<PAGE> 1
As filed with the Securities and Exchange Commission on
October 23, 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. 32 [X]
and
Registration Statement Under the Investment Company Act of 1940
Amendment No. 35 [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 LLP
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:
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2), of Rule 485.
[ ] This post-effective amendment designates a new effective
[ ] date for a previously filed post-effective amendment.
____________________
Title of Securities being registered: Shares of Beneficial Interest
<PAGE> 2
THE PAYDEN & RYGEL INVESTMENT GROUP
CROSS REFERENCE SHEET
FORM N-1A
<TABLE>
<CAPTION>
N-1A Location in
Item No. Item Registration Statement
- -------- ---- ----------------------
<S> <C> <C>
Part A: Information Required in Prospectus
-------------------------------------------
1. Cover Page Cover Page
2. Synopsis Funds In Review and Expense Information
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
PAYDEN & RYGEL
FIXED INCOME FUNDS
Limited Maturity Fund
Short Bond Fund
U.S. Treasury Fund
Intermediate Bond Fund
Investment Quality Bond Fund
Total Return Fund
High Income 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
European Growth & Income Fund
International Equity Fund
PROSPECTUS
, 1997
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
Funds in Review................................................................. 1
Expense Information............................................................. 5
Financial Highlights............................................................ 8
Net Asset Value................................................................. 25
Dividends, Distributions and Taxes.............................................. 25
Investment Objectives and Policies.............................................. 28
Investment Practices............................................................ 40
Management of the Funds......................................................... 57
Shareholder Services............................................................ 61
Redemption of Shares............................................................ 64
How to Purchase Shares.......................................................... 65
Appendix A - Description of Ratings............................................. 67
</TABLE>
<PAGE> 6
PAYDEN & RYGEL INVESTMENT GROUP
333 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90071
(800) 5PAYDEN
(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 a number of distinct portfolios with separate investment objectives.
Information about seventeen of the portfolios (each a Fund), including 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 , 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) 5PAYDEN (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 NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 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 28. There can be no
assurance that the Funds' objectives will be achieved. Complete information on
how to purchase, redeem and exchange shares begins on page 61.
FUND DESCRIPTIONS
FIXED INCOME FUNDS
Each Fixed Income Fund invests in debt obligations which pay principal and
interest in U.S. dollars. In addition, for each Fixed Income Fund other than
the High Income and Total Return Funds, all such debt obligations 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. The High Income Fund will invest at least 65% of its total assets in
fixed income securities rated below investment grade and may invest a portion
of its assets in securities which pay principal and interest in foreign
currencies. In addition, the Total Return Fund may also 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.
1
<PAGE> 8
The INTERMEDIATE BOND FUND invests primarily in intermediate-term fixed-income
securities of the same types as the Limited Maturity Fund. Most investments
mature within ten years. Average portfolio maturity is generally between three
and six years.
The INVESTMENT QUALITY BOND FUND invests in the same 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. However, 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 "high yield bonds" or "junk bonds,"
are speculative and subject to greater market fluctuations and risk of loss of
principal and income than higher rated bonds. The Fund is not constrained with
respect to its average maturity.
The High Income Fund seeks to provide high current income consistent with
reasonable risk through investment in a professionally managed, diversified
portfolio consisting principally of higher yielding, below investment grade
bonds. Securities below investment grade, commonly known as "high yield bonds"
or "junk bonds," are speculative and subject to greater market fluctuations and
risk of loss of principal and income than higher rated bonds. The Fund will
invest at least 65% of its assets in such high yield bonds and may also invest
up to 20% of its total assets in convertible bonds, preferred stocks, Brady
bonds, or bonds of issuers organized or headquartered in "emerging markets."
The average maturity of the portfolio will generally be less than eight years.
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 portfolio 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
2
<PAGE> 9
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. However, the Market Return Fund may also invest
up to 25% of its assets in debt obligations payable in foreign currencies, and
up to 25% of its total assets in non-investment grade debt. Securities below
investment grade, commonly referred to as "high yield bonds" or "junk bonds,"
are speculative and subject to greater market fluctuations and risk of loss of
income and principal than higher rated bonds.
GLOBAL FUNDS
The objective of the International Equity Fund is long-term capital
appreciation. The objective of the European Growth & Income Fund is capital
appreciation and some current income. 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 as investment
grade. 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.
The EUROPEAN GROWTH & INCOME FUND normally invests its assets in common stocks
of approximately ten issuers located in each of France, Germany, the
Netherlands and the United Kingdom. In each country, the Fund selects the ten
stocks with the highest dividend yield. These stocks come from among the
thirty issuers with the largest market capitalizations which are included in
the country's leading stock index. The Fund, also known as the "Euro
3
<PAGE> 10
Dogs" Fund, follows investment objectives and policies that are analogous to
the Group's Growth & Income Fund.
INVESTMENT RISKS AND CONSIDERATIONS
Because each Fixed Income Fund, each Tax Exempt Fund, each Global Fund (other
than the International Equity and the European Growth & Income Funds) and the
Market Return Fund invests or may invest principally in debt securities, the
value of its portfolio will generally vary inversely with changes in interest
rates, and each Fund's ability to achieve its investment objective will depend
on the ability of issuers to pay their debt obligations when due.
The Growth & Income, International Equity and European Growth & Income 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, Market Return, Global Fixed Income, Global Short Bond, Global
Balanced, High Income 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.
The High Income Fund will invest at least 65% of its assets in below
investment grade securities. These securities are regarded by the rating
agencies as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments and generally involve more risk
of loss of principal and income than investment grade securities. In addition,
each of the Total Return and Market Return Funds may invest up to 25% of its
total assets in below investment grade debt.
Each of the International Equity, Global Balanced and High Income Funds may
also invest up to 20% of its assets in securities of issuers organized or
headquartered in "emerging market countries," which may include developing
countries or countries with new or developing markets. Investing in securities
of emerging market countries involves certain risks and considerations that are
not typically associated with investing in the United States or other developed
countries.
INVESTMENT ADVISER AND SUB-ADVISER
4
<PAGE> 11
Payden & Rygel serves as Adviser to each Fund. The Adviser has retained
Scottish Widows Investment Management as Sub-adviser to the International
Equity and European Growth & Income Funds and to a portion of the Global
Balanced Fund. See "Management of the Funds."
PURCHASE AND REDEMPTION OF SHARES
Each Fund offers Class R Shares and Class S Shares (previously designated Class
A Shares and Class B Shares, respectively), and each of the Intermediate Bond,
Investment Quality Bond and Total Return Funds offers a third class of shares,
Class I Shares. All classes of shares of each Fund are offered through Payden &
Rygel Distributors with no sales charge for any class. In general, the minimum
initial investment is $5,000, and the minimum additional investment is $1,000.
However, the minimum investment for the Class I Shares is $3,000,000 and the
minimum additional investment is $100,000. In addition, tax-sheltered
Retirement Plans and the Automated Investment Programs require different minimum
investments. See "Shareholder Services" and "How to Purchase Shares." Class S
Shares are subject to Shareholder Service Plan fees of 0.25% of average daily
net assets. Class R Shares and Class I Shares do not participate in the Plan
and do not pay these fees. With the exception of Class I Shares which may only
be exchanged for Class I Shares of another Fund, shares of each Fund may be
exchanged for any class of shares of any other Fund or portfolio of the Group,
or for the other class or classes 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 R Shares of each Fund other than the High Income Fund, as a
percentage of average net assets for the fiscal year ended October 31, 1997. For
Class R Shares of the High Income Fund Class, S Shares of all Funds, and Class I
Shares of the Intermediate Bond, Investment Quality Bond and Total Return Funds,
as an estimated percentage of average net assets for the fiscal year ending
October 31, 1998. Except as otherwise indicated, after reimbursement of
Advisory fees and Other expenses.)
<TABLE>
<CAPTION>
CLASS R SHARES CLASS S SHARES
======================================= ========================================
ADVISORY OTHER TOTAL FUND ADVISORY OTHER EXPENSES TOTAL FUND
FIXED INCOME FUNDS FEES EXPENSES EXPENSES FEES (ESTIMATED)* EXPENSES
- ------------------ ---- -------- -------- ---- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Limited Maturity Fund 0.28% 0.02% 0.30% 0.28% 0.27% 0.55%
Short Bond Fund 0.28% 0.12% 0.40% 0.28% 0.37% 0.65%
U.S. Treasury Fund 0.28% 0.17% 0.45% 0.28% 0.42% 0.70%
Intermediate Bond Fund 0.28% 0.17% 0.45% 0.28% 0.42% 0.70%
Investment Quality Bond Fund** 0.28% 0.17% 0.45% 0.28% 0.42% 0.70%
Total Return Fund** 0.28% 0.17% 0.45% 0.28% 0.42% 0.70%
</TABLE>
5
<PAGE> 12
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
High Income Fund 0.35% 0.20% 0.55% 0.35% 0.45% 0.80%
TAX EXEMPT FUNDS
- ----------------
Short Duration Tax Exempt Fund 0.32% 0.13% 0.45% 0.32% 0.38% 0.70%
Tax Exempt Bond Fund 0.32% 0.13% 0.45% 0.32% 0.38% 0.70%
EQUITY FUNDS
- ------------
Growth & Income Fund** 0.30% 0.24% 0.54% 0.30% 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%
European Growth & Income Fund ** 0.40% 0.30% 0.70% 0.40% 0.55% 0.95%
</TABLE>
<TABLE>
<CAPTION>
CLASS I SHARES
=======================================
ADVISORY OTHER TOTAL FUND
FUNDS FEES EXPENSES EXPENSES
- ----- ---- -------- --------
<S> <C> <C> <C>
Intermediate Bond Fund
Investment Quality Bond Fund**
Total Return Fund**
</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 and 0.10% of its advisory fee for the European Growth &
Income Fund through at least October 31, 1998. 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, 1998 (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.
FUND EXPENSE LIMITS
<TABLE>
<CAPTION>
CLASS R SHARES CLASS S 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%
<CAPTION>
CLASS I SHARES
=========================
CURRENT
VOLUNTARY
EXPENSE EXPENSE
FIXED INCOME FUNDS GUARANTEE LIMIT
--------- -----
<S> <C> <C>
Intermediate Bond Fund
Investment Quality Bond Fund
Total Return Fund
</TABLE>
6
<PAGE> 13
<TABLE>
<S> <C> <C> <C> <C>
High Income Fund 0.75% 0.55% 1.00% 0.80%
- ----------------
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%
GLOBAL FUNDS
- ------------
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%
European Growth & Income Fund 0.90% 0.70% 1.15% 0.95%
</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 R Shares of the Funds
for the fiscal year ended October 31, 1997, before reimbursement by the Adviser,
were as follows: Limited Maturity Fund, %; Short Bond Fund, %; U.S. Treasury
Fund, %; Intermediate Bond Fund, %; Investment Quality Bond Fund, %; Short
Duration Tax Exempt Fund, %; Tax Exempt Bond Fund, %; Market Return Fund, %;
Global Short Bond Fund, %; Global Fixed Income Fund, %; and International Bond
Fund, %; Total Return Fund, %; Global Short Bond Fund, %; International Equity
Fund, %: European Growth & Income Fund, %; Global Balanced Fund, %; and Growth &
Income Fund, %. Actual expenses for Class R Shares and Class S Shares of the
High Income Fund for the fiscal year ending October 31, 1998, before
reimbursement by the Adviser, are estimated to be % and %, respectively, of
average daily net assets (annualized). Actual expenses for Class I Shares of
the Intermediate Bond, Investment Quality Bond and Total Return Funds for the
fiscal year ending October 31, 1998, before reimbursement by the Adviser, are
estimated to be % of average daily net assets (annualized). No Class S
Shares or Class I Shares were sold during the fiscal year ended October 31,
1997.
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 R SHARES CLASS S SHARES CLASS I SHARES
======================================== ======================================== =================
FIXED INCOME FUNDS 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS
- ------------------ ------ ------- ------- -------- ------ ------- ------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Limited Maturity Fund $ 3 $11 $17 $38 $ 6 $18 $31 $71
</TABLE>
7
<PAGE> 14
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short Bond Fund $ 4 $ 13 $ 22 $ 51 $ 7 $ 21 $ 37 $ 83
U.S. Treasury Fund $ 5 $ 15 $ 25 $ 57 $ 7 $ 23 $ 40 $ 89
Intermediate Bond Fund $ 5 $ 15 $ 25 $ 57 $ 7 $ 23 $ 40 $ 89
Investment Quality Bond Fund $ 5 $ 15 $ 25 $ 57 $ 7 $ 23 $ 40 $ 89
Total Return Fund $ 5 $ 15 $ 25 $ 57 $ 7 $ 23 $ 40 $ 89
High Income Fund
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 $ 27 $ 9 $ 27
Market Return Fund $ 5 $ 15 $ 25 $ 57 $ 7 $ 23 $ 40 $ 89
GLOBAL FUNDS
Global Short Bond Fund $ 5 $ 15 $ 7 $ 23
Global Fixed Income Fund $ 5 $ 17 $ 30 $ 67 $ 10 $ 31 $ 53 $118
International Bond Fund $ 7 $ 22 $ 39 $ 87 $ 10 $ 31 $ 53 $118
Global Balanced Fund $ 7 $ 22 $ 10 $ 31
International Equity Fund $ 9 $ 29 $ 12 $ 37
European Growth & Income Fund $ 7 $ 22 $ 10 $ 31
</TABLE>
The information in the table is provided for purposes of assisting current and
prospective shareholders in understanding the various costs and expenses that
an investor will bear, directly or indirectly. The hypothetical annual return
of 5% is used for illustrative purposes only and should not be interpreted as
an estimate of any Fund's annual returns, as there can be no guarantee of any
Fund's future performance.
FINANCIAL HIGHLIGHTS
The following financial highlights are included to assist shareholders in
evaluating the performance of the Funds since their commencement of operations
through October 31, 1997. The information set forth in these tables has been
derived from financial statements and financial highlights audited by Deloitte
& Touche LLP, independent auditors, whose report thereon was unqualified. The
information should be read in conjunction with the Funds' financial statements
and notes thereto, which appear in the 1997 Annual Report to Shareholders
incorporated by reference in the Statement of Additional Information. Class S
Shares were not sold during the period, and the High Income Fund was not open
during the period.
8
<PAGE> 15
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 YEAR ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1996 1995 1994 (a)
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.06 $ 10.00 $ 10.00
------------- ------------- -------------
Income (loss) from investment activities:
Net investment income 0.53 0.56 0.19
Net realized and unrealized gains (losses) 0.07 (0.01)
------------- ------------- -------------
Total from investment activities 0.53 0.63 0.18
------------- ------------- -------------
Distributions to shareholders:
From net investment income (0.53) (0.57) (0.18)
------------- ------------- -------------
Total distributions to shareholders (0.53) (0.57) (0.18)
------------- ------------- -------------
Net asset value, end of period $ 10.06 $ 10.06 $ 10.00
============= ============= =============
Total return 5.41% 6.43% 1.84% (b)
Ratios/supplemental data:
Net assets at end of period (000) $ 50,771 $ 18,414 $ 14,248
Ratio of expenses to average net assets 0.30% 0.33% 0.41% (c)
Ratio of net investment income to average net assets 5.45% 5.59% 4.74% (c)
Ratio of expenses to average net assets prior to subsidies 0.62% 0.83% 2.92% (c)
Ratio of net investment income to average net assets prior
to subsidies 5.13% 5.09% 2.23% (c)
Portfolio turnover rate 216.68% 166.07% 86.35% (c)
</TABLE>
(a) The Fund commenced operations on May 1, 1994.
(b) Not annualized
(c) Annualized
9
<PAGE> 16
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 YEAR ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1996 1995 1994 (a)
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.04 $ 9.68 $ 10.00
------------- ------------- ------------
Income (loss) from investment activities:
Net investment income 0.54 0.54 0.34
Net realized and unrealized gains (losses) (0.06) 0.36 (0.32)
------------- ------------- ------------
Total from investment activities 0.48 0.90 0.02
------------- ------------- ------------
Distributions to shareholders:
From net investment income (0.54) (0.54) (0.34)
From net realized gains (0.01)
------------- ------------- ------------
Total distributions to shareholders (0.55) (0.54) (0.34)
------------- ------------- ------------
Net asset value, end of period $ 9.97 $ 10.04 $ 9.68
============= ============= ============
Total return 4.86% 9.56% 0.21% (b)
Ratios/supplemental data:
Net assets at end of period (000) $ 97,966 $ 19,157 $ 2,592
Ratio of expenses to average net assets 0.40% 0.40% 0.48% (c)
Ratio of net investment income to average
net assets 5.67% 5.72% 4.47% (c)
Ratio of expenses to average net assets
prior to subsidies 0.57% 1.03% 4.56% (c)
Ratio of net investment income to average
net assets prior to subsidies 5.50% 5.09% 0.39% (c)
Portfolio turnover rate 212.44% 170.27% 186.85% (c)
</TABLE>
(a) The Fund commenced operations on January 1, 1994.
(b) Not annualized
(c) Annualized
10
<PAGE> 17
PAYDEN & RYGEL
U.S. TREASURY FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1996 1995 (a)
------------- ------------- -------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 10.61 $ 10.00
------------- -------------
Income (loss) from investment activities:
Net investment income 0.58 0.53
Net realized and unrealized gains (losses) (0.04) 0.61
------------- -------------
Total from investment activities 0.54 1.14
------------- -------------
Distributions to shareholders:
From net investment income (0.58) (0.53)
From net realized gains (0.03)
------------- -------------
Total distributions to shareholders (0.61) (0.53)
------------- -------------
Net asset value, end of period $ 10.54 $ 10.61
============= =============
Total return 5.20% 11.61% (b)
Ratios/supplemental data:
Net assets at end of period (000) $ 22,114 $ 10,894
Ratio of expenses to average net assets 0.45% 0.45% (c)
Ratio of net investment income to average net assets 5.59% 6.31% (c)
Ratio of expenses to average net assets prior to subsidies 0.78% 1.84% (c)
Ratio of net investment income to average net assets prior
to subsidies 5.26% 4.92% (c)
Portfolio turnover rate 151.83% 87.10% (c)
</TABLE>
(a) The Fund commenced operations on January 1, 1995.
