<PAGE> 1
As filed with the Securities and Exchange Commission on
April 14, 1997
Securities Act File No. 33-46973
Investment Company Act File No. 811-6625
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M N-1A
Registration Statement Under the Securities Act of 1933 [X]
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. 28 [X]
and
Registration Statement Under the Investment Company Act of 1940
Amendment No. 31 [X]
____________________________________
THE PAYDEN & RYGEL INVESTMENT GROUP
(formerly P & R Investment Trust)
(Exact Name of Registrant as Specified in Charter)
333 South Grand Avenue, 32nd Floor
Los Angeles, California 90071
(Address of Principal Executive Offices)
(213) 625-1900
(Registrant's Telephone Number, Including Area Code)
JOAN A. PAYDEN
333 South Grand Avenue, 32nd Floor
Los Angeles, California 90071
(213) 625-1900
(Name and Address of Agent for Service)
Copy to: Michael Glazer
Paul, Hastings, Janofsky & Walker
555 S. Flower St., Los Angeles, California 90071
____________________
Approximate Date of Proposed Public Offering:
As soon as practicable following effective date.
____________________
It is proposed that this filing will become effective:
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
----------
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (b)
----------
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii), of Rule 485.
----------
[ ] This post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has
registered under the Securities Act of 1933 an indefinite number of shares of
beneficial interest. Registrant filed a Notice under such Rule for its fiscal
year ended October 31, 1996 on December 31, 1996.
<PAGE> 2
THE PAYDEN & RYGEL INVESTMENT GROUP
CROSS REFERENCE SHEET
FORM N-1A
<TABLE>
<CAPTION>
N-1A Location in
Item No. Item Registration Statement
- -------- ---- ----------------------
Part A: Information Required in Prospectus
-------------------------------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis Funds in Review
3. Condensed Financial Financial Highlights
Information
4. General Description Investment Objectives
of Registrant and Policies; Dividends, Distributions and Taxes
5. Management of Management of the
the Fund Funds
5A. Management's Discussion Contained in Registrant's
of Fund Performance annual report
6. Capital Stock and How to Purchase Shares;
Other Securities Dividends, Distributions and Taxes; Shareholder Services
7. Purchase of Securities How to Purchase Shares;
Being Offered Management of the Funds;
Net Asset Value
8. Redemption or Redemption of Shares
Repurchase
9. Pending Legal Not Applicable
Proceedings
</TABLE>
-i-
<PAGE> 3
Part B: Information Required in
Statement of Additional Information
<TABLE>
<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents Cover Page
12. General Information Not Applicable
and History
13. Investment Objectives Investment Objectives
and Policies and Policies; Fundamental
and Operating Policies
14. Management of the Management of the Group
Registrant
15. Control Persons and Management of the Group
Principal Holders of
Securities
16. Investment Advisory Management of the Group:
and Other Services Other Information
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Other Information
Other Securities
19. Purchase, Redemption Purchases and Redemptions
and Pricing of Securities
Being Offered
20. Tax Status Taxation
21. Underwriters Management of the Group
22. Calculation of Fund Performance
Performance Data
23. Financial Statements Other Information
</TABLE>
Part C: Other Information
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
-ii-
<PAGE> 4
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
APRIL 14, 1997
[GRAPHIC OMITTED]
<PAGE> 5
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Funds in Review........................................................1
Expense Information ...................................................4
Financial Highlights...................................................7
Net Asset Value.......................................................24
Dividends, Distributions and Taxes....................................24
Investment Objectives and Policies ...................................26
Investment Practices..................................................37
Management of the Funds...............................................52
Shareholder Services..................................................56
Redemption of Shares..................................................59
How to Purchase Shares................................................60
</TABLE>
<PAGE> 6
PAYDEN & RYGEL INVESTMENT GROUP
333 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90071
(800) 5-PAYDEN
(213) 625-1900
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 $22
billion.
A Statement of Additional Information, dated April 14, 1997, 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 April 14, 1997.
<PAGE> 7
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 26. Pages 56-62 have
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.
1
<PAGE> 8
The INVESTMENT QUALITY BOND FUND invests in the same types 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
2
<PAGE> 9
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 ten 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 Tax Exempt 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 and International Equity Funds invest, and the Global
Balanced Fund may 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
3
<PAGE> 10
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. In general, the minimum
initial investment is $5,000, and the minimum additional investment is $1,000.
Tax-sheltered Retirement Plans and the Automated Investment Programs require
different minimum investments. See "Shareholder Services" and "How to Purchase
Shares." 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
(For Class A Shares, as a percentage of average net assets for the fiscal year
ended October 31, 1996. For Class B Shares, as an estimated percentage of
average net assets for the fiscal year ended October 31, 1997. Except as
otherwise indicated, after reimbursement of Advisory fees and Other expenses.)
<TABLE>
<CAPTION>
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 0.28% 0.17% 0.45% 0.28% 0.42% 0.70%
Fund**
Total Return Fund** 0.28% 0.17% 0.45% 0.28% 0.42% 0.70%
TAX EXEMPT FUNDS
- ----------------
Short Duration Tax Exempt 0.32% 0.13% 0.45% 0.32% 0.38% 0.70%
Fund
</TABLE>
4
<PAGE> 11
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
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% 0.30% 0.55% 0.85%
Market Return Fund** 0.28% 0.17% 0.45% 0.28% 0.42% 0.70%
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 voluntarily agreed to waive 0.20% of its advisory fee for the
Growth & Income Fund through at least October 31, 1997. In addition, the Adviser
has guaranteed that, for so long as it acts as investment adviser to a Fund, the
total 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.
<TABLE>
<CAPTION>
FUND EXPENSE LIMITS
- -------------------
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 Fund 0.60% 0.45% 0.85% 0.70%
Total Return Fund 0.60% 0.45% 0.85% 0.70%
TAX EXEMPT FUNDS
- ----------------
Short Duration Tax Exempt Fund 0.60% 0.45% 0.85% 0.70%
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%
</TABLE>
5
<PAGE> 12
<TABLE>
<CAPTION>
GLOBAL FUNDS
- ------------
<S> <C> <C> <C> <C>
Global Short Bond Fund 0.70% 0.45% 0.95% 0.70%
Global Fixed Income Fund 0.70% 0.95%
International Bond Fund 0.70% 0.95%
Global Balanced Fund 0.85% 0.70% 1.10% 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 daily
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>
<CAPTION>
CLASS A SHARES CLASS B SHARES
============================== =============================
FIXED INCOME FUNDS 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------ ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Limited Maturity Fund $3 $11 $17 $38 $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 $5 $15 $25 $57 $7 $23 $40 $89
Fund
Total Return Fund $5 $15 $25 $57 $7 $23 $40 $89
TAX EXEMPT FUNDS
- ----------------
Short Duration Tax Exempt $5 $15 $25 $57 $7 $23 $40 $89
Fund
Tax Exempt Bond Fund $5 $15 $25 $57 $7 $23 $40 $89
EQUITY FUNDS
- ------------
Growth & Income Fund $6 $19 $9 $27
</TABLE>
6
<PAGE> 13
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Market Return Fund $5 $15 $25 $57 $7 $23
GLOBAL FUNDS
- ------------
Global Short Bond Fund $5 $15 $7 $23
Global Fixed Income Fund $5 $17 $30 $67 $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.
The information set forth in these tables as of February 28, 1997, is unaudited.
Such information should be read in conjunction with the Funds' financial
statements and notes thereto, which appear in Appendix B to the Statement of
Additional Information. The remainder of 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. Such information should be read in conjunction with the Funds'
financial statements and notes thereto, which appear in the 1996 Annual Report
to Shareholders incorporated by reference in the Statement of Additional
Information. Class B Shares were not sold during the periods.
7
<PAGE> 14
PAYDEN & RYGEL
LIMITED MATURITY FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED YEAR ENDED ENDED
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)
(a) The Fund commenced operations on May 1, 1994.
(b) Not annualized
(c) Annualized
</TABLE>
8
<PAGE> 15
PAYDEN & RYGEL
SHORT BOND FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED YEAR ENDED ENDED
OCTOBER 31, OCTOBER 31, 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)
(a) The Fund commenced operations on January 1, 1994.
(b) Not annualized
(c) Annualized
</TABLE>
9
<PAGE> 16
PAYDEN & RYGEL
U.S. TREASURY FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, PERIOD ENDED
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)
(a) The Fund commenced operations on January 1, 1995.
(b) Not annualized
(c) Annualized
</TABLE>
10
<PAGE> 17
PAYDEN & RYGEL
INTERMEDIATE BOND FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED YEAR ENDED ENDED
OCTOBER 31, OCTOBER 31, 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)
(a) The Fund commenced operations on January 1, 1994.
(b) Not annualized
(c) Annualized
</TABLE>
11
<PAGE> 18
PAYDEN & RYGEL
INVESTMENT QUALITY BOND FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED YEAR ENDED ENDED
OCTOBER 31, OCTOBER 31, 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)
(a) The Fund commenced operations on January 1, 1994.
(b) Not annualized
(c) Annualized
</TABLE>
12
<PAGE> 19
PAYDEN & RYGEL
TOTAL RETURN FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1997 (A)
<S> <C>
Net asset value, beginning of period $10.00
Income (loss) from investment activities:
Net investment income 0.13
Net realized and unrealized gains (losses) (0.10)
Total from investment activities 0.03
Distributions to shareholders:
From net investment income (0.10)
Total distributions to shareholders (0.10)
Net asset value, end of period $9.93
=====
Total return 0.31% (b)
Ratios/supplemental data:
Net assets at end of period (000) $9,082
Ratio of expenses to average net assets 0.45% (c)
Ratio of net investment income to average net assets 5.96% (c)
Ratio of expenses to average net assets prior to subsidies 1.62% (c)
Ratio of net investment income to average net assets prior
to subsidies 4.79% (c)
Portfolio turnover rate 304.54% (c)
(a) The Fund commenced operations on December 9, 1996.
(b) Not annualized
(c) Annualized
</TABLE>
13
<PAGE> 20
PAYDEN & RYGEL
SHORT DURATION TAX EXEMPT FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED YEAR ENDED ENDED
OCTOBER 31, OCTOBER 31, 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)
(a) The Fund commenced operations on September 1, 1994.
(b) Not annualized
(c) Annualized
</TABLE>
14
<PAGE> 21
PAYDEN & RYGEL
TAX EXEMPT BOND FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED YEAR ENDED ENDED
OCTOBER 31, OCTOBER 31, 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)
(a) The Fund commenced operations on December 21, 1993.
(b) Not annualized
(c) Annualized
</TABLE>
15
<PAGE> 22
PAYDEN & RYGEL
GROWTH & INCOME FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1997 (A)
--------
<S> <C>
Net asset value, beginning of period $10.00
Income (loss) from investment activities:
Net investment income 0.06
Net realized and unrealized gains (losses) 1.27
Total from investment activities 1.33
Distributions to shareholders:
From net investment income (0.03)
Total distributions to shareholders (0.03)
Net asset value, end of period $11.30
======
Total return 13.31% (b)
Ratios/supplemental data:
Net assets at end of period (000) $36,603
Ratio of expenses to average net assets 0.54% (c)
Ratio of net investment income to average net assets 2.26% (c)
Ratio of expenses to average net assets prior to subsidies 1.04% (c)
Ratio of net investment income to average net assets prior
to subsidies 1.76% (c)
Portfolio turnover rate 4.51% (c)
(a) The Fund commenced operations on November 1, 1996.
(b) Not annualized
(c) Annualized
</TABLE>
16
<PAGE> 23
PAYDEN & RYGEL
MARKET RETURN FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD ENDED
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)
(a) The Fund commenced operations on December 1, 1995
(b) Not annualized
(c) Annualized
</TABLE>
17
<PAGE> 24
PAYDEN & RYGEL
GLOBAL SHORT BOND FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28, PERIOD ENDED
1997 OCTOBER 31, 1996 (A)
------------ --------------------
<S> <C> <C>
Net asset value, beginning of period $10.07 $10.00
------
Income (loss) from investment activities:
Net investment income 0.39 0.05
Net realized and unrealized gains (losses) (0.16) 0.06
----
Total from investment activities 0.23 0.11
----
Distributions to shareholders:
From net investment income (0.17) (0.04)
------
Total distributions to shareholders (0.17) (0.04)
------
Net asset value, end of period $10.13 $10.07
====== ======
Total return 2.33% (b) 1.10% (b)
Ratios/supplemental data:
Net assets at end of period (000) $ 92,240 $28,913
Ratio of expenses to average net assets 0.45% (c) 0.45% (c)
Ratio of net investment income to average net assets 4.99% (c) 4.86% (c)
Ratio of expenses to average net assets prior to subsidies 0.60% (c) 2.31% (c)
Ratio of net investment income to average net assets prior
to subsidies 4.84% (c) 3.00% (c)
Portfolio turnover rate 178.66% (c) 0.00% (c)
(a) The Fund commenced operations on September 18, 1996.
(b) Not annualized
(c) Annualized
</TABLE>
18
<PAGE> 25
PAYDEN & RYGEL
GLOBAL FIXED INCOME FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
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%
(b) Not annualized
(c) Annualized
</TABLE>
19
<PAGE> 26
PAYDEN & RYGEL
GLOBAL FIXED INCOME FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED ENDED
OCTOBER 31, 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)
(a) The Fund commenced operations on September 1, 1992.
(b) Not annualized
(c) Annualized
</TABLE>
20
<PAGE> 27
PAYDEN & RYGEL
INTERNATIONAL BOND FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED ENDED
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)
(a) The Fund commenced operations on April 1, 1995.
(b) Not annualized
(c) Annualized
</TABLE>
21
<PAGE> 28
PAYDEN & RYGEL
GLOBAL BALANCED FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1997 (A)
--------
<S> <C>
Net asset value, beginning of period $10.00
Income (loss) from investment activities:
Net investment income 0.01
Net realized and unrealized gains (losses) 0.02
Total from investment activities 0.03
Distributions to shareholders:
From net investment income (0.01)
Total distributions to shareholders (0.01)
Net asset value, end of period $10.02
======
Total return 0.32% (b)
Ratios/supplemental data:
Net assets at end of period (000) $8,362
Ratio of expenses to average net assets 0.70% (c)
Ratio of net investment income to average net assets 3.09% (c)
Ratio of expenses to average net assets prior to subsidies 2.22% (c)
Ratio of net investment income to average net assets prior
to subsidies 1.57% (c)
Portfolio turnover rate 89.36% (c)
(a) The Fund commenced operations on December 9, 1996.
(b) Not annualized
(c) Annualized
</TABLE>
22
<PAGE> 29
PAYDEN & RYGEL
INTERNATIONAL EQUITY FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 28,
1997 (A)
--------
<S> <C>
Net asset value, beginning of period $10.00
Income (loss) from investment activities:
Net investment income 0.01
Net realized and unrealized gains (losses) 0.22
Total from investment activities 0.23
Distributions to shareholders:
From net investment income (0.01)
Total distributions to shareholders (0.01)
Net asset value, end of period $10.22
======
Total return 2.28% (b)
Ratios/supplemental data:
Net assets at end of period (000) $7,629
Ratio of expenses to average net assets 0.90% (c)
Ratio of net investment income to average net assets 0.40% (c)
Ratio of expenses to average net assets prior to subsidies 2.26% (c)
Ratio of net investment income to average net assets prior
to subsidies -0.96% (c)
Portfolio turnover rate 30.65% (c)
(a) The Fund commenced operations on December 9, 1996.
(b) Not annualized
(c) Annualized
</TABLE>
23
<PAGE> 30
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. Eastern 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.
24
<PAGE> 31
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
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.
25
<PAGE> 32
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 April 10,
1997, Tessera, Inc. held 30% of the outstanding shares of the Limited Maturity
Fund; Fluor Master Retirement Trust held 33% of the outstanding shares of the
Total Return Fund; Scottish Widows Investment Management held 26% of the
outstanding shares of the International Equity Fund; Lon V. Smith Foundation
held 32% of the outstanding shares of the Global Balanced Fund; and the Consuelo
Zobel Alger Foundation held 67% 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
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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.
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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
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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 have greater vulnerability
to default than higher-rated securities, but currently have 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.
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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 in common stocks known as the "Dow
Dogs" as described below (the "Dow Dogs Portfolio"). During each month, the
common stocks purchased by the Fund for the Dow Dogs Portfolio will be comprised
of the ten common stocks included in the Dow Jones Industrial Average1 which had
the highest dividend rates (as a percentage of their market price) as of the end
of the preceding month. Under normal market conditions, the Fund will hold for
approximately one year all common stocks purchased for the Dow Dogs Portfolio
during a month, including common stocks that may no longer be among the Dow
Dogs, except to the extent that stocks must be sold to satisfy redemption
requests or to rebalance the Fund as described below.
- --------
1 "Dow Jones Industrial Average" is a trademark of Dow Jones & Company, Inc.
("Dow Jones"). Neither the Fund nor the Adviser is affiliated with, nor is the
Fund sponsored by, Dow Jones. Dow Jones has not participated in any way in the
creation of the Fund or in the selection of the stocks included in the Fund, nor
has Dow Jones reviewed or approved any information included in this Prospectus.
