not eligible
for the dividends received deduction. The tax treatment of dividends and
distributions will be the same whether a shareholder reinvests them in
additional shares or elects to receive them in cash.
Hedging Transactions
Many of the options, futures contracts and forward contracts used by the
Funds are "section 1256 contracts." Any gains or losses on section 1256
contracts are generally considered 60% long-term and 40% short-term capital
gains or losses ("60/40"). Also, section 1256 contracts held by a Fund at
the end of each taxable year (and, for purposes of the 4% excise tax, on
certain other dates as prescribed under the Code) are "marked to market"
with the result that unrealized gains or losses are treated as though they
were realized and the resulting gain or loss is treated as ordinary or
60/40 gain or loss, depending on the circumstances.
Generally, the hedging transactions and certain other transactions in
options, futures and forward contracts undertaken by a Fund, may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may
affect the character of gains (or losses) realized by a Fund. In addition,
losses realized by a Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the investment company taxable income or net capital gain for
the taxable year in which such losses are realized. Because only a few
regulations implementing the straddle rules have been promulgated, the tax
consequences of transactions in options, futures and forward contracts to a
Fund are not entirely clear. The transactions may increase the amount of
short-term capital gain realized by a Fund which is taxed as ordinary
income when distributed to shareholders.
Each Fund may make one or more of the elections available under the Code
which are applicable to straddles. If a Fund makes any of the elections,
the amount, character and timing of the recognition of gains or losses from
the affected straddle positions will be determined under rules that vary
according to the election(s) made. The rules applicable under certain of
the elections operate to accelerate the recognition of gains or losses from
the affected straddle positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
The 30% limit on gains from the disposition of certain options, futures,
and forward contracts held less than three months and the qualifying income
and diversification requirements applicable to the Fund's assets may limit
the extent to which a Fund will be able to engage in transactions in
options, futures contracts or forward contracts.
Sales of Shares
Upon disposition of shares of a Fund (whether by redemption, sale or
exchange), a shareholder will realize a gain or loss. Such gain or loss
will be capital gain or loss if the shares are capital assets in the
shareholder's hands, and will be long-term or short-term generally
depending upon the shareholder's holding period for the shares. Any loss
realized on a disposition will be disallowed by "wash sale" rules to the
extent the shares disposed of are replaced within a period of 61 days
beginning 30 days before and ending 30 days after the disposition. In such
a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on a disposition of
shares held by the shareholder for six months or less will be treated as a
long-term capital loss to the extent of any distributions of capital gain
dividends received by the shareholder with respect to such shares.
Backup Withholding
A Fund may be required to withhold for U.S. federal income taxes 31% of all
taxable distributions payable to shareholders who fail to provide the Fund
with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service
that they are subject to backup withholding. Corporate shareholders and
certain other shareholders specified in the Code generally are exempt from
such backup withholding. Backup withholding is not an additional tax. Any
amounts withheld may be credited against the shareholder's U.S. federal tax
liability.
Foreign Investments
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund amortizes or accrues premiums or
discounts, accrues interest or other receivables or accrues expenses or
other liabilities denominated in a foreign currency and the time the Fund
actually collects such receivables or pays such liabilities generally are
treated as ordinary income or loss. Similarly, on disposition of debt
securities denominated in a foreign currency and on disposition of certain
futures contracts, forward contracts and options, gains or losses
attributable to fluctuations in the value of the foreign currency between
the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These gains and
losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the U.S. may reduce or eliminate
such taxes. In addition, the Adviser intends to manage the Funds with the
intention of minimizing foreign taxation in cases where it is deemed
prudent to do so. If more than 50% of the value of a Fund's total assets
at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible to elect to "pass-through" to the
Fund's shareholders the amount of foreign income and similar taxes paid by
the Fund. If this election is made, a shareholder generally subject to tax
will be required to include in gross income (in addition to taxable
dividends actually received) his pro rata share of the foreign income taxes
paid by the Fund, and may be entitled either to deduct (as an itemized
deduction) his or her pro rata share of foreign taxes in computing his
taxable income or to use it (subject to limitations) as a foreign tax
credit against his or her U.S. federal income tax liability. No deduction
for foreign taxes may be claimed by a shareholder who does not itemize
deductions. Each shareholder will be notified within 60 days after the
close of a Fund's taxable year whether the foreign taxes paid by the Fund
will "pass-through" for that year. Absent the Fund making the election to
"pass through" the foreign source income and foreign taxes, none of the
distributions may be treated as foreign source income for purposes of the
foreign tax credit calculation.