(b) Not annualized
(c) Annualized
11
<PAGE> 18
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 YEAR ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1996 1995 1994 (a)
--------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.85 $ 9.30 $ 10.00
------------- ------------- -------------
Income (loss) from investment activities:
Net investment income 0.56 0.57 0.35
Net realized and unrealized gains (losses) (0.17) 0.55 (0.70)
------------- ------------- -------------
Total from investment activities 0.39 1.12 (0.35)
------------- ------------- -------------
Distributions to shareholders:
From net investment income (0.56) (0.57) (0.35)
From net realized gains (0.08)
------------- ------------- -------------
Total distributions to shareholders (0.64) (0.57) (0.35)
------------- ------------- -------------
Net asset value, end of period $ 9.60 $ 9.85 $ 9.30
============= ============= =============
Total return 4.06% 12.43% -3.52% (b)
Ratios/supplemental data:
Net assets at end of period (000) $ 52,767 $ 34,391 $ 14,312
Ratio of expenses to average net assets 0.45% 0.45% 0.46% (c)
Ratio of net investment income to average net assets 5.90% 6.10% 5.39% (c)
Ratio of expenses to average net assets prior to subsidies 0.58% 0.68% 2.03% (c)
Ratio of net investment income to average net assets prior
to subsidies 5.77% 5.87% 3.82% (c)
Portfolio turnover rate 195.63% 189.00% 358.23% (c)
</TABLE>
(a) The Fund commenced operations on January 1, 1994.
(b) Not annualized
(c) Annualized
12
<PAGE> 19
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 YEAR ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1996 1995 1994 (a)
--------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.96 $ 9.09 $ 10.00
------------- ------------- ------------
Income (loss) from investment activities:
Net investment income 0.63 0.57 0.37
Net realized and unrealized gains (losses) (0.17) 0.87 (0.91)
------------- ------------- ------------
Total from investment activities 0.46 1.44 (0.54)
------------- ------------- ------------
Distributions to shareholders:
From net investment income (0.61) (0.57) (0.37)
------------- ------------- ------------
Total distributions to shareholders (0.61) (0.57) (0.37)
------------- ------------- ------------
Net asset value, end of period $ 9.81 $ 9.96 $ 9.09
============= ============= ============
Total return 4.86% 16.39% -5.49% (b)
Ratios/supplemental data:
Net assets at end of period (000) $ 32,304 $ 25,822 $ 3,030
Ratio of expenses to average net assets 0.00% 0.45% 0.49% (c)
Ratio of net investment income to average net assets 6.41% 6.20% 5.25% (c)
Ratio of expenses to average net assets prior to subsidies 0.64% 1.11% 4.52% (c)
Ratio of net investment income to average net assets prior
to subsidies 5.77% 5.55% 1.22% (c)
Portfolio turnover rate 196.78% 252.09% 513.35% (c)
</TABLE>
(a) The Fund commenced operations on January 1, 1994.
(b) Not annualized
(c) Annualized
13
<PAGE> 20
PAYDEN & RYGEL
TOTAL RETURN FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD ENDED
OCTOBER 31,
1997 (a)
------------
<S> <C>
Net asset value, beginning of period
Income (loss) from investment activities:
Net investment income
Net realized and unrealized gains (losses)
Total from investment activities
Distributions to shareholders:
From net investment income
Total distributions to shareholders
Net asset value, end of period
Total return (b)
Ratios/supplemental data:
Net assets at end of period (000)
Ratio of expenses to average net assets (c)
Ratio of net investment income to average net assets (c)
Ratio of expenses to average net assets prior to subsidies (c)
Ratio of net investment income to average net assets prior
to subsidies (c)
Portfolio turnover rate (c)
</TABLE>
(a) The Fund commenced operations on December 9, 1996.
(b) Not annualized
(c) Annualized
14
<PAGE> 21
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 YEAR ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1996 1995 1994 (a)
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.08 $ 9.93 $ 10.00
------------- ------------- -------------
Income (loss) from investment activities:
Net investment income 0.38 0.42 0.04
Net realized and unrealized gains (losses) (0.06) 0.15 (0.07)
------------- ------------- -------------
Total from investment activities 0.32 0.57 (0.03)
------------- ------------- -------------
Distributions to shareholders:
From net investment income (0.38) (0.42) (0.04)
From net realized gains (0.01)
------------- ------------- -------------
Total distributions to shareholders (0.39) (0.42) (0.04)
------------- ------------- -------------
Net asset value, end of period $ 10.01 $ 10.08 $ 9.93
============= ============= =============
Total return 3.28% 5.88% -0.35% (b)
Ratios/supplemental data:
Net assets at end of period (000) $ 36,336 $ 16,019 $ 20,150
Ratio of expenses to average net assets 0.45% 0.45% 0.45% (c)
Ratio of net investment income to average net assets 3.81% 4.12% 3.20% (c)
Ratio of expenses to average net assets prior to subsidies 0.70% 0.91% 2.87% (c)
Ratio of net investment income to average net assets prior
to subsidies 3.56% 3.66% 0.78% (c)
Portfolio turnover rate 34.72% 79.81% 0.00% (c)
</TABLE>
(a) The Fund commenced operations on September 1, 1994.
(b) Not annualized
(c) Annualized
15
<PAGE> 22
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 YEAR ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1996 1995 1994 (a)
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.59 $ 8.90 $ 10.00
------------- ------------- -------------
Income (loss) from investment activities:
Net investment income 0.45 0.46 0.33
Net realized and unrealized gains (losses) (0.12) 0.69 (1.10)
------------- ------------- -------------
Total from investment activities 0.33 1.15 (0.77)
------------- ------------- -------------
Distributions to shareholders:
From net investment income (0.45) (0.46) (0.33)
------------- ------------- -------------
Total distributions to shareholders (0.45) (0.46) (0.33)
------------- ------------- -------------
Net asset value, end of period $ 9.47 $ 9.59 $ 8.90
============= ============= =============
Total return 3.52% 13.25% -7.85% (b)
Ratios/supplemental data:
Net assets at end of period (000) $ 49,862 $ 40,052 $ 25,474
Ratio of expenses to average net assets 0.45% 0.45% 0.50%(c)
Ratio of net investment income to average net assets 4.73% 4.97% 4.47% (c)
Ratio of expenses to average net assets prior to subsidies 0.61% 0.74% 1.07% (c)
Ratio of net investment income to average net assets prior
to subsidies* 4.57% 4.69% 3.90% (c)
Portfolio turnover rate 23.04% 41.87% 97.53% (c)
</TABLE>
(a) The Fund commenced operations on December 21, 1993.
(b) Not annualized
(c) Annualized
16
<PAGE> 23
PAYDEN & RYGEL
GROWTH & INCOME FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
1997 (a)
-----------
<S> <C>
Net asset value, beginning of period
Income (loss) from investment activities:
Net investment income
Net realized and unrealized gains (losses)
Total from investment activities
Distributions to shareholders:
From net investment income
Total distributions to shareholders
Net asset value, end of period
Total return (b)
Ratios/supplemental data:
Net assets at end of period (000)
Ratio of expenses to average net assets (c)
Ratio of net investment income to average net assets (c)
Ratio of expenses to average net assets prior to subsidies (c)
Ratio of net investment income to average net assets prior
to subsidies (c)
Portfolio turnover rate (c)
</TABLE>
(a) The Fund commenced operations on November 1, 1996.
(b) Not annualized
(c) Annualized
17
<PAGE> 24
PAYDEN & RYGEL
MARKET RETURN FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
YEARE ENDED
OCTOBER 31, PERIOD ENDED
1997 OCTOBER 31, 1996 (a)
--------------- --------------------
<S> <C> <C>
Net asset value, beginning of period $ 10.00
------------
Income (loss) from investment activities:
Net investment income 0.50
Net realized and unrealized gains (losses) 0.86
------------
Total from investment activities 1.36
------------
Distributions to shareholders:
From net investment income (0.50)
------------
Total distributions to shareholders (0.50)
------------
Net asset value, end of period $ 10.86
============
Total return 14.06% (b)
Ratios/supplemental data:
Net assets at end of period (000) $ 5,789
Ratio of expenses to average net assets 0.00% (c)
Ratio of net investment income to average net assets 5.95% (c)
Ratio of expenses to average net assets prior to subsidies 4.14% (c)
Ratio of net investment income to average net assets prior
to subsidies 1.81% (c)
Portfolio turnover rate 146.31% (c)
</TABLE>
(a) The Fund commenced operations on December 1, 1995
(b) Not annualized
(c) Annualized
18
<PAGE> 25
PAYDEN & RYGEL
GLOBAL SHORT BOND FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, PERIOD ENDED
1997 OCTOBER 31, 1996 (a)
------------ --------------------
<S> <C> <C>
Net asset value, beginning of period $ 10.00
------------
Income (loss) from investment activities:
Net investment income 0.05
Net realized and unrealized gains (losses) 0.06
------------
Total from investment activities 0.11
------------
Distributions to shareholders:
From net investment income (0.04)
------------
Total distributions to shareholders (0.04)
------------
Net asset value, end of period $10.07
============
Total return (b) 1.10% (b)
Ratios/supplemental data:
Net assets at end of period (000) $28,913
Ratio of expenses to average net assets (c) 0.45% (c)
Ratio of net investment income to average net assets (c) 4.86% (c)
Ratio of expenses to average net assets prior to subsidies (c) 2.31% (c)
Ratio of net investment income to average net assets prior
to subsidies (c) 3.00% (c)
Portfolio turnover rate (c) 0.00% (c)
</TABLE>
(a) The Fund commenced operations on September 18, 1996.
(b) Not annualized
(c) Annualized
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>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1996 1995 1994
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.32 $ 9.77 $ 10.62
-------------- -------------- --------------
Income(loss) 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%
Ratio of expenses to average net assets prior to subsidies 0.53% 0.50% 0.55%
Ratio of net investment income to average net assets prior 5.67% 8.94% 4.24%
to subsidies
Portfolio turnover rate 175.68% 226.72% 348.12%
</TABLE>
(b) Not annualized
(c) Annualized
20
<PAGE> 27
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)
</TABLE>
(a) The Fund commenced operations on September 1, 1992.
(b) Not annualized
(c) Annualized
21
<PAGE> 28
PAYDEN & RYGEL
INTERNATIONAL 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,
1997 1996 1995 (a)
-------------- ------------ ----------
<S> <C> <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 (0.01) (0.04)
In excess of net realized gains (0.06) (0.01)
------------ ----------
Total distributions to shareholders (0.10) (0.20)
------------ ----------
Net asset value, end of period $ 10.39 $ 10 .04
============ ==========
Total return 4.47% 2 .43% (b)
Ratios/supplemental data:
Net assets at end of period (000) $ 18,364 $ 19,194
Ratio of expenses to average net assets 0.70% 0 .70% (c)
Ratio of net investment income to average net assets 5.61% 5.24% (c)
Ratio of expenses to average net assets prior to subsidies 0.98% 1 .64% (c)
Ratio of net investment income to average net assets prior
to subsidies 5.33% 4 .30% (c)
Portfolio turnover rate 216.80% 96.62% (c)
</TABLE>
(a) The Fund commenced operations on April 1, 1995.
(b) Not annualized
(c) Annualized
22
<PAGE> 29
PAYDEN & RYGEL
GLOBAL BALANCED FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD ENDED
OCTOBER 31,
1997 (a)
-----------
<S> <C>
Net asset value, beginning of period
Income (loss) from investment activities:
Net investment income
Net realized and unrealized gains (losses)
Total from investment activities
Distributions to shareholders:
From net investment income
Total distributions to shareholders
Net asset value, end of period
Total return (b)
Ratios/supplemental data:
Net assets at end of period (000)
Ratio of expenses to average net assets (c)
Ratio of net investment income to average net assets (c)
Ratio of expenses to average net assets prior to subsidies (c)
Ratio of net investment income to average net assets prior
to subsidies (c)
Portfolio turnover rate (c)
</TABLE>
(a) The Fund commenced operations on December 9, 1996.
(b) Not annualized
(c) Annualized
1
<PAGE> 30
PAYDEN & RYGEL
INTERNATIONAL EQUITY FUND
PER SHARE INCOME AND CAPITAL CHANGES
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD ENDED
OCTOBER 31,
1997 (a)
-----------
<S> <C>
Net asset value, beginning of period
Income (loss) from investment activities:
Net investment income
Net realized and unrealized gains (losses)
Total from investment activities
Distributions to shareholders:
From net investment income
Total distributions to shareholders
Net asset value, end of period
Total return (b)
Ratios/supplemental data:
Net assets at end of period (000)
Ratio of expenses to average net assets (c)
Ratio of net investment income to average net assets (c)
Ratio of expenses to average net assets prior to subsidies (c)
Ratio of net investment income to average net assets prior
to subsidies (c)
Portfolio turnover rate (c)
</TABLE>
(a) The Fund commenced operations on December 9, 1996.
(b) Not annualized
(c) Annualized
24
<PAGE> 31
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 for the International Bond, International Equity, European Growth
& Income, Global Balanced, High Income and Growth & Income Funds which declare
and distribute dividends quarterly. Class R dividends will normally be lower
than Class I dividends, and Class S dividends will normally be lower than Class
R or Class I 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.
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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 Tax Exempt 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.
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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
eighteen series of shares, including the seventeen series of shares which are
sold through this prospectus. Each of these seventeen series of shares has two
classes, Class R and Class S. In addition, each of the Intermediate Bond,
Investment Quality Bond and Total Return Funds has Class I Shares The Board of
Trustees may establish additional series or classes of shares in the future. As
of September 30, 1997, the following persons held of record more than 25% of the
outstanding shares of the following classes of shares of the Group: Payden &
Rygel Intermediate Bond Fund, Class R - - Bert Bell NFL Retirement Plan
(55.6%); Payden & Rygel U.S. Treasury Fund, Class R - - Dan Murphy Foundation
(46.0%) and L. Horvitz (27.2%); Payden & Rygel International Bond Fund, Class R
- -- Consuelo Zobel Alger Foundation (74.3%); Payden & Rygel Global Balanced Fund,
Class R -- Lon V. Smith Foundation (34.9%); Payden & Rygel International Equity
Fund, Class R - - Dan Murphy Foundation (31.0%).
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
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Group may remove a person serving as Trustee at a shareholder meeting called by
written request of the holders of not less than 10% of the outstanding shares
of any series.
INVESTMENT OBJECTIVES AND POLICIES
FIXED INCOME FUNDS
The Payden & Rygel Fixed Income Funds are designed to seek income and capital
gains where appropriate. The Funds which invest in intermediate and long-term
securities will generally provide capital gain opportunities during periods of
falling interest rates.
No Fixed Income Fund is constrained as to the maximum maturity of its
individual portfolio securities, and the dollar-weighted average maturity of
each Fund's portfolio will be adjusted as market conditions warrant given the
investment outlook of the Adviser. However, the average maturity objectives of
many of the Funds will act to limit the amount of longer term investments in
their portfolios. Average maturity objectives for each Fund are discussed
below. Certain debt securities such as, but not limited to, mortgage-related
securities, collateralized mortgage obligations (CMOs), asset backed securities
and securitized loan receivables, are expected to be repaid prior to their
stated maturity dates. As a result, the effective maturity of these securities
is expected to be shorter than their stated maturity. For purposes of
calculation of weighted average maturity, the effective maturity of such
securities will be used.
A Fund's dollar-weighted average portfolio maturity ("average maturity") is
used as a measure of the potential price movement of the Fund. Dollar
weighting is used because it provides a more accurate indication than a
non-weighted average. For example, assume a Fund holds two Treasury
securities, with 99% invested in a 10-year note and 1% invested in a 30-day
bill. The mathematical average maturity is close to five years, but the
dollar-weighted average maturity is close to ten years. When the Adviser
forecasts a positive environment for bonds, the Funds' average portfolio
maturity will generally be longer than when the Adviser is forecasting a
negative environment for bonds.
Yields on short, intermediate, and long-term debt obligations depend on a
variety of factors, including the general conditions of the money and bond
markets, the size of a particular offering, the maturity of the obligation and
the rating of the issue. Debt obligations with longer maturities tend to
produce higher yields and are generally subject to potentially greater capital
appreciation and depreciation than obligations with shorter maturities and
lower yields. The market prices of debt obligations usually vary depending
upon available yields. An increase in interest rates will generally reduce the
value of such portfolio investments, and a decline in interest rates will
generally increase the value of such portfolio investments. The ability of a
Fund to achieve its investment objective also depends on the continuing ability
of the issuers of the debt securities in which the Fund invests to meet their
obligations for the payment of interest and principal when due.
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The LIMITED MATURITY FUND seeks to earn a total return that, over time, is
greater than that available from money market funds. The Fund invests in debt
obligations of the U.S. Treasury, U.S. government agencies, foreign and
domestic public corporations and mortgage-backed securities. Under normal
conditions, the average portfolio maturity of the Limited Maturity Fund will
range from four to nine months with a maximum average maturity of one year.
The SHORT BOND FUND seeks to realize a high level of total return consistent
with preservation of capital. It invests in the same types of debt obligations
as the Limited Maturity Fund. However, the Fund has a maximum portfolio
average maturity of three years. Under normal market conditions, at least 65%
of the net assets of the Fund will be invested in securities with more than one
year to maturity.
The U.S. TREASURY FUND seeks to realize a high level of total return consistent
with preservation of capital. It primarily invests in U.S. Treasury
securities guaranteed by the full faith and credit of the United States
Government. The Fund will invest at least 65% of its net assets in obligations
issued by the U.S. Treasury and guaranteed by the full faith and credit of the
U.S. government. In addition, the Fund may invest up to 35% 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.
Average portfolio maturity, under normal market conditions, is generally less
than five 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. Average portfolio maturity
is generally less than ten years.
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
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appropriate by the Adviser, hedge this currency exposure in order to protect
the Fund's share price. Like the Investment Quality Bond Fund, the Total
Return Fund is not constrained with respect to its average portfolio maturity.