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Each month, the Adviser will rebalance a portion of the Fund's investments.
Stocks in the Dow Dogs Portfolio which were purchased approximately one year
earlier and which are no longer among the Dow Dogs will be sold. Additional
stocks in the Dow Dogs Portfolio may be sold and reinvested in other assets (or
a portion of the remaining assets of the Fund may be sold and reinvested in Dow
Dogs) so that, under normal market conditions after the entire rebalancing
process is completed, approximately 50% of the rebalanced Fund assets will
consist of the Dow Dogs Portfolio (approximately 5% per common stock). The
balance of the Fund's 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
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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 500 Index futures contracts are priced, the Fund will theoretically
outperform the S&P 500 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
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an amount which, when added to the amount held as initial margin, equals the
aggregate amount of the Fund's obligations under its long futures contract
positions. 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 of an investor's return
expected to be earned by the Market Return Fund will be income 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.
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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
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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 that are included in the Morgan Stanley Capital International World
Index ("MSCI"), which include Europe, Canada, Australia, New Zealand and the Far
East. 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 that are not in the MSCI. These countries 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.
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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 purchase and sell 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
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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.
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<PAGE> 44
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.
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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
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<PAGE> 46
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 Global Fixed Income, Global Short Bond, Global Balanced, Total Return and
International Bond Funds may invest in securities payable in a foreign currency.
These Funds are restricted to investment in non-U.S. dollar obligations rated at
least AA at the time of purchase by at least one of the rating agencies.
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,
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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 person, or a 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.
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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 March, 1997 of 1.1 million 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
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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 sell covered put and
call options on securities and securities indexes, interest rate, foreign
currency and index futures contracts (agreements to take or make delivery of a
specified quantity of financial instruments at a specified price and date), and
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 such investments.
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.
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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 summarizes the types of futures and options transactions in
which the Funds may engage:
<TABLE>
<CAPTION>
TYPES OF CONTRACTS
===================================
OTHER
INTEREST SECURITY STOCK
RATE INDICES INDEX CURRENCY SECURITIES
---- ------- ----- -------- ----------
<S> <C> <C> <C> <C> <C>
Fixed Income Funds Yes Yes No No Yes
(except Total Return)
Tax Exempt Funds Yes Yes No No Yes
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 Short Yes Yes No Yes Yes
Bond, International Bond Funds
Global Balanced Fund Yes Yes Yes Yes Yes
International Equity Fund No Yes Yes Yes Yes
</TABLE>
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 liquid assets having
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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.
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 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 liquid assets having an aggregate net asset value at least
equal to the accrued excess is maintained in a segregated account by the Fund'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.
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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 Investment Company Act of 1940,
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
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"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, or may invest, primarily in debt obligations. Because of its
investment policies, each such
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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.
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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, Total Return,
Global Balanced and International Bond Funds will, when deemed appropriate by
the Adviser, hedge this currency exposure in order to protect the Fund's 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, Total Return, 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
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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, Total Return, 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, Total Return 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. To the extent that a Fund enters into
futures contracts, options on futures contracts or options on foreign
currencies, in each case other than for bona fide hedging purposes (as defined
by the Commodity Futures Trading Commission), the aggregate initial margin and
premiums required to establish those positions (excluding the amount by which
options are "in-the-money") will not exceed 5% of the liquidation value of the
Fund's portfolio, after taking into account unrealized profits and unrealized
losses on any contracts the Fund has entered into. Each Fund covers its
obligations with respect to such futures contracts and options by
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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
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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 $22 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 within the broad investment parameters established by the Adviser's
Global Investment Policy Committee. These teams are supervised by the Executive
Committee of the Global Investment Policy
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Committee, comprised of John Isaacson, Scott King and Christopher Orndorff.
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.
Christopher Orndorff is a Vice President and head of Global Asset Allocation at
Payden & Rygel. He joined the company in 1990 and has 13 years of experience in
the investment business. Mr. Isaacson, Mr. King and Mr. Orndorff are responsible
for defining the broad investment parameters of the Funds, including the types
of strategies to be employed and the 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%;
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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
("Scottish Widows"), 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 $39 billion as of
December 31, 1996. 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 its experience in continental European equities dates back to the
mid-1970's. Investment decisions are made by an account management team headed
by Kenneth A. Anderson. Mr. Anderson joined Scottish Widows in 1988 and has
managed a variety of international equity portfolios. 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 each Fund by
other persons.
Investors Fiduciary Trust Company ("IFTC"), a Missouri trust company located at
127 West 10th Street, Kansas City, Missouri, 64105, provides accounting,
dividend disbursing and transfer agency services to each Fund pursuant to fund
accounting and transfer agency contracts with the Group.
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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 daily 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
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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, 403(b) and 401(k) plans. Please call a Fund
Representative to receive a retirement package which includes a special
application for tax-sheltered accounts. The Group currently waives the Fiduciary
Administration Fees charged by IFTC associated with such plans.
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. The minimum amount for any
exchange is $1,000.
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.
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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). Finally, shareholders may
participate in the Automatic Exchange Plan to automatically redeem a fixed
amount from one Fund for investment in another Fund on a regular basis. See
"Automated Investment Programs."
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. If a shareholder calls before 1:00
p.m. (Pacific Time), the exchange or redemption will be at the net asset value
determined that day; if a shareholder calls after 1:00 p.m. (Pacific Time), the
exchange or redemption will be at the net asset value determined on the next
business day. 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
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 the 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
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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 with 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.
AUTOMATED INVESTMENT PROGRAMS
Shareholders may take advantage of two programs which permit automated
investments in the Group's Funds.
ELECTRONIC INVESTMENT PLAN
If authorized by the shareholder, additional investments in any Fund may be made
using the Automated Clearing House System ("ACH") which transfers money directly
from the shareholder's bank account to the Fund for investment. Initial
investments in any Fund may not be made by ACH. The ACH is an electronic money
transfer system that is used throughout the United States. It is easy,
convenient, inexpensive and avoids the potential of theft of checks from the
postal system. It is used by many employers to pay salaries and is also used by
the United States Government to send social security payments directly into
retiree accounts.
Two investment options may be chosen. First, the shareholder may elect to make
investments on a set schedule either monthly or quarterly. Under this option,
the shareholder's financial institution will deduct an amount authorized by the
shareholder which will normally by credited to the Fund on the 15th day of the
month (or next business day if the 15th is a holiday or on a weekend). The
shareholder's bank account will typically be debited the prior business day,
although this varies with each financial institution. The minimum initial
investment, which may be made by check or wire, is $2,500, with additional
investments by ACH of no less than $250.
Under the second option, the shareholder may also elect to authorize ACH
transfers via telephone request. Money will be withdrawn from the shareholder's
account only when authorized by the shareholder. There will be no set schedule
of withdrawals from the shareholder's account. Additionally, the investor may
vary the amount of the investment. Under this option, the minimum initial
investment is $5,000, with additional investments by ACH no less than $1,000.
Due to operational considerations, for telephonic requests received prior to
12:30 p.m. (Pacific Time), the investment will be at the net asset value
determined on the next business day. For telephonic requests received after
12:30 p.m. (Pacific Time), the investment will be at the net asset value
determined on the second business day following receipt of the call.
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Please note the following guidelines:
- - The shareholder's financial institution must be a member of the Automated
Clearing House System.
- - The shareholder must complete and return an Automated Investment Program
form along with a voided check or deposit slip at least 15 days prior to
the initial transaction.
- - An account with the Group must be established before the Electronic
Investment Plan goes into effect.
- - The Electronic Investment Plan will automatically terminate if all shares
are redeemed.
- - Termination must be in writing and will become effective the month
following receipt.
AUTOMATIC EXCHANGE PLAN
Shareholders may participate in the Automatic Exchange Plan to automatically
redeem a fixed amount from one Fund for investment in another Fund on a regular
basis. The shareholder elects this option by completing an Automated Investment
Programs form to determine the periodic schedule (monthly or quarterly) and
exchange amount (minimum amount of $1,000) and to identify the Fund in which the
investment is to be made. The automatic transfer is effected on the 15th day (or
the next business day if the 15th is a holiday or on a weekend) of the month.
SHAREHOLDER INQUIRIES
Shareholders with inquires concerning any of the Group's Funds may call the
Group at (213) 625-1900, or (800) 5-PAYDEN, or write to Payden & Rygel
Investment Group, 333 South Grand Avenue, Los Angeles, CA 90071.
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
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<PAGE> 66
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.
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 and additional investment levels per Fund are as set forth
below. An account may only be opened by completing an application and mailing it
to the appropriate address below under "Initial Investment." Shares cannot be
purchased until a properly completed application is received by the Group. If
you wish to open a tax-sheltered retirement plan (such as an IRA) or invest
under the Automated Investment Programs, special application forms 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
P.O. Box 419318
Kansas City, MO 64141-6318
BY FEDERAL FUNDS WIRE
- - Complete application and mail to:
Payden & Rygel Investment Group
P.O. Box 419318
Kansas City, MO 64141-6318
- - WIRE FUNDS AS FOLLOWS WHEN APPLICATION HAS BEEN PROCESSED:
The Boston Safe Deposit and Trust Company
ABA 011001234
A/C #115762
Mutual Funds #6630
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Credit to (name of Payden & Rygel Fund here) For Account of
(insert your account name here)
Please call the Group, at (213) 625-1900 or (800) 5-PAYDEN, to
advise of any purchases by wire.
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. The minimum
investment amount may be waived from time to time by the Distributor.
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.
MINIMUM INVESTMENTS
The minimum initial and additional investments per Fund for each type of account
are as follows:
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
ACCOUNT TYPE INVESTMENT INVESTMENT
------------ ---------- ----------
<S> <C> <C>
Regular $5,000 $1,000
Tax-Sheltered $2,000 $1,000
Electronic Investment Plan
Set schedule $2,500 $ 250
No set schedule $5,000 $1,000
</TABLE>
ADDITIONAL INVESTMENTS
Additional investments may be made at any time at net asset value by check, by
ACH, 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
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<PAGE> 68
shares if information provided in the client application proves to be incorrect
in any material manner.
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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
April 14, 1997
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<PAGE> 70
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
APRIL 14, 1997
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 April 14, 1997, 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).
<PAGE> 71
<TABLE>
TABLE OF CONTENTS
-----------------
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES.....................................1
FUNDAMENTAL AND OPERATING POLICIES....................................29
PORTFOLIO TRANSACTIONS................................................32
VALUATION OF PORTFOLIO SECURITIES.....................................33
FUND PERFORMANCE......................................................34
TAXATION..............................................................37
MANAGEMENT OF THE GROUP...............................................42
PURCHASES AND REDEMPTIONS.............................................48
OTHER INFORMATION.....................................................49
APPENDIX A - DESCRIPTION OF RATINGS ..................................55
APPENDIX B - FINANCIAL STATEMENTS.....................................60
</TABLE>
<PAGE> 72
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives 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
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<PAGE> 73
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
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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
3
<PAGE> 75
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-
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<PAGE> 76
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.
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<PAGE> 77
ASSET BACKED RECEIVABLES
The Funds may purchase asset-backed securities including, but not limited to,
Certificates for Automobile Receivables ("CARSsm") and credit card receivable
securities. CARSsm represent undivided fractional interests in a trust with
assets consisting of a pool of motor vehicle retail installment sales contracts
and security interests in the vehicles securing these contracts. In addition to
the general risks pertaining to all asset-backed securities, CARSsm are subject
to the risks of delayed payments or losses if the full amounts due on underlying
sales contracts are not realized by the trust due to unanticipated legal or
administrative costs of enforcing the contracts, or due to depreciation, damage
or loss of the vehicles securing the contracts. Credit card receivable
securities are backed by receivables from revolving credit card accounts. Since
balances on revolving credit card accounts are generally paid down more rapidly
than CARSsm, issuers often lengthen the maturity of these securities by
providing for a fixed period during which interest payments are passed through
and principal payments are used to fund the transfer of additional receivables
to the underlying pool. The failure of the underlying receivables to generate
principal payments may therefore shorten the maturity of these securities. In
addition, unlike most other asset-backed securities, credit card receivable
securities are backed by obligations that are not secured by interests in
personal or real property. 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
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<PAGE> 78
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.
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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 elect not to invest in all the
countries listed, and it may invest in other countries as well when such
investments are consistent with the Fund's investment objective and policies.
<TABLE>
<CAPTION>
Pacific Basin Western Europe North America
- ------------- -------------- -------------
<S> <C> <C>
Australia Austria Canada
Japan Belgium United States
New Zealand Denmark
Finland
France
Germany
Ireland
Italy
Netherlands
Norway
Spain
Sweden
Switzerland
United Kingdom
</TABLE>
The International Equity Fund may invest as much as 20% of total assets in
countries whose long-term
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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.
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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:
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- 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
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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.
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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
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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
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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.
The positive news on the employment front is that California has regained all of
the jobs lost in the past few years. Downsizing in defense-related jobs is
ending while strong growth has occurred business services, motion pictures and
television, entertainment and international trade. While the current 6.8%
unemployment rate remains above the national average of 5.2%, the jobless rate
is at the lowest level since mid-1990. The jobless rate is higher than the
national average primarily due to labor force expansion from net in-migration
last year.
Because of the economy's strength, tax revenues are running ahead of
expectations. In the first three months of fiscal 1997, the state collected $400
million more than the budget projection. Despite the fiscal 1996 operating
surplus, California's General Fund reserve is minimal at $300 million. It
represents only 0.6% of the state's $47 billion General Fund budget for fiscal
1997.
The reserve is expected to remain thin. California's long-term structural budget
problems include expanding education and prison spending, demands for
infrastructure spending and reductions in federal support for healthcare. K-14
spending requirements, the largest single expenditure in the budget, are
expected to increase 9.3% annually over the next two years. Justice/correctional
spending is estimated to grow 5.4% annually over this same time period, even
though the inmate population has not grown as fast as previously estimated.
The anticipated decline in State spending on welfare in the next two years
reflects fewer caseloads because of improved economic conditions. The full
impact of the new federal welfare reform on California is not yet known at this
time. Based on its current caseload, California expects to receive $1.4 billion
more federal funds under the new "Temporary Assistance for Needy Families"
(TANF) than under the existing "Aid to Families with Dependent Children" (AFDC)
over the next six years. However, this projection does not assume any recession
scenario and the resulting higher number of welfare applicants. History has
shown that welfare caseloads can increase as much as ten percent during a
recession. Therefore, the extra $1.4 billion may very well be absorbed by an
increased caseload in the event of a recession.
Finally, as a means of restoring California's competitiveness, the State granted
a 5% corporate income tax reduction, beginning in January 1997. In the next two
years, the legislation analyst's office projects that revenues will be reduced
by $375 million.
Although California's financial reserve is weak, its net tax-supported debt
level at 2.8% is only moderately higher than the national median at 2.1%.
Further, the State reduced its use of short-term debt financing to the lowest
level in years. In the 1996-1997 budget, debt financing only included the
issuance of $3 billion revenue anticipation notes, which was a significant
improvement from the $7 billion outstanding short-term debt in prior years.
The improvement in California's economy led S&P to upgrade the State's general
obligation credit one notch to A+ in September 1996, and Fitch had raised its
rating to A+ in February 1996. Moody's has maintained its A1 rating. The State
needs to show progress in correcting its structural budget imbalances before a
double-A rating is likely.
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One of the issues concerning the financial strength of local governments in
California is that the State has shifted some expenditure responsibilities to
local governments in order to balance its budget, which could impact these other
entities negatively. Counties, in particular, are vulnerable because they are
responsible for large health, welfare and correctional programs and must fund a
large portion of these programs themselves.
Los Angeles County, the nation's largest county, is a prime example of this
financial difficulty. The County has struggled with severe budget deficits for
four years due to the 1990 recession, revenue diversions by the State and the
lack of adequate funding for health care. These factors were compounded by the
County's inability to make substantial changes in their expenditures and its
reliance on debt financings. The County's budget has stabilized over the past
year, but much remains to be done. In Los Angeles, the economic recovery has a
positive effect on expenditures because there are fewer welfare caseloads, but
the primary source of tax receipts, property taxes, has lagged because of
continued weakness in the real estate market.
A number of voter initiatives to limit taxes may reduce the financial
flexibility of both state and local governments. 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.
Yet another shadow was cast on municipal debt in California with the passage of
Proposition 218 in the November 1996 election. This new measure makes it more
difficult for local governments to raise revenues by 1) restricting local
governments' ability to charge property-related fees, 2) limiting special
assessments, which are placed on property tax bills, 3) requiring a majority
vote approval for general tax increases and a two-thirds approval for special
tax increases and 4) mandating that all new or increased local taxes implemented
since January 1995 must be approved by a majority vote. Not only does
Proposition 218 have the potential to reduce revenues to local governments, but
will also increase their costs to comply with the measure. Local government
general funds may be impaired over time. One important fact for bondholders is
that all taxes, assessments, rates and fees levied before the November 6
effective date are exempted from the provisions of the proposition due to the
U.S. Constitution's protection of contracts.
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.
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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 of 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
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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
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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
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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,
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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
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("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.
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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
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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
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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
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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
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<PAGE> 98
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.