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax attributable to his or her total
foreign source taxable income. For this purpose, if the pass-through
election is made, the source of a Fund's income will flow through to
shareholders of the Fund. With respect to such election, gains from the
sale of securities will be treated as derived from U.S. sources. The
limitation on the foreign tax credit is applied separately to foreign
source passive income, and to certain other types of income. Shareholders
may be unable to claim a credit for the full amount of their proportionate
share of the foreign taxes paid by the Fund. The foreign tax credit is
modified for purposes of the Federal alternative minimum tax and can be
used to offset only 90% of the alternative minimum tax imposed on
corporations and individuals and foreign taxes generally are not deductible
in computing alternative minimum taxable income.
Certain Debt Securities
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Fund may be
treated as debt securities that are issued originally at a discount.
Generally, the amount of the original issue discount ("OID") is treated as
interest income and is included in income over the term of the debt
security, even though payment of that amount is not received until a later
time, usually when the debt security matures. A portion of the OID
includable in income with respect to certain high-yield corporate debt
securities may be treated as a dividend for Federal income tax purposes.
Some of the debt securities (with a fixed maturity date of more than one
year from the date of issuance) that may be acquired by a Fund in the
secondary market may be treated as having market discount. Generally, any
gain recognized on the disposition of, and any partial payment of principal
on, a debt security having market discount issued after July 18, 1984 is
treated as ordinary income to the extent the gain, or principal payment,
does not exceed the "accrued market discount" on such debt security.
Market discount generally accrues in equal daily installments. A Fund may
make one or more of the elections applicable to debt securities having
market discount, which could affect the character and timing of recognition
of income.
Some of the debt securities (with a fixed maturity date of one year or less
from the date of issuance) that may be acquired by a Fund may be treated as
having an acquisition discount, or OID in the case of certain types of debt
securities. Generally, the Fund will be required to include the
acquisition discount, or OID, in income ratably over the term of the debt
security, even though payment of that amount is not received until a later
time, usually when the debt security matures. The Fund may make one or
more of the elections applicable to debt securities having acquisition
discount, or OID, which could affect the character and timing of
recognition of income.
A Fund generally will be required to distribute dividends to shareholders
representing discount on debt securities that is currently includable in
income, even though cash representing such income may not have been
received by the Fund. Cash to pay such dividends may be obtained from
sales proceeds of securities held by the Fund.
Other Taxes
Distributions also may be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Under the
laws of various states, distributions of investment company taxable income
generally are taxable to shareholders even though all or a substantial
portion of such distributions may be derived from interest on certain
Federal obligations which, if the interest were received directly by a
resident of such state, would be exempt from such state's income tax
("qualifying Federal obligations"). However, some states may exempt all or
a portion of such distributions from income tax to the extent the
shareholder is able to establish that the distribution is derived from
qualifying Federal obligations. Moreover, for state income tax purposes,
interest on some Federal obligations generally is not exempt from taxation,
whether received directly by a shareholder or through distributions of
investment company taxable income (for example, interest on Federal
National Mortgage Association Certificates and Government National Mortgage
Association Certificates). Each Fund will provide information annually to
shareholders indicating the amount and percentage of the Fund's dividend
distribution which is attributable to interest on Federal obligations, and
will indicate to the extent possible from what types of Federal obligations
such dividends are derived. Shareholders are advised to consult their own
tax advisers with respect to the particular tax consequences to them of an
investment in a Fund.
MANAGEMENT OF THE GROUP
TRUSTEES AND OFFICERS
The Trustees and officers of the Group are as set forth below. Unless
otherwise indicated, the address of all persons below is 333 South Grand
Avenue, Los Angeles, California 90071.
Board of Trustees:
<TABLE>
Position with Principal Occupations
Name the Group During Past Five Years
<S> <C> <C>
* Joan A. Payden(1) Chairman of the President, Payden & Rygel
Board,
President,
Trustee
* Lynda L. Faber Trustee Senior Vice President,
Payden & Rygel
* John Paul Isaacson Trustee Executive Vice President,
Payden & Rygel
* Christopher N. Orndorff Trustee Vice President, Payden &
Rygel (since 1990);
previously Second Vice
President, The Northern
Trust Company
J. Clayburn La Force Trustee Dean Emeritus, The John E.
P.O. Box 1009 Anderson Graduate School of
Pauma Valley, CA 92061 Management at University of
California, Los Angeles;
Director, The Timken Company
(since February, 1994);
Trustee for PIC
Institutional Growth
Portfolio, PIC Institutional
Balanced Portfolio and PIC
Small Capital Portfolio
(since June, 1992)
Thomas McKernon, Jr. (1) Trustee President and Chief
2601 South Figueroa Executive Officer,
Street Automobile Club of Southern
Los Angeles, CA 90007 California
Dennis C. Poulsen Trustee President and Chief
3900 South Workman Mill Executive Officer, Rose
Road Hills Company
Whittier, CA 90601
Stender E. Sweeney Trustee Private Investor since 1994;
Times Mirror Square previously Vice President,
Fifth Floor Finance, Times Mirror
Los Angeles, CA 90053 Company
W.D. Hilton, Jr. Trustee Managing Trustee, NGC
310 East Interstate 30, Settlement Trust; previously
Suite 285 Chief Financial Officer,
Garland, TX 75043 Texas Association of School
Boards and Board Member,
First Greenville National
Bank
</TABLE>
* An "interested person" of the Group, as defined in the 1940 Act.