Investments of the Total Return Fund will consist of (1) debt obligations
issued or guaranteed by the U.S. Government or its agencies and
instrumentalities; (2) debt obligations issued or guaranteed by a foreign
sovereign government or one of its agencies, authorities, instrumentalities, or
political subdivisions, including foreign states, provinces or municipalities;
(3) debt obligations issued or guaranteed by supranational organizations such
as the World Bank, Asian Development Bank, European Investment Bank and
European Economic Community; (4) debt obligations of U.S. and foreign banks and
bank holding companies; (5) debt securities and commercial paper issued by U.S.
and foreign companies, including commercial paper indexed to specific foreign
currency exchange rates; (6) U.S. and foreign collateralized mortgage
obligations and asset-backed bonds; (7) non-voting, preferred stock in a
corporation which pays a fixed or variable stream of dividends; (8) convertible
bonds or shares of convertible preferred stock which may be exchanged for a
fixed number of shares of common stock at the purchaser's option; and (9) Brady
Bonds and other emerging market debt.
In addition, at any time, 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 ("Standard & Poor's") or Moody's Investor Service, Inc.
("Moody's"), 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 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.
The High Income Fund seeks to provide high current income consistent with
reasonable risk through investment in a professionally managed, diversified
portfolio consisting principally of higher yielding, below investment grade
bonds, commonly known as "high yield bonds" or "junk bonds." Under normal
market conditions and as a fundamental policy, the Fund will invest at least
65% of its total assets in high yield bonds. The Fund will emphasize
investments in securities that the Adviser considers to be at the lower-risk
end of the high yield bond spectrum. These represent securities issued by
companies considered by the Adviser to have stable to improving business
prospects. The Fund also expects to purchase securities issued by companies
considered by the Adviser to be in the growth stage of development and to have
reasonable prospects for improved operating results and debt ratings. Such
issuers generally have shorter operating histories and lower revenues and
entail greater risk than issuers of investment grade securities. Finally, the
Fund will make investments in securities of selected companies that have
undergone leveraged buyouts or recapitalizations.
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The Fund may invest up to 20% of its total assets, measured at the time of
purchase, in Eurodollar securities. These are fixed income securities of a
U.S. or foreign issuer that are issued in U.S. dollars outside the United
States. The Fund may also invest up to 20% of its total assets, measured at
the time of purchase, in convertible debt securities, in convertible and
non-convertible preferred stocks, in Brady bonds, or in bonds of issuers
organized or headquartered in "emerging markets." The Fund will not invest
more than 10% of the value of its total assets, measured at the time of
purchase, in non-dollar denominated foreign securities. The Fund will not
purchase common stocks or warrants or options to acquire common stocks, except
when attached to or included in a unit with fixed income securities that
otherwise would be attractive to the Fund, or upon conversion of a convertible
security or exercise of a warrant or option. Common stock obtained by the Fund
upon any such conversion or exercise may be retained in the Fund's portfolio to
permit orderly disposition.
The higher yields sought by the Fund are generally obtainable from investing in
securities rated below investment grade by recognized rating services. The Fund
invests principally in fixed income securities rated Ba1 or lower by Moody's or
BB+ or lower by Standard & Poor's, but as a matter of operating policy, the Fund
will not purchase securities rated both below B3 by Moody's and below B- by
Standard & Poor's. Securities rated B- by Standard & Poor's 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 the issuer's
capacity or willingness to pay interest and repay principal. The Fund may invest
in unrated securities if the Adviser determines that the credit characteristics
of the issuers of such securities and/or the protection afforded by the terms of
the securities limit the risk to the Fund to a level comparable to that of rated
securities in which the Fund may invest. While the Fund is not required to
dispose of debt securities whose credit quality declines at some point after the
security is purchased, no more than 25% of the Portfolio's assets will be
invested at any time in securities rated less than CCC by Standard & Poor's or
Caa by Moody's or, if unrated, of comparable quality in the opinion of the
Advisor. Securities rated CCC by Standard & Poor's are currently vulnerable to
nonpayment, and are dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitments on the security.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
security. The Fund will not invest in securities of bankrupt companies.
Further information regarding investment ratings is in the appendix.
The Fund's approach emphasizes consistent and high current income rather than
the possibly greater but more uncertain profits which could be earned through
short-term trading or through attempting to anticipate events such as the
rescue of ailing or bankrupt companies. The Fund attempts to reduce the risks
involved in investment in lower rated securities through diversification of its
portfolio and by analysis of each issuer, of each issuer's ability to make
timely payments of principal and interest, and of broad economic trends and
corporate developments. Average portfolio maturity is generally less than
eight years.
TAX EXEMPT FUNDS
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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.
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
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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 Average(1) 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 eighteen months 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.
Each month, the Adviser will rebalance a portion of the Fund's investments.
Stocks in the Dow Dogs Portfolio which were purchased approximately eighteen
months 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.
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.
__________________________
(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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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
generally 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. However, up to 25% of the Fund's total assets may be invested in debt
obligations that are payable in foreign currency. 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.
Generally, the debt securities held by the Market Return Fund are rated
"investment grade" at the time of purchase by at least one of the established
rating agencies (e.g., AAA, AA, A, or BBB by Standard & Poor's) 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. However, the Market 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 or
Moody's, or a comparable rating by another established rating agency, or, if
unrated, determined by the Adviser to be of comparable quality. Securities
rated below B by Standard & Poor's 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.
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
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S&P 500 Index, SPDRs, or a portfolio of some of the individual stocks which are
included in the S&P 500 Index. Such reductions will occur during periods of
market volatility (when the costs of investing in stock index futures and
equity swap contracts are likely to rise), when for any other reason the
purchase of such securities is less expensive than the cost of other
equity-based investments, or when the cash available for investment in stock
index futures and equity swap contracts is not sufficient to purchase an
instrument with a contract price in the desired amount. During such periods,
the portion of Market Return Fund's assets allocated to fixed income securities
would be reduced.
Futures index contracts, which will generally be the majority of the Market
Return Fund's equity-based investments, require a small deposit called "initial
margin" at the time of acquisition (the equivalent of a good faith deposit).
This allows the Market Return Fund to invest the balance of its assets,
initially about 95% of the Fund's net assets, in other assets. The Market
Return Fund is required to maintain a segregated account with its Fund
Custodian in an amount which, when added to 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 S&P 500 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
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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 as investment grade by at least one of the
rating agencies.
The GLOBAL FIXED INCOME FUND seeks to realize a high level of total return
consistent with preservation of capital. It invests primarily in U.S. and
foreign government notes and bonds and U.S. and foreign corporate debt
securities. The Fund also has substantial investment in foreign currency
contracts in order to hedge foreign currency exposure. Under normal market
conditions, as a fundamental policy which cannot be changed without shareholder
approval, at least 65% of the Global Fixed Income Fund's total assets are
invested in debt securities of issuers organized or headquartered 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) 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.
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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 Fund invests
primarily in securities that are not denominated in U.S. dollars. The Fund's
average portfolio maturity will not exceed ten years. Under normal market
conditions, (1) the Fund invests no more than 35% of its assets in U.S. dollar
denominated securities, and (2) at least 65% of net assets are invested in
securities with more than one year to maturity. However for temporary
defensive or emergency purposes, the Fund may invest without limit in U.S. debt
securities. In addition, the International Bond Fund generally has more
exposure to foreign currency exchange rates than the Global Fixed Income and
Global Short Bond Funds, which may cause greater share price volatility.
The EUROPEAN GROWTH & INCOME FUND seeks to provide capital appreciation and
some current income. The Fund's investment objectives and policies are
analogous to the Growth & Income Fund, and the Fund is often referred to as the
"Euro Dogs" Fund.
Under normal market conditions, the Fund will invest its assets in common
stocks of approximately forty issuers organized or headquartered in France,
Germany, the Netherlands and the United Kingdom, which have the largest market
capitalization among countries in the Morgan Stanley Capital International
("MSCI") Europe Regional Index.
During each month, the Fund will purchase the common stocks of the issuers which
had the highest dividend rates (as a percentage of their market price) at the
end of the preceding month of common stocks of the thirty issuers with the
largest market capitalizations included in each such country's leading stock
index. For example, the Fund may invest in the ten highest yielding German
stocks among the thirty largest stocks included in the DAX Index. Under normal
market conditions, the Fund will hold for approximately eighteen months all
stocks purchased during a month, including stocks that may no longer be among
those with the highest dividend rates of the largest thirty stocks in the
country's index, except to the extent that stocks must be sold to satisfy
redemption requests or to rebalance the Fund as described below.
Each month, the Sub-adviser will rebalance the Fund's investments. Stocks of
issuers in each such country which were purchased approximately eighteen months
earlier and which are no longer among those with the highest dividend rates of
the largest thirty stocks in the country's index will be sold. Additional
stocks may be sold and reinvested in other assets so that, under normal market
conditions after the entire rebalancing process is completed, the Fund will
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hold approximately 2.5% of its assets in each stock. In addition, the Fund
will invest from time to time in World Equity Benchmark Shares ("WEBS"), which
are described in greater detail under "Investment Practices," in order to
invest small amounts of money, such as miscellaneous daily cash flows, until
the Fund has fully invested in the portfolio of forty stocks.
Although the Fund's return will vary with changes in each country's 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 dividend paying stocks.
The INTERNATIONAL EQUITY FUND seeks to earn long-term capital appreciation. It
invests in equity securities (common and preferred stock) of issuers organized
or headquartered 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 MSCI World Index, which include Canada,
Australia, New Zealand and countries in Europe 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 issuers organized or headquartered in the
universe of countries that are not in the MSCI World Index. These countries
are sometimes referred to as emerging markets.
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.
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The Fund's portfolio will normally be comprised of 50-75 stocks. There are no
constraints on the market capitalization of the issuers in which the Fund may
invest. Stocks are purchased for the long-term and turnover tends to be
relatively low.
The GLOBAL BALANCED FUND seeks to earn long-term capital appreciation. It
allocates its assets among a common stock portfolio, a bond portfolio, and
money market instruments, in proportions which reflect the Adviser's judgment
of the anticipated returns and risks of each asset class. The Fund maintains
at least 25% of the value of its assets in fixed income senior securities. In
addition, the Fund may invest up to 20% of the value of its assets in
securities of issuers organized or headquartered in emerging markets, which may
include developing countries or countries with new or developing capital
markets. Other than the foregoing, 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,
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the Adviser expects the volatility of the Global Balanced Fund's total return
to be less than that of a common stock portfolio.
Investors should be aware that the investment results of the Fund depend not
only on the Adviser's and Sub-adviser's selection of specific portfolio
securities, but also upon the Adviser's ability to anticipate correctly the
relative performance and risk of stocks, bonds and money market instruments.
The Fund's investment results would underperform other global balanced funds,
for example, if only a small portion of the Fund's assets were allocated to
stocks during a significant stock market advance, or if a major portion of its
assets were allocated to stocks during a market decline. Similarly, the Fund's
performance could deteriorate if the Fund were substantially invested in bonds
at a time when interest rates increased.
INVESTMENT PRACTICES
The Adviser and Sub-adviser utilize various investment techniques in managing
each Fund's portfolio, including the following:
U.S. GOVERNMENT AND AGENCY OBLIGATIONS. Each Fund may invest in obligations
issued by the U.S. Treasury and in securities issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies. These securities
include Treasury bills, which mature in one year or less, Treasury notes and
bonds that mature in 2 to 30 years, and agency issues, which may have
maturities from one day to 40 years. Securities are generally not callable and
normally have interest rates that are fixed for the life of the security.
MONEY MARKET FUNDS. To maintain liquidity, each Fund may invest in
unaffiliated money market funds. Under normal circumstances, money market
investment of the Short Duration Tax Exempt 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.
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CORPORATE DEBT SECURITIES. Each Fund, other than the U.S. 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.
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.
HIGH YIELD BONDS. The High Income Fund will invest at least 65% of its total
assets in debt rated below investment grade or, if unrated, determined to be of
comparable quality by the Adviser, and at any time, each of the Total Return
and Market Return Funds may also 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
"high yield bonds" or "junk bonds," are 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. High yield securities
are generally subject to greater credit risk than higher-rated securities
because the issuers are more vulnerable to economic downturns, higher interest
rates or adverse issuer-specific developments. In addition, the prices of high
yield securities are generally subject to greater market risk and therefore
react more sharply to changes in interest rates. Their value and liquidity
may also be diminished by adverse publicity and investor perceptions. Also,
legislative proposals limiting the tax benefits to the issuers or holders of
taxable high yield securities or requiring federally insured savings and loan
institutions to reduce their holdings of taxable high yield securities have had
and may continue to have an adverse effect on the market value of these
securities.
Because high yield securities are frequently traded only in markets where the
number of potential purchasers and sellers, if any, is limited, the ability of
the Funds to sell these securities at their fair value either to meet
redemption requests or to respond to changes in the
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financial markets may be limited. In such an event, such securities could be
regarded as illiquid for the purposes of the limitation on the purchase of
illiquid securities. Thinly traded high yield securities may be more difficult
to value accurately for the purpose of determining a Fund's net asset value.
Also, because the market for certain high yield securities is relatively new,
that market may be particularly sensitive to an economic downturn or a general
increase in interest rates.
MORTGAGE BACKED SECURITIES. Each of the Funds, other than the European Growth
& Income, 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, High
Income 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 U.S. Treasury, Growth &
Income, European Growth & Income and International Equity Funds, each Fund may
invest in asset backed receivables, which represent undivided fractional
interests in a trust with assets consisting of a pool of domestic loans such as
motor vehicle retail installment sales contracts or credit card receivables.
Payments are typically made monthly, consisting of both principal and interest
payments. Asset backed securities may be prepaid prior to maturity, and hence
the actual life of the security cannot be accurately predicted. During periods
of falling interest rates, prepayments may accelerate, which would require a
Fund to reinvest the proceeds at a lower interest rate. Although generally
rated AAA, it is possible that the securities could become illiquid or
experience losses if guarantors or insurers default.
REPURCHASE AGREEMENTS. For the purpose of maintaining liquidity or realizing
additional income, each Fund may enter into repurchase agreements (agreements
to purchase U.S. Treasury notes and bills, subject to the seller's agreement to
repurchase them at a specified time and price) with well-established registered
securities dealers or banks. Repurchase agreements are the economic equivalent
of loans by a Fund. In the event of a bankruptcy or default of any such dealer
or bank, a Fund could experience costs and delays in liquidating the underlying
securities which are held as collateral, and the Fund might incur a loss if the
value of the collateral held declines during this period.
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REVERSE REPURCHASE AGREEMENTS. Each of the 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,
European Growth & Income, Global Balanced, High Income and International Equity
Funds may invest in convertible securities and warrants. Convertible
securities, such as convertible preferred stocks and debentures, may be
exchanged for or converted into a predetermined number of shares of the
issuer's common stock at the option of the holder during a specified time
period. Convertible securities generally pay interest or dividends and provide
for participation in the appreciation of the underlying common stock.
Convertible securities generally provide higher yields than the underlying
equity securities, but generally offer lower yields than non-convertible
securities of similar quality. The value of a convertible security is a
function of a variety of factors, including its yield in comparison with
comparable non-convertible securities, its value if converted into the
underlying common stock, and the credit standing of the issuer.
Warrants give the holder the right to purchase a specified number of shares of
the underlying stock at any time at a fixed price, but do not pay a fixed
dividend. Investment in warrants involve certain risks, including the possible
lack of a liquid market for resale, potential price fluctuations as a result of
speculation or other factors, and the failure of the price of the underlying
security to reach or have reasonable prospects of reaching a level at which the
warrant can be prudently exercised (in which event the warrant may expire
without being exercised, resulting in a loss of the Fund's entire investment in
the warrant). As a matter of operating policy, a Fund will not invest more
than 5% of its total assets in warrants.
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FOREIGN GOVERNMENT OBLIGATIONS. Each of the Limited Maturity, Short Bond,
Intermediate Bond, Investment Quality Bond, Total Return, High Income and
Global Balanced Funds and each of the 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,
Market Return, High Income and International Bond Funds may invest in
securities payable in a foreign currency. With the exception of the Total
Return, High Income and Market Return Funds, each of these Funds is restricted
to investment in non-U.S. dollar obligations rated at least investment grade at
the time of purchase by at least one of the rating agencies.
TAX EXEMPT OBLIGATIONS. The Short Duration Tax Exempt 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.
PUT BONDS. Both Funds may invest in tax-exempt securities (including
securities with variable interest rates) which may be redeemed or sold
back ("put") to the issuer of the security or a third party prior to
stated maturity ("put bonds"). Such securities will normally trade as
if maturity is the earlier put date, even though stated maturity is
longer. For both Funds, maturity for put bonds is deemed to be the
date on which the put becomes exercisable.
PRIVATE ACTIVITY AND INDUSTRIAL DEVELOPMENT BONDS. Both Funds may
invest in private activity and industrial development bonds, which are
obligations issued by or on behalf of public authorities to raise
money to finance various privately owned or operated facilities for
business and manufacturing, housing, sports and pollution control.
These bonds are also used to finance public facilities, such as
airports, mass transit systems, ports, parking or sewage or solid
waste disposal facilities. The payment of the principal and interest
on such bonds is generally dependent solely on the ability of the
facility's user to meet its financial obligations and the pledge, if
any, of real and personal property so financed as security for such
payment.
MUNICIPAL LEASE OBLIGATIONS AND CERTIFICATES OF PARTICIPATION. Both
Funds may invest in lease obligations issued by state or local
government authorities to acquire
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land and a wide variety of equipment and facilities. These
obligations typically are not fully backed by the municipality's
credit, and their interest may become taxable if the lease is
assigned. If funds are not appropriated for the following year's
lease payments, a Fund's only recourse may be to the leased property
securing payment, and disposition of the property might prove
difficult. In addition, as these securities represent a relatively
new type of financing, certain lease obligations may be considered to
be illiquid securities. Certificates of participation are issued by a
particular municipality or municipal authority to evidence a
proportionate interest in base rental or lease payments relating to a
specific project to be made by the municipality or authority.
TAX EXEMPT ZERO COUPON SECURITIES. 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 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, European Growth &
Income 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.
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 changes 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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PREFERRED STOCK. Any Equity Fund and the Global Balanced, European Growth &
Income, High Income and International Equity Funds may invest in cumulative and
non-cumulative preferred stock. 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. As a general rule, the
market value of preferred stocks with fixed dividend rates and no conversion
rights varies inversely with interest rates and perceived credit risk, with the
price determined by the dividend rate. The market price of convertible
preferred stocks generally reflects an element of conversion value. In
addition, in the absence of credit deterioration, adjustable rate preferred
stocks tend to have more stable market values than fixed rate preferred stocks.