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<PAGE> 99
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.
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<PAGE> 100
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).
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<PAGE> 101
(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.
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<PAGE> 102
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) The Treasury Fund will not borrow amounts exceeding 33% of total assets
valued at market (including reverse repurchase agreements and delayed delivery
transactions).
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<PAGE> 103
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 and Sub-Adviser each place all orders for the purchase and sale of
portfolio securities, options and futures contracts for the Funds it manages and
buys and sells such securities, options and
32
<PAGE> 104
futures for the Funds through a substantial number of brokers and dealers. In so
doing, the Adviser and Sub-Adviser seek the best execution available. In seeking
the most favorable execution, the Adviser and Sub-Adviser consider 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 or Sub-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 or Sub-Adviser, transactions in such
securities will be allocated among the Fund and other clients in a manner deemed
fair and reasonable by the Adviser or Sub-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 and Sub-Adviser each 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:
<TABLE>
<CAPTION>
Fiscal Year Ended October 31
========================================
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
The Board of Trustees will periodically review the Adviser's and Sub-Adviser's
performance of their 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.
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<PAGE> 105
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.
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<PAGE> 106
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(R), 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.
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<PAGE> 107
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 (except as otherwise noted) were as follows:
<TABLE>
<CAPTION>
Annualized
Return Since
1 Year Inception Inception Date
------ --------- --------------
<S> <C> <C> <C>
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
Total Return Fund 0.31%*+ December 9, 1996
Short Duration Tax Exempt Fund 3.29% 4.04% September 1, 1994
Tax Exempt Bond Fund 3.53% 2.74% December 21, 1993
Growth & Income Fund 13.31%*+ November 1, 1996
Market Return Fund 14.06%* December 1, 1995
Global Short Bond Fund 3.45%*+ September 18, 1996
Global Fixed Income Fund 7.43% 7.63% September 1, 1992
International Bond Fund 4.48% 4.36% April 1, 1995
Global Balanced Fund 0.31%*+ December 9, 1996
International Equity Fund 2.28%*+ December 9, 1996
* Unannualized
+ As of February 28, 1997
</TABLE>
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
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<PAGE> 108
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
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<PAGE> 109
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.
38
<PAGE> 110
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
39
<PAGE> 111
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.
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 an 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.
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
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<PAGE> 112
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.
41
<PAGE> 113
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>
<CAPTION>
Position with Principal Occupations
Name the Group During Past Five Years
---- --------- ----------------------
<S> <C> <C>
*Joan A. Payden(1) Chairman of the Board, President, Payden & Rygel
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
J. Clayburn La Force Trustee Dean Emeritus, The John E. Anderson
P.O. Box 1009 Graduate School of Management at
Pauma Valley, CA 92061 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 McKernan, Jr. (1) Trustee President and Chief Executive Officer,
2601 South Figueroa Street Automobile Club of Southern California
Los Angeles, CA 90007
Dennis C. Poulsen Trustee President and Chief Executive Officer,
3900 South Workman Mill Road Rose Hills Company
Whittier, CA 90601
Stender E. Sweeney Trustee Private Investor since 1994; previously
Times Mirror Square Vice President, Finance, Times Mirror
Fifth Floor Company
Los Angeles, CA 90053
W.D. Hilton, Jr. Trustee Managing Trustee, NGC Settlement Trust;
310 East Interstate 30, Suite 285 previously 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.
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<PAGE> 114
(1) Ms. Payden is a Director of the Automobile Club of Southern California, of
which Mr. McKernan is President and Chief Executive Officer.
Trustees other than those affiliated with the Adviser or Sub-Adviser receive an
annual retainer of $20,000, 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 Group 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; there are no other funds in the "trust complex"
(as defined in Schedule 14A under the Securities Exchange Act of 1934):
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Total
Benefits Annual Compensation
Aggregate Accrued as Benefits from Group and
Compensation Part of Group Upon Group Complex
Name from Group Expenses Retirement Paid to Trustee
- ---- ---------- -------- ---------- ---------------
<S> <C> <C> <C> <C>
Dennis Poulsen $18,500 None N/A $18,500
James Clayburn La Force $18,500 None N/A $18,500
Stender Sweeney $18,500 None N/A $18,500
W.D. Hilton $18,500 None N/A $18,500
Thomas V. McKernan, Jr. $18,500 None N/A $18,500
</TABLE>
OFFICERS:
<TABLE>
<CAPTION>
Position with Principal Occupations
Name the Group During Past Five Years
- ---- ------------- ----------------------
<S> <C> <C>
Shirley T. Hosoi Vice President, Chief Chief Operating Officer,
Operating Officer Payden & Rygel (since 1996);
previously, First Interstate
Bancorp: Director of
Corporate Communications,
Executive Assistant to the
Chairman and President and
CEO, First Interstate
Franchise Services
Thomas Barrett Vice President, Treasurer Controller, Payden & Rygel
(since 1995); previously,
Manager, Finance and
Administration, Marine Spill
Response Corp.
David L. Wagner Vice President Portfolio Manager, Payden &
Rygel
</TABLE>
43
<PAGE> 115
<TABLE>
<S> <C> <C>
Gregory P. Brown Vice President, Institutional Marketing,
Payden & Rygel (since 1996);
previously, Vice President,
Corporate Banking at Wells
Fargo Bank
Carole Trist Secretary Mutual Fund Administration,
Payden & Rygel (since 1997);
previously, Manager, Mutual
Fund Operations, Payden &
Rygel
Yot Chattrabhuti Vice President Manager, Mutual Fund
Operations, Payden & Rygel
(since 1997); previously, Bank
of America: Vice President
and Manager, Securities
Processing, Assistant Vice
President and Manager of
various finance related
functions, and Senior Trust
Officer, Employee Benefit
Trust Accounts
</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
March 31, 1997, its staff consisted of 83 employees, 25 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 over $22 billion, with about $5 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 Group 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
44
<PAGE> 116
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 Group; (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 Group 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 Group 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
Group 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, no such state expense limitation is currently in
effect.
Fees earned by the Adviser during the last three fiscal years ended October 31,
are shown below.
<TABLE>
<CAPTION>
Fiscal Year Ending October 31
===========================================
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Limited Maturity Fund $ 7,360 $ 44,030 $ 104,879
Short Bond Fund 4,974 27,936 150,282
U.S. Treasury Fund * 13,233 49,630
Intermediate Bond Fund 14,006 71,012 111,179
Investment Quality Bond Fund 5,115 23,790 83,067
Short Duration Tax Exempt Fund 6,145 51,350 89,100
Tax Exempt Bond Fund 60,945 99,303 159,206
Market Return Fund * * 8,031
Global Short Bond Fund * * 7,843
Global Fixed Income Fund 1,216,816 1,533,836 1,982,809
International Bond Fund * 25,948 65,046
* Fund had not commenced operations
</TABLE>
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.
45
<PAGE> 117
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.
SUB-ADVISER
The Sub-Adviser provides investment management services to certain of the Fund
pursuant to the Subadvisory Agreement with the Adviser dated as of December 5,
1996. The Agreement provides that the Sub-Adviser will pay all expenses of its
personnel and facilities required to carry out its duties. Fees payable to the
Sub-Adviser for its services are the obligation of the Adviser, and not the
Group, and are not reduced in the event of any voluntary or regulatory
limitation on the adviser's fees.
The Subadvisory Agreement contains provisions regarding liability of the
Sub-Adviser similar to those of the Investment Management Agreement between the
Group and the Adviser described above. Unless earlier terminated as described
below, the Subadvisory Agreement will continue in effect for an initial period
of two years with respect to each Fund, and thereafter for successive annual
periods, subject to annual approval by the Board of Trustees in the same manner
as the Investment Management Agreement. The Subadvisory Agreement terminates
upon assignment or upon termination of the Investment Management Agreement with
respect to a Fund, and may be terminated with respect to a Fund without penalty
on 60 days' written notice by the Adviser or the Board of Trustees or
shareholders of the Fund, or upon 90 days' written notice by the Sub-Adviser.
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
46
<PAGE> 118
Group, 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 Group.
During the last three fiscal years, the Administrator was paid the amounts
listed below.
<TABLE>
<CAPTION>
Fiscal Year Ending October 31
====================================================
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Limited Maturity Fund $ 2,250 $ 12,864 $ 22,883
Short Bond Fund 1,572 7,884 32,665
U.S. Treasury Fund * 4,476 10,950
Intermediate Bond Fund 4,317 20,487 24,631
Investment Quality Bond Fund 1,600 6,731 18,435
Short Duration Tax Exempt Fund 1,610 14,771 17,181
Tax Exempt Bond Fund 16,708 25,275 30,854
Market Return Fund * * 1,721
Global Short Bond Fund * * 1,569
Global Fixed Income Fund 353,701 386,974 397,116
International Bond Fund * 5,469 11,676
* Fund had not commenced operations
</TABLE>
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 Group 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").
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<PAGE> 119
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
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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 April 10, 1997, the following persons held of record more than 5% of the
outstanding shares of the Limited Maturity Fund: Tessera, Inc., San Jose, CA
95134, 29.6%; Directors Guild of America, Los Angeles, CA 90071, 13.3%;
Northwest Building Corporation, Seattle, WA 98104, 5.6%; Infirmary Health
Systems Inc., Mobile, AL 36633, 7.9%; Casa de Las Campanas, San Diego, CA 92127,
5.6%; Archstone Foundation, Long Beach, CA 90802, 5%.
As of April 10, 1997, the following persons held of record more than 5% of the
outstanding shares of the Short Bond Fund: University & Community College System
of Nevada, Reno, Nevada 89512, 24.1%; Michigan Conference of Teamsters Welfare
Fund, Detroit, MI 48216, 18.4%; Dan Murphy Foundation, Los Angeles, CA 90016,
7.1%.
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<PAGE> 121
As of April 10, 1997, the following persons held of record more than 5% of the
outstanding shares of the U.S. Treasury Fund: Dan Murphy Foundation, Los Angeles
CA 90016, 15.6%; Leonard C. Horvitz, Moreland Hills, OH 44122, 16.1%; Best
Products Co. Inc. Pension, Richmond, VA 23260, 15.6%; Carol Ann Leif, Beverly
Hills, CA 90210, 9.3%; Rose Hills Memorial Park, Calabasas, CA 91302, 6.5%;
Casey Myers Trust, Beverly Hills, CA 90210, 5.2%.
As of April 10, 1997, the following persons held of record more than 5% of the
outstanding shares of the Intermediate Bond Fund: Lon V. Smith Foundation,
Beverly Hills, CA 90210, 21.2%; Children's Memorial Hospital Pension, Chicago,
IL 60675, 18.6%; North Hills Passavant, Philadelphia, PA 19182, 14.0%; Passavant
Hospital Pension, Philadelphia, PA 19182, 10.8%; SSMHCS Liability Trust, St.
Louis, MO 63166, 9.0%; Augustana College, Rock Island, IL 61201, 7.8%.
As of April 10, 1997, the following persons held of record more than 5% of the
outstanding shares of the Investment Quality Bond Fund: Amateur Athletic
Foundation, Los Angeles, CA 90018, 24.2%; World Cup USA 1994, Inc., Los Angeles,
CA 90067, 11.2%; FMTC Premier Trust, N. Quincy, MA 02171, 12.6%; Dan Murphy
Foundation, Los Angeles, CA 90016, 8.4%; Southern California Presbyterian Homes
Operating Fund, Glendale, CA 91202, 10.3%; House Ear Institute Endowment, Los
Angeles, CA 90057, 5.2%.
As of April 10, 1997, the following persons held of record more than 5% of the
outstanding shares of the Short Duration Tax Exempt Fund: Ronald Bension, La
Canada, CA 91011, 13.8%; Carol Ann Leif, Beverly Hills, CA 90210, 17.6%; Kleiner
Family Trust, Menlo Park, CA 94025, 6.0%; Diane Von Furstenberg, New Milford, CT
06766, 7.4%; Wertheimer Family Trust, Santa Monica, CA 90402, 6.6%; Beverly
Haas, Los Angeles, CA 90027, 5.3%; Casey Myers Trust, Beverly Hills, CA 90210,
10.6%; Nordskog Family Trust, Tarzana, CA 91356, 6.1%.
As of April 10, 1997, the following persons held of record more than 5% of the
outstanding shares of the Tax Exempt Bond Fund: Kleiner Family Trust, Menlo
Park, CA 94025, 19.4%; Wertheimer Family Trust, Santa Monica, CA 90402, 14.3%;
Clack & Co., Spokane, WA 99202, 10.0%; Charles S. Paul Living Trust, Los
Angeles, CA 90077, 8.4%.
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As of April 10, 1997, the following persons held of record more than 5% of the
outstanding shares of the Market Return Fund: Wasserman Foundation, Beverly
Hills, CA 90210, 24.1%; Dan Murphy Foundation, Los Angeles, CA 90016, 18.7%;
Payden and Rygel II, Los Angeles, CA 90071, 15.9%; Beverly Haas, Los Angeles, CA
90027, 11.0%; Roth Family Foundation, Beverly Hills, CA 90210, 5.7%.
As of April 10, 1997, the following persons held of record more than 5% of the
outstanding shares of the Global Short Bond Fund: Kaiser Permanente Retirement
Plan, Los Angeles, CA 90071, 16.4%; Bert Bell NFL Retirement Plan, Brooklyn, NY
11231, 10.2%; Hoag Memorial Hospital Board, Los Angeles, CA 90051, 10.6%; Grey
Advertising, Inc., New York, NY 10017, 5.2%; Joint Industry Board of the
Electrical Industry, Flushing, NY 11365, 16.3%.
As of April 10, 1997, the following persons held of record more than 5% of
the outstanding shares of the Global Fixed Income Fund: UniHealth, Pittsburgh,
PA 15230, 8.8%; City of St. Louis, St. Louis MO, 63103, 5.9%; Sheinberg Family
Trust, Beverly Hills, CA 90210, 5.65%; Federated Dept. St. Inc., Brooklyn, NY
12131, 5.3%.
As of April 10, 1997, the following persons held of record more than 5% of the
outstanding shares of the International Bond Fund: Alger Foundation, New York,
NY 10286, 67.2%; Liz Claiborne Profit Sharing, North Bergen, NJ 07047, 14.7%;
Liz Claiborne Foundation, North Bergen, NJ 07047, 5.2%.
As of April 10, 1997, the following persons held of record more than 5% of the
outstanding shares of the International Equity Fund: Scottish Widows Investment
Management, Scotland, 25.9%; Dan Murphy Foundation, Los Angeles, CA 90016,
12.95%; Teague Family Trust #2, Palos Verdes, CA 90274, 10.4%; Teague Family
Trust #1, Palos Verdes, CA 90274, 9.0%; Carol Ann Leif, Beverly Hills, CA 90210,
7.2%; Lynne K. Wasserman, Beverly Hills, CA 90210, 6.5%.
As of April 10, 1997, the following persons held of record more than 5% of the
outstanding shares of the Growth and Income Fund: Lon V. Smith Foundation,
Beverly Hills, CA 90210, 7.7%; Payden and Rygel II, Los Angeles, CA 90071, 6.4%.
As of April 10, 1997, the following persons held of record more than 5% of the
outstanding shares of the Total Return Fund: Fluor Master Retirement Trust,
Nashville, TN 37211, 32.6%; Payden and Rygel II, Los Angeles, CA 90071, 16.2%;
Rose Hills Memorial Park, Calabasas, CA 91302, 16.0%;
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<PAGE> 123
Mark and Pat Benjamin, Palos Verdes Estates, CA 90274, 7.2%; Kleiner Family
Trust, Menlo Park, CA 94025, 20.2%.
As of April 10, 1997, the following persons held of record more than 5% of the
outstanding shares of the Global Balanced Fund: Lon V. Smith Foundation, Beverly
Hills, CA 90210, 31.7%; Scottish Widows Investment Management, Edenburgh,
Scotland, 19.3%; Payden & Rygel, Los Angeles, CA 9071, 12.3%; Dan Murphy
Foundation, Los Angeles, CA 90016, 9.6%; Carol Ann Leif, Beverly Hills, CA
90210, 8.7%.
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 Growth & Income
Fund, 8%; Market Return Fund, 16%; Global Balanced Fund, 12.3%; and Total Return
Fund, 16%).
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 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
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<PAGE> 124
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 Boston Safe Deposit and Trust Company serves as Custodian for the assets of
the Funds. The Custodian's address is One Boston Place, Boston, Massachusetts
02109. 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 LLP 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 LLP also acts as counsel to
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<PAGE> 125
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 Annual Report to Shareholders accompanies this Statement of
Additional Information. The financial statements in such Annual Report are
incorporated in this Statement of Additional Information by reference. The
financial statements in such Annual Report 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 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.
In addition, certain financial information included as Appendix B to this
Statement of Additional Information is as of February 28, 1997, and is
unaudited.
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.
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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.
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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.
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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
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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
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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.