(1) Ms. Payden is a Director of the Automobile Club of Southern
California, of which Mr. McKernon is President and Chief Executive
Officer.
Trustees other than those affiliated with the Adviser receive an annual
retainer of $10,000, plus $1,500 for each Board of Trustees meeting and/or
audit committee 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, 1996, 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
Name from Trust Expenses Retirement Paid to Trustee
<S> <C> <C> <C> <C>
Dennis Poulsen $18,500 None N/A $18,500 (11*)
James Clayburn La Force $18,500 None N/A $18,500 (11*)
Stender Sweeney $18,500 None N/A $18,500 (11*)
W.D. Hilton $18,500 None N/A $18,500 (11*)
Thomas V. McKernon, Jr. $18,500 None N/A $18,500 (11*)
</TABLE>
* Indicates total number of Funds in Trust Complex.
Officers:
<TABLE>
Position with Principal Occupations
Name the Group During Past Five
Years
<S> <C> <C>
Lynn M. Bowker Vice President, Vice President &
Treasurer Treasurer, Payden &
Rygel
Scott A. King Executive Executive Vice
Vice President President, Payden &
Rygel
David L. Wagner Vice President Portfolio Manager,
Payden & Rygel
Steven D. Persky Vice President, Vice President,
Assistant Secretary Payden & 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 November 30, 1996, its staff consisted of 80 employees, 23 of whom
either have advanced degrees and/or are Chartered Financial Analysts. As
of such date, it had over 200 clients, including pension funds, endowments,
credit unions, foundations, corporate cash accounts and individuals, and
managed total assets of approximately $20 billion, with about $2.3 billion
invested globally.
The Adviser's focus is the management of fixed income securities in both
the domestic and global markets. These include securities that have
absolute or average maturities out to five years with a bias toward very
high quality and liquidity. Portfolios are actively managed according to
client approved guidelines and benchmarks. Payden & Rygel also utilizes
futures and options strategies, primarily as defensive measures to control
interest rate and currency volatility.
The Adviser provides investment management services to the Funds pursuant
to an Investment Management Agreement with the Trust dated as of June 24,
1992 as amended on June 14, 1994 with respect to Class B shares of the
Group. The Agreement provides that the Adviser will pay all expenses
incurred in connection with managing the ordinary course of a Fund's
business, except the following expenses, which are paid by each Fund: (i)
the fees and expenses incurred by a Fund in connection with the management
of the investment and reinvestment of the Fund's assets; (ii) the fees and
expenses of Trustees who are not affiliated persons of the Adviser; (iii)
the fees and expenses of the Trust's Custodian, Transfer Agent, Fund
Accounting Agent and Administrator; (iv) the charges and expenses of legal
counsel and independent accountants for the Trust; (v) brokers' commissions
and any issue or transfer taxes chargeable to a Fund in connection with its
securities and futures transactions; (vi) all taxes and corporate fees
payable by a Fund to federal, state or other governmental agencies; (vii)
the fees of any trade associations of which the Trust may be a member;
(viii) the cost of fidelity bonds and trustees and officers errors and
omission insurance; (ix) the fees and expenses involved in registering and
maintaining registration of a Fund and of its shares with the SEC,
registering the Trust as a broker or dealer and qualifying the shares of a
Fund under state securities laws, including the preparation and printing of
the Trust's registration statements, prospectuses and statements of
additional information for filing under federal and state securities laws
for such purposes; (x) communications expenses with respect to investor
services and all expenses of shareholders' and trustees' meetings and of
preparing, printing and mailing reports to shareholders in the amount
necessary for distribution to the shareholders; (xi) litigation and
indemnification expenses and other extraordinary expenses not incurred in
the ordinary course of the Trust's business, and (xii) any expenses assumed
by the Trust pursuant to a plan of distribution adopted in conformity with
Rule 12b-1 under the 1940 Act.
The Adviser has agreed that if in any fiscal year the expenses borne by a
Fund exceed the applicable expense limitations imposed by the securities
regulations of any state in which shares of such Fund are registered or
qualified for sale to the public, it will reimburse the Fund for any excess
to the extent required by such regulations. The Administrator will bear a
portion of this reimbursement obligation. Unless otherwise required by law
such reimbursement would be accrued and paid on the same basis that the
advisory fees are accrued and paid by the Fund. To the Trust's knowledge,
the only state expense limitation in effect on the date of this Statement
of Additional Information is that of California, which requires the Adviser
to reimburse the Fund for advisory fees to the extent that certain expenses
exceed 2-1/2% of average annual net assets up to $30,000,000, 2% of the
next $70 million of average net assets, and 1-1/2% of average net assets in
excess of $100,000,000.