All preferred stocks are subject to the same types of credit risks of the
issuer as are corporate bonds of the issuer.
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 S&P 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 , 1997 of million shares per day. Because SPDRs exactly
replicate the S&P 500 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 S&P 500 Index.
The administrator of the SPDR program, the American Stock Exchange, receives a
fee to cover its costs of about % 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
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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 Equity
Fund will invest more than 25% of its total assets in when-issued and delayed
delivery transactions.
RESERVES. Each Fund may establish and maintain reserves when the Adviser or
Sub-adviser determines that such reserves would be desirable for temporary
defensive purposes (for example, during periods of substantial volatility in
interest rates) or to enable it to take advantage of buying opportunities. A
Fund's reserves may be invested in domestic and foreign money market
instruments, including government obligations, commercial paper and short-term
corporate debt issues meeting the quality standards described above; money
market funds, certificates of deposit and bankers' acceptances of banking
institutions described in the Statement of Additional Information; and
repurchase agreements. Although there is no limit on the percentage of a
Fund's assets which may be maintained in such reserves, under normal
circumstances no more than 10% of its total assets is expected to be maintained
in such reserves.
ILLIQUID SECURITIES. Some debt obligations can be illiquid, meaning that they
may not be sold in the ordinary course of business within seven days at
approximately the price at which they are valued. A Fund will not invest more
than 15% of its net assets in illiquid securities. In accordance with
guidelines established by the Board, the Adviser or Sub-adviser will determine
the liquidity of each investment using various factors such as (1) the
frequency of trades and quotations, (2) the number of dealers and prospective
purchasers in the marketplace, (3) dealer undertakings to make a market, (4)
the nature of the security (including any demand or tender features) and (5)
the likelihood of continued marketability and credit quality of the issuer.
OPTIONS AND FUTURES CONTRACTS. Each Fund may purchase and 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. Further
information regarding these techniques may be found in the Statement of
Additional Information. 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. 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.
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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 or currency futures contract provides for the delivery by one
party and the purchase by another party of a specified quantity of a financial
instrument or currency 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 or currencies, no physical delivery of these securities or
currencies is made. Such futures contracts are derivative instruments which
may be traded on U.S. exchanges or with broker-dealers which maintain futures
markets. Upon entering into a futures contract, the Fund will be required to
deposit with its custodian in a segregated account in the name of its futures
broker a specified amount of cash or securities. This amount is known as
"initial margin", and is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. Subsequent
payments, called "variation margin" to and from the broker, will be made on a
daily basis as the price of the index fluctuates, making the position in the
futures contract more or less valuable, a process known as "marking to market".
The following chart 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 Yes Yes
Growth & Income Fund No Yes Yes No Yes
Global Fixed Income, Global Short Bond, Yes Yes No Yes Yes
International Bond Funds
Global Balanced Fund Yes Yes Yes Yes Yes
International Equity Fund No Yes Yes Yes Yes
European Growth & Income Fund No Yes Yes Yes Yes
</TABLE>
INTEREST RATE, INDEX AND CURRENCY SWAPS. The Funds, other than the Growth &
Income, European Growth & Income and International Equity Funds, may enter into
interest rate, index and currency swap transactions and purchase or sell caps
and floors. An interest rate,
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index 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).
A 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 or reference index 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 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, the European Growth & Income 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.
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DEPOSITORY RECEIPTS. The Equity Funds and the Global Balanced, European Growth
& Income and International Equity Funds may invest in foreign issuers through
sponsored American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs") and Global Depository Receipts ("GDRs"). Generally, an ADR is a
dollar-denominated security issued by a U.S. bank or trust company which
represents, and may be converted into, the underlying security that is issued
by a foreign company. Generally, an EDR represents a similar securities
arrangement but is issued by a European bank, while GDRs are issued by a
depository. ADRs, EDRs and GDRs may be denominated in a currency different
from the underlying securities into which they may be converted. Typically,
ADRs, in registered form, are designed for issuance in U.S. securities markets
and EDRs, in bearer form, are designed for issuance in European securities
markets.
ADRs may be sponsored by the foreign issuer or may be unsponsored. Unsponsored
ADRs are organized independently and without the cooperation of the foreign
issuer of the underlying securities; as a result, available information
regarding the issuer may not be as current as for sponsored ADRs, and the
prices of unsponsored ADRs may be more volatile than if they were sponsored by
the issuers of the underlying securities.
COUNTRY FUNDS. Subject to the provisions of the Investment Company Act of 1940,
the Global Balanced, European Growth & Income 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. Each of the
Global Balanced, European Growth & Income 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, European Growth & Income 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, European Growth & Income 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.
The European Growth & Income Fund will invest from time to time in WEBS, World
Equity Benchmark Shares, which are issued in a number of country-specific Index
Series by an investment company. The investment objective of each of the Index
Series is to seek to provide investment results that correspond generally to
the price and yield performance of publicly traded securities in the aggregate
in particular markets, as represented by a particular foreign equity series
index compiled by MSCI. The Fund will invest in WEBS with respect to France,
Germany, the Netherlands and the United Kingdom.
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FOREIGN CURRENCY TRANSACTIONS. Each of the Total Return, High Income and Market
Return Funds and the 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. Open positions in forward contracts are covered by the
segregation with the Group's Custodian of cash, U.S. Government securities or
other debt obligations and are marked-to-market daily.
TEMPORARY DEFENSIVE MEASURES. During times when the Adviser believes that a
temporary defensive posture is warranted, each 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. When
the assets of a Fund are so invested, the Fund may not be achieving its
investment objectives.
ADDITIONAL RISK FACTORS
DIVERSIFICATION. 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 and High Income Funds, has been classified as
"non-diversified". As provided in the Investment Company Act of 1940, 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 "A" at the time of purchase 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
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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 a swap transaction at any time that the aggregate amount of its net
obligations under such transactions exceeds 15% 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 an 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, European
Growth & Income and International Equity Funds, invests, or may invest,
primarily in debt obligations. Because of its investment policies, each such
Fund may or may not be suitable or appropriate for all investors. The Funds
are not money market funds and are not appropriate for those whose primary
objective is stability of principal. The value of the portfolio securities of
each Fund will fluctuate based upon market conditions.
In general and except as noted below under "Below Investment Grade Debt
Obligations," 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) 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.
BELOW INVESTMENT GRADE DEBT OBLIGATIONS. The High Income Fund will invest at
least 65% of its total assets in below investment grade debt obligations, or in
unrated securities determined by the Adviser to be of comparable quality. In
addition and at any time, each of the Total Return and Market Return Funds may
invest up to 25% of its assets in debt obligations 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.
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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 each of the Global Funds invests principally in such
securities. In addition, the Total Return, High Income and Market Return Funds
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.
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
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which appear relatively weak or are potentially volatile compared to the U.S.
dollar. The Global Fixed Income, Global Short Bond, Total Return, Market
Return, Global Balanced, High Income 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, European Growth & Income, High Income and Global
Balanced Funds are expected to incur operating expenses which are higher than
those of mutual funds investing exclusively in U.S. equity securities, since
expenses such as brokerage commissions and custodial fees related to foreign
investments are usually higher than those associated with investments in U.S.
securities. In addition, dividends and interest from foreign securities may be
subject to foreign withholding taxes. See "Dividends, Distributions and
Taxes."
If the U.S. government were to impose any restrictions, through taxation or
other means, on foreign investments by U.S. investors such as those to be made
through the Global Funds, the Board of Trustees will promptly review the
policies of the Funds to determine whether significant changes in their
portfolios are appropriate.
The Adviser undertakes several measures in seeking to preserve investors'
principal in the Global Fixed Income, Global Short Bond, Global Balanced 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 as investment grade by Moody's or
Standard & Poor's. If the rating of bonds of any country issuing or regulating
securities or currencies in which any such Fund has made an investment falls
below such level, the Fund will discontinue making investments in that country
and liquidate any current holdings as soon as the Adviser determines it is in
the best interest of the Funds to do so.
Second, the Adviser actively manages the maturity of the portfolios of each of
the Global Short Bond, Global Fixed Income, Global Balanced and International
Bond Funds 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, Market Return, Global
Balanced, High Income 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,
Market Return, High Income and Global Short Bond Funds will generally hedge a
greater proportion
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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.
EMERGING MARKETS. Each of the International Equity, Global Balanced, High
Income and Total Return Funds may invest a portion of its assets in securities
of issuers organized or headquartered in emerging markets, which may include
developing countries or countries with new or developing capital markets. The
considerations noted above under "Foreign Investments" 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, thereby making it difficult to
conduct such transactions. Brokerage commissions, custodial services and other
similar investment costs are generally more expensive than in the United
States. In addition, securities of issuers located in these countries tend to
have volatile prices and may offer significant potential for loss as well as
gain.
BRADY BONDS. Each of the High Income and Total Return Funds may invest a
portion of its assets in Brady bonds. Brady bonds are bonds issued as a result
of a restructuring of a country's debt obligations to commercial banks under
the "Brady plan." Brady bonds have been issued by the governments of
Argentina, Costa Rica, Mexico, Nigeria, Uruguay, Venezuela, Brazil and the
Philippines, as well as other emerging market countries. Most Brady bonds are
currently rated below BBB by S&P or Baa by Moody's. While the Adviser is not
aware of the occurrence of any payment defaults on Brady bonds, investors
should recognize that these debt securities have been issued only recently and,
accordingly, do not have a long payment history. Brady bonds may be
collateralized or uncollateralized, are issued in various currencies (primarily
the U.S. dollar) and are actively traded in the secondary market for Latin
American debt.
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 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
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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, each of 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 (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, (c) SPDRs will be divided according to the industries of their
underlying common stocks, and (d) 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 each
of the Fixed Income Funds (other than the High Income Fund), Global Short Bond,
Global Fixed Income and International Bond Funds, more than 5% of the value of
the Fund's total assets would be invested in the securities of unseasoned
issuers which at the time of purchase have been in operation for less than three
years, including predecessors and unconditional guarantors; or (2) purchase
additional securities when borrowings exceed 5% of the Fund's total assets. In
addition, each of the Limited Maturity, Short Bond, Intermediate Bond,
Investment Quality Bond, Total Return, Tax Exempt and Global 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
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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 Tax Exempt Funds and for the Growth &
Income, European 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 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 &
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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, High Income Fund and
Total Return Fund); and the Equity Strategy Group (Growth & Income Fund,
European Growth & Income Fund, International Equity Fund and Global Balanced
Fund).
The Adviser receives a monthly fee from each Fund at the following annual
rates: the Limited Maturity, Short Bond, U.S. Treasury, Intermediate Bond,
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 Tax Exempt 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; the European Growth & Income Fund, 0.50% of the first $2 billion of
average daily net assets of the portfolio, and 0.40% thereafter; and the High
Income Fund, 0.35% of average daily net assets.
For the fiscal year which ended October 31, 1997, the Adviser earned a fee from
each Fund as follows: Limited Maturity, Short Bond, U.S. Treasury,
Intermediate Bond, Investment Quality Bond and Market Return Funds, %; Short
Duration Tax Exempt and Tax Exempt Funds, %; Global Short Bond Fund, %; Global
Fixed Income Fund, %; International Bond Fund, %; Total Return Fund, %; Growth
& Income Fund, %; Global Balanced Fund, %; European Growth & Income Fund, %;
and International Equity Fund, %. The High Income Fund was not open during
this period.
THE SUB-ADVISER
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For the International Equity, European Growth & Income and Global Balanced
Funds, the Adviser has entered into sub-advisory agreements 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 and European Growth &
Income Funds 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. The Adviser pays the Sub-adviser a monthly
advisory fee for the European Growth & Income Fund at an annual rate equal to
50% of the advisory fee earned and received 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.
For the fiscal year ended October 31, 1997, the Sub-adviser earned a fee from
each Fund as follows: International Equity Fund, %; Global Balanced Fund, %,
and European Growth & Income Fund, %.
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.
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.
IFTC receives fees for fund
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<PAGE> 66
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 S shares of the Funds and of the other portfolios of the Group. Under
the Plan, the Class S 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 S shares for services provided by the Distributor, broker-dealers and
other service organizations to the beneficial owners of Class S 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 S 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 S 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 R, Class S and Class I
Shares. Yield will be quoted using the SEC definition, which is the annualized
net investment income per share during a particular 30-day (or one month)
period. Quotations of average annual total return will be expressed in terms
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of the average annual compounded rate of return of a hypothetical investment in
a Fund over specified periods.
OFFERING
Copies of the Group's 1997 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 eighteen investment portfolios with varying
investment objectives or policies, and other investment portfolios may be
created. With the exception of Class I Shares of any Fund which may only be
exchanged for Class I Shares of another Fund, shares of a Fund may be exchanged
for any class of 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
With the exception of holders of Class I Shares, all 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 and Short
Duration Tax Exempt Funds 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 will vary daily. An investor may incur a taxable
capital gain or loss on the shares redeemed
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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
With the exception of holders of Class I Shares, all 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
through 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.
Please note the following guidelines:
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- - 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 portfolio of the Group 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 portfolio of the Group 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 Funds or other portfolios of
the Group 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 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
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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), 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
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.
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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,
Martin Luther King 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 either Class R
Shares or Class S Shares, for each type of account are as follows:
<TABLE>
<CAPTION>
ACCOUNT TYPE INITIAL ADDITIONAL
- ------------ ------- ----------
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>
For Class I Shares, the minimum investment is $3,000,000; the minimum additional
investment is $100,000.
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 shares if
information provided in the client application proves to be incorrect in any
material manner.
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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. 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.
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 edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term 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 which are 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 be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well..
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.
Caa: Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
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Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked short-comings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
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.
U.S. TAX-EXEMPT MUNICIPALS
Moody's ratings for U.S. Tax-Exempt Municipals range from Aaa to B and utilize
the same definitional elements as are set forth above under "Bonds."
Advance refunded issues: Advance refunded issues that are secured by
escrowed funds held in cash, held in trust, reinvested in direct non-callable
United States government obligations or non-callable obligations
unconditionally guaranteed by the U.S. government are identified with a #
(hatchmark) symbol, e.g., # Aaa.
MUNICIPAL NOTE RATINGS
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade (MIG), and for variable rate
demand obligations are designated Variable Moody's Investment Grade (VMIG).
This distinction recognizes the differences between short-term credit risk and
long-term risk. Loans bearing the designation MIG 1/VMIG 1 are of the best
quality, enjoying strong protection from established cash flows for their
servicing or from established and broad-based access to the market for
refinancing, or both. Loans bearing the designation MIG2/VMIG 2 are of high
quality, with ample margins of protection, although not as large as the
preceding group.
COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted. Moody's
employs the following three designations, all judged to be investment grade, to
indicate the relative repayment ability of rated issuers:
Prime-1: Issuers rated Prime-1 (or related supporting institutions)
have a superior ability 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 ample 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.
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Prime-2: Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
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. The obligor's capacity to meet its financial commitment on the
obligation (i.e., pay interest and repay principal) is extremely strong.
AA: Bonds rated AA differ from the highest-rated obligations only in
a small degree. The obligor's capacity to meet its financial commitment on the
obligation (i.e., pay interest and repay principal) is very strong.
A: Bonds rated A are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation (i.e., pay interest and repay principal) is still
strong.
BBB: Bonds rated BBB exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation (i.e., pay interest and repay principal).
BB: Bonds rated BB are less vulnerable to nonpayment than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation (i.e., pay interest and repay principal).
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B: Bonds rated B are more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation (i.e., pay interest and repay principal). Adverse
business, financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the obligation.
CCC: An obligation rated CCC is currently vulnerable to nonpayment,
and is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions, the obligor is
not likely to have the capacity to meet its financial commitment on the
obligation.
CC: An obligation rated CC is currently highly vulnerable to
nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
D: An obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
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.
r: This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or
commodities; obligations exposed to severe prepayment risk-such as
interest-only or principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.
MUNICIPAL BOND RATINGS
AAA - Prime Grade: These are obligations of the highest quality. They
have the strongest capacity for timely payment of debt service.
General Obligations Bonds: In a period of economic stress, the
issuers will suffer the smallest declines in income and will be least
susceptible to autonomous decline. Debt burden is moderate. A strong
revenue structure appears more than adequate to meet future
expenditure requirements. Quality of management appears superior.
Revenue Bonds: Debt service coverage has been, and is expected to
remain, substantial, stability of the pledged revenues is also
exceptionally strong due to the competitive position of the municipal
enterprise or to the nature of the revenues. Basic security
provisions (including rate covenant, earnings test for issuance of
additional bonds and debt service reserve requirements) are rigorous.
There is evidence of superior management.
AA - High Grade: The investment characteristics of bonds in this
group are only slightly less marked than those of the prime quality issues.
Bonds rated AA have the second strongest capacity for payment of debt service.
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A - Good Grade: Principal and interest payments on bonds in this
category are regarded as safe although the bonds are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
bonds in higher rated categories. This rating describes the third strongest
capacity for payment of debt service. Regarding municipal bonds, the rating
differs from the two higher ratings because:
General Obligation Bonds: There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and
expenditures, or in quality of management. Under certain adverse
circumstances, any one such weakness might impair the ability of the
issuer to meet debt obligations at some future date.
Revenue Bonds: Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because
of increased competition or economic influences on revenues. Basic
security provisions, while satisfactory, are less stringent.
Management performance appearance appears adequate.
Rating Refinements: Standard & Poor's letter ratings may be modified
by the addition of a plus (+) or a minus (-) sign, which is used to show
relative standing within the major rating categories, except in the AAA rating
category.
MUNICIPAL NOTE RATINGS
Municipal notes with maturities of three years or less are usually given note
ratings (designated SP-1, or SP-2) to distinguish more clearly the credit
quality of notes as compared to bonds. Notes rated SP-1 have a very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given the designation of SP-1.
Notes rated SP-2 have a satisfactory capacity to pay principal and interest.
COMMERCIAL PAPER
A-1: A short-term obligation rated A-1 is rated in the highest
category by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that the
obligor's capacity to meet its financial commitment on these obligations is
extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
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
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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.