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APPENDIX B
FINANCIAL STATEMENTS
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STATEMENTS OF ASSETS AND LIABILITIES
FEBRUARY 28, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
GLOBAL TOTAL GLOBAL
SHORT BOND RETURN BALANCED
FUND FUND FUND
================ =============== ==============
<S> <C> <C> <C>
ASSETS:
Investments, at value* $102,833,948 $11,024,802 $8,317,989
Dividends receivable 5,174
Interest receivable 1,920,537 69,534 62,019
Open forward currency contracts 1,028,536 26,040
Closed forward currency contracts 20,340 1,324
Receivable for open futures contracts 3,094
Receivable for fund shares sold
Unamortized organization costs (Note 4) 1,341 2,891 3,674
Deferred expense subsidy (Note 5) 74,865 17,688 23,196
Other assets 11,680 453
---------------- --------------- --------------
Total Assets 105,891,247 11,118,009 8,439,869
---------------- --------------- --------------
LIABILITIES:
Open forward currency contracts 152,388 3,860 20,517
Payable for investments purchased 13,418,834 2,010,708
Payable for open options contracts 19,891
Payable to Payden & Rygel (Note 5) 11,834 20,275
Accrued expenses:
Investment advisory fees 40,499 4,126 5,524
Administration fees 8,100 884 899
Other expenses 31,443 4,867 10,658
---------------- --------------- --------------
Total Liabilities 13,651,264 2,036,279 77,764
---------------- --------------- --------------
NET ASSETS $92,239,983 $9,081,730 $8,362,105
================ =============== ==============
NET ASSETS:
Paid in capital $92,136,984 $9,114,470 $8,346,891
Undistributed net investment income (170,276) 11,620 38,941
Accumulated net realized gains (losses) from:
Investments (53,448) 10,395 (13,117)
Foreign currency transactions 2,166,263 17,895 (31,556)
Futures contracts (19,710)
Net unrealized appreciation (depreciation) from:
Investments (2,700,960) (36,839) 8,245
Translation of assets and liabilities in foreign
currencies 861,420 (3,913) 3,583
Open futures contracts (12,188)
Open options contracts written 9,118
================ =============== ==============
NET ASSETS $92,239,983 $9,081,730 $8,362,105
================ =============== ==============
Outstanding shares of beneficial interest 9,108,133 914,620 834,600
================ =============== ==============
NET ASSET VALUE - offering and redemption price
per share $10.13 $9.93 $10.02
================ =============== ==============
*Investments, at cost $105,534,908 $11,061,641 $8,309,744
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH &
EQUITY INCOME
FUND FUND
================ ===============
ASSETS:
<S> <C> <C>
Investments, at value* $7,633,129 $36,765,135
Dividends receivable 10,088 73,917
Interest receivable 3,419
Open forward currency contracts
Closed forward currency contracts
Receivable for open futures contracts
Receivable for fund shares sold 162,876
Unamortized organization costs (Note 4) 3,417 10,851
Deferred expense subsidy (Note 5) 21,636 17,849
Other assets 208
---------------- ---------------
Total Assets 7,668,478 37,034,047
---------------- ---------------
LIABILITIES:
Open forward currency contracts
Payable for investments purchased 400,015
Payable for open options contracts
Payable to Payden & Rygel (Note 5) 22,011 7,076
Accrued expenses:
Investment advisory fees 5,366 16,779
Administration fees 931 3,356
Other expenses 10,700 3,409
---------------- ---------------
Total Liabilities 39,008 430,635
---------------- ---------------
NET ASSETS $7,629,470 $36,603,412
================ ===============
NET ASSETS:
Paid in capital $7,463,034 $35,035,872
Undistributed net investment income 656 92,509
Accumulated net realized gains (losses) from:
Investments 11,080 (2,848)
Foreign currency transactions (53,723)
Futures contracts
Net unrealized appreciation (depreciation) from:
Investments 208,484 1,477,879
Translation of assets and liabilities in foreign
currencies (61)
Open futures contracts
Open options contracts written
================ ===============
NET ASSETS $7,629,470 $36,603,412
================ ===============
Outstanding shares of beneficial interest 746,541 3,238,648
================ ===============
NET ASSET VALUE - offering and redemption price
per share $10.22 $11.30
================ ===============
*Investments, at cost $7,424,645 $35,287,256
</TABLE>
See notes to financial statements.
<PAGE> 133
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED FEBRUARY 28, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
GLOBAL TOTAL GLOBAL INTERNATIONAL GROWTH &
SHORT BOND RETURN BALANCED EQUITY INCOME
FUND (A) FUND (B) FUND (B) FUND (B) FUND (C)
============== =========== =========== ================ ==============
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $6,682 $10,140 $138,313
Interest $879,428 $95,896 50,708 10,050 20,500
-------------- ----------- ----------- ---------------- --------------
Total Income 879,428 95,896 57,390 20,190 158,813
-------------- ----------- ----------- ---------------- --------------
EXPENSES:
Investment advisory fees (Note 5) 47,972 4,126 7,491 9,303 27,965
Administration fees (Note 5) 9,594 884 899 930 3,356
Custodian fees 8,151 2,760 7,923 7,975 2,245
Accounting fees (Note 5) 6,239 1,990 2,023 2,026 3,337
Legal fees 576 88 95 95 240
Audit fees 5,658 4,689 5,202 5,202 6,110
Organization expenses (Note 4) 171 363 389 381 596
Trustees' fees and expenses 1,300 154 165 167 412
Transfer agent fees (Note 5) 3,256 2,586 2,586 2,586 4,035
Registration and filing fees 11,147 5,852 5,835 5,847 9,181
Printing costs 314 57 58 58 180
Other expenses 1,985 771 1,018 1,020 1,579
Waived advisory fee (Note 5) (11,186)
Expense subsidy (Note 5) (24,405) (17,688) (23,196) (21,636) (17,849)
-------------- ----------- ----------- ---------------- --------------
Net Expenses 71,958 6,632 10,488 13,954 30,201
-------------- ----------- ----------- ---------------- --------------
Net Investment Income 807,470 89,264 46,902 6,236 128,612
-------------- ----------- ----------- ---------------- --------------
REALIZED AND UNREALIZED GAINS (LOSSES):
Net realized gains (losses) from:
Investments (53,448) 10,395 (13,117) 11,080 (2,848)
Foreign currency transactions 2,166,263 17,895 (31,556) (53,723)
Futures contracts (19,710)
Change in net unrealized appreciation
(depreciation) from:
Investments (2,779,806) (36,839) 8,245 208,484 1,477,879
Translation of assets and
liabilities in foreign currencies 837,932 (3,913) 3,583 (61)
Open futures contracts (12,188)
Open options contracts written 9,118
-------------- ----------- ----------- ---------------- --------------
Net realized and unrealized
gains (losses) 170,941 (44,360) (23,727) 165,780 1,475,031
-------------- ----------- ----------- ---------------- --------------
CHANGE IN NET ASSETS RESULTING
FROM OPERATIONS $978,411 $44,904 $23,175 $172,016 $1,603,643
============== =========== =========== ================ ==============
</TABLE>
- ----------
(a) The Fund commenced operations on September 18, 1996.
(b) The Fund commenced operations on December 9, 1996.
(c) The Fund commenced operations on November 1, 1996.
See notes to financial statements.
<PAGE> 134
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
TOTAL RETURN GLOBAL
GLOBAL SHORT BOND FUND FUND BALANCED FUND
------------------------------------- ------------------ ------------------
Period ended Period ended Period ended
Feb. 28, 1997 Period ended Feb. 28, 1997(b) Feb. 28, 1997(b)
(Unaudited) October 31, 1996(a) (Unaudited) (Unaudited)
============== ===================== ================== ==================
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income $807,470 $130,720 $89,264 $46,902
Net realized gains (losses) 2,112,815 (8) 8,580 (44,673)
Change in net unrealized appreciation
(depreciation) (1,941,874) 102,334 (52,940) 20,946
-------------- --------------------- ------------------ ------------------
Change in net assets resulting from
operations 978,411 233,046 44,904 23,175
-------------- --------------------- ------------------ ------------------
FROM DISTRIBUTIONS TO
SHAREHOLDERS:
Net investment income (1,003,459) (104,999) (77,644) (7,961)
Net realized gains from investments
In excess of net realized gains
from investments
-------------- --------------------- ------------------ ------------------
Change in net assets from distributions to
shareholders (1,003,459) (104,999) (77,644) (7,961)
-------------- --------------------- ------------------ ------------------
FROM CAPITAL TRANSACTIONS:
Proceeds from fund shares sold 64,009,978 28,680,369 9,060,576 8,341,355
Reinvestment of distributions 931,675 104,999 53,904 5,546
Cost of fund shares redeemed (1,590,037) (10) (10)
-------------- --------------------- ------------------ ------------------
Change in net assets from capital
transactions 63,351,616 28,785,368 9,114,470 8,346,891
-------------- --------------------- ------------------ ------------------
Total Change in Net Assets 63,326,568 28,913,415 9,081,730 8,362,105
NET ASSETS:
Beginning of period 28,913,415 0 0 0
-------------- --------------------- ------------------ ------------------
End of period $92,239,983 $28,913,415 $9,081,730 $8,362,105
============== ===================== ================== ==================
FUND SHARES OF BENEFICIAL
INTEREST:
Outstanding shares at beginning of period 2,871,151 0 0 0
-------------- --------------------- ------------------ ------------------
Shares sold 6,301,208 2,860,724 909,184 834,047
Shares issued in reinvestment of distributions 91,810 10,427 5,437 554
Shares redeemed (156,036) 0 (1) (1)
-------------- --------------------- ------------------ ------------------
Change in shares outstanding 6,236,982 2,871,151 914,620 834,600
-------------- --------------------- ------------------ ------------------
Outstanding shares at end of period 9,108,133 2,871,151 914,620 834,600
============== ===================== ================== ==================
</TABLE>
- ----------
(a) The Fund commenced operations on September 18, 1996.
(b) The Fund commenced operations on December 9, 1996.
(c) The Fund commenced operations on November 1, 1996.
See notes to financial statements.
<PAGE> 135
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH &
EQUITY FUND INCOME FUND
------------------ ------------------
Period ended Period ended
Feb. 28, 1997(b) Feb. 28, 1997(c)
(Unaudited) (Unaudited)
================== ==================
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income $6,236 $128,612
Net realized gains (losses) (42,643) (2,848)
Change in net unrealized appreciation
(depreciation) 208,423 1,477,879
------------------ ------------------
Change in net assets resulting from
operations 172,016 1,603,643
------------------ ------------------
FROM DISTRIBUTIONS TO
SHAREHOLDERS:
Net investment income (5,580) (36,103)
Net realized gains from investments
In excess of net realized gains
from investments
------------------ ------------------
Change in net assets from distributions to
shareholders (5,580) (36,103)
------------------ ------------------
FROM CAPITAL TRANSACTIONS:
Proceeds from fund shares sold 7,474,106 35,368,112
Reinvestment of distributions 3,938 36,103
Cost of fund shares redeemed (15,010) (368,343)
------------------ ------------------
Change in net assets from capital
transactions 7,463,034 35,035,872
------------------ ------------------
Total Change in Net Assets 7,629,470 36,603,412
NET ASSETS:
Beginning of period 0 0
------------------ ------------------
End of period $7,629,470 $36,603,412
================== ==================
FUND SHARES OF BENEFICIAL
INTEREST:
Outstanding shares at beginning of period 0 0
------------------ ------------------
Shares sold 747,617 3,268,980
Shares issued in reinvestment of distributions 393 3,353
Shares redeemed (1,469) (33,685)
------------------ ------------------
Change in shares outstanding 746,541 3,238,648
------------------ ------------------
Outstanding shares at end of period 746,541 3,238,648
================== ==================
</TABLE>
<PAGE> 136
GLOBAL SHORT BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Principal Amount Market Value
in Local Currency Security Description in U.S. Dollars
----------------- -------------------- ---------------
<S> <C> <C> <C>
Australia (Australian Dollar) (17.9%):
Government Bonds (17.9%):
4,900,000 Australian Commonwealth Government Bond, 7.00%,
04/15/00 $3,810,543
3,600,000 New South Wales Treasury Note, 8.00%, 12/01/01 2,859,630
4,950,000 Queensland Treasury Note, 8.00%, 07/14/99 3,940,824
2,350,000 South Australia Government Finance Authority, 12.50%,
10/15/00 2,128,869
4,650,000 Western Australia Treasury Corp., 9.00%, 04/15/99 3,766,559
-----------------
Total Australia (Cost - $16,662,758) 16,506,425
-----------------
Germany (German Mark) (22.5%):
Government Bonds (20.0%):
11,400,000 German Bundeschatze, 6.875%, 10/15/03 7,173,800
17,650,000 German Bundesobligation, 7.00%, 01/13/00 11,338,959
-----------------
Total Government Bonds 18,512,759
-----------------
U.S. Government Agencies (1.2%):
Federal National Mortgage Association (1.2%):
1,720,000 Global Bond, 6.00%, 08/23/00 1,075,127
-----------------
Total U.S. Government Agencies 1,075,127
-----------------
Supranational Bonds (1.3%):
1,850,000 IBRD-Global Bond, 7.25%, 10/13/99 1,186,311
-----------------
Total Germany (Cost - $22,101,468) 20,774,197
-----------------
Great Britain (British Pound) (8.8%):
Corporate Bonds (5.8%):
Financial (5.9%):
840,000 KFW International Finance, 7.88%, 07/06/98 1,390,865
1,765,000 Abbey National Treasury, 6.00%, 08/10/99 2,817,398
700,000 European Investment Bank, 8.75%, 12/07/00 1,204,950
-----------------
Total Corporate Bonds 5,413,213
-----------------
Government Bonds (3.0%):
1,540,000 12.00%, 11/20/98 2,729,162
-----------------
Total Government Bonds 2,729,162
-----------------
Total Great Britain (Cost - $8,089,344) 8,142,375
-----------------
Spain (Spanish Peseta) (8.7%):
Government Bonds (8.7%):
1,100,000,000 7.80%, 10/31/99 8,010,119
-----------------
Total Spain (Cost - $8,633,339) 8,010,119
-----------------
Sweden (Swedish Krona) (12.9%):
Government Bonds (12.9%):
46,300,000 10.25%, 05/05/00 7,090,290
32,300,000 11.00%, 01/21/99 4,796,390
-----------------
</TABLE>
<PAGE> 137
<TABLE>
<S> <C> <C> <C>
Total Sweden (Cost - $12,514,268) 11,886,680
-----------------
United States (United States Dollar) (40.7%):
U.S. Treasury Notes (17.9%):
1,650,000 5.13%, 03/31/98 1,639,622
3,500,000 6.13%, 05/15/98 3,512,180
500,000 5.88%, 08/15/98 499,600
5,000,000 5.88%, 10/31/98 (a) 4,990,550
5,900,000 5.50%, 11/15/98 5,850,440
-----------------
Total U.S. Treasury Notes 16,492,392
-----------------
Investment Companies (22.8%):
21,021,760 Dreyfus Treasury Cash Management Fund 21,021,760
-----------------
Total United States (Cost - $37,533,731) 37,514,152
-----------------
Total (Cost - $105,534,908)(b) (111.5%) $102,833,948
=================
</TABLE>
- ----------
Percentages indicated are based on net assets of $92,239,983.
(a) A portion of the security is held by the custodian in a segregated account
as collateral for open short positions.
(b) This represents cost for federal income tax purposes and differs from value
by unrealized appreciation (depreciation) of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation $154,213
Unrealized depreciation (2,855,173)
----------------
Net unrealized depreciation ($2,700,960)
================
</TABLE>
See notes to financial statements.
<PAGE> 138
GLOBAL SHORT BOND FUND
FORWARD CURRENCY CONTRACTS
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Unrealized
Contract Contract Value Appreciation Delivery
Currency Price (U.S. Dollars) (Depreciation) Date
-------- ----- -------------- -------------- ----
<S> <C> <C> <C> <C>
Assets:
Australian Dollar (bought) 0.77470 $3,131,192 $4,440 03/22/83
British Pound (sold) 0.61370 1,629,450 2,250 03/10/97
German Mark (sold) 1.68646 13,638,062 830,077 03/13/97
German Mark (sold) 1.68646 364,670 15,171 03/13/97
German Mark (sold) 1.68646 2,431,133 72,470 03/13/97
Spanish Peseta (sold) 143.30543 6,419,854 7,195 03/21/97
Spanish Peseta (sold) 143.30543 1,884,088 1,651 03/21/97
Swedish Krona (sold) 7.49591 1,000,546 13,529 04/18/97
Swedish Krona (sold) 7.49591 2,561,398 15,783 04/18/97
Swedish Krona (sold) 7.49617 8,937,894 65,970 04/28/97
------------- -------------
$41,998,287 $1,028,536
============= =============
Liabilities:
Australian Dollar (sold) 0.76910 $13,732,758 ($119,511) 03/24/97
Australian Dollar (sold) 0.77440 3,142,241 (5,921) 03/24/97
British Pound (bought) 0.61277 1,615,086 (931) 03/03/97
British Pound (sold) 0.61370 6,028,965 (7,160) 03/10/97
British Pound (sold) 0.61370 733,253 (3,443) 03/10/97
German Mark (bought) 1.68750 4,216,343 (750) 03/03/97
German Mark (sold) 1.68655 4,210,010 (233) 03/13/97
Spanish Peseta (bought) 143.30000 1,885,877 (2,504) 03/03/97
Swedish Krona (bought) 7.46040 2,558,656 (11,935) 03/03/97
------------- -------------
$38,123,189 ($152,388)
============= =============
</TABLE>
See notes to financial statements.