Fees earned by the Adviser during the last three fiscal years ended October
31, are shown below.
<TABLE>
Fiscal Year Ending October 31
========================================
1994 1995 1996
<S> <C> <C> <C>
Limited Maturity $7,360 $44,030 $104,879
Short Bond 4,974 27,936 150,282
U.S. Treasury * 13,233 49,630
Intermediate Bond 14,006 71,012 111,179
Investment Quality Bond 5,115 23,790 83,076
Short Duration Tax Exempt 6,145 51,350 89,100
Tax Exempt Bond 60,945 99,303 159,206
Market Return * * 8,031
Global Short Bond * * 7,843
Global Fixed Income 1,216,816 1,533,836 1,982,809
International Bond * 25,948 65,046
</TABLE>
* Fund had not commenced operations
The Agreement provides that the Adviser will not be liable for any error of
judgment or mistake of law or for any loss suffered by the Funds in
connection with the performance of the Agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation
for services or a loss resulting from willful misfeasance, bad faith or
gross negligence in the performance of the Adviser's duties or from
reckless disregard by the Adviser of its duties and obligations thereunder.
Unless earlier terminated as described below, the Agreement will continue
in effect with respect to each Fund until June 14, 1995 and thereafter for
successive annual periods, subject to annual approval by the Board of
Trustees (or by a majority of the outstanding voting shares of each Fund as
defined in the 1940 Act) and by a majority of the Trustees who are not
interested persons of any party to the Agreement by vote cast in person at
a meeting called for such purpose. The Agreement terminates upon
assignment and may be terminated with respect to a Fund without penalty on
60 days' written notice at the option of either party thereto or by the
vote of the shareholders of the Fund.
ADMINISTRATOR, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT
Treasury Plus, Incorporated, a wholly owned subsidiary of the Adviser
serves as Administrator to the Fund. Under its Administration Agreement
with the Group, the Administrator has agreed to prepare periodic reports to
regulatory authorities, maintain financial accounts and records of the
Fund, transmit communications by the Fund to shareholders of record, make
periodic reports to the Board of Trustees regarding Fund operations, and
overview the work of the fund accountant and transfer agent.
Investors Fiduciary Trust Company ("IFTC") provides fund accounting and
transfer agency services to the Group. IFTC calculates daily expense
accruals and net asset value per share of the Funds, issues and redeems
Fund shares, maintains shareholder accounts and prepares annual investor
tax statements.
The liability provisions of the Group's agreements with Treasury Plus and
IFTC are similar to those of the Investment Management Agreement discussed
above. In addition, the Group has agreed to indemnify IFTC against certain
liabilities. The respective agreements may be terminated by either party
on 90 days notice.
The Administrator has agreed that, if in any fiscal year the expenses borne
by the Fund exceed the applicable expense limitations imposed by the
securities regulations of any state in which shares of the Fund are
registered or qualified for sale to the public, it will reimburse the Fund
for a portion of such excess expenses, which portion is determined by
multiplying the excess expenses by the ratio of (i) the fees respecting the
Fund otherwise payable to the Administrator pursuant to its agreement with
the Trust, to (ii) the aggregate fees respecting the Fund otherwise payable
to the Administrator pursuant to its agreement and to the Adviser pursuant
to its Investment Management Agreement with the Trust.
During the last three fiscal years, the Administrator was paid the amounts
listed below.
<TABLE>
Fiscal Year Ending October 31
======================================
1994 1995 1996
<S> <C> <C> <C>
Limited Maturity $2,250 $12,864 $22,883
Short Bond 1,572 7,884 32,665
U.S. Treasury * 4,476 10,950
Intermediate Bond 4,317 20,487 24,631
Investment Quality Bond 1,600 6,731 18,435
Short Duration Tax Exempt 1,610 14,771 17,181
Tax Exempt Bond 16,708 25,275 30,854
Market Return * * 1,721
Global Short Bond * * 1,569
Global Fixed Income 353,701 386,974 397,116
International Bond * 5,469 11,676
</TABLE>
* Fund had not commenced operations
DISTRIBUTOR
Payden & Rygel Distributors, 333 South Grand Avenue, Los Angeles,
California 90071, acts as Distributor to the Group pursuant to a
Distribution Agreement with the Group dated as of June 24, 1992, as
amended. The Distributor has agreed to use its best efforts to effect
sales of shares of the Funds, but is not obligated to sell any specified
number of shares. The Distribution Agreement contains provisions with
respect to renewal and termination similar to those in the Investment
Management Agreement described above. Pursuant to the Agreement, the Trust
has agreed to indemnify the Distributor to the extent permitted by
applicable law against certain liabilities under the Securities Act of
1933.