CCC: Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. "DDD" represents the highest potential for recovery on these bonds,
and "D" represents the lowest potential for recovery. Plus (+) and minus (-)
signs are used with a rating symbol to indicate the relative position of a
credit within the rating category. Plus and minus signs, however, are not used
in the "DDD," "DD," or "D" categories.
COMMERCIAL PAPER
F-1: Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment. Those issues regarded as having the strongest
degree of assurance of repayment are denoted
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with a plus (+) sign designation.
IBCA, LIMITED
IBCA analyzes credit quality of short term debt (maturities of one year or
less).
A: An issuer of impeccable financial condition, with a consistent
record of above average performance.
B: An issuer with a sound risk profile and without significant
problems. The issuer's performance has generally been in line with or better
than that of its peers.
C: An issuer which has an adequate risk profile but possesses one or
more troublesome aspects, giving rise to the possibility of risk developing, or
which has generally failed to perform in line with its peers.
In addition, ratings of "A/B" and "B/C" may be assigned.
THOMPSON BANK WATCH
Thompson Bank Watch ratings are based upon a qualitative and quantitative
analysis of all segments of the organization, including holding company and
operating subsidiaries.
ISSUER RATINGS
Thompson Bank Watch assigns only one Issuer Rating to each company, based on
consolidated financials. While the rating is blended to be equally applicable
to all operating entities of the organization, there may, in certain cases, be
more liquidity and/or credit risk associated with doing business with one
segment of the company as opposed to another (i.e., holding company vs.
subsidiary).
Bank Watch Issuer Ratings are not merely an assessment of the likelihood of
receiving payment of principal and interest on a timely basis. It is also
important to recognize that the ratings incorporate our opinion of the
vulnerability of the company to adverse developments, which may impact the
market's perception of the company, thereby affecting the marketability of its
securities.
Bank Watch Issuer Ratings are assigned using an intermediate time horizon.
RATING DEFINITIONS
A: Company possesses an exceptionally strong balance sheet and
earnings record, translating into an excellent reputation and very good access
to its natural money markets. If weakness or vulnerability exists in any
aspect of the company's business, it is entirely mitigated by the strengths of
the organization.
A/B: Company is financially very solid with a favorable track record
and no readily apparent weakness. Its overall risk profile, while low, is not
quite as favorable as for companies in the highest rating category.
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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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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
, 1997
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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 HIGH INCOME 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 EUROPEAN GROWTH & INCOME FUND
PAYDEN & RYGEL INTERNATIONAL EQUITY FUND
STATEMENT OF ADDITIONAL INFORMATION
, 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 High
Income Fund ("High Income 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"), Payden & Rygel European Growth & Income Fund ("European Growth
& Income 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 , 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).
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TABLE OF CONTENTS
INVESTMENT OBJECTIVES AND POLICIES.................................. 3
FUNDAMENTAL AND OPERATING POLICIES..................................31
PORTFOLIO TRANSACTIONS..............................................33
VALUATION OF PORTFOLIO SECURITIES...................................34
FUND PERFORMANCE....................................................35
TAXATION............................................................38
MANAGEMENT OF THE GROUP.............................................43
PURCHASES AND REDEMPTIONS...........................................49
OTHER INFORMATION...................................................50
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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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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, in general, the debt securities in which the Funds
invest will be considered "investment-grade"(e.g., rated AAA,
AA, A or BBB by Standard & Poor's Corporation) by at least one
of the established rating agencies, or if not rated, will be
determined to be of comparable quality by the Adviser.
However, the High Income Fund will invest at least 65% of its
total assets in debt securities rated below investment grade
by one of the established rating agencies, or if not rated,
determined to be of comparable quality by the Adviser, and
each of the Total Return and Market Return Funds may invest up
to 25% of its total debt assets in such below investment grade
debt. For all Fixed Income Funds except the High Income Fund,
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 and Market Return Funds), 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.
As a matter of operating policy, the High Income Fund will not
purchase securities rated both below B3 by Moody's Investor
Services, Inc. and below B- by Standard & Poor's Corporation.
While the High Income Fund is not required to dispose of debt
securities whose credit quality declines at some point after
the security is purchased, no more than 25% of the Fund's
assets will be invested at any time in securities rated less
than CCC by Standard & Poor's or Caa by Moody's or, if
unrated, of comparable quality in the opinion of the Adviser.
The High Income Fund will not invest in securities of bankrupt
companies. Except for the High, Income, Total Return and
Market Return Funds, 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
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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.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities are interests in pools of mortgage loans made to
U.S. residential home buyers, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various
governmental, government-related and private organizations. The Funds may also
invest in debt securities which are secured with collateral consisting of U.S.
mortgage-related securities, and in other types of U.S. mortgage-related
securities. Under normal circumstances, all debt securities held by each Fund
(with the exception of the Total Return, High Income and Market Return Funds)
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, European 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
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state and federally chartered savings and loan associations, mutual savings
banks, commercial banks and credit unions and mortgage bankers. FHLMC is a
government-sponsored corporation created to increase availability of mortgage
credit for residential housing and owned entirely by private stockholders.
FHLMC issues participation certificates which represent interests in
conventional mortgages from FHLMC's national portfolio. Pass-through
securities issued by FNMA and participation certificates issued by FHLMC are
guaranteed as to timely payment of principal and interest by FNMA and FHLMC,
respectively, but are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers
may, in addition, be the originators or services of the underlying mortgage
loans as well as the guarantors of the mortgage-related securities. Pools
created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because they lack direct
or indirect government or agency guarantees of payment. However, timely
payment of interest and principal of these pools may be supported by various
forms of insurance or guarantees, including individual loan, title, pool and
hazard insurance and letters of credit, issued by governmental entities,
private insurers and mortgage poolers. Such insurance and guarantees and the
creditworthiness of the issuers thereof will be considered in determining
whether a mortgage-related security meets the Fund's investment quality
standards. However, there can be no assurance that private insurers or
guarantors will meet their obligations. In addition, the Funds may buy
mortgage-related securities without insurance or guarantees if through an
examination of the loan experience and practices of the originator/services and
poolers the Adviser determines that the securities meet the Funds' quality
standards.
Although the underlying mortgage loans in a pool may have maturities of up to
30 years, the actual average life of the pool certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Prepayment rates vary
widely and may be affected by changes in market interest rates. In periods of
falling interest rates, the rate of prepayment tends to increase, thereby
shortening the actual average life of the pool certificates. Conversely, when
interest rates are rising, the rate of prepayments tends to decrease, thereby
lengthening the actual average life of the certificates. Accordingly, it is
not possible to predict accurately the average life of a particular pool.
Although the market for mortgage pass-through securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable. A Fund will not purchase mortgage-related securities
which in the Adviser's opinion are illiquid if, as a result, more than 15% of
the value of the Fund's total assets will be illiquid.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Like a bond,
interest and prepaid principal is paid, in most cases, semi-annually. CMOs may
be collateralized by whole mortgage loans, but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC or FNMA.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool
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of underlying mortgages, including prepayments, is first returned to investors
holding the shortest maturity class. Investors holding the longer maturity
classes receive principal only after the earlier classes have been retired.
OTHER MORTGAGE-RELATED SECURITIES. Other mortgage-related securities include
securities of U.S. or foreign issuers that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans on real
property. These other mortgage-related securities may be equity or debt
securities issued by governmental agencies or instrumentalities or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities.
ASSET BACKED RECEIVABLES
The Funds, with the exception of the U.S. Treasury, Growth & Income, European
Growth & Income and International Equity Funds, may purchase asset-backed
securities including, but not limited to, Certificates for Automobile
Receivables ("CARS(sm)") and credit card receivable securities. CARS(sm)
represent undivided fractional interests in a trust with assets consisting of a
pool of motor vehicle retail installment sales contracts and security interests
in the vehicles securing these contracts. In addition to the general risks
pertaining to all asset- backed securities, CARS(sm) are subject to the risks of
delayed payments or losses if the full amounts due on underlying sales contracts
are not realized by the trust due to unanticipated legal or administrative costs
of enforcing the contracts, or due to depreciation, damage or loss of the
vehicles securing the contracts. Credit card receivable securities are backed
by receivables from revolving credit card accounts. Since balances on revolving
credit card accounts are generally paid down more rapidly than CARS(sm), issuers
often lengthen the maturity of these securities by providing for a fixed period
during which interest payments are passed through and principal payments are
used to fund the transfer of additional receivables to the underlying pool. The
failure of the underlying receivables to generate principal payments may
therefore shorten the maturity of these securities. In addition, unlike most
other asset-backed securities, credit card receivable securities are backed by
obligations that are not secured by interests in personal or real property.
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
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such obligations, as well as the creditworthiness of the institution
responsible for paying the principal amount of the obligations under the demand
feature.
OBLIGATIONS WITH PUTS ATTACHED
Each Fund may purchase long-term fixed rate debt obligations that have been
coupled with an option granted by a third party financial institution allowing
the Fund at specified intervals to tender (or "put") such debt obligations to
the institution and receive the face value. These third party puts are
available in many different forms, and may be represented by custodial receipts
or trust certificates and may be combined with other features such as interest
rate swaps. The financial institution granting the option does not provide
credit enhancement. If there is a default on, or significant downgrading of,
the bond or a loss of its tax-exempt status, the put option will terminate
automatically. The risk to the Fund will then be that of holding a long-term
bond.
These investments may require that a Fund pay a tender fee or other fee for the
features provided. In addition, the Fund may acquire "stand-by commitments"
from banks or broker dealers with respect to the securities held in its
portfolios. Under a stand-by commitment, a bank or broker/dealer agrees to
purchase at the Fund's option a specific security at a specific price on a
specific date. The Fund may pay for a stand-by commitment either separately,
in cash, or in the form of a higher price paid for the security. The Fund will
acquire stand-by commitments solely to facilitate portfolio liquidity. The
Growth & Income and International Equity Funds do not invest in these
securities.
REPURCHASE AGREEMENTS
For the purpose of maintaining liquidity, each Fund may enter into repurchase
agreements (agreements to purchase U.S. Treasury notes and bills, subject to
the seller's agreement to repurchase them at a specified time and price) with
well-established registered securities dealers or banks. Repurchase agreements
are the economic equivalent of loans by a Fund. In the event of a bankruptcy
or default of any registered dealer or bank, a Fund could experience costs and
delays in liquidating the underlying securities which are held as collateral,
and a Fund might incur a loss if the value of the collateral declines during
this period.
DELAYED DELIVERY TRANSACTIONS
When delayed delivery purchases are outstanding, a Fund will set aside and
maintain until the settlement date in a segregated account cash, U.S.
Government securities or high grade debt obligations in an amount sufficient to
meet the purchase price. When purchasing a security on a delayed delivery
basis, a Fund assumes the rights and risks of ownership of the security,
including the risk of price and yield fluctuations, and takes such fluctuations
into account when determining its net asset value, but does not accrue income
on the security until delivery. When a Fund sells a security on a delayed
delivery basis, it does not participate in future gains or losses with respect
to the security. If the other party to a delayed delivery transaction fails to
deliver or pay for the securities, a Fund could miss a favorable price or yield
opportunity or could suffer a loss. A Fund will not invest more than 25% of
its total assets in when-issued and delayed delivery transactions.
REVERSE REPURCHASE AGREEMENTS
Each Fund covers its obligations under a reverse repurchase agreement by
maintaining a segregated account comprised of cash, U.S. Government securities
or high-grade debt obligations, maturing no
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later than the expiration of the agreement, in an amount (marked-to-market
daily) equal to its obligations under the agreement. Reverse repurchase
agreements are the economic equivalent of borrowing by a Fund, and are entered
into by a Fund to enable it to avoid selling securities to meet redemption
requests during market conditions deemed unfavorable by the Adviser.
ILLIQUID SECURITIES
No Fund may invest more than 15% of the value of its net assets in securities
that at the time of purchase have legal or contractual restrictions on resale
or are otherwise illiquid. The Adviser will monitor the amount of illiquid
securities in each Fund's portfolio, to ensure compliance with the Fund's
investment restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placement or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have
an adverse effect on the marketability of portfolio securities and the Fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemption requests within seven days. The Fund might also have to register
such restricted securities in order to dispose of them, resulting in additional
expense and delay. Adverse market conditions could impede such a public
offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for repayment. The
fact that there are contractual or legal restrictions on resale to the general
public or to certain institutions may not be indicative of the liquidity of
such investments. If such securities are subject to purchase by institutional
buyers in accordance with Rule 144A promulgated by the Commission under the
Securities Act, the Board of Trustees may determine that such securities are
not illiquid securities notwithstanding their legal or contractual restrictions
on resale. In all other cases, however, securities subject to restrictions on
resale will be deemed illiquid.
FOREIGN INVESTMENTS
Except as noted below, the countries in which each of the Global Funds and the
Market Return, High Income and Total Return Funds will seek investments
primarily include those listed below. A Fund may elect not to invest in all
the countries listed, and it may also invest in other countries when such
investments are consistent with the Fund's investment objective and policies.
As indicated in the Prospectus, the International Equity Fund does not invest
in U.S. securities, and the European Growth & Income Fund invests only in
securities of issuers located in France, Germany, the Netherlands and the
United Kingdom.
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<TABLE>
<S> <C> <C>
Pacific Basin Western Europe North America
------------- -------------- -------------
Australia Austria Canada
Japan Belgium United States
New Zealand Denmark
Finland
France
Germany
Ireland
Italy
Netherlands
Norway
Spain
Sweden
Switzerland
United Kingdom
</TABLE>
FOREIGN MORTGAGE-RELATED SECURITIES
Foreign mortgage-related securities are interests in pools of mortgage loans
made to residential home buyers domiciled in a foreign country. These include
mortgage loans made by trust and mortgage loan companies, credit unions,
chartered banks, and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related,
and private organizations (e.g., Canada Mortgage and Housing Corporation and
First Australian National Mortgage Acceptance Corporation Limited). The
mechanics of these mortgage-related securities are generally the same as those
issued in the United States. However, foreign mortgage markets may differ
materially from the U.S. mortgage market with respect to matters such as the
sizes of loan pools, pre-payment experience, and maturities of loans.
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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.
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Revenue bonds are issued to finance a wide variety of capital projects
including: electric, gas, water, and sewer systems; highways, bridges, and
tunnels; port and airport facilities; colleges and universities; and hospitals.
Although the principal security behind these bonds may vary, many provide
additional security in the form of a debt service reserve fund the assets of
which may be used to make principal and interest payments on the issuer's
obligations. Housing finance authorities have a wide range of security,
including partially or fully insured mortgages, rent subsidized and
collateralized mortgages, and the net revenues from housing or other public
projects. Some authorities are provided further security in the form of a
state's assurance (although without obligation) to make up deficiencies in the
debt service reserve fund.
Both Funds may purchase insured municipal debt in which scheduled payments of
interest and principal are guaranteed by a private, non- governmental or
governmental insurance company. The insurance does not guarantee the market
value of the municipal debt or the value of the shares of a Fund.
The Adviser will undertake several measures in seeking to preserve investors'
principal:
- First, the debt securities in which a Fund invests will be
considered "investment-grade"(e.g., rated AAA, AA, A or BBB by
Standard & Poor's Corporation) at the time of purchase by at
least one of the following rating agencies: Fitch Investor
Services, Moody's Investor Services, Inc. or Standard & Poor's
Corporation, or if not rated, will be determined to be of
comparable quality by the Adviser. If the rating of a
municipal debt security in which the Fund has made an
investment falls below the investment grade level, the Fund
will discontinue making investments in that issuer and
liquidate any current holdings as soon as the Adviser
determines it is in the best interest of the Fund to do so.
In no event will a Fund hold more than 5% of its net assets in
obligations rated below investment grade. No such obligation
will be rated below BB.
- Second, the Adviser will actively manage the maturity of a
Fund's portfolio in response to expected interest rate
movements. When anticipating a decline in interest rates, the
Adviser will attempt to lengthen the portfolio's maturity to
capitalize on the expected appreciation of such securities.
When interest rates are expected to rise, both Funds will seek
to shorten their maturities to protect against the expected
capital depreciation.
- Finally, the Adviser may use interest rate and municipal bond
index futures and options on futures contracts, options on
securities, and interest rate swaps to effect a change in a
Fund's exposure to interest rate changes. These investment
techniques involve certain risks described below.
There is, of course, no guarantee these investment strategies will accomplish a
Fund's objective. See Appendix A for further information regarding the ratings
referred to above.
Securities of issuers of municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Bankruptcy Reform Act of 1978. In addition, the
obligations of such issuers may become subject to laws enacted in the future by
Congress, state legislatures of referenda extending the time for payment of
principal or interest, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. Furthermore,
as a result of legislation or other conditions, the power or ability of any
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<PAGE> 95
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.
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,
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<PAGE> 96
agency or authority.
However, certain lease obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in any year unless money is appropriated for such purpose for
such year. Although "non-appropriation" lease obligations are secured by the
leased property, disposition of the property in the event of default and
foreclosure might prove difficult. In addition, these securities represent a
relatively new type of financing, and certain lease obligations may therefore
be considered to be illiquid securities.
Both Funds will attempt to minimize the special risks inherent in municipal
lease obligations and certificates of participation by purchasing only lease
obligations which meet the following criteria: (1) rated A or better by at
least one national recognized securities rating organization; (2) secured by
payments from a governmental lessee which has actively traded debt obligations;
(3) determined by the Adviser to be critical to the lessee's ability to deliver
essential services; and (4) contain legal features which the Adviser deems
appropriate, such as covenants to make lease payments without the right of
offset or counterclaim, requirements for insurance policies, and adequate debt
service reserve funds.
SHORT-TERM OBLIGATIONS
Both Funds may invest in short-term municipal obligations. These securities
include the following:
TAX ANTICIPATION NOTES are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
to be payable from these specific future taxes. They are usually general
obligations of the issuer, secured by the taxing power of the municipality for
the payment of principal and interest when due.
REVENUE ANTICIPATION NOTES are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under the Federal Revenue
Sharing Program. They also are usually general obligations of the issuer.
BOND ANTICIPATION NOTES normally are issued to provide interim financing until
long-term financing can be arranged. The long-term bonds then provide the
money for the repayment of the notes.
CONSTRUCTION LOAN NOTES are sold to provide construction financing for specific
projects. After successful completion and acceptance, many projects receive
permanent financing through the Federal National Mortgage Association or the
Government National Mortgage Association.