<PAGE> 139
TOTAL RETURN FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Principal Amount Market Value
in Local Currency Security Description in U.S. Dollars
- ----------------- ------------------------------------------------------------------------------- -------------------
<S> <C> <C>
Australia (Australian Dollar) (4.2%):
Government Bonds (4.2%):
520,000 6.75%, 11/15/06 $377,597
-------------------
Total Australia (Cost - $393,549) 377,597
-------------------
Great Britain (British Pound) (4.6%):
Government Bonds (4.6%):
250,000 7.25%, 12/07/06 414,758
-------------------
Total Great Britain (Cost - $419,614) 414,758
-------------------
United States (United States Dollar) (112.6%):
Asset Backed Securities (19.5%):
390,000 Capstead Securities Corporation IV, 7.60%, 08/25/07 393,169
350,847 Merit Securities Corporation, 5.65%., 09/28/30 (a) 350,956
400,000 Nationsbank Auto Owner Trust, 6.25%, 07/15/99 400,680
250,000 Pacific SW97-1, 6.06%, 06/17/02 249,453
376,678 Student Loan Marketing Association, 5.60%, 07/25/04 (a) 376,791
-------------------
Total Asset Backed Securities 1,771,049
-------------------
Collateralized Mortgage Obligations (22.6%):
200,000 Countrywide Funding Corporation, 6.50%, 03/25/24 183,702
395,958 Federal National Mortgage Association, 6.10%,
05/25/99 (a) 399,300
600,000 Merrill Lynch, 6.277%, 06/15/06 (a) 608,040
200,000 Prudential Home Mortgage Security, 6.75%, 12/25/23 176,080
496,534 Residential Funding Corporation, 6.25%, 10/25/23 (a) 496,857
200,000 Residential Funding Mortgage Securities I, 7.00%, 08/25/23 190,778
-------------------
Total Collateralized Mortgage Obligations 2,054,757
-------------------
Corporate Bonds (21.0%):
Banking (5.2%):
250,000 Coast Savings Financial, 10.00%, 03/01/00 265,313
200,000 First Nationwide, 9.13%, 12/01/03 209,000
-------------------
474,313
-------------------
Financial (4.7%):
200,000 Contifinanial Corporation, 9.25%, 08/15/03 204,750
225,000 Salomon Incorporated, 6.25%, 11/30/00 223,594
-------------------
428,344
-------------------
Industrial (11.1%):
250,000 Barnes & Noble Subscription Notes, 11.88%, 01/15/03 274,063
250,000 Owens - Illinois Incorporated, 11.00%, 12/01/03 277,813
200,000 Tenet Healthcare Corporation, 9.25%, 09/01/02 219,500
250,000 Time Warner, 6.10%, 12/30/01 237,813
-------------------
1,009,189
-------------------
Total Corporate Bonds 1,911,846
-------------------
Mortgage Backed Securities (32.9%):
Federal Home Loan Mortgage Corporation (21.7%):
497,503 7.50%, 12/01/26 497,812
499,676 7.51%, 01/01/27 499,986
</TABLE>
<PAGE> 140
<TABLE>
<S> <C> <C>
1,000,000 7.00%, 01/15/27 975,310
-------------------
1,973,108
-------------------
Government National Mortgage Association (11.2%):
1,000,000 8.00%, 01/15/27 1,018,120
-------------------
Total Mortgage Backed Securities 2,991,228
-------------------
U.S. Government Agencies (15.7%):
Federal Home Loan Mortgage Association (15.7%):
1,475,000 Discount Note, 7.50%, 03/04/97 1,424,382
-------------------
Total U.S. Government Agencies 1,424,382
-------------------
U.S. Treasury Bills (0.6%):
50,000 4.98%, 06/05/97 (b) 49,331
-------------------
Total U.S. Treasury Bills 49,331
-------------------
Investment Companies (0.3%):
29,854 Dreyfus Treasury Cash Management Fund 29,854
-------------------
Total Investment Companies 29,854
-------------------
Total United States (Cost - $10,248,478) 10,232,447
-------------------
Total (Cost - $11,061,641)(c) (121.4%) $11,024,802
===================
</TABLE>
- ----------
Percentages indicated are based on net assets of $9,081,730.
(a) This is a variable rate investment and the rate reflected on the Schedule
of Portfolio Investments is the rate in effect at February 28, 1997.
(b) A portion of the security is held by the custodian in a segregated account
as collateral for open short positions.
At February 28, 1997, the Fund's open futures contracts were as follows:
<TABLE>
<CAPTION>
Number of Expiration Current Unrealized
Contracts Contract Type Date Market Value Depreciation
- --------- ------------------------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
2 5 Year U.S. Treasury 6/30/97 $211,531 ($2,969)
Bond Future
14 10 Year U.S. Treasury 6/30/97 1,507,625 (1,344)
Bond Future
9 U.S. Treasury Long 6/30/97 993,938 (7,875)
Bond Future
------------- -------------
$2,713,094 ($12,188)
</TABLE>
(c) This represents cost for federal income tax purposes and differs from value
by unrealized appreciation (depreciation) of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation $8,504
Unrealized depreciation (45,343)
-----------------
Net unrealized depreciation ($36,839)
=================
</TABLE>
See notes to financial statements.
<PAGE> 141
TOTAL RETURN FUND
FORWARD CURRENCY CONTRACTS
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Unrealized
Contract Contract Value Appreciation Delivery
Currency Price (U.S. Dollars) (Depreciation) Date
-------- ----- -------------- -------------- ----
<S> <C> <C> <C> <C>
Liabilities:
Australian Dollar (sold) 0.76911 $387,931 ($3,376) 03/24/97
British Pound (sold) 0.61443 407,363 (484) 03/10/97
---------- ---------
$795,294 ($3,860)
========== =========
</TABLE>
See notes to financial statements.
<PAGE> 142
GLOBAL BALANCED FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Principal Amount
in Local Currency Market Value
or Shares Security Description in U.S. Dollars
- ------------------- ---------------------------------------------------------------- ----------------
<S> <C> <C>
Common Stocks (40.5%):
Aerospace & Defense (1.6%):
Aerospace (1.6%):
3,528 British Aerospace PLC $73,510
8,000 Mitsubishi Heavy Industries Limited 57,621
----------------
Total Aerospace & Defense 131,131
----------------
Basic Industries (3.8%):
Chemicals (2.4%):
968 Air Products & Chemicals Incorporated 71,753
1,990 Bayer AG 83,595
4,420 Laporte PLC 46,678
----------------
202,026
----------------
Packaging & Containers (1.4%):
48,000 Cosco Pacific Limited 66,946
7,240 Low & Bonar PLC 53,079
----------------
120,025
----------------
Total Basic Industries 322,051
----------------
Conglomerates & Holding Companies (2.0%):
Diversified Operations (2.0%):
840 General Electric Company 86,415
6,000 Hutchison Whampoa 45,716
4,000 United Engineers (Malaysia) 36,898
----------------
Total Conglomerates & Holding Companies 169,029
----------------
Construction & Real Estate (0.3%):
Real Estate Development (0.3%):
4,500 Land & House Public Company Limited 25,550
----------------
Total Construction & Real Estate 25,550
----------------
Durables (2.9%):
Autos (1.6%):
1,236 Daimler - Benz Ag 89,709
1,908 Scania AB - B Shares 46,840
----------------
136,549
----------------
Auto Tires & Accessories (0.9%):
1,065 Valeo SA 71,791
----------------
Consumer Products (0.4%):
6,495 Srithai Superware Company Limited 30,355
----------------
Total Durables 238,695
----------------
Energy (2.0%):
Oil (2.0%):
848 Exxon Corporation 84,694
5,005 Shell Transporting & Trading Company PLC 85,101
----------------
Total Energy 169,795
----------------
Finance (5.3%):
</TABLE>
<PAGE> 143
<TABLE>
<S> <C> <C>
Banking (3.6%):
1,469 Banco Galicia Y Bueno ADR 34,705
6,285 Bangkok Bank Company Limited 42,725
13,200 Bank of East Asia 48,157
1,663 Banque Nationale De Paris 75,465
12,024 Lloyds TSB Group PLC 99,723
----------------
300,775
----------------
Financial Services (1.7%):
1,541 Fannie Mae 61,640
1,435 Ing Groep N.V. 55,570
2,000 Nomura Securities Corporation Limited 26,689
----------------
143,899
----------------
Total Finance 444,674
----------------
Health (5.8%):
Drugs & Pharmaceuticals (3.8%):
520 Bristol - Myers Squibb Company 67,860
85 Novartis - Ciba Rights 5,381
85 Novartis Ag 97,192
11 Roche Holding AG 92,618
2,000 Sankyo Corporation Limited 55,698
----------------
318,749
----------------
Hospital Administration (1.3%):
1,363 Columbia / HCA Healthcare Corporation 57,246
1,000 Nichii Gakkan Company 47,244
----------------
104,490
----------------
Medical Equipment & Supplies (0.7%):
970 Cardinal Health Incorporated 59,655
----------------
Total Health 482,894
----------------
Industrial Machinery & Equipment (2.3%):
Machinery & Engineering (1.5%):
2,866 Atlas Copco AB - B Shares 66,534
152 Mannesmann AG 60,087
----------------
126,621
----------------
Machinery & Industrial Equipment (0.8%):
1,550 KCI Konecranes International 64,698
----------------
Total Industrial Machinery & Equipment 191,319
----------------
Media & Leisure (3.6%):
Hotels & Motels (0.4%):
1,900 Scandic Hotels AB 35,109
----------------
Leisure (0.8%):
4,481 Granada Group PLC 66,416
----------------
Multimedia (0.6%):
9,359 News Corporation Limited 49,808
----------------
Printing (0.8%):
6,000 Toppan Printing Corporation Limited 69,126
----------------
Publishing (1.0%):
5,088 Elsevier 81,494
----------------
Total Media & Leisure 301,953
----------------
Nondurables (0.5%):
Tobacco (0.5%):
9,000 PT Hanjaya Mandala Sampoerna 44,672
----------------
Total Nondurables 44,672
----------------
Retail & Wholesale (1.1%):
</TABLE>
<PAGE> 144
<TABLE>
<S> <C> <C>
Drug Stores (0.7%):
1,000 Seven - Eleven Japan 60,174
----------------
Restaurants (0.4%):
8,000 Kentucky Fried Chicken Holding (Malaysia) Berhad 34,804
----------------
Total Retail & Wholesale 94,978
----------------
Services (1.3%):
Human Resources (1.3%):
323 Adecco SA 104,709
----------------
Total Services 104,709
----------------
Technology (8.0%):
Computer Services (0.4%):
3,000 Ines 36,801
----------------
Data Processing (0.8%):
1,701 First Data Corporation 62,299
----------------
Electrical & Electronics (4.8%):
2,000 Murata Manufacturing Corporation Limited 70,120
2,048 Philips Electronics 92,473
5,680 Premier Farnell PLC 45,996
1,000 Rohm Company 71,695
1,412 Schneider SA 74,386
700 Sony Corporation 50,535
----------------
405,205
----------------
Telecommunications (2.0%)
6,000 Nippon Comsys Corporation 66,142
6 Nippon Telegraph & Telephone Corporation 42,719
675 Telecel - Communicacoes Pessoai 55,886
----------------
164,747
----------------
Total Technology 669,052
----------------
Total Common Stocks (Cost - $3,265,388) 3,390,502
----------------
Australia (Australian Dollar) (3.7%):
Government Bonds (3.7%)
425,000 6.75%, 11/15/06 308,613
----------------
Total Australia (Cost - $327,580) 308,613
----------------
Germany (German Mark) (4.5%):
Government Bonds (4.5%)
595,000 Treuhandanstalt, 6.25%, 03/04/04 374,563
----------------
Total Germany (Cost - $396,360) 374,563
----------------
Great Britain (British Pound) (7.0%):
Government Bonds (7.0%)
115,000 7.00%, 11/06/01 187,917
240,000 7.25%, 12/07/06 398,168
----------------
Total Great Britain (Cost - $588,603) 586,085
----------------
Italy (Italian Lira) (2.0%):
Government Bonds (2.0%)
275,000,000 9.50%, 04/15/99 170,388
----------------
Total Italy (Cost - $187,785) 170,388
----------------
Spain (Spanish Peseta) (2.0%):
Government Bonds (2.0%)
20,000,000 10.30%, 06/15/02 163,098
----------------
Total Spain (Cost - $166,387) 163,098
----------------
</TABLE>
<PAGE> 145
<TABLE>
<S> <C> <C>
Sweden (Swedish Krona) (1.7%):
Government Bonds (1.7%)
1,100,000 6.00%, 02/09/05 142,387
----------------
Total Sweden (Cost - $153,087) 142,387
----------------
United States (United States Dollar) (38.1%):
U.S. Treasury Notes (21.5%):
1,800,000 6.38%, 08/15/02 (a) 1,797,534
----------------
Options Purchased (0.2%):
19 10 Year Treasury June future put option purchased,
strike price 107.00, expiring 05/17/97 (b) 17,813
----------------
Investment Companies (16.4%):
1,367,006 Dreyfus Treasury Cash Management Fund 1,367,006
----------------
Total United States (Cost - $3,224,554) 3,182,353
----------------
Total (Cost - $8,309,744)(c) (99.5%) $8,317,989
================
</TABLE>
- ----------
Percentages indicated are based on net assets of $8,362,105.
Distribution of investments by country of issue, as a percentage of total value
of investment securities, is as follows:
<TABLE>
<S> <C>
United States 45.3%
Great Britain 12.7%
Japan 7.9%
Germany 7.3%
Australia 4.3%
Switzerland 3.6%
Sweden 3.5%
Netherlands 2.8%
France 2.7%
Italy 2.0%
Spain 2.0%
Hong Kong 1.9%
Thailand 1.2%
Other (individually less than 1%) 2.8%
</TABLE>
(a) A portion of the security is held by the custodian in a segregated account
as collateral for open short positions.
(b) Security is non-income producing.
(c) This represents cost for federal income tax purposes and differs from value
by unrealized appreciation (depreciation) of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation $232,559
Unrealized depreciation (224,314)
-----------
Net unrealized appreciation $8,245
===========
</TABLE>
See notes to financial statements.
<PAGE> 146
GLOBAL BALANCED FUND
OPTIONS WRITTEN
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Number of Premiums Market Value
Contracts Description Received in U.S. Dollars
- --------------- ----------------------------------------- ------------- -----------------
<S> <C> <C> <C>
19 10 Year Treasury June future call option
written, strike price 109.00,
expiring 05/17/97 $14,653 $12,766
19 10 Year Treasury June future put option
written, strike price 105.00,
expiring 05/17/97 14,356 7,125
-------------- -----------------
$29,009 $19,891
============== =================
</TABLE>
See notes to financial statements.
<PAGE> 147
GLOBAL BALANCED FUND
FORWARD CURRENCY CONTRACTS
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Unrealized
Contract Contract Value Appreciation Delivery
Currency Price (U.S. Dollars) (Depreciation) Date
- ------------------------ ----------- -------------- -------------- ---------
<S> <C> <C> <C> <C>
Assets:
British Pound (sold) 0.59535 $162,883 $5,085 03/14/97
Japanese Yen (bought) 122.41000 386,588 18,971 05/20/97
Swedish Krona (sold) 7.39590 146,747 1,984 04/18/97
============== ==============
$696,218 $26,040
============== ==============
Liabilities:
Australian Dollar (sold) 0.76911 $329,741 ($2,870) 03/24/97
British Pound (sold) 0.62524 195,534 (3,608) 03/10/97
Canadian Dollar (bought) 1.33930 366,481 (6,848) 04/07/97
Irish Punt (bought) 0.60456 158,269 (7,141) 03/14/97
Italian Lira (sold) 1,687.85000 177,792 (50) 03/20/97
============== ==============
$1,227,817 ($20,517)
============== ==============
</TABLE>
See notes to financial statements.