No compensation is payable by the Funds to the Distributor for its
distribution services. The Distributor pays for the personnel involved in
accepting orders for purchase and redemption of Fund shares, expenses
incurred in connection with the printing of Prospectuses and Statements of
Additional Information (other than those sent to existing shareholders),
sales literature, advertising and other communications used in the public
offering of shares of a Fund, and other expenses associated with performing
services as distributor of the Funds' shares. Each Fund pays the expenses
of issuance, registration and transfer of its shares, including filing fees
and legal fees.
SHAREHOLDER SERVICE PLAN
Pursuant to the Shareholder Service Plan, each Fund will pay the
Distributor for expenses incurred in connection with non-distribution
shareholder services provided by the Distributor to securities broker-
dealers and other securities professionals ("Service Organizations") with
respect to Class B shares of a Fund, and to the beneficial owners of such
shares, and for fees paid by the Distributor to such Service Organizations
for the provision of support services to their clients who are beneficial
owners of Class B shares ("Clients").
Support services provided pursuant to the Shareholder Service Plan include
(a) establishing and maintaining accounts and records relating to Clients
who invest in Class B shares; (b) aggregating and processing purchase,
exchange and redemption requests for Class B shares from Clients and
placing net purchase and redemption orders with respect to such shares; (c)
investing, or causing to be invested, the assets of Clients' accounts in
Class B shares pursuant to specific or pre-authorized instructions; (d)
processing dividend and distribution payments from the Group on behalf of
Clients; (e) providing information periodically to Clients showing their
positions in Class B shares; (f) arranging for bank wires; (g) responding
to Client inquiries relating to the services performed by Service
Organizations; (h) providing sub-accounting services with respect to Class
B shares beneficially owned by Clients or the information to the Group
necessary for sub-accounting services; (i) preparing any necessary tax
reports or forms on behalf of Clients; (j) if required by law, forwarding
shareholder communications from a Fund to Clients; and (k) assisting
Clients in changing dividend options, account designations and addresses.
The Shareholder Service Plan continues in effect from year to year,
provided that each such continuance is approved at least annually by a vote
of the Board of Trustees of the Group, including a majority of the Trustees
who have no direct or indirect financial interest in the operation of the
Plan or in any agreement related to the Plan (the "Independent Trustees"),
cast in person at a meeting called for the purpose of voting on such
continuance. The Plan may be amended at any time by the Board of Trustees,
provided that any material amendments of the terms of the Plan will become
effective only upon the approval by a majority of the Board and a majority
of the Independent Trustees pursuant to a vote cast in person at a meeting
called for the purpose of voting on the Plan.
No Plan fees were paid for any Fund during the fiscal year ended October
31, 1996.
PURCHASES AND REDEMPTIONS
Certain managed account clients of the Adviser may purchase shares of the
Fund. To avoid the imposition of duplicative fees, the Adviser may be
required to make adjustments in the management fees charged separately by
the Adviser to these clients to offset the generally higher level of
management fees and expenses resulting from a client's investment in the
Fund.
The Funds reserve the right to suspend or postpone redemptions during any
period when: (a) trading on the New York Stock Exchange is restricted, as
determined by the Securities and Exchange Commission, or that Exchange is
closed for other than customary weekend and holiday closings; (b) the
Securities and Exchange Commission has by order permitted such suspension;
or (c) an emergency, as determined by the Securities and Exchange
Commission, exists, making disposal of portfolio securities or valuation of
net assets of the Fund not reasonably practicable.
Each Fund will redeem shares solely in cash up to the lesser of $250,000 or
1% of its net assets during any 90-day period for any one shareholder.
Each Fund reserves the right to pay any redemption price exceeding this
amount in whole or in part by a distribution in kind of securities held by
the Fund in lieu of cash. It is highly unlikely that shares would ever be
redeemed in kind. If shares are redeemed in kind, however, the redeeming
shareholder would incur transaction costs upon the disposition of the
securities received in the distribution.