SHORT-TERM DISCOUNT NOTES (tax-exempt commercial paper) are short-term (365
days or less) promissory notes issued by municipalities to supplement their
cash flow.
FLOATING RATE AND VARIABLE RATE DEMAND NOTES
Both Funds may purchase floating rate and variable rate demand notes and bonds.
These securities may have a stated maturity in excess of one year, but permit a
holder to demand payment of principal plus accrued interest upon a specified
number of days notice. Frequently, such obligations are secured by letters of
credit or other credit support arrangements provided by banks. The issuer has
a corresponding right, after a given period, to prepay in its discretion the
outstanding principal of the obligation plus accrued interest upon a specific
number of days notice to the holders. The interest rate of a floating rate
instrument may be based on a known lending rate, such as a bank's prime rate,
and is
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<PAGE> 97
reset whenever such rate is adjusted. The interest rate on a variable rate
demand note is reset at specified intervals at a market rate.
Each Fund will limit its purchase of municipal securities that bear floating
rates and variable rates of interest to those meeting the rating quality
standards set forth in the Prospectus. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided by
banks. The quality of the underlying creditor or of the bank, as the case may
be, must, as determined by the Adviser under the supervision of the Board of
Trustees, also be equivalent to the quality standards set forth above. In
addition, the Adviser monitors the earning power, cash flow and other liquidity
ratios of the issuers of such obligations, as well as the creditworthiness of
the institution responsible for paying the principal amount of the obligations
under the demand feature.
Both Funds may also invest in municipal securities in the form of
"participation interests" in variable rate tax-exempt demand obligations held
by a financial institution, usually a commercial bank. Municipal participation
interests provide the purchaser with an undivided interest in one or more
underlying municipal securities and the right to demand payment from the
institution upon a specified number of days' notice (no more than seven) of the
unpaid principal balance plus accrued interest. In addition, the municipal
participation interests are typically enhanced by an irrevocable letter of
credit or guarantee from such institution. Since a Fund has an undivided
interest in the obligation, it participates equally with the institution with
the exception that the institution normally retains a fee out of the interest
paid for servicing, providing the letter of credit or guarantee, and issuing
the repurchase commitment.
OBLIGATIONS WITH PUTS ATTACHED
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 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.
[No page 17 or 18; page 19 next]
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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, High
Income, Market Return and Global Funds) foreign currencies, enter into interest
rate and index futures contracts and (in the case of the Total Return, High
Income, Market Return and Global Funds), foreign currency 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
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absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount are placed in a segregated account with the Group's
Custodian) upon conversion or exchange of other securities held by the Fund. A
call option on an index is covered if the Fund maintains with its Custodian
cash or cash equivalents equal to the contract value. A call option is also
covered if the Fund holds a call on the same security or index as the call
written, and the exercise price of the call held is (i) equal to or less than
the exercise price of the call written, or (ii) greater than the exercise price
of the call written, provided the difference is maintained by the Fund in cash
or cash equivalents in a segregated account with its Custodian. A put option
on a security or an index is covered if the Fund maintains cash or cash
equivalents equal to the exercise price in a segregated account with its
Custodian. A put option is also covered if the Fund holds a put on the same
security or index as the put written, and the exercise price of the put held is
(i) equal to or greater than the exercise price of the put written, or (ii)
less than the exercise price of the put written, provided the difference is
maintained by the Fund in cash or cash equivalents in a segregated account with
its Custodian.
If an option written by a Fund expires unexercised, the Fund realizes a capital
gain equal to the premium received at the time the option was written. If an
option purchased by a Fund expires unexercised, the Fund realizes a capital
loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out by
an offsetting purchase or sale of an option of the same series (i.e., of the
type, traded on the same exchange, with respect to the same underlying security
or index, and with the same exercise price and expiration date). A Fund will
realize a capital gain from a closing purchase transaction if the cost of the
closing option is less than the premium received from writing the option; if it
is more, the Fund will realize a capital loss. If the premium received from a
closing sale transaction is more than the premium paid to purchase the option,
the Fund will realize a capital gain; if it is less, the Fund will realize a
capital loss. The principal factors affecting the market value of a put or a
call option include supply and demand, interest rates, the current market price
of the underlying security or index in relation to the exercise price of the
option, the volatility of the underlying security or index, and the time
remaining until the expiration date.
The premium paid for a put or call option purchased by a Fund is an asset of
the Fund. The premium received for an option written by a Fund is recorded as
a deferred credit. The value of an option purchased or written is marked to
market daily and is valued at the closing price on the exchange on which it is
traded or, if not traded on an exchange or no closing price is available, at
the mean between the last bid and asked prices.
FOREIGN CURRENCY OPTIONS
Each of the Total Return, High Income, Market 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
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currency risk using such options.
COMBINATIONS OF OPTIONS
As indicated in the Prospectus, the Funds may employ certain combinations of
put and call options. A "straddle" involves the purchase of a put and call
option on the same security with the same exercise prices and expiration dates.
A "strangle" involves the purchase of a put option and a call option on the
same security with the same expiration dates but different exercise prices. A
"collar" involves the purchase of a put option and the sale of a call option on
the same security with the same expiration dates but different exercise prices.
A "spread" involves the sale of a put option and the purchase of a call option
on the same security with the same or different expiration dates and different
exercise prices.
RISKS ASSOCIATED WITH OPTIONS
Several risks are associated with transactions in options on securities,
indices and currencies. For example, significant differences between the
securities and options markets could result in an imperfect correlation between
those markets, causing a given transaction not to achieve its objectives. A
decision as to whether, when and how to use options involves the exercise of
skill and judgment, and even a well-conceived transaction may be unsuccessful
to some degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Fund seeks to
close out an option position. Among the possible reasons for the absence of a
liquid secondary market on an exchange are: (i) insufficient trading interest
in certain options; (ii) restrictions on transactions imposed by an exchange;
(iii) trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities; (iv)
interruption of the normal operations of an exchange; (v) inadequacy of the
facilities of an exchange or the Options Clearing Corporation to handle current
trading volume; or (vi) a decision by an exchange to discontinue the trading of
options or a particular class or series of options (in which event the
secondary market on that exchange or in that class or series of options could
cease to exist, although outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would generally continue to be exercisable in accordance with their
terms). If a Fund were unable to close out an option that it had purchased on
a security, it would have to exercise the option in order to realize any
profit. If a Fund were unable to close out a covered call option that it had
written on a security, it would not be able to sell the underlying security
unless the option expired without exercise. As the writer of a covered call
option, a Fund forgoes, during the option's life, the opportunity to profit
from increases in the market value of the security covering the call option
above the sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased by a Fund, the Fund would not
be able to close out the option. If restrictions on exercise were imposed, the
Fund might be unable to exercise an option it has purchased. Except to the
extent that a call option on a security, currency or index written by a Fund is
covered by an option on the same security, currency or index purchased by the
Fund, movements in the index may result in a loss to the Fund; however, such
losses may be mitigated by changes in the value of the Fund's securities during
the period the option was outstanding.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
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The Funds may use interest rate, foreign currency or index futures contracts,
as specified in the Prospectus. An interest rate or foreign currency contract
provides for the future sale by one party and purchase by another party of a
specified quantity of a financial instrument or foreign currency at a specified
price and time. A futures contract on an index is an agreement pursuant to
which two parties agree to take or make delivery of an amount of cash equal to
the difference between the value of the index at the close of the last trading
day of the contract and the price at which the index contract was originally
written. Although the value of an index might be a function of the value of
certain specified securities, no physical delivery of these securities is made.
A public market exists in futures contracts covering several indices as well as
a number of financial instruments and foreign currencies, including U.S.
Treasury bonds, U.S. Treasury notes, GNMA Certificates, three-month U.S.
Treasury bills, 90-day commercial paper, bank certificates of deposit,
Eurodollar certificates of deposit, the Australian dollar, the Canadian dollar,
the British pound, the German mark, the Japanese yen, the Swiss franc and
certain multi-national currencies such as the European Currency Unit ("ECU").
Other futures contracts are likely to be developed and traded in the future.
The Fund will only enter into futures contracts and futures options which are
standardized and traded on a U.S. or foreign exchange, board of trade, or
similar entity, or quoted on an automated quotation system.
The Funds may also purchase and write call and put options on futures
contracts. Futures options possess many of the same characteristics as options
on securities and indices. A futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a futures contract at a specified exercise price at any time during
the period of the option. Upon exercise of a call option, the holder acquires
a long position in the futures contract and the writer is assigned the opposite
short position. In the case of a put option, the opposite is true.
As long as required by regulatory authorities the Funds will use futures
contracts and futures options for hedging purposes and not for speculation and
will comply with applicable regulations of the Commodity Futures Trading
Corporation which limit trading of futures contracts (See "Limitations on the
Use of Futures and Options"). For example, a Fund might use futures contracts
to hedge against anticipated changes in interest rates that might adversely
affect either the value of the Fund's securities or the price of the securities
which the Fund intends to purchase. A Fund's hedging activities may include
sales of futures contracts as an offset against the effect of expected
increases in interest rates, and purchases of futures contracts as an offset
against the effect of expected declines in interest rates. Although other
techniques could be used to reduce a Fund's exposure to interest rate
fluctuations, a Fund may be able to hedge its exposure more effectively and at
a lower cost by using futures contracts and futures options.
When a purchase or sale of a futures contract is made by a Fund, the Fund is
required to deposit with its Custodian (or futures commission merchant, if
legally permitted) a specified amount of cash or U.S. Government securities
("initial margin"). The margin required for a futures contract is set by the
exchange on which the contract is traded and may be modified during the term of
the contract. The initial margin is in the nature of a performance bond or
good faith deposit on the futures contract which is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. The Funds expect to earn interest income on their initial margin
deposits. A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day a Fund pays
or receives cash, called "variation margin," equal to the daily change in value
of the futures contract. This process is known as "marking to market."
Variation margin does not represent a borrowing or loan by a Fund but is
instead a settlement between the Fund and
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the futures commission merchant of the amount one would owe the other if the
futures contract expired. In computing daily net asset value, the Funds will
mark to market their open futures positions.
Each Fund is also required to deposit and maintain margin with respect to put
and call options on futures contracts written by it. Such margin deposits will
vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts
(contracts traded on the same exchange, on the same underlying security or
index, and with the same delivery month). If an offsetting purchase price is
less than the original sale price, the Fund realizes a capital gain; if it is
more, a Fund realizes a capital loss. Conversely, if an offsetting sale price
is more than the original purchase price, a Fund realizes a capital gains; if
it is less, a Fund realizes a capital loss. The transaction costs must also be
included in these calculations.
LIMITATIONS ON USE OF FUTURES AND FUTURES OPTIONS
A Fund will not enter into a futures contract or futures option contract if,
immediately thereafter, the aggregate initial margin deposits relating to such
positions plus premiums paid by it for open futures option positions, less the
amount by which any such options are "in-the- money," would exceed 5% of the
Fund's total assets. A call option is "in-the-money" if the value of the
futures contract that is the subject of the option exceeds the exercise price.
A put option is "in-the-money" if the exercise price exceeds the value of the
futures contract that is the subject of the option.
When purchasing a futures contract, a Fund will maintain with its Custodian
(and mark to market on a daily basis) cash, U.S. Government securities, or
other liquid securities that, when added to the amounts deposited with a
futures commission merchant as margin, are equal to the market value of the
futures contract. Alternatively, a Fund may "cover" its position by purchasing
a put option on the same futures contract with a strike price as high or higher
than the price of the contract held by the Fund.
When selling a futures contract, a Fund will maintain with its Custodian (and
mark to market on a daily basis) liquid assets that, when added to the amount
deposited with a futures commission merchant as margin, are equal to the market
value of the instruments underlying the contract. Alternatively, a Fund may
"cover" its position by owning the instruments underlying the contract (or, in
the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Fund's Custodian).
When selling a call option on a futures contract, a Fund will maintain with its
custodian (and mark to market on a daily basis) cash, U.S. Government
securities, or other liquid securities that, when added to the amounts
deposited with a futures commission merchant as margin, equal the total market
value of the futures contract underlying the call option. Alternatively, a
Fund may cover its position by entering into a long position in the same
futures contract at a price no higher than the strike price of the call option,
by owning the instruments underlying the futures contract, or by holding a
separate call option permitting the Fund to purchase the same futures contract
at a price not higher than the
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strike price of the call option sold by the Fund.
When selling a put option on a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, or other liquid securities that equal the purchase price of the
futures contract, less any margin on deposit. Alternatively, a Fund may cover
the position either by entering into a short position in the same futures
contract, or by owning a separate put option permitting it to sell the same
futures contract so long as the strike price of the purchased put option is the
same or higher than the strike price of the put option sold by the Fund.
In order to comply with applicable regulations of the Commodity Futures Trading
Commission ("CFTC") for exemption from the definition of a "commodity pool,"
each Fund is limited in its futures trading activities to: (1) positions which
constitute "bona fide hedging" positions within the meaning and intent of
applicable CFTC rules, and (2) other positions for the establishment of which
the aggregate initial margin and premiums (less the amount by which such
options are "in-the-money") do not exceed 5% of the Fund's net assets (after
taking into account unrealized gains and unrealized losses on any contracts it
has entered into).
The requirements for qualification as a regulated investment company also may
limit the extent to which the Funds may enter into futures, futures options or
forward contracts. See "Taxation."
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS
There are several risks associated with the use of futures contracts and
futures options as hedging techniques. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in the futures
contract. There can be no guarantee that there will be a correlation between
price movements in the hedging vehicle and in the Fund securities being hedged.
In addition, there are significant differences between the securities and
futures markets that could result in an imperfect correlation between the
markets, causing a given hedge not to achieve its objectives. The degree of
imperfection of correlation depends on circumstances such as variations in
speculative market demand for futures and futures options on securities,
including technical influences in futures trading and futures options, and
differences between the financial instruments being hedged and the instruments
underlying the standard contracts available for trading in such respects as
interest rate levels, maturities, and creditworthiness of issuers. A decision
as to whether, when and how to hedge involves the exercise of skill and
judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a
price beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses, because
the limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
There can be no assurance that a liquid market will exist at a time when a Fund
seeks to close out a futures contract or a futures option position, in which
event the Fund would remain obligated to meet
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margin requirements until the position is closed. In addition, many of the
contracts discussed above are relatively new instruments without a significant
trading history. As a result, there can be no assurance that an active
secondary market will develop or continue to exist.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in futures contracts or options,the Fund could experience delays
and losses in liquidating open positions purchased or sold through the broker,
and incur a loss of all or part of its margin deposits with the broker.
DEALER OPTIONS
The Funds may engage in transactions involving dealer options on securities,
currencies or indices as well as exchange-traded options. Certain risks are
specific to dealer options. While a Fund would look to a clearing corporation
to exercise exchange-traded options, if a Fund were to purchase a dealer option
it would rely on the dealer from whom it purchased the option to perform if the
option were exercised. Failure by the dealer to do so would result in the loss
of the premium paid by the Fund as well as loss of the expected benefit of the
transaction.
Exchange-traded options generally have a continuous liquid market while dealer
options may not. Consequently, a Fund may generally be able to realize the
value of a dealer option it has purchased only by exercising or reselling the
option to the dealer who issued it. Similarly, when a Fund writes a dealer
option, the Fund may generally be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to whom the Fund originally wrote the option. While the Funds will seek to
enter into dealer options only with dealers who will agree to and which are
expected to be capable of entering into closing transactions with the Fund,
there can be no assurance that the Fund will be able to liquidate a dealer
option at a favorable price at any time prior to expiration. Unless a Fund, as
a covered dealer call option writer, is able to effect a closing purchase
transaction, it will not be able to liquidate securities (or other assets) used
as cover until the option expires or is exercised. In the event of insolvency
of the other party, the Funds may be unable to liquidate a dealer option. With
respect to options written by a Fund, the inability to enter into a closing
transaction may result in material losses to the Fund. For example, since a
Fund must maintain a secured position with respect to any call option on
security it writes, the Fund may not sell the assets which it has segregated to
secure the position while it is obligated under the option. This requirement
may impair the Fund's ability to sell portfolio securities at a time when such
sale might be advantageous.
The Staff of the SEC has taken the position that many purchased dealer options
and the assets used to secure written dealer options are illiquid securities.
A Fund may treat the cover used for these written dealer options as liquid if
the dealer agrees that the Fund may repurchase the dealer option it has written
for a maximum price to be calculated by a predetermined formula. In such
cases, the dealer option would be considered illiquid only to the extent the
maximum purchase price under the formula exceeds the intrinsic value of the
option. Accordingly, the Funds will treat certain dealer options as subject to
the Funds' limitation on illiquid securities. If the SEC changes its position
on the liquidity of dealer options on securities, currencies or indices, the
Funds will change their treatment of such instruments accordingly.
INTEREST RATE AND CURRENCY SWAPS
INTEREST RATE AND INDEX SWAPS
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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. The same process applies
when dealing with an index swap. The buyer of the swap pays on a floating rate
basis and receives a fixed rate payment, based on the total return of the
particular reference index.
CROSS-CURRENCY SWAPS
A cross-currency swap is a contract between two counterparties to exchange
interest and principal payments in different currencies. A cross- currency swap
normally has an exchange of principal at maturity (the final exchange); an
exchange of principal at the start of the swap (the initial exchange) is
optional. An initial exchange of notional principal amounts at the spot
exchange rate serves the same function as a spot transaction in the foreign
exchange market (for an immediate exchange of foreign exchange risk). An
exchange at maturity of notional principal amounts at the spot exchange rate
serves the same function as a forward transaction in the foreign exchange
market (for a future transfer of foreign exchange risk). The currency swap
market convention is to use the spot rate rather than the forward rate for the
exchange at maturity. The economic difference is realized through the coupon
exchanges over the life of the swap. In contrast to single currency interest
rate swaps, cross-currency swaps involve both interest rate risk and foreign
exchange risk.
SWAP OPTIONS
Each of the Global Funds and the Total Return Fund may invest in swap options.