<PAGE> 148
INTERNATIONAL EQUITY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Principal Amount Market Value
or Shares Security Description in U.S. Dollars
- ------------------- ------------------------------------------------------- ----------------
<S> <C> <C>
Common Stocks (97.2%):
Aerospace & Defense (4.4%):
Aerospace (4.4%):
7,448 British Aerospace PLC $155,187
25,000 Mitsubishi Heavy Industries Limited 180,066
----------------
Total Aerospace & Defense 335,253
----------------
Basic Industries (8.1%):
Chemicals (4.1%):
5,040 Bayer AG 211,717
9,328 Laporte PLC 98,510
----------------
310,227
----------------
Packaging & Containers (4.0%):
140,000 Cosco Pacific Limited 195,261
15,287 Low & Bonar PLC 112,074
----------------
307,335
----------------
Total Basic Industries 617,562
----------------
Conglomerates & Holding Companies (3.1%):
Diversified Operations (3.1%):
18,000 Hutchison Whampoa 137,147
10,000 United Engineers (Malaysia) 92,246
----------------
Total Conglomerates & Holding Companies 229,393
----------------
Construction & Real Estate (0.7%):
Real Estate Development (0.7%):
9,700 Land & House Public Company Limited 55,075
----------------
Total Construction & Real Estate 55,075
----------------
Durables (7.1%):
Autos (3.8%):
2,608 Daimler - Benz Ag 189,288
4,026 Scania AB - B Shares 98,834
----------------
288,122
----------------
Auto Tires & Accessories (2.5%):
2,812 Valeo SA 189,556
----------------
Consumer Products (0.8%):
13,605 Srithai Superware Company Limited 63,585
----------------
Total Durables 541,263
----------------
Energy (3.4%):
Oil (3.4%):
4,000 Petroleo Brasileiro S.A. - ADR 79,548
10,565 Shell Transporting & Trading Company PLC 179,639
----------------
Total Energy 259,187
----------------
Finance (12.3%):
Banking (9.2%):
3,102 Banco Galicia Y Bueno ADR 73,285
13,300 Bangkok Bank Company Limited 90,413
</TABLE>
<PAGE> 149
<TABLE>
<S> <C> <C>
28,080 Bank of East Asia 102,442
2,631 Banque Nationale De Paris 119,391
25,393 Lloyds TSB Group PLC 210,600
17,000 Sakura Bank Limited 108,637
----------------
704,768
----------------
Financial Services (3.1%):
4,040 Ing Groep N.V. 156,449
6,000 Nomura Securities Corporation Limited 80,066
----------------
236,515
----------------
Total Finance 941,283
----------------
Health (10.2%):
Drugs & Pharmaceuticals (8.3%):
8,000 Glaxo Wellcome PLC 135,699
179 Novartis - Ciba Rights 11,332
179 Novartis Ag 204,675
17 Roche Holding AG 143,137
5,000 Sankyo Corporation Limited 139,246
----------------
634,089
----------------
Hospital Administration (1.9%):
3,000 Nichii Gakkan Company 141,732
----------------
Total Health 775,821
----------------
Industrial Machinery & Equipment (6.4%):
Machinery & Engineering (3.9%):
6,049 Atlas Copco AB - B Shares 140,427
402 Mannesmann AG 158,914
----------------
299,341
----------------
Machinery & Industrial Equipment (2.5%):
4,600 KCI Konecranes International 192,006
----------------
Total Industrial Machinery & Equipment 491,347
----------------
Media & Leisure (11.4%):
Entertainment (1.6%):
14,000 Shochiku 126,482
----------------
Hotels & Motels (2.2%):
9,000 Scandic Hotels AB 166,306
----------------
Leisure (1.8%):
9,460 Granada Group PLC 140,213
----------------
Multimedia (1.4%):
20,067 News Corporation Limited 106,796
----------------
Printing (1.7%):
11,000 Toppan Printing Corporation Limited 126,730
----------------
Publishing (2.7%):
12,887 Elsevier 206,409
----------------
Total Media & Leisure 872,936
----------------
Nondurables (3.4%):
Consumer Products (2.2%):
1,163 Christian Dior 169,045
----------------
Tobacco (1.2%):
18,500 PT Hanjaya Mandala Sampoerna 91,825
----------------
Total Nondurables 260,870
----------------
Retail & Wholesale (5.2%):
Drug Stores (2.4%):
3,000 Seven - Eleven Japan 180,522
----------------
Grocery Stores (1.9%):
</TABLE>
<PAGE> 150
<TABLE>
<S> <C> <C>
2,280 Koninklijke Ahold N.V. 147,395
----------------
Restaurants (0.9%):
16,000 Kentucky Fried Chicken Holding (Malaysia) Berhad 69,607
----------------
Total Retail & Wholesale 397,524
----------------
Services (2.3%):
Human Resources (2.3%):
546 Adecco SA 177,001
----------------
Total Services 177,001
----------------
Technology (19.2%):
Computer Services (1.3%):
8,000 Ines 98,135
----------------
Electrical & Electronics (12.4%):
4,000 Murata Manufacturing Corporation Limited 140,240
4,322 Philips Electronics 195,150
11,991 Premier Farnell PLC 97,102
3,000 Rohm Company 215,085
2,235 Schneider SA 117,743
2,500 Sony Corporation 180,481
----------------
945,801
----------------
Telecommunications (5.5%)
14,000 Nippon Comsys Corporation 154,331
21 Nippon Telegraph & Telephone Corporation 149,515
1,400 Telecel - Communicacoes Pessoai 115,912
----------------
419,758
----------------
Total Technology 1,463,694
----------------
Total Common Stocks (Cost - $7,209,725) 7,418,209
----------------
Investment Companies (2.8%):
214,920 Dreyfus Treasury Cash Management Fund 214,920
----------------
Total Investment Companies (Cost - $214,920) 214,920
----------------
Total (Cost - $7,424,645)(a) (100.0%) $7,633,129
================
</TABLE>
- ----------
Percentages indicated are based on net assets of $7,629,470.
Distribution of investments by country of issue, as a percentage of total value
of investment securities, is as follows:
<TABLE>
<S> <C>
Japan 26.6%
Great Britain 14.9%
Netherlands 9.2%
France 7.8%
Germany 7.3%
Switzerland 7.0%
Hong Kong 5.7%
Sweden 5.3%
United States 2.8%
Thailand 2.7%
Finland 2.5%
Malaysia 2.1%
Portugal 1.5%
Australia 1.4%
Indonesia 1.2%
Brazil 1.0%
Spain 1.0%
</TABLE>
<PAGE> 151
(a) This represents cost for federal income tax purposes and differs from value
by unrealized appreciation (depreciation) of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation $466,305
Unrealized depreciation (257,821)
------------
Net unrealized appreciation $208,484
============
</TABLE>
See notes to financial statements.
<PAGE> 152
GROWTH & INCOME FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Principal Amount Market Value
or Shares Security Description in U.S. Dollars
- ------------------- ------------------------------------------------------ ----------------
<S> <C> <C>
Common Stocks (50.4%):
Basic Industries (9.9%):
Chemicals (5.1%):
17,273 Du Pont (E.I.) De Nemours & Company $1,852,529
---------------
Paper & Related Products (4.8%):
41,655 International Paper Company 1,739,096
---------------
Total Basic Industries 3,591,625
---------------
Conglomerates & Holding Companies (5.3%):
Diversified Operations (5.3%):
21,270 Minnesota Mining & Manufacturing Company 1,956,840
---------------
Total Conglomerates & Holding Companies 1,956,840
---------------
Durables (4.8%):
Autos (4.8%):
30,552 General Motors Corporation 1,768,197
---------------
Total Durables 1,768,197
---------------
Energy (14.2%):
Oil (14.2%):
26,452 Chevron Corporation 1,706,154
18,060 Exxon Corporation 1,803,743
17,186 Texaco Incorporated 1,699,266
---------------
Total Energy 5,209,163
---------------
Finance (5.2%):
Banking (5.2%):
18,225 J.P. Morgan & Company 1,915,903
---------------
Total Finance 1,915,903
---------------
Nondurables (5.9%):
Tobacco (5.9%):
15,835 Philip Morris Companies Incorporated 2,139,704
---------------
Total Nondurables 2,139,704
---------------
Technology (5.1%):
Computers & Office Services (0.1%):
1,172 NCR Corporation 38,676
---------------
Telecommunications (5.0%):
46,013 AT&T Corporation 1,834,768
---------------
Total Technology 1,873,444
---------------
Total Common Stocks (Cost - $17,649,438) 18,454,876
---------------
Investment Companies (50.0%):
2,716,003 Dreyfus Treasury Cash Management Fund 2,716,003
197,006 Standard & Poors Depositary Receipts 15,594,256
---------------
Total Investment Companies (Cost - $17,637,818) 18,310,259
---------------
</TABLE>
<PAGE> 153
<TABLE>
<S> <C> <C>
Total (Cost - $35,287,256)(a) (100.4%) $36,765,135
===============
</TABLE>
- ----------
Percentages indicated are based on net assets of $36,603,412.
(a) This represents cost for federal income tax purposes and differs from value
by unrealized appreciation (depreciation) of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation $1,622,540
Unrealized depreciation (144,661)
-------------
Net unrealized appreciation $1,477,879
=============
</TABLE>
See notes to financial statements.
<PAGE> 154
NOTES TO FINANCIAL STATEMENTS
February 28, 1997 (Unaudited)
1. Organization
Payden & Rygel Global Short Bond Fund, Payden & Rygel Total Return Fund, Payden
& Rygel Global Balanced Fund, Payden & Rygel International Equity Fund and
Payden & Rygel Growth & Income Fund (the "Funds") are non-diversified series of
Payden & Rygel Investment Group ("Group"), a no-load, open-end management
investment company organized as a Massachusetts business trust on January 22,
1992 and registered under the Investment Company Act of 1940, as amended.
The objective of the Global Short Bond and Total Return Funds is to realize a
high level of total return consistent with preservation of capital. In order to
achieve these objectives, each Fund invests primarily in debt obligations. The
Total Return Fund invests in debt obligations of the U.S. Treasury, U.S.
government agencies, U.S. dollar-denominated foreign and domestic public
corporations and mortgage-backed securities. In addition, the Total Return Fund
can invest in foreign bonds denominated in foreign currencies, and up to 25% of
its total assets in non-investment grade debt.
The Global Short Bond invests primarily in U.S. and foreign government notes and
bonds and U.S. and foreign corporate debt securities. The Global Short Bond and
Total Return Funds can also have substantial investments in foreign currency
contracts.
The objective of the Global Balanced Fund is to realize a high level of total
return consistent with preservation of capital. This Fund invests in common
stocks, bonds and money market instruments of both domestic and foreign issuers.
The objective of the International Equity Fund is long-term capital
appreciation. This Fund invests in equity securities (common and preferred
stock) of issuers whose corporate headquarters are outside the United Stated
("foreign equities").
The Growth & Income Fund seeks to provide growth of capital and some current
income. To achieve these objectives the Growth & Income 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 ("S&P 500 Index"), normally Standard & Poor's
Depositary Receipts or additional common stocks. There can, however, be no
assurance that any of the Funds' investment objectives will be achieved.
The Funds offer both Class A and Class B shares; however, as of February 28,
1997, there have been no Class B shares issued. Class B shares are subject to
certain fees under a shareholder service plan (the "Plan"); Class A shares do
not participate in the Plan. Both
<PAGE> 155
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1997 (Unaudited)
classes of shares have identical rights and privileges except with respect to
the shareholder service fees borne by Class B and voting rights on matters
affecting a single class. The Group is authorized to issue an unlimited number
of shares of each class which are units of beneficial interest with a par value
of $.001 per share.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the
Funds:
Securities Valuation
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 on the basis of quotations obtained
from brokers and dealers or pricing services with consideration of such factors
as institutional-sized trading in similar groups of securities, quality, yield,
coupon rate, maturity, type of issue, trading characteristics and other market
data. Options, futures, swaps and other similar assets are valued at the last
available bid price in the case of listed securities or on the basis of
information provided by the institution with which the Fund entered into the
transaction in the case of other securities. Investments in investment companies
are valued at their net asset values as reported by such companies. Securities
for which market quotations are not readily available are valued at fair value
as determined in good faith pursuant to guidelines established by the Board of
Trustees 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. Debt securities with remaining maturities of sixty days or less
are valued on an amortized cost basis unless Payden & Rygel ("the Adviser")
determines that such basis does not represent fair value. Non-U.S. dollar
securities are translated into U.S. dollars using the spot exchange rate at the
close of the London market. The differences between cost and market values of
investments are reflected as either unrealized appreciation or depreciation.
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. 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.
Investment Transactions and Related Income
<PAGE> 156
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1997 (Unaudited)
Investment transactions are accounted for on the date the security is purchased
or sold (trade date). Interest income is recognized on the accrual basis. All
premiums and discounts are amortized or accreted for both financial statement
and tax reporting purposes as required by Federal income tax regulations.
Dividend income is recorded on the ex-dividend date. Realized gains or losses on
investment transactions are determined on the identified cost basis.
Foreign Currency Translation
The accounting records of the Funds are maintained in U.S. dollars. The Global
Short Bond, Total Return, Global Balanced and International Equity Funds may
purchase investment securities that are payable in a foreign currency. For these
four Funds, investment securities, other assets and liabilities denominated in a
foreign currency are translated into U.S. dollars at the current exchange rate.
Purchases and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the exchange rate on the dates of the
transactions.
Each of these four Funds isolates that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuation arising from changes in market prices of securities held.
Reported net realized foreign exchange gains or losses arise from sales and
maturities of securities, purchases and sales of foreign currencies, currency
gains or losses realized between the trade and settlement dates of securities
transactions, and the difference between the amount of interest or expenses
recorded on each of these Fund's books and the U.S. dollar equivalent of the
amounts actually received or paid. Net unrealized foreign exchange gains and
losses arise from changes in the value of assets and liabilities, including
investments in securities, resulting from changes in the exchange rates.
Repurchase Agreements
Any of the Funds may enter into repurchase agreements (agreements to purchase
U.S. Treasury notes and bills, subject to the seller's agreement to repurchase
them at a specified time and price) with well-established registered securities
dealers or banks. Repurchase agreements are the equivalent of loans by the
Funds. With respect to such agreements, it is each Fund's policy to take
possession of the underlying securities and, on a daily basis, mark-to-market
such securities to ensure that the value, including accrued interest, is at
least equal to the amount to be repaid to each Fund under each agreement.
Options Transactions
<PAGE> 157
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1997 (Unaudited)
When any of the Funds writes a covered call or put option, an amount equal to
the premium received is included in that Fund's statement of assets and
liabilities as a liability. The amount of the liability is subsequently
marked-to-market to reflect the current market value of the option. If an option
expires on its stipulated expiration date or if the Fund enters into a closing
purchase transaction, a gain or loss is realized. If a written call option is
exercised, a gain or loss is realized for the sale of the underlying security
and the proceeds from the sale are increased by the premium originally received.
If a written put option is exercised, the cost of the security acquired is
decreased by the premium originally received.
When any of the Funds purchases a call or put option, an amount equal to the
premium paid is included in that Fund's statement of assets and liabilities as
an investment, and is subsequently marked-to-market to reflect the current
market value of the option. If an option expires on the stipulated expiration
date or if a Fund enters into a closing sale transaction, a gain or loss is
realized. If a Fund exercises a call option, the cost of the security acquired
is increased by the premium paid for the call. If a Fund exercises a put option,
a gain or loss is realized from the sale of the underlying security, and the
proceeds from such sale are decreased by the premium originally paid. Written
and purchased options are non-income producing securities.
The option techniques utilized are 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, equity and currency markets and not for
speculation.
Futures Contracts
Any Fund may purchase or sell futures contracts and options on futures contracts
which provide for the future sale by one party and purchase by another party of
a specified quantity of a financial instrument or foreign currency at a fixed
price on a future date. Upon entering into such a contract, a Fund is required
to deposit and maintain as collateral such initial margin as required by the
exchange on which the contract is traded. Pursuant to the contract, that Fund
agrees to receive from or pay to the broker an amount equal to the daily
fluctuations in the value of the contract. Such receipts or payments are known
as variation margin and are recorded as unrealized gains or losses by that Fund.
When the contract is closed, that Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed. The Funds invest in futures contracts to
hedge against
<PAGE> 158
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1997 (Unaudited)
anticipated future changes in interest or exchange rates or security prices. The
potential risk to the Funds is that the change in value of the underlying
securities may not correlate to the change in value of the contracts.
The Total Return, Global Balanced, International Equity and Growth & Income
Funds may invest in stock index futures contracts which are an agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the close of the
last trading day of the contract and the price at which the index contract was
originally written. Variation margin accounting procedures as discussed above
apply to these index futures contracts. Each Fund invests in these futures
contracts to permit a Fund to meet its objectives at a lower cost than investing
directly in equity securities, while permitting the equivalent of an investment
in a portfolio of equity securities. The potential risk to a Fund is that the
change in value of the underlying index may not correlate to the change in value
of the contracts.
Equity Swap Contracts
The Global Balanced, International Equity and Growth & Income Funds may enter
into equity swap transactions which involve an agreement between a Fund and
another party to exchange payments calculated as if they were interest on a
fictitious ("notional") principal amount. A Fund will typically pay a floating
rate of interest and receive the total return of a specified equity index. 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 amounts of the two payment
streams. The net amount of the excess or deficiency, if any, of a Fund's
obligations over its entitlements with respect to each swap is accrued on a
daily basis and is recorded as an unrealized gain or loss by that Fund.
These Funds invest in these swap transactions to permit the Funds to meet their
objectives at a lower cost than investing directly in equity securities, while
permitting the equivalent of an investment in a portfolio of equity securities.
The potential risk to a Fund is that the swap position may correlate imperfectly
with the markets or the asset or liability being hedged.