Due to the relatively high cost of maintaining smaller accounts, each Fund
reserves the right to redeem shares in any account for their then-current
value (which will be promptly be paid to the investor) if at any time, due
to shareholder redemption, the shares in the Fund account do not have a
value of at least $5,000. An investor will be notified that the value of
his account is less than the minimum and allowed at least 30 days to bring
the value of the account up to at least $5,000 before the redemption is
processed. The Declaration of Trust also authorizes the Funds to redeem
shares under certain other circumstances as may be specified by the Board
of Trustees
OTHER INFORMATION
CAPITALIZATION
Each Fund is a series of Payden & Rygel Investment Group, an open-end
management investment company organized as a Massachusetts business trust
in January 1992 (initially called P&R Investment Trust). The
capitalization of the Funds consists solely of an unlimited number of
shares of beneficial interest. The Board of Trustees has currently
authorized fifteen series of shares: Global Fixed Income Fund, Global
Short Bond Fund, International Bond Fund, Short Duration Tax Exempt Fund,
Tax Exempt Bond Fund, Limited Maturity Fund, Short Bond Fund, Intermediate
Bond Fund, Investment Quality Bond Fund, U.S. Treasury Fund, Market Return
Fund, Total Return Fund, Global Balanced Fund and International Equity
Fund. The Board of Trustees may establish additional funds (with different
investment objectives and fundamental policies) and additional classes of
shares at any time in the future. Establishment and offering of additional
portfolios will not alter the rights of the Funds' shareholders. Shares do
not have preemptive rights or subscription rights. In liquidation of a
Fund, each shareholder is entitled to receive their pro rata share of the
assets of the Fund.
Expenses incurred by the Group in connection with its organization and the
initial public offering are being reimbursed to the Adviser, subject to the
expense limitation described in the Prospectus under "Management of the
Funds -- Expense Guarantee", and amortized on a straight line basis over a
period of five years. Expenses incurred in the organization of
subsequently offered series of the Group will be charged to those series
and will be amortized on a straight line basis over a period of not less
than five years.
PRINCIPAL SHAREHOLDERS
As of November 30, 1996, the following persons were known to hold of record
more than 5% of the outstanding shares of the Limited Maturity Fund:
Foundation to Assist California Teachers, Pasadena, CA 91101, 13.3%;
Infirmary Health System, Inc., Mobile, AL 36633, 12.5%; Northwest Building
Corp., Seattle, WA 98104, 12.4%; Payden & Rygel, Los Angeles, CA 90071,
10.4%; Center Theatre Group, Los Angeles, CA 90012, 9.0%; Directors Guild
of America, Los Angeles, CA 90048, 15.2%.
As of November 30, 1996, the following persons were known to hold of record
more than 5% of the outstanding shares of the Short Bond Fund: University &
Community College System of Nevada, Reno, NV, 24.9%; Michigan Conference of
Teamsters Welfare Fund, Detroit, MI, 16.8%; Dan Murphy Foundation, Los
Angeles, CA 90016, 10.7%.
As of November 30, 1996, the following persons were known to hold of record
more than 5% of the outstanding shares of the U.S. Treasury Fund: Leonard
C. Horvitz, Moreland Hills, OH 4022, 12.7%; Carol Ann Leif, Beverly Hills,
CA 90210, 12.1%; Best Products Company Pension Plan, Richmond, VA 23260,
12.3%; Dan Murphy Foundation, Los Angeles, CA 90016, 22.5%; Carol Ann Leif,
Beverly Hills, CA 90210, 12.1%; Casey Wasserman, Beverly Hills 90210, 8.7%;
Payden & Rygel, Los Angeles, CA 90071, 12.6%; Rose Hills Memorial Park,
Calabasas, CA 91302, 8.3%.
As of November 30, 1996, the following persons were known to hold of record
more than 5% of the outstanding shares of the Intermediate Bond Fund:
North Hills Passavant Hospital, Philadelphia, PA 19182, 15.5%; Children's
Memorial Hospital, Chicago, IL 60675, 24.0%; Augustana College, Rock
Island, IL 61201, 10.1%; SSMHCS Liability Trust I, St. Louis, MO 63166,
11.4%; Stroum Foundation, Seattle, WA 98101, 6.9%.
As of November 30, 1996, the following persons were known to hold of record
more than 5% of the outstanding shares of the Investment Quality Bond Fund:
Southern California Presbyterian Homes, Glendale, CA 91202, 15.4%; USSF
Foundation, McLean, VA 22101, 6.0%; World Cup USA, 1994, Inc., Los Angeles,
CA 90067, 18.1%; Mark & Pat Benjamin Revocable Trust, Palos Verdes Estates,
CA 90274, 5.8%; Dan Murphy Foundation, Los Angeles, CA 90016, 11.9%; House
Ear Institute, Los Angeles, CA 90057, 10.8%; Rose Hills Memorial Park,
Calabasas, CA 91302, 7.3%.
As of November 30, 1996, the following persons were known to hold of record
more than 5% of the outstanding shares of the Short Duration Tax Exempt
Fund: Thomas and Elinor Wertheimer, Santa Monica, CA 90402, 7.6%; Diane
Von Furstenberg, New Milford, CT 06766, 8.8%; Carol Ann Leif, Beverly
Hills, CA 91210, 23.4%; Beverly Haas, Los Angeles, CA 90027, 5.3%; Kleiner
Family Trust, Menlo Park, CA 94025, 9.1%; Lynne K. Wasserman, Beverly
Hills, CA 90210, 7.4%; Casey Wasserman, Beverly Hills, CA 90210, 7.4%.