A swap option is a contract that gives a counterparty the right (but not the
obligation) to enter into a new swap agreement or to shorten, extend, cancel or
otherwise change an existing swap agreement, at some designated future time on
specified terms. It is different from a forward swap, which is a commitment to
enter into a swap that starts at some future date with specified rates. A swap
option may be structured European-style (exercisable on the pre specified date)
or American- style (exercisable during a designated period). The right
pursuant to a swap option must be exercised by the right holder. The buyer of
the right to pay fixed pursuant to a swap option is said to own a put. The
buyer of the right to receive fixed pursuant to a swap option is said to own a
call.
CAPS AND FLOORS
Each of the Global Funds and the Total Return Fund 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
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quarterly. Rights arising pursuant to both caps and floors are exercised
automatically if the strike is in the money. Caps and floors eliminate the
risk that the buyer fails to exercise an in-the-money option.
RISKS ASSOCIATED WITH SWAPS
The risks associated with interest rate and currency swaps and interest rate
caps and floors are similar to those described above with respect to dealer
options. In connection with such transactions, a Fund relies on the other
party to the transaction to perform its obligations pursuant to the underlying
agreement. If there were a default by the other party to the transaction, the
Fund would have contractual remedies pursuant to the agreement, but could incur
delays in obtaining the expected benefit of the transaction or loss of such
benefit. In the event of insolvency of the other party, the Fund might be
unable to obtain its expected benefit. In addition, while each Fund will seek
to enter into such transactions only with parties which are capable of entering
into closing transactions with the Fund, there can be no assurance that a Fund
will be able to close out such a transaction with the other party, or obtain an
offsetting position with any other party, at any time prior to the end of the
term of the underlying agreement. This may impair a Fund's ability to enter
into other transactions at a time when doing so might be advantageous.
FOREIGN CURRENCY TRANSACTIONS
Precise matching of the amount of forward currency contracts and the value of
securities denominated in such currencies of each of the Total Return, High
Income and Market Return Funds and each of the Global Funds 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
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gain or a loss to the extent that there has been movement in forward contract
prices. If the Fund engages in an offsetting transaction, it may subsequently
enter into a new forward contract to sell the foreign currency. Should forward
prices decline during the period between the date the Fund enters into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, the Fund will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
Each Fund's dealings in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, each Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Use of forward currency
contracts to hedge against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities.
Additionally, although such contracts tend to minimize the risk of loss due to
a decline in the value of the hedged currency, they also tend to limit any
potential gain which might result from an increase in the value of that
currency.
Although each Fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on
a daily basis. Foreign exchange dealers do not charge a fee for conversion,
but they do realize a profit based on the difference (the "spread") between the
prices at which they are buying and selling various currencies. Thus, a dealer
may offer to sell a foreign currency to a Fund at one rate, while offering a
lesser rate of exchange should the Fund desire to resell that currency to the
dealer.
LENDING OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, each Fund may lend securities
with a value of up to 33% of its total assets to broker-dealers, institutional
investors or other persons. Each loan will be secured by collateral which is
maintained at no less than 100% of the value of the securities loaned by
"marking to market" daily. A Fund will have the right to call each loan and
obtain the securities on five business days' notice or, in connection with
securities trading on foreign markets, within a longer period of time which
coincides with the normal settlement period for purchases and sales of such
securities in such foreign markets. Loans will only be made to persons deemed
by the Adviser to be of good standing in accordance with standards approved by
the Board of Trustees and will not be made unless, in the judgment of the
Adviser, the consideration to be earned from such loans would justify the risk.
BORROWING
Each Fund may borrow for temporary, extraordinary or emergency purposes, or for
the clearance of transactions. The Investment Company Act of 1940 (the "1940
Act") requires each Fund to maintain continuous asset coverage (that is, total
assets including borrowings, less liabilities exclusive of borrowings) of 300%
of the amount borrowed. If the 300% asset coverage should decline as a result
of market fluctuations or other reasons, a Fund may be required to sell some of
its portfolio holdings within three days to reduce the debt and restore the
300% asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. To avoid the potential leveraging
effects of a Fund's borrowings, additional investments will not be made while
borrowings are in excess of 5% of the Fund's total assets. Money borrowed will
be subject to interest costs which may or may not be recovered by appreciation
of the securities purchased. The Funds also may be
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required to maintain minimum average balances in connection with any such
borrowings or to pay a commitment or other fee to maintain a line of credit,
either of which would increase the cost of borrowing over the stated interest
rate.
RISKS OF FOREIGN INVESTING
There are special risks in investing in any foreign securities in addition to
those relating to investments in U.S. securities.
POLITICAL AND ECONOMIC FACTORS
Individual foreign economies of certain countries may differ favorably or
unfavorably from the United States' economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency, diversification and balance of payments position. The
internal politics of certain foreign countries may not be as stable as those of
the United States.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could include restrictions
on foreign investment, nationalization, expropriation of goods or imposition of
taxes, and could have a significant effect on market prices of securities and
payment of interest. The economies of many foreign countries are heavily
dependent upon international trade and are accordingly affected by the trade
policies and economic conditions of their trading partners. Enactment by these
trading partners of protectionist trade legislation could have a significant
adverse effect upon the securities markets of such countries.
CURRENCY FLUCTUATIONS
To the extent that a Fund invests in securities denominated in foreign
currencies, a change in the value of any such currency against the U.S. dollar
will result in a corresponding change in the U.S. dollar value of the Fund's
assets denominated in that currency. Such changes will also affect the Fund's
income. The value of a Fund's assets may also be affected significantly by
currency restrictions and exchange control regulations enacted from time to
time.
MARKET CHARACTERISTICS
The Group expects that most foreign securities in which the Funds invest will
be purchased in over-the-counter markets or on bond exchanges located in the
countries in which the principal offices of the issuers of the various
securities are located, if that is the best available market. Foreign bond
markets may be more volatile than those in the United States. While growing in
volume, they usually have substantially less volume than U.S. markets, and the
Funds' portfolio securities may be less liquid and more volatile than U.S.
Government securities. Moreover, settlement practices for transactions in
foreign markets may differ from those in United States markets, and may include
delays beyond periods customary in the United States.
Transactions in options on securities, futures contracts and futures options
may not be regulated as effectively on foreign exchanges as similar
transactions in the United States, and may not involve clearing mechanisms and
related guarantees. The value of such positions also could be adversely
affected by the imposition of different exercise terms and procedures and
margin requirements than in the United States. Foreign security trading
practices, including those involving securities settlement
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where Fund assets may be released prior to payment, may expose a Fund to
increased risk in the event of a failed trade or the insolvency of a foreign
broker-dealer.
The value of the Funds' portfolio positions may also be adversely impacted by
delays in the Funds' ability to act upon economic events occurring in foreign
markets during non-business hours in the United States.
LEGAL AND REGULATORY MATTERS
Certain foreign countries may have less supervision of securities markets,
brokers and issuers of securities, and less financial information available to
issuers, than is available in the United States.
TAXES
The interest payable on certain of a Fund's foreign portfolio securities may be
subject to foreign withholding taxes, thus reducing the net amount of income
available for distribution to the Fund's shareholders. A shareholder otherwise
subject to United States federal income taxes may, subject to certain
limitations, be entitled to claim a credit or deduction for U.S. federal income
tax purposes for his proportionate share of such foreign taxes paid by a Fund.
The Funds intend to sell such bonds prior to the interest payment date in order
to avoid withholding.
COSTS
The expense ratios of Funds investing in foreign securities (before
reimbursement by the Adviser pursuant to the expense limitation described in
the Prospectus under "Management of the Funds -- Expense Guarantee") are likely
to be higher than those of investment companies investing in domestic
securities, since the cost of maintaining the custody of foreign securities is
higher.
EMERGING MARKETS INVESTMENTS
Investments by the Funds in securities issued by the governments of emerging or
developing countries, and of companies 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
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AVERAGE MATURITY
The portfolio average maturity of each Fund will be computed by weighting the
maturity of each security in the Fund's portfolio by the market value of that
security. For securities which have put dates, reset dates, or trade based on
average maturity, the put date, reset date or average maturity will be used
instead of the final maturity date for the average maturity calculation.
Average maturity is normally used when trading mortgage backed securities and
asset backed securities.
DURATION
One common measure of the price volatility of a fixed income security is
duration, a weighted average term-to-maturity of the present value of a
security's cash flows. As it is a weighted term-to-maturity, duration is
generally measured in years and can vary from zero to the time-to- maturity of
the security. Duration is a complex formula that utilizes each cash flow and
the market yield of the security. Bonds of the same maturity can have
different durations if they have different coupon rates or yields.
For securities which pay periodic coupons and have a relatively short maturity,
duration tends to approximate the time to maturity. As the maturity of the
bond extends, the duration also extends but at a slower rate. For example, the
duration of a 2-year security can be about 1.8 years; the duration of a 30-year
bond will be roughly 10 to 11 years. However, the duration of any security
that pays interest only at maturity is the time to maturity. Thus a 30-year
zero coupon bond has a duration of 30 years.
If the duration of the security is divided by the sum of one plus its yield,
the resultant number is called the modified duration of the security. Modified
duration is important to portfolio managers as it is used to determine the
sensitivity of the security to changes in interest rates. For small changes in
yield, the price of a security, as a percentage of its initial price, will move
inversely to the yield change by an amount equal to the modified duration times
the yield change. The market price of a security with a modified duration of
ten years will change twice as much as a security with a with a five year
duration.
Modified duration is a much better indicator of price volatility than time to
maturity. For example, the times to maturity for a 30 year bond and a 30 year
zero coupon security are both 30 years. A portfolio manager using average
maturity to judge price volatility would expect to see no difference in
portfolio impact from these two securities (given equal yield). However, the
zero coupon bond will experience a percentage price change roughly three times
greater than the 30 year bond.
FUNDAMENTAL AND OPERATING POLICIES
The Funds have adopted the investment restrictions described below.
Fundamental policies of a Fund may not be changed without the approval of the
lesser of (1) 67% of the Fund's shares present at a meeting of shareholders if
the holders of more than 50% of the outstanding shares are present in person or
by proxy or (2) more than 50% of the Fund's outstanding shares. Operating
policies are subject to change by the Board of Trustees without shareholder
approval. Any investment restriction which involves a maximum percentage of
securities or assets will not be considered to be violated unless an excess
occurs immediately after, and is caused by, an acquisition of securities or
assets of, or borrowings by, the Fund.
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<PAGE> 111
FUNDAMENTAL POLICIES
As a matter of fundamental policy, a Fund may not:
(1) BORROWING. Borrow money, except as a temporary measure for extraordinary
or emergency purposes or for the clearance of transactions, and then only in
amounts not exceeding 30% of its total assets valued at market (for this
purpose, reverse repurchase agreements and delayed delivery transactions
covered by segregated accounts are not considered to be borrowings).
(2) COMMODITIES. Purchase or sell commodities or commodity contracts, except
that (i) a Fund other than the U.S. Treasury Fund may enter into financial and
currency futures contracts and options on such futures contracts, (ii) a Fund
other than the U.S. Treasury, Short Duration Tax Exempt 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
U.S. 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
U.S. 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 U.S. 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
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with the purchase and sale of its portfolio securities in the ordinary course
of pursuing its investment program.
(11) GLOBAL DIVERSIFICATION. Under normal market conditions, each of the
Global Fixed Income, Global Short Bond and International Bond Funds may not
invest less than 65% of the Fund's assets in debt securities of issuers located
in at least three countries (one of which may be the United States for the
Global Funds). Under normal market conditions, no less than 65% of the
International Equity Fund's assets will be invested in equity securities of
companies which are headquartered in at least three foreign countries.
OPERATING POLICIES
As a matter of operating policy, a Fund may not:
(1) CONTROL OF PORTFOLIO COMPANIES. Invest in companies for the purpose of
exercising management or control.
(2) ILLIQUID SECURITIES. Purchase a security if, as a result of such purchase,
more than 15% of the value of the Fund's net assets would be invested in
illiquid securities or other securities that are not readily marketable,
including repurchase agreements which do not provide for payment within seven
days. For this purpose, restricted securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933 may be determined to be liquid.
(3) INVESTMENT COMPANIES. Purchase securities of open-end or closed-end
investment companies except in compliance with the 1940 Act.
(4) OIL AND GAS PROGRAMS. Purchase participations or other direct interests in
oil, gas, or other mineral exploration or development programs or leases.
(5) OPTIONS. Invest in puts, calls, or any combination thereof, except that a
Fund may invest in or commit its assets to purchasing and selling call and put
options to the extent permitted by the Prospectus and Statement of Additional
Information.
(6) BORROWINGS. The U.S. Treasury Fund will not borrow amounts exceeding 33% of
total assets valued at market (including reverse repurchase agreements and
delayed delivery transactions).
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.
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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 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
===================================================
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Investment Quality Bond Fund $ $ $
Short Duration Tax Exempt Fund
Tax Exempt Bond Fund
Market Return Fund
Global Fixed Income Fund
</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.
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<PAGE> 114
are valued using the official closing price or the last sale price in the
principal market where they are traded. If the last sale price on the local
exchange is unavailable, the last evaluated quote or last bid price is normally
used.
Fixed income securities are valued on the basis of valuations furnished by a
pricing service which utilizes both dealer-supplied valuations and electronic
data processing techniques. Such techniques take into account appropriate
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon quoted prices or
exchange or over-the-counter prices, since such valuations are believed to
reflect more accurately the fair value of such securities.
Foreign securities are valued at the closing bid price in the principal market
where they are traded, or, if closing prices are unavailable, at the last
traded bid price available prior to the time a fund's net asset value is
determined. Foreign security prices that cannot be obtained by the quotation
services are priced individually by the pricing service using dealer-supplied
quotations. Short-term obligations that mature in 60 days or less are valued
at amortized cost, which constitutes fair value as determined by the Board of
Trustees. All other securities and other assets are appraised at their fair
value as determined in good faith under consistently applied procedures
established by and under the general supervision of the Board of Trustees.
Generally, trading in corporate bonds, U.S. government securities, foreign
securities, money market instruments and repurchase agreements, is
substantially completed each day at various times prior to the close of regular
trading on the New York Stock Exchange. The values of any such securities held
by a Fund are determined as of such times for the purpose of computing the
Fund's net asset value. Foreign currency exchange rates are also generally
determined prior to the close of the New York Stock Exchange. If an
extraordinary event that is expected to affect the value of a portfolio
security materially occurs after the close of an exchange on which that
security is traded, then the security will be valued at fair value as
determined in good faith under procedures established by and under the general
supervision of the Board of Trustees.
FUND PERFORMANCE
The Funds may quote their performance in various ways. All performance
information supplied by a Fund in advertising is historical and is not intended
to indicate future returns. A Fund's share price, yield and total returns
fluctuate in response to market conditions and other factors, and the value of
Fund shares when redeemed may be more or less than their original cost.
Performance information for a Fund may be compared to various unmanaged indices
(such as the Lehman Brothers Municipal Bond Index) or indices prepared by
Lipper Analytical Services and other entities or organizations which track the
performance of investment companies or investment advisers. Comparisons may
also be made to indices or data in publications such as The Bond Buyer, Forbes,
Barron's, The Wall Street Journal, The New York Times, and Business Week. For
example, a Fund may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on
the basis of risk-adjusted performance. Rankings that compare the performance
a Fund to other funds in appropriate categories over specific periods of time
may also be quoted in advertising. Unmanaged indices generally do not reflect
deductions for administrative and management costs and expenses. Payden &
Rygel may also report to shareholders or to the public in advertisements
concerning the performance of Payden & Rygel as adviser to clients other than
the Funds, and on the comparative performance or standing of Payden & Rygel in
relation to other
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<PAGE> 115
money managers. Such comparative information may be compiled or provided by
independent rating services or other organizations.
Information regarding a Fund may also be included in newsletters or other
general communications by Payden & Rygel to advisory clients and potential
clients. These publications principally contain information regarding market
and economic trends and other general matters of interest to investors, such
as: principles of investing which, among other things includes asset
allocation, model portfolios, diversification, risk tolerance and goal setting,
saving for college or other goals or charitable giving; long-term economic or
market trends; historical studies of gold, other commodities, equities, fixed
income securities and statistical market indices; new investment theories or
techniques; economic and/or political trends in foreign countries and their
impact on the United States; municipal bond market fundamentals and trends;
corporate financing trends and other factors that may impact corporate debt;
and housing trends and other economic factors that may impact mortgage rates
and lending activity. In addition, Payden & Rygel may quote financial or
business publications and periodicals as they relate to fund management,
investment philosophy and investment techniques. Materials may also include
discussions regarding Payden & Rygel's asset allocation services and other
Payden & Rygel funds, products and services.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills and the U.S. rate
of inflation (based on the Consumer Price Index) and a combination of various
capital markets. The Group may use the long- term performance of these capital
markets in order to demonstrate general long-term risk-versus-reward investment
scenarios or the value of a hypothetical investment in any of these capital
markets. The performance of these capital markets is based on the returns of
several different indices. Ibbotson calculates total returns in the same
method as the Group. Performance comparisons could also include the value of a
hypothetical investment in any of the capital markets.
If appropriate, the Group may compare the performance of a Fund or the
performance of securities in which a Fund may invest to averages published by
IBC USA (Publications, Inc.). These averages assume reinvestment of
distributions. The IBC/Donoghue's Money Fund Averages(TM)/All Taxable, which
is reported in the Donoghue's Money Fund Report(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
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<PAGE> 116
the end of the period, whichever is earlier. Capital gains and losses are
generally excluded from the calculation, as are gains and losses from currency
exchange rate fluctuations.
Because yield accounting methods differ from the methods used for other
accounting purposes, the Fund's yield may not equal its distribution rate or
income reported in the Fund's financial statements.
TOTAL RETURN CALCULATIONS
Total returns quoted in advertising with respect to a class of shares of the
Fund reflect all aspects of a Fund's return, including the effect of
reinvesting dividends and capital gain distributions, and any change in the
class' net asset value per share over the period. Average annual total returns
for each class are calculated by determining the growth or decline in value of
a hypothetical historical investment in that class of shares of a Fund over a
stated period, and then calculating the annually compounded percentage rate
that would have produced the same result if the rate of growth or decline in
value had been constant over the period. For example, a cumulative return of
100% over ten years would result from an average annual total return of 7.18%,
which is the steady annual total return that would equal 100% growth on a
compounded basis in ten years. While average annual total returns are a
convenient means of comparing investment alternatives, investors should realize
that a Fund's performance is not constant over time, but changes from year to
year, and that average annual total returns represent averaged figures as
opposed to the actual year-to-year performance of the Fund.