Forward Currency Contracts
The Global Short Bond, Total Return, Global Balanced and International Equity
Funds each may enter into forward foreign currency exchange contracts for the
purchase or sale of a specific foreign currency at a fixed price on a future
date. Risks may arise upon entering these contracts from the potential inability
of counter parties to meet the terms of their contracts and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar. These
four Funds will enter into forward contracts as a hedge
<PAGE> 159
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1997 (Unaudited)
against specific transactions or portfolio positions to protect against adverse
currency movements. The forward foreign currency exchange contracts are adjusted
by the daily exchange rate of the underlying currency and any gains or losses
are recorded for financial statement purposes as unrealized until the contract
settlement date, at which time a Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
Delayed Delivery Transactions
Any of the Funds 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
three 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 may
change prior to delivery.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date. Dividends
from net investment income and net realized gains on foreign currency
transactions are declared and paid monthly, except for the International Bond,
Global Balanced, International Equity and Growth & Income Funds which are paid
quarterly, and net realized gains on investments, if any, are declared and
distributed at least annually. All distributions are paid in the form of
additional shares unless cash payment is requested.
Distributions to shareholders are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
Federal Income Taxes
It is the policy of each Fund to meet the requirements for qualification as a
regulated investment company as defined in applicable sections of the Internal
Revenue Code (the "Code"), and to make distributions of net investment income
and net realized gains sufficient to relieve it from all Federal income or
excise taxes. Accordingly, no provision for Federal income or excise tax is
necessary.
Each Fund files a tax return annually using tax accounting methods required
under provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared. The
differences arise primarily from the treatment of foreign currency transactions
and futures contracts and the deferral of certain losses under Federal income
tax regulations. Accordingly, the
<PAGE> 160
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1997 (Unaudited)
amount of net investment income and net realized gains or losses reported in
these financial statements may differ from that reported in each Fund's tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders for Federal income tax purposes. Distributions which exceed net
investment income and net realized gains for financial reporting purposes but
not for tax purposes, if any, are shown as distributions in excess of net
investment income and net realized gains from investments in the accompanying
statements.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
Other
Shared expenses incurred by the Group are allocated among the series of the
Group on the basis of relative net assets. Series-specific expenses are charged
to each series as incurred. Fund expenses not specific to any class will be
allocated between the classes based upon net assets of each class.
Class-specific expenses will be charged to each class as incurred.
3. Purchases and Sales of Investments
Purchases and sales of investments (excluding short-term investments and
long-term U.S. Government securities) for the period ended February 28, 1997
were as follows:
<TABLE>
<CAPTION>
Purchases Sales
------------ ------------
<S> <C> <C>
Global Short Bond Fund $ 73,342,532 $24,978,411
Total Return Fund 13,345,625 3,765,135
Global Balanced Fund 5,986,254 885,492
International Equity Fund 7,553,100 354,453
Growth & Income Fund 32,812,755 238,653
</TABLE>
Purchases and sales of long-term U.S. Government securities for the period ended
February 28, 1997 were as follows:
<PAGE> 161
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1997 (Unaudited)
<TABLE>
Purchases Sales
------------- -----------
<S> <C> <C>
Global Short Bond Fund $ 15,881,320 $ 4,477,574
Total Return Fund 0 0
Global Balanced Fund 1,954,945 125,176
International Equity Fund 0 0
Growth & Income Fund 0 0
</TABLE>
The Global Balanced Fund's activity in written options for the period ended
February 28, 1997 was as follows:
<TABLE>
<CAPTION>
Number of Contracts
Contracts Premium
----------- -----------
<S> <C> <C>
Options outstanding at
beginning of period 0 $ 0
Options sold 38 29,008
Options canceled in closing
purchase transactions 0 0
Options expired prior to exercise 0 0
-- ----------
Options outstanding at end of period 38 $ 29,008
</TABLE>
None of the other Funds had activity in written options for the period ended
February 28, 1997.
4. Unamortized Organization Costs
The organization costs incurred on behalf of the Funds listed below are being
reimbursed to Payden & Rygel and are being amortized on a straight-line basis
over a period not exceeding five years. The organization costs and the amounts
reimbursed as of February 28, 1997 are as follows:
<TABLE>
<CAPTION>
Cumulative Amortized
Organization Organization
Costs Expenses
------------ --------------
<S> <C> <C>
Global Short Bond Fund $ 2,046 $ 705
Total Return Fund 3,254 363
Global Balanced Fund 4,063 389
International Equity Fund 3,798 381
Growth & Income Fund 11,447 596
</TABLE>
<PAGE> 162
Any redemption by Payden & Rygel of its initial investment of $100,000 will
reduce the reimbursement by a prorata portion of any of the then unamortized
organization costs.
5. Related Party Transactions
Investment advisory services are provided to the Funds by Payden & Rygel. Under
the terms of the investment advisory agreement Payden & Rygel is entitled to
receive fees monthly, computed on the average daily net assets of each of the
Funds separately at an annualized rate. The rate for the Global Short Bond Fund
is 0.30% on net assets up to $2 billion and 0.25% on net assets over $2 billion.
The rate for the Total Return Fund is 0.28% on net assets up to $1 billion and
0.25% on net assets over $1 billion. The rate for the Global Balanced Fund is
0.50% on net assets up to $1 billion and 0.40% on net assets over $1 billion.
The rate for the International Equity Fund is 0.60% on net assets up to $1
billion and 0.45% on net assets over $1 billion. The rate for the Growth &
Income Fund is 0.50% on net assets up to $2 billion and 0.30% on net assets over
$2 billion.
Payden & Rygel has voluntarily agreed to permanently waive 0.20% of its fee for
advisory services for the Growth & Income Fund through at least October 31,
1997. In addition, Payden & Rygel has agreed to guarantee that, for so long as
it acts as investment adviser to a Fund, the expenses of a Fund attributable to
Class A Shares, 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 indicated below of that Fund's average daily net assets on an
annualized basis. In addition, Payden & Rygel has voluntarily agreed to
temporarily limit each Fund's total expenses, including advisory fees, to the
percentage indicated below of that Fund's average daily net assets 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).
<TABLE>
<CAPTION>
Voluntary
Expense Expense
Guarantee Limit
--------- --------
<S> <C> <C>
Global Short Bond Fund 0.70% 0.45%
Total Return Fund 0.60% 0.45%
Global Balanced Fund 0.85% 0.70%
International Equity Fund 1.05% 0.90%
Growth & Income Fund 0.80% 0.54%
</TABLE>
<PAGE> 163
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1997 (Unaudited)
Each Fund remains liable to Payden & Rygel for expenses subsidized in any fiscal
year so long as any reimbursement will not cause the annual expense ratio for
the year in which it is made to exceed the amount of the expense guarantee or
expense limit (whichever is in effect at the time of reimbursement). The
deferred expense subsidies, as identified in the statements of assets and
liabilities, represent the cumulative amount of expenses subsidized for the
Funds and will be recognized as net expense in the statements of operations in
future periods, if expense limits permit.
Payden & Rygel has incurred certain expenses in connection with the offering of
multiple class shares that will be charged to the Group upon the initial sale of
Class B shares to the public. Such expenses, approximately $41,000 as of
February 28, 1997, will be allocated to all series of the Group that offer Class
B shares on the basis of relative net assets at the time of the initial sale of
Class B shares, and will be prorated between the classes on the basis of
eligible net assets of each class over a five year period.
For the Global Balanced and International Equity Funds, Payden & Rygel has
entered into a sub-advisory agreement with Scottish Widows Investment Management
("Sub-Adviser"). The Sub-Adviser is a wholly owned subsidiary of Scottish Widows
Fund and Life Assurance Society, a mutual company chartered in 1815. Under the
terms of the sub-advisory agreement, the Sub-Adviser receives fees monthly at a
rate of 0.40% on the first $1 billion of average daily net assets and 0.30% on
average daily net assets over $1 billion. In the case of the Global Balanced
Fund, fees are based on the average daily net assets allocated to the
Sub-Adviser. The Sub-Adviser's fee does not represent a separate or additional
charge against the Funds.
Payden & Rygel Distributors, a wholly owned subsidiary of Payden & Rygel, serves
as the distributor for the Funds and is not entitled to receive any fees from
the Group under the distribution agreement.
Treasury Plus, Inc., a wholly owned subsidiary of Payden & Rygel, serves as
administrator to the Group. Under the terms of the administration agreement,
Treasury Plus receives fees monthly, computed on the average daily net assets of
the Group at an annualized rate of 0.06%.
Investors Fiduciary Trust Company ("IFTC"), a Missouri trust company, serves as
transfer agent to the Funds. Under the terms of the transfer agency agreement,
IFTC is entitled to receive fees based upon a specified amount per shareholder
with specified minimum-per-Fund amounts and surcharges, plus certain
out-of-pocket expenses. IFTC also serves as fund accountant. Under the terms of
the fund accounting agreement, IFTC receives
<PAGE> 164
fees based on specified minimum-per-Group amounts, plus certain out-of-pocket
expenses.
All expenses incurred by the Funds are paid directly by Payden & Rygel subject
to subsequent reimbursement by the Funds. For Funds which have not fully
reimbursed Payden & Rygel for expenses paid on their behalf as of February 28,
1997, the cumulative amounts of expenses paid by Payden & Rygel and the
reimbursement of expenses by the Funds are as follows:
<TABLE>
<CAPTION>
Cumulative Cumulative
Total of Total of
Expenses Paid by Reimbursement
Payden & Rygel of Expenses
---------------- --------------
<S> <C> <C>
Total Return Fund 17,334 5,500
Global Balanced Fund 20,275 0
International Equity Fund 22,011 0
Growth & Income Fund 35,376 28,300
</TABLE>
Certain officers and/or trustees of the Group are affiliated with Payden &
Rygel, Payden & Rygel Distributors and/or Treasury Plus, Inc. Such officers and
trustees receive no fees from the Funds for serving as officers and/or trustees
of the Group.
<PAGE> 165
THE PAYDEN & RYGEL INVESTMENT GROUP
F O R M N-1A
PART C: OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
Registrant's Statements of Assets and Liabilities as of
October 31, 1996, Statements of Operations for the periods
ended October 31, 1996, Statements of Changes in Net
Assets for the periods ended October 31, 1996 and October
31, 1995, Schedules of Portfolio Investments as of October
31, 1996, related notes, and Independent Auditor's Report,
with respect to the Funds are incorporated by reference in
Part B.
Registrant's unaudited Statements of Assets and
Liabilities as of February 28, 1997, Statements of
Operations for the periods ended February 28, 1997,
Statements of Changes in Net Assets for the periods ended
February 28, 1998, and Schedules of Portfolio Investments
as of February 28, 1997, with respect to its Global Short
Bond, Total Return, Growth & Income, Global Balanced and
International Equity Funds are included in Part B.
(b) Exhibits:
(1.1) Master Trust Agreement of Registrant (a).
(1.2) Certificate of Amendment of Master Trust
Agreement (b).
(1.3) Amendment No. 2 to the Master Trust Agreement
dated September 16, 1993 (c).
(1.4) Amendment No. 3 to the Master Trust Agreement
dated December 13, 1993 (d).
(1.5) Amendment No. 4 to the Master Trust Agreement
dated March 17, 1994 (e).
(1.6) Amendment No. 5 to the Master Trust Agreement
dated as of August 31, 1994 (f).
(1.7) Amendment No. 6 to the Master Trust Agreement (g).
C-1
<PAGE> 166
(1.8) Amendment No. 7 to the Master Trust Agreement (h).
(1.9) Amendment No. 8 to the Master Trust Agreement (i).
(1.10) Amendment No. 9 to the Master Trust Agreement (j).
(1.11) Amendment No. 10 to the Master Trust Agreement (k).
(1.12) Form of Amendment No. 11 to the Master Trust
Agreement (k).
(1.13) Form of Amendment No. 12 to the Master Trust
Agreement (l).
(1.14) Form of Amendment No. 13 to the Master Trust
Agreement (m).
(2) By-laws of Registrant (a).
(3) None.
(4) None.
(5.1) Investment Management Agreement between
Registrant and Payden & Rygel (n).
(5.2) Amendment to Investment Management Agreement
between Registrant and Payden & Rygel dated as of
September 16, 1993, adding Tax-Exempt Bond Fund
to the Agreement (n).
(5.3) Amendment to Investment Management Agreement
between Registrant and Payden & Rygel dated
December 29, 1993, adding Short Bond,
Intermediate Bond and Investment Quality Bond
(previously Opportunity) Funds to the Agreement
(n).
(5.4) Amendment to Investment Management Agreement
between Registrant and Payden & Rygel dated as of
April 29, 1994, adding Limited Maturity Fund to
the Agreement (e).
(5.5) Amendment to Investment Management Agreement
between Registrant and Payden & Rygel dated as of
June 14, 1994 with respect to Class B shares (e).
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<PAGE> 167
(5.6) Amendment to Investment Management Agreement
between Registrant and Payden & Rygel dated as of
June 14, 1994, adding Short Duration Tax Exempt
Fund to the Agreement (e).
(5.7) Agreement between Registrant and Payden & Rygel
dated June 14, 1994 with respect to voluntary
expense limitations (g).
(5.8) Amendment to Investment Management Agreement
between Registrant and Payden & Rygel adding U.S.
Treasury Fund and International Bond Fund
(previously Global Opportunity Fund) to the
Agreement (g).
(5.9) Form of Amendment to Investment Management
Agreement between Registrant and Payden & Rygel
adding Market Return Fund to the Agreement (o).
(5.10) Form of Amendment to Investment Management
Agreement between Registrant and Payden & Rygel
adding Growth & Income Fund to the Agreement (k).
(5.11) Form of Amendment to Investment Management
Agreement between Registrant and Payden & Rygel
adding Global Short Bond Fund to the Agreement
(l).
(5.12) Form of Amendment to Investment Management
Agreement between Registrant and Payden & Rygel
adding Total Return Fund, International Equity
Fund and Global Balanced Fund to the Agreement
(m).
(5.13) Form of Subadvisory Agreement between Payden &
Rygel and Scottish Widows Investment Management
Limited with respect to the International Equity
Fund and Global Balanced Fund (m).
(6.1) Distribution Agreement between Registrant and
Payden & Rygel Distributors, Inc. (n).
(6.2) Amendment to Distribution Agreement between
Registrant and Payden & Rygel Distributors dated
August 31, 1992 (p).
(7) None.
(8) Form of Custody Agreement between Registrant and
Boston Safe Deposit and Trust Company (q).
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<PAGE> 168
(9.1) Management and Administration Agreement between
Registrant and Treasury Plus, Incorporated dated
as of January 1, 1996 (o).
(9.2) Form of Investment Accounting Agreement between
Registrant and Investors Fiduciary Trust Company
(o).
(9.3) Form of Transfer Agency and Service Agreement
between Registrant and Investors Fiduciary Trust
Company (o).
(9.4) License Agreement between Registrant and Payden &
Rygel (n).
(10) Opinion of Counsel (b).
(11) Consent of Independent Auditors.
(12) Not applicable.
(13) Investment letter of Payden & Rygel (b).
(14) None.
(15) None.
(16) Total return calculations (o).
(17) Financial Data Schedule.
(18) Multiple Class Plan (l).
(19.1) Powers of Attorney of Dennis Poulsen and J.
Clayburn La Force (r).
(19.2) Power of Attorney of Stender E. Sweeney (r).
(19.3) Power of Attorney of Thomas McKernan, Jr. (s).
(19.4) Power of Attorney of W.D. Hilton, Jr. (f).
______________________________
(a) Filed as an exhibit to the Registration Statement on April 2, 1992
and incorporated herein by reference.
(b) Filed as an exhibit to the Pre-Effective Amendment No. 2 to the
Registration Statement on July 28, 1992 and incorporated herein by
reference.
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<PAGE> 169
(c) Filed as an exhibit to Post-Effective Amendment No. 2 to the
Registration Statement and incorporated herein by reference.
(d) Filed as an exhibit to Post-Effective Amendment No. 4 to the
Registration Statement on January 24, 1994 and incorporated herein
by reference.
(e) Filed as an exhibit to Post-Effective Amendment No. 6 to the
Registration Statement on June 30, 1994 and incorporated herein by
reference.
(f) Filed as an exhibit to Post-Effective Amendment No. 9 to the
Registration Statement on October 17, 1994 and incorporated herein
by reference.
(g) Filed as an exhibit to Post-Effective Amendment No. 11 to the
Registration Statement on January 12, 1995 and incorporated herein
by reference.
(h) Filed as an exhibit to Post-Effective Amendment No. 15 to the
Registration Statement on July 6, 1995 and incorporated herein by
reference.
(i) Filed as an exhibit to Post-Effective Amendment No. 17 to the
Registration Statement on October 5, 1995 and incorporated herein
by reference.
(j) Filed as an exhibit to Post-Effective Amendment No. 21 to the
Registration Statement on February 7, 1996 and incorporated herein
by reference.
(k) Filed as an exhibit to Post-Effective Amendment No. 24 to the
Registration Statement on May 29, 1996 and incorporated herein by
reference.
(l) Filed as an exhibit to Post-Effective Amendment No. 25 to the
Registration Statement on July 3, 1996 and incorporated herein by
reference.
(m) Filed as an exhibit to Post-Effective Amendment No. 26 to the
Registration Statement on September 23, 1996 and incorporated
herein by reference.
(n) Filed as an exhibit to Post-Effective Amendment No. 7 to the
Registration Statement on July 1, 1994 and incorporated herein by
reference.