As of November 30, 1996, the following persons were known to hold of record
more than 5% of the outstanding shares of the Tax Exempt Bond Fund: Eugene
Kleiner, Menlo Park, CA 94025, 18.7%; Thomas and Elinor Wertheimer, Santa
Monica CA 90402, 13.7%; Clack & Co., Spokane, WA 99202, 9.7%; Charles S.
Paul, Los Angeles, CA 90077, 5.9%; Nordskog Family Trust, Tarzana, CA
91356, 5.4%; Walker Family Trust, Flintridge, CA 91011, 6.0%.
As of November 30, 1996, the following persons where known to hold of
record more than 5% of the outstanding shares of the Market Return Fund:
Dan Murphy Foundation, Los Angeles, CA 90016, 23.8%; Community Limited
Investment Partnership, Los Angeles, CA 90071, 16.7%; Beverly Haas, Los
Angeles, CA 90027, 11.6%; Edmund D. Edelman Foundation, Los Angeles, CA
90057, 5.1%; Wasserman Foundation, Beverly Hills, CA 90210, 10.7%.
As of November 30, 1996, the following persons were known to hold of record
more than 5% of the outstanding shares of the Global Short Bond Fund: Bert
Bell NFL Retirement Plan, Brooklyn, NY 11231, 22.0%; Evans & Sutherland
Computer Corporation, Salt Lake City, UT 84158, 16.4%; Grey Advertising,
New York, NY 10017, 21.6%; University of Notre Dame, Notre Dame, IN 46556,
22.0%.
As of November 30, 1996, the following persons were known to hold of record
more than 5% of the outstanding shares of the Global Fixed Income Fund:
Public Service Electric & Gas Co. Pension Plan Trust, Bankers Trust Co.,
Trustee, Jersey City, NJ 07302, 9.9%; SSM Health Care System, Pittsburgh,
PA 15230, 5.3%; UniHealth America, Burbank, CA 91505, 7.9%; City of St.
Louis, St. Louis, MO 63103, 5.4%; Sheinberg Family Trust, Beverly Hills, CA
90210, 5.3%.
As of November 30, 1996, the following persons were known to hold of record
more than 5% of the outstanding shares of the International Bond Fund:
Consuelo Zobel Alger Foundation, Honolulu, HI 96805, 83.8%.
The Fund has no information regarding the beneficial ownership of such
shares. As of such date, the officers and directors of the Group as a
group owned less than 1% of the outstanding shares of the Funds (except for
the U.S. Treasury Fund, 13%; International Bond Fund, 4%; Limited Maturity
Fund, 10%; Growth & Income Fund, 8%; and Market Return Funds, 17%).
DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of a Fund. However, the
Declaration of Trust disclaims liability of the shareholders of a Fund for
acts or obligations of the Group, which are binding only on the assets and
property of the Fund, and requires that notice of the disclaimer be given
in each contract or obligation entered into or executed by a Fund or the
Trustees. The Declaration of Trust provides for indemnification out of
Fund property for all loss and expense of any shareholder held personally
liable for the obligations of a Fund. The risk of a shareholder incurring
financial loss on account of shareholder liability is limited to
circumstances in which a Fund itself would be unable to meet its
obligations and thus should be considered remote.
The Declaration of Trust provides further that no officer or Trustee of the
Group will be personally liable for any obligations of the Group, nor will
any officer or Trustee be personally liable to the Group or its
shareholders except by reason of his own bad faith, willful misfeasance,
gross negligence in the performance of his duties or reckless disregard of
his obligations and duties. With these exceptions, the Declaration of
Trust provides that a Trustee or officer of the Group is entitled to be
indemnified against all liabilities and expenses, including reasonable
accountants' and counsel fees, incurred by the Trustee or officer in
connection with the defense or disposition of any proceeding in which he
may be involved or with which he may be threatened by reason of his being
or having been a Trustee or officer.
CLASS B SHARES
The Board of Trustees of the Group has adopted a Multiple Class Plan in
accordance with Rule 18f-3 under the 1940 Act in order to establish two
series of shares. The Plan provides that Class A and Class B shares will
be identical in all respects except as follows: (a) the designation of
each class of shares of a Fund; (b) the exclusive right of Class B shares
to vote on matters related to the Shareholder Service Plan; (c) the impact
of the disproportionate payments made under the Plan; (d) the incremental
transfer agency costs attributable to a class b of shares ; (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.