(o) Filed as an exhibit to Post-Effective Amendment No. 16 to the
Registration Statement on September 11, 1995 and incorporated
herein by reference.
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<PAGE> 170
(p) Filed as an exhibit to Post-Effective Amendment No. 1 to the
Registration Statement on February 17, 1993 and incorporated
herein by reference.
(q) Filed as an exhibit to Post-Effective Amendment No. 27 to the
Registration Statement on December 20, 1996 and incorporated
herein by reference.
(r) Filed as an exhibit to Pre-Effective Amendment No. 1 to the
Registration Statement on June 19, 1992 and incorporated herein by
reference.
(s) Filed as an exhibit to Post-Effective Amendment No. 5 to the
Registration Statement on March 1, 1994 and incorporated herein by
reference.
Item 25. Persons Controlled by or Under Common Control with Registrant.
As of April 10, 1997, the following persons held of record
more than 25% of the outstanding shares of the following classes of shares of
Registrant: Payden & Rygel International Bond Fund, Class A -- Consuelo Zobel
Alger Foundation (67%); Payden & Rygel Limited Maturity Fund, Class A --
Tessera, Inc. (30.0%); Payden & Rygel Global Balanced Fund, Class A -- Lon V.
Smith Foundation (32%); Payden & Rygel International Equity Fund, Class A --
Scottish Widows Fund (26%); Payden & Rygel Total Return Fund, Class A -- Fluor
Master Retirement Trust (33%).
Item 26. Number of Holders of Securities.
As of March 31, 1997, the number of record holders of each
class of securities of Registrant was as follows:
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C> <C>
Shares of beneficial interest of Payden
& Rygel Global Fixed Income Fund - Class A 250
- Class B 0
Shares of beneficial interest of Payden
& Rygel International Bond Fund - Class A 6
- Class B 0
Shares of beneficial interest of Payden
& Rygel Tax Exempt Bond Fund - Class A 66
- Class B 0
Shares of beneficial interest of Payden
</TABLE>
C-6
<PAGE> 171
<TABLE>
<S> <C> <C>
& Rygel Short Duration Tax Exempt Fund
- Class A 47
- Class B 0
Shares of beneficial interest of Payden
& Rygel Short Bond Fund - Class A 48
- Class B 0
Shares of beneficial interest of Payden
& Rygel Intermediate Bond Fund - Class A 30
- Class B 0
Shares of beneficial interest of Payden
& Rygel Investment Quality Bond
Fund - Class A 45
- Class B 0
Shares of beneficial interest of Payden
& Rygel Limited Maturity Fund - Class A 126
- Class B 0
Shares of beneficial interest of Payden
& Rygel U.S. Treasury Fund - Class A 26
- Class B 0
Shares of beneficial interest of Payden
& Rygel Market Return Fund - Class A 78
- Class B 0
Shares of beneficial interest of Payden
& Rygel Growth & Income Fund - Class A 1,211
- Class B 0
Shares of beneficial interest of Payden
& Rygel Global Short Bond Fund - Class A 23
- Class B 0
Shares of beneficial interest of Payden
& Rygel Total Return Fund - Class A 9
- Class B 0
Shares of beneficial interest of Payden
& Rygel Global Balanced Fund - Class A 40
- Class B 0
Shares of beneficial interest of Payden
& Rygel International Equity
Fund - Class A 46
- Class B 0
</TABLE>
C-7
<PAGE> 172
Item 27. Indemnification.
Section 6.4 of Article VI of Registrant's Master Trust Agreement,
filed herewith as Exhibit 1, provides for the indemnification of Registrant's
trustees and officers against liabilities incurred by them in connection with
the defense or disposition of any action or proceeding in which they may be
involved or with which they may be threatened, while in office or thereafter,
by reason of being or having been in such office, except with respect to
matters as to which it has been determined that they acted with willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of their office ("Disabling Conduct").
Section 7 of Registrant's Investment Management Agreement, filed
herewith as Exhibit 5, provides for the indemnification of Registrant's Adviser
against all liabilities incurred by it in performing its obligations under the
Agreement, except with respect to matters involving its Disabling Conduct.
Section 4 of Registrant's Distribution Agreement, filed herewith as Exhibit 6,
provides for the indemnification of Registrant's Distributor against all
liabilities incurred by it in performing its obligations under the Agreement,
except with respect to matters involving its Disabling Conduct.
Registrant has obtained from a major insurance carrier a trustees'
and officers' liability policy covering certain types of errors and omissions.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
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<PAGE> 173
Item 28. Business and Other Connections of Investment Adviser.
During the two fiscal years ended December 31, 1996,
Payden & Rygel has engaged principally in the business of providing investment
services to institutional clients. During such period, the other substantial
businesses, professions, vocations or employments of the directors and officers
of Payden & Rygel have been as set forth below. The principal business address
of such persons is 333 South Grand Avenue, Los Angeles, California 90071,
except as otherwise indicated below.
<TABLE>
<S> <C> <C>
Name and Principal
Business Address Office Other Employment
- ---------------- ------- ----------------
Joan A. Payden President and
Director
Lynn M. Bowker Vice President
and Treasurer
Lynda L. Faber Senior Vice
President and
Director
John P. Isaacson Executive Vice
President and
Director
Scott A. King Executive Vice
President and
Director
Brian W. Matthews Vice President
Christopher N. Orndorff Vice President
</TABLE>
Item 29. Principal Underwriters.
(a) Payden & Rygel Distributors, Inc. does not act as a
principal underwriter, depositor or investment adviser to any investment
company other than Registrant.
(b) Information is furnished below with respect to the
officers and directors of Payden & Rygel Distributors, Inc. The principal
business address of such persons is 333 South Grand Avenue, Los Angeles,
California 90071, except as otherwise indicated below.
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<PAGE> 174
<TABLE>
<CAPTION>
Positions and
Offices with Positions and
Name and Principal Principal Offices with
Business Address Underwriter Registrant
- ------------------ ------------- -------------
<S> <C> <C>
Joan A. Payden President Trustee, Chairman
and Director of the Board and
President
Christopher N. Orndorff Chief Financial Trustee
Officer, Secretary
and Director
</TABLE>
(c) Not applicable.
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be maintained
by Section 31(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder are maintained either at the offices of the Registrant
(333 South Grand Avenue, Los Angeles, California 90071), its adviser Payden &
Rygel (333 South Grand Avenue, 32nd Floor, Los Angeles, California 90071), its
Administrator Treasury Plus, Inc. (333 South Grand Avenue, 32nd Floor, Los
Angeles, California 90071), its Fund Accountant and Transfer Agent Investors
Fiduciary Trust Company (127 West 10th Street, Kansas City, Missouri 64105), or
its Custodian Boston Safe Deposit and Trust Company (One Boston Place, Boston,
Massachusetts 02108).
Item 31. Management Services.
Not Applicable.
Item 32. Undertakings.
Registrant hereby undertakes that if it is requested by the
holders of at least 10% of its outstanding shares to call a meeting of
shareholders for the purpose of voting upon the question of removal of a
Trustee, it will do so and will assist in communications with other
shareholders as required by Section 16(c) of the Investment Company Act of
1940.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual report to
shareholders, upon request and without charge.
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<PAGE> 175
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Los Angeles, State of California, on
the 10th day of April, 1997.
THE PAYDEN & RYGEL INVESTMENT GROUP
By s/Joan A. Payden
----------------------------
Joan A. Payden
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
s/Joan A. Payden Trustee and April 10, 1997
- ------------------------- Principal
Joan A. Payden Executive Officer
J. Clayburn La Force* Trustee April 10, 1997
- -------------------------
J. Clayburn La Force
Dennis C. Poulsen* Trustee April 10, 1997
- -------------------------
Dennis C. Poulsen
Thomas McKernan, Jr.* Trustee April 10, 1997
- -----------------------
Thomas McKernan, Jr.
Stender E. Sweeney* Trustee April 10, 1997
- -------------------------
Stender E. Sweeney
W.D. Hilton, Jr.* Trustee April 10, 1997
- -------------------------
W.D. Hilton, Jr.
s/Lynda L. Faber Trustee April 10, 1997
- -------------------------
Lynda L. Faber
s/John Paul Isaacson Trustee April 10, 1997
- -------------------------
John Paul Isaacson
s/Christopher N. Orndorff Trustee April 10, 1997
- -------------------------
Christopher N. Orndorff
s/Thomas J. Barrett Principal April 10, 1997
- ------------------------- Financial and
Thomas J. Barrett Accounting Officer
*s/Joan A. Payden
- -------------------------
By: Joan A. Payden
Attorney-In-Fact
</TABLE>
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EXHIBIT INDEX
THE PAYDEN & RYGEL INVESTMENT GROUP
FORM N-1A REGISTRATION STATEMENT
Post-Effective Amendment No. 28
<TABLE>
<CAPTION>
Exhibit No. Title of Exhibit
- ----------- ----------------
<S> <C>
(1.1) Master Trust Agreement of Registrant (a).
(1.2) Certificate of Amendment of Master Trust Agreement (b).
(1.3) Amendment No. 2 to the Master Trust Agreement dated September 16, 1993 (c).
(1.4) Amendment No. 3 to the Master Trust Agreement dated December 13, 1993 (d).
(1.5) Amendment No. 4 to the Master Trust Agreement dated March 17, 1994 (e).
(1.6) Amendment No. 5 to the Master Trust Agreement dated as of August 31, 1994 (f).
(1.7) Amendment No. 6 to the Master Trust Agreement (g).
(1.8) Amendment No. 7 to the Master Trust Agreement (h).
(1.9) Amendment No. 8 to the Master Trust Agreement (i).
(1.10) Amendment No. 9 to the Master Trust Agreement (j).
(1.11) Amendment No. 10 to the Master Trust Agreement (k).
(1.12) Form of Amendment No. 11 to the Master Trust Agreement (k).
(1.13) Form of Amendment No. 12 to the Master Trust Agreement (l).
(1.14) Form of Amendment No. 13 to the Master Trust Agreement (m).
(2) By-laws of Registrant (a).
(3) None.
</TABLE>
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<TABLE>
<S> <C>
(4) None.
(5.1) Investment Management Agreement between
Registrant and Payden & Rygel (n).
(5.2) Amendment to Investment Management Agreement
between Registrant and Payden & Rygel dated as
of September 16, 1993, adding Tax-Exempt Bond
Fund to the Agreement (n).
(5.3) Amendment to Investment Management Agreement
between Registrant and Payden & Rygel dated
December 29, 1993, adding Short Bond,
Intermediate Bond and Investment Quality Bond
(previously Opportunity) Funds to the Agreement
(n).
(5.4) Amendment to Investment Management Agreement
between Registrant and Payden & Rygel dated as
of April 29, 1994, adding Limited Maturity Fund
to the Agreement (e).
(5.5) Amendment to Investment Management Agreement
between Registrant and Payden & Rygel dated as
of June 14, 1994 with respect to Class B shares
(e).
(5.6) Amendment to Investment Management Agreement
between Registrant and Payden & Rygel dated as
of June 14, 1994, adding Short Duration Tax
Exempt Fund to the Agreement (e).
(5.7) Agreement between Registrant and Payden & Rygel
dated June 14, 1994 with respect to voluntary
expense limitations (g).
(5.8) Amendment to Investment Management Agreement
between Registrant and Payden & Rygel adding
U.S. Treasury Fund and International Bond Fund
(previously Global Opportunity Fund) to the
Agreement (g).
(5.9) Form of Amendment to Investment Management
Agreement between Registrant and Payden & Rygel
adding Market Return Fund to the Agreement (o).
(5.10) Form of Amendment to Investment Management
Agreement between Registrant and Payden & Rygel
adding Growth & Income Fund to the Agreement
(k).
(5.11) Form of Amendment to Investment Management
</TABLE>
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<PAGE> 178
<TABLE>
<S> <C>
Agreement between Registrant and Payden & Rygel
adding Global Short Bond Fund to the Agreement
(l).
(5.12) Form of Amendment to Investment Management
Agreement between Registrant and Payden & Rygel
adding Total Return Fund, International Equity
Fund and Global Balanced Fund to the Agreement
(m).
(5.13) Form of Subadvisory Agreement between Payden &
Rygel and Scottish Widows Investment Management
Limited with respect to the International Equity
Fund and Global Balanced Fund (m).
(6.1) Distribution Agreement between Registrant and
Payden & Rygel Distributors, Inc. (n).
(6.2) Amendment to Distribution Agreement between
Registrant and Payden & Rygel Distributors dated
August 31, 1992 (p).
(7) None.
(8) Form of Custody Agreement between Registrant and
Boston Safe Deposit and Trust Company (q).
(9.1) Management and Administration Agreement between
Registrant and Treasury Plus, Incorporated dated
as of January 1, 1996 (o).
(9.2) Form of Investment Accounting Agreement between
Registrant and Investors Fiduciary Trust
Company (o).
(9.3) Form of Transfer Agency and Service Agreement
between Registrant and Investors Fiduciary Trust
Company (o).
(9.4) License Agreement between Registrant and Payden
& Rygel (n).
(10) Opinion of Counsel (b).
(11) Consent of Independent Auditors.
(12) Not applicable.
(13) Investment letter of Payden & Rygel (b).
(14) None.
</TABLE>
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<PAGE> 179
<TABLE>
<S> <C>
(15) None.
(16) Total return calculations (o).
(17) Financial Data Schedule.
(18) Multiple Class Plan (l).
(19.1) Powers of Attorney of Dennis Poulsen and J.
Clayburn La Force (r).
(19.2) Power of Attorney of Stender E. Sweeney (r).
(19.3) Power of Attorney of Thomas McKernan, Jr. (s).
(19.4) Power of Attorney of W.D. Hilton, Jr. (f).
</TABLE>
_______________________________
<TABLE>
<S> <C>
(a) Filed as an exhibit to the Registration Statement on April 2,
1992 and incorporated herein by reference.
(b) Filed as an exhibit to the Pre-Effective Amendment No. 2 to the
Registration Statement on July 28, 1992 and incorporated herein
by reference.
(c) Filed as an exhibit to Post-Effective Amendment No. 2 to the
Registration Statement and incorporated herein by reference.
(d) Filed as an exhibit to Post-Effective Amendment No. 4 to the
Registration Statement on January 24, 1994 and incorporated
herein by reference.
(e) Filed as an exhibit to Post-Effective Amendment No. 6 to the
Registration Statement on June 30, 1994 and incorporated herein
by reference.
(f) Filed as an exhibit to Post-Effective Amendment No. 9 to the
Registration Statement on October 17, 1994 and incorporated
herein by reference.
(g) Filed as an exhibit to Post-Effective Amendment No. 11 to the
Registration Statement on January 12, 1995 and incorporated
herein by reference.
(h) Filed as an exhibit to Post-Effective Amendment No. 15 to the
Registration Statement on July 6, 1995 and incorporated herein
by reference.
</TABLE>
C-15
<PAGE> 180
<TABLE>
<S> <C>
(i) Filed as an exhibit to Post-Effective Amendment No. 17 to the
Registration Statement on October 5, 1995 and incorporated
herein by reference.
(j) Filed as an exhibit to Post-Effective Amendment No. 21 to the
Registration Statement on February 7, 1996 and incorporated
herein by reference.
(k) Filed as an exhibit to Post-Effective Amendment No. 24 to the
Registration Statement on May 29, 1996 and incorporated herein
by reference.
(l) Filed as an exhibit to Post-Effective Amendment No. 25 to the
Registration Statement on July 3, 1996 and incorporated herein
by reference.
(m) Filed as an exhibit to Post-Effective Amendment No. 26 to the
Registration Statement on September 23, 1996 and incorporated
herein by reference.
(n) Filed as an exhibit to Post-Effective Amendment No. 7 to the
Registration Statement on July 1, 1994 and incorporated herein
by reference.
(o) Filed as an exhibit to Post-Effective Amendment No. 16 to the
Registration Statement on September 11, 1995 and incorporated
herein by reference.
(p) Filed as an exhibit to Post-Effective Amendment No. 1 to the
Registration Statement on February 17, 1993 and incorporated
herein by reference.
(q) Filed as an exhibit to Post-Effective Amendment No. 27 to the
Registration Statement on December 20, 1996 and incorporated
herein by reference.
(r) Filed as an exhibit to Pre-Effective Amendment No. 1 to the
Registration Statement on June 19, 1992 and incorporated herein
by reference.
(s) Filed as an exhibit to Post-Effective Amendment No. 5 to the
Registration Statement on March 1, 1994 and incorporated herein
by reference.
</TABLE>
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<PAGE> 1
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 28 to Registration
Statement under the Securities Act of 1933, filed under Registration Statement
No. 33-46973 of our report dated December 6, 1996, relating to Payden & Rygel
Investment Group, including Global Short Bond Fund, Global Fixed Income Fund,
International Bond Fund, Short Duration Tax Exempt Fund, Tax Exempt Bond Fund,
U.S. Treasury Fund, Limited Maturity Fund, Short Bond Fund, Intermediate Bond
Fund, Opportunity Fund and Market Return Fund, incorporated by reference in the
Statement of Additional Information and to reference to us under the caption
"Financial Statements," in such Registration Statement.
DELOITTE & TOUCHE LLP
Dayton, Ohio
April 10, 1997