VOTING
Shareholders of the Funds and any other series of the Group will vote in
the aggregate and not by series or class except as otherwise required by
law or when the Board of Trustees determines that the matter to be voted
upon affects only the interests of the shareholders of a particular series
or class of shares. Pursuant to Rule 18f-2 under the 1940 Act, the
approval of an investment advisory agreement or any change in a fundamental
policy would be acted upon separately by the series affected. Matters such
as ratification of the independent public accountants and election of
Trustees are not subject to separate voting requirements and may be acted
upon by shareholders of the Group voting without regard to series or class.
CUSTODIAN
The First National Bank of Chicago serves as Custodian for the assets of
the Funds. The Custodian's address is One First National Plaza, Chicago,
Illinois 60670. Under its Custodian Agreement with the Group, the
Custodian has agreed among other things to maintain a separate account in
the name of each Fund; hold and disburse portfolio securities and other
assets on behalf of the Funds; collect and make disbursements of money on
behalf of the Funds; and receive all income and other payments and
distributions on account of each Fund's portfolio securities.
Pursuant to rules adopted under the 1940 Act, the Funds may maintain
foreign securities and cash in the custody of certain eligible foreign
banks and securities depositories. Selection of these foreign custodial
institutions is made by the Board of Trustees following a consideration of
a number of factors, including (but not limited to) the reliability and
financial stability of the institution; the ability of the institution to
perform capably custodial services for the Funds; the reputation of the
institution in its national market; the political and economic stability of
the country in which the institution is located; and risks of
nationalization or expropriation of Fund assets. The Board of Trustees
reviews annually the continuance of foreign custodial arrangements for the
Funds. No assurance can be given that the Trustees' appraisal of the risks
in connection with foreign custodial arrangements will always be correct or
that expropriation, nationalization, freezes, or confiscation of assets
that would impact assets of the Portfolio will not occur, and shareholders
bear the risk of losses arising from these or other events.
INDEPENDENT AUDITORS
Deloitte & Touche LLP serves as the independent auditors for the Funds.
Deloitte & Touche provides audit and tax return preparation services to the
Group. The independent auditors' address is 1700 Courthouse Plaza
Northeast, Dayton, Ohio 45402-1788.
COUNSEL
Paul, Hastings, Janofsky & Walker pass upon certain legal matters in
connection with the shares offered by the Group, and also act as Counsel to
the Group. Counsel's address is 555 South Flower Street, Los Angeles,
California 90071. Paul, Hastings, Janofsky & Walker also acts as counsel
to the Adviser and the Distributor.
LICENSE AGREEMENT
The Adviser has entered into a non-exclusive License Agreement with the
Group which permits the Group to use the name "Payden & Rygel". The
Adviser has the right to require the Group to cease using the name at such
time as the Adviser is no longer employed as investment manager to the
Group.
FINANCIAL STATEMENTS
The Funds' 1996 Semi-Annual Report to Shareholders and 1995 Annual Report
to Shareholders accompany this Statement of Additional Information. The
financial statements in such Semi-Annual Report and Annual Report are
incorporated in this Statement of Additional Information by reference. The
Semi-Annual Report has been prepared by the Group and is unaudited. The
financial statements in the 1995 Annual Report to Shareholders have been
audited by the Fund's independent auditors, Deloitte & Touche LLP, whose
report thereon also appears in such Annual Report and is incorporated
herein by reference. Such financial statements have been incorporated
herein in reliance upon such reports given upon their authority as experts
in accounting and auditing. Additional copies of the Funds' 1996 Semi-
Annual Report to Shareholders and 1995 Annual Report to Shareholders may be
obtained at no charge by writing or telephoning the Group at the address or
number on the front page of this Statement of Additional Information.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not contain
all the information included in the Group's registration statement filed
with the Securities and Exchange Commission under the Securities Act of
1933 with respect to the securities offered hereby, certain portions of
which have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The registration statement, including
the exhibits filed therewith, may be examined at the offices of the
Securities and Exchange Commission in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents referred to are not necessarily complete, and,
in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference.
APPENDIX A
DESCRIPTION OF RATINGS
The following paragraphs summarize the descriptions for the ratings
referred to in the Prospectus and Statement of Additional Information.
Moody's Investors Service, Inc.
The purpose of Moody's ratings is to provide investors with a single system
of gradation by which the relative investment qualities of bonds may be
rated.
Bonds
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge". Interest payments are protected by a large or
by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements, may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa: Bonds rated Baa are considered as medium grade obligations.
They are neither highly protected nor poorly secured. Interest payments
and security appear adequate for the present but certain protective
elements may appear lacking or unreliable.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often, the protection
of interest and principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this asset class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small.
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.
BB and B: Bonds rated BB and B are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. While such
bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
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.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified,
which could assist in the obligor satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
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.