For Class R Shares, the one-year and since inception total return for each of
the Funds through October 31, 1997 (except as otherwise noted) were as follows:
<TABLE>
<CAPTION>
Annualized Return
1 Year Since Inception Inception Date
------ --------------- --------------
<S> <C>
Limited Maturity Fund May 1, 1994
Short Bond Fund January 1, 1994
U.S. Treasury Fund January 1, 1995
Intermediate Bond Fund January 1, 1994
Investment Quality Bond Fund January 1, 1994
Total Return Fund December 9, 1996
Short Duration Tax Exempt Fund September 1, 1994
Tax Exempt Bond Fund December 21, 1993
Growth & Income Fund November 1, 1996
Market Return Fund December 1, 1995
Global Short Bond Fund September 18, 1996
Global Fixed Income Fund September 1, 1992
International Bond Fund April 1, 1995
Global Balanced Fund December 9, 1996
International Equity Fund December 9, 1996
European Growth & Income Fund June 30, 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
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<PAGE> 117
amount, and may be calculated for a single investment, a series of investments,
and/or a series of redemptions, over any time period. Total returns may be
broken down into their components of income, capital (including capital gains
and changes in share price) and currency returns in order to illustrate the
relationship of these factors and their contributions to total return. Total
returns, yields and other performance information maybe quoted numerically, or
in a table, graph or similar illustration.
TAXATION
Each Fund intends to qualify annually and has elected to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). To qualify as a regulated investment company, a Fund must, among
other things, (a) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of stock, securities or foreign currencies,
or other income (including gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies ("Qualifying Income Test"); (b) 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 (c) distribute
to its shareholders 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) and 90% of its exempt interest income 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
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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 calendar year, (2) at least 98% of
its capital gains in excess of its capital losses (and adjusted for certain
ordinary losses) for the twelve month period ending on October 31 of the
calendar year, and (3) all ordinary income and capital gains for previous years
that were not distributed during such years. A distribution will be treated as
paid on December 31 of the calendar year if it is declared by the Fund in
October, November, or December of that year to shareholders of record on a date
in such a month and paid by a Fund during January of the following year. Such
distributions will be taxable to shareholders (other than those not subject to
federal income tax) in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
To avoid application of the excise tax, the Funds intend to make their
distributions in accordance with the distribution requirement.
DISTRIBUTIONS
The Short Duration Tax Exempt 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 Tax Exempt 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
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capital gain for the taxable year in which such losses are realized. Because
limited regulations implementing the straddle rules have been promulgated,
the tax consequences of transactions in options, futures and forward contracts
to a Fund are not entirely clear. The transactions may increase the amount of
short-term capital gain realized by a Fund which is taxed as ordinary income
when distributed to shareholders.
Each Fund may make one or more of the elections available under the Code which
are applicable to straddles. If a Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections operate
to accelerate the recognition of gains or losses from the affected straddle
positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not engage in such hedging transactions.
The 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, mid-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 numbers 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
40
<PAGE> 120
accrues expenses or other liabilities denominated in a foreign currency and the
time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or loss. Similarly, on disposition of
debt securities denominated in a foreign currency and on disposition of certain
futures contracts, forward contracts and options, gains or losses attributable
to fluctuations in the value of the foreign currency between the date of
acquisition of the security or contract and the date of disposition also are
treated as ordinary gain or loss. These gains and losses, referred to under
the Code as "Section 988" gains or losses, may increase or decrease the amount
of the Fund's investment company taxable income to be distributed to its
shareholders as ordinary income.
Income received by a Fund from sources within foreign countries may be subject
to withholding and other taxes imposed by such countries. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes. In
addition, the Adviser intends to manage the Funds with the intention of
minimizing foreign taxation in cases where it is deemed prudent to do so. If
more than 50% of the value of a Fund's total assets at the close of its taxable
year consists of securities of foreign corporations, the Fund will be eligible
to elect to "pass- through" to the Fund's shareholders the amount of foreign
income and similar taxes paid by the Fund. If this election is made, a
shareholder generally subject to tax will be required to include in gross income
(in addition to taxable dividends actually received) his pro rata share of the
foreign income taxes paid by the Fund, and may be entitled either to deduct (as
an itemized deduction) his or her pro rata share of foreign taxes in computing
his taxable income or to use such amount (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 in writing 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 Funds intend 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
41
<PAGE> 121
is modified for purposes of the Federal alternative minimum tax and can be used
to offset only 90% of the alternative minimum tax imposed on corporations and
individuals and foreign taxes generally are not deductible in computing
alternative minimum taxable income.
CERTAIN DEBT SECURITIES
Some of the debt securities (with a fixed maturity date of more than one year
from the date of issuance) that may be acquired by a Fund may be treated as
debt securities that are issued originally at a discount. Generally, the
amount of the original issue discount ("OID") is treated as interest income and
is included in income over the term of the debt security, even though payment
of that amount is not received until a later time, usually when the debt
security matures. A portion of the OID includable in income with respect to
certain high-yield corporate debt securities may be treated as a dividend for
Federal income tax purposes.
Some of the debt securities (with a fixed maturity date of more than one year
from the date of issuance) that may be acquired by a Fund in the secondary
market may be treated as having market discount. Generally, any gain
recognized on the disposition of, and any partial payment of principal on, a
debt security having market discount issued after July 18, 1984 is treated as
ordinary income to the extent the gain, or principal payment, does not exceed
the "accrued market discount" on such debt security. Market discount generally
accrues in equal daily installments. A Fund may make one or more of the
elections applicable to debt securities having market discount, which could
affect the character and timing of recognition of income.
Some of the debt securities (with a fixed maturity date of one year or less
from the date of issuance) that may be acquired by a Fund may be treated as
having an acquisition discount, or OID in the case of certain types of debt
securities. Generally, the Fund will be required to include the acquisition
discount, or OID, in income ratably over the term of the debt security, even
though payment of that amount is not received until a later time, usually when
the debt security matures. The Fund may make one or more of the elections
applicable to debt securities having acquisition discount, or OID, which could
affect the character and timing of recognition of income.
A Fund generally will be required to distribute dividends to shareholders
representing discount on debt securities that is currently includable in
income, even though cash representing such income may not have been received by
the Fund. Cash to pay such dividends may be obtained from sales proceeds of
securities held by the Fund.
OTHER TAXES
Distributions also may be subject to additional state, local and foreign taxes,
depending on each shareholder's particular situation. Under the laws of various
states, distributions of investment company taxable income generally are taxable
to shareholders even though all or a substantial portion of such distributions
may be derived from interest on certain Federal obligations which, if the
interest were received directly by a resident of such state, would be exempt
from such state's income tax ("qualifying Federal obligations"). However, some
states may exempt all or a portion of such distributions from income tax to the
extent the shareholder is able to establish that the distribution is derived
from qualifying Federal obligations. Moreover, for state income tax purposes,
interest on some Federal obligations generally is not exempt from taxation,
whether received directly by a shareholder or through distributions of
investment company taxable income (for example, interest on Federal National
Mortgage Association Certificates and Government National Mortgage Association
42
<PAGE> 122
Certificates). Each Fund will provide information annually to shareholders
indicating the amount and percentage of the Fund's dividend distribution which
is attributable to interest on Federal obligations, and will indicate to the
extent possible from what types of Federal obligations such dividends are
derived. Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund.
MANAGEMENT OF THE GROUP
TRUSTEES AND OFFICERS
The Trustees and officers of the Group are as set forth below. Unless
otherwise indicated, the address of all persons below is 333 South Grand
Avenue, Los Angeles, California 90071.
BOARD OF TRUSTEES:
<TABLE>
<CAPTION>
Position with Principal Occupations
Name the Group During Past Five Years
----- ------------ ----------------------
<S> <C> <C> <C>
* Joan A. Payden(1) Chairman of the Board, Chief President, Payden & Rygel
Executive Officer, 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 Graduate
P.O. Box 1009 School of Management at University of
Pauma Valley, CA 92061 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 Chairman of Board since 1997; previously,
3900 South Workman Mill Road President and Chief Executive Officer, Rose
Whittier, CA 90601 Hills Company
</TABLE>
43
<PAGE> 123
<TABLE>
<S> <C> <C>
Stender E. Sweeney Trustee Private Investor since 1994; previously, Vice
Times Mirror Square President, Finance, Times Mirror Company
Fifth Floor
Los Angeles, CA 90053
W.D. Hilton, Jr. Trustee Managing Trustee, NGC Settlement Trust;
310 East Interstate 30, Suite 285 previously, Chief Financial Officer, Texas
Garland, TX 75043 Association of School Boards and Board Member,
First Greenville National Bank
</TABLE>
* An "interested person" of the Group, as defined in the 1940 Act.
(1) Ms. Payden is a Director of the Automobile Club of Southern
California, of which Mr. 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, 1997, 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
Aggregate Benefits Annual Compensation
Compensation Accrued as Benefits from Group and
from Part of Group Upon Group Complex
Name Group Expenses Retirement Paid to Trustee
---- ----- -------- ---------- ---------------
<S> <C> <C> <C> <C>
Dennis Poulsen $ None N/A $
James Clayburn La Force $ None N/A $
Stender Sweeney $ None N/A $
W.D. Hilton $ None N/A $
Thomas V. McKernan, Jr. $ None N/A $
OFFICERS:
Position with Principal Occupations
Name the Group During Past Five Years
------------- ----------- ----------------------
Shirley T. Hosoi President, Chief Operating Chief Operating Officer, Payden &
Officer Rygel (since 1996); previously,
First Interstate Bancorp: Director
of Corporate Communications,
Executive Assistant to the Chairman
and President and CEO, First
Interstate Franchise Services
</TABLE>
44
<PAGE> 124
<TABLE>
<S> <C> <C>
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
Gregory P. Brown Vice President Institutional Marketing, Payden &
Rygel (since 1996); previously, Vice
President, Corporate Banking at
Wells Fargo Bank
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
Edward S. Garlock Secretary General Counsel, Payden & Rygel
(since 1997); previously, Senior
Vice President and Group General
Counsel, First Interstate Bancorp
</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 October 31, 1997, its staff consisted of employees, 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 $ billion, with about $ 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
45
<PAGE> 125
respect to Class S shares of the Group. The Agreement provides that the
Adviser will pay all expenses incurred in connection with managing the ordinary
course of a Fund's business, except the following expenses, which are paid by
each Fund: (i) the fees and expenses incurred by a Fund in connection with the
management of the investment and reinvestment of the Fund's assets; (ii) the
fees and expenses of Trustees who are not affiliated persons of the Adviser;
(iii) the fees and expenses of the Trust's Custodian, Transfer Agent, Fund
Accounting Agent and Administrator; (iv) the charges and expenses of legal
counsel and independent accountants for the 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
==================================================
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Limited Maturity Fund $ $ $
Short Bond Fund
U.S. Treasury Fund
Intermediate Bond Fund
Investment Quality Bond Fund
Short Duration Tax Exempt Fund
Tax Exempt Bond Fund
Market Return Fund
Global Short Bond Fund
Global Fixed Income Fund
International Bond Fund
Total Return Fund
Growth & Income Fund
Global Balanced Fund
European Growth & Income Fund
International Equity Fund
</TABLE>
* Fund had not commenced operations
The Agreement provides that the Adviser will not be liable for any error of
judgment or mistake of law or for any loss suffered by the Funds in connection
with the performance of the Agreement,
46
<PAGE> 126
except a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence in the performance of the Adviser's
duties or from reckless disregard by the Adviser of its duties and obligations
thereunder. Unless earlier terminated as described below, the Agreement will
continue in effect with respect to each Fund until June 14, 1995 and thereafter
for successive annual periods, subject to annual approval by the Board of
Trustees (or by a majority of the outstanding voting shares of each Fund as
defined in the 1940 Act) and by a majority of the Trustees who are not
interested persons of any party to the Agreement by vote cast in person at a
meeting called for such purpose. The Agreement terminates upon assignment and
may be terminated with respect to a Fund without penalty on 60 days' written
notice at the option of either party thereto or by the vote of the shareholders
of the Fund.
SUB-ADVISER
The Sub-adviser provides investment management services to the International
Equity and Global Balanced Funds 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 Sub-adviser also provides management services to the European Growth &
Income Fund pursuant to the Subadvisory Agreement with the Advisor dated as of
June 15, 1997. 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 commensurately reduced in the event of any
voluntary or regulatory limitation on the Adviser's fees.
Each 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, each 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. Each 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.
Fees earned by the Sub-adviser since the inception of the Funds are shown below:
<TABLE>
<CAPTION>
Fiscal Year Ending
October 31, 1997
------------------
<S> <C>
International Equity Fund
Global Balanced Fund
European Growth & Income Fund
</TABLE>
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.
47
<PAGE> 127
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 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
===================================================
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Limited Maturity Fund $ $ $
Short Bond Fund
U.S. Treasury Fund
Intermediate Bond Fund
Investment Quality Bond Fund
Short Duration Tax Exempt Fund
Tax Exempt Bond Fund
Market Return Fund
Global Short Bond Fund
Global Fixed Income Fund
International Bond Fund
</TABLE>
* Fund had not commenced operations
DISTRIBUTOR
Payden & Rygel Distributors, 333 South Grand Avenue, Los Angeles, California
90071, acts as Distributor to the Group pursuant to a Distribution Agreement
with the Group dated as of June 24, 1992, as amended. The Distributor has
agreed to use its best efforts to effect sales of shares of the Funds, but is
not obligated to sell any specified number of shares. The Distribution
Agreement contains provisions with respect to renewal and termination similar
to those in the Investment Management Agreement described above. Pursuant to
the Agreement, the 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,
48
<PAGE> 128
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 S 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 S shares ("Clients").
Support services provided pursuant to the Shareholder Service Plan include (a)
establishing and maintaining accounts and records relating to Clients who
invest in Class S shares; (b) aggregating and processing purchase, exchange and
redemption requests for Class S 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 S 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 S 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 S 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,
1997.
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
49
<PAGE> 129
securities or valuation of net assets of the Fund not reasonably practicable.
Each Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of its net assets during any 90-day period for any one shareholder. Each Fund
reserves the right to pay any redemption price exceeding this amount in whole
or in part by a distribution in kind of securities held by the Fund in lieu of
cash. It is highly unlikely that shares would ever be redeemed in kind. If
shares are redeemed in kind, however, the redeeming shareholder would incur
transaction costs upon the disposition of the securities received in the
distribution.
Due to the relatively high cost of maintaining smaller accounts, each Fund
reserves the right to redeem shares in any account for their then-current value
(which will be promptly be paid to the investor) if at any time, due to
shareholder redemption, the shares in the Fund account do not have a value of at
least $5,000 ($3,000,000 for Class I Shares). 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 ($3,000,000 for Class I
Shares) 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 eighteen 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, Growth & Income Fund, Market Return Fund, Total Return
Fund, Global Balanced Fund, European Growth & Income Fund, High Income,
International Equity Fund and PRAAM Money Market 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 September 30, 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, 23.3%; Retirement Fund Trust of the Plumbing, Heating and Piping
Industry of Southern California, Los
50
<PAGE> 130
Angeles, CA 90020, 18.2%; Infirmary Health Systems Inc., Mobile, AL 36633,
5.5%; Jicarrila Apache Tribe, Dulce, NM 87528, 9.8%; Rockford Health System,
Rockford, Il 61103, 6.5%; Bert Bell NFL Retirement Plan, Brooklyn, NY 11231,
5.8%; Center Theatre Group, Los Angeles, CA 90012, 5.7%; Indian River Memorial
Hospital, Vero Beach, FL 32960, 5.2%.
As of September 30, 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, NV 89512, 20.9%; Michigan Conference of Teamsters
Welfare Fund, Detroit, MI 48216, 22.5%; Rockford Health System, Rockford, Il
61103, 11.2%; Center Theatre Group, Los Angeles, CA 90012, 6.3%.
As of September 30, 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, 46.0%; L. Horvitz, Moreland Hills, OH 44122, 27.2%.
As of September 30, 1997, the following persons held of record more than 5% of
the outstanding shares of the Intermediate Bond Fund: Bert Bell NFL Retirement
Plan, Brooklyn, NY 11231, 55.6%; Lon V. Smith Foundation, Beverly Hills, CA
90210, 10.8%; North Hills Passavant, Philadelphia, PA 19182, 7.4%; Passavant
Hospital Pension, Philadelphia, PA 19182, 5.6%; Dan Murphy Foundation, Los
Angeles, CA 90016, 5.2%.
As of September 30, 1997, the following persons held of record more than 5% of
the outstanding shares of the Investment Quality Bond Fund: The Interlake
Corporation Retirement Plan, Milwaukee, WI 53202, 16.2%; FMTC Premier Trust, N.
Quincy, MA 02171, 15.7%; City of University City Retirement Funds, St. Louis,
MO 63178, 15.4%; Washington Suburban Sanitary Commission, Laurel, MD 20702,
9.2%; Earl B. and Loraine Miller Foundation, Long Beach, CA 90802, 7.7%.
As of September 30, 1997, the following persons held of record more than 5% of
the outstanding shares of the Short Duration Tax Exempt Fund: R. Bension, La
Canada, CA 91011, 12.7%; C. Leif, Beverly Hills, CA 90210, 23.0%; Wertheimer
Family Trust, Santa Monica, CA 90402, 5.3%; Casey Myers Trusts, Beverly Hills,
CA 90210, 15.2%; Kleiner Family Trust, Menlo Park, CA 94025, 8.7%; Charles S.
Paul Living Trust, Los Angeles, CA 90077, 5.9%.
As of September 30, 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, 17.0%; Wertheimer Family Trust, Santa Monica, CA 90402,
10.8%; Clack & Co., Spokane, WA 99202, 7.9%; Charles S. Paul Living Trust, Los
Angeles, CA 90077, 7.3%.
As of September 30, 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, 24.9%; Dan Murphy Foundation, Los Angeles, CA 90016,
14.7%; CMA
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<PAGE> 131
Management Company, Los Angeles, CA 90071, 8.9%; B. Haas IRA, Los Angeles, CA
90027, 6.1%; CH Foundation, Los Angeles, CA 90071, 13.0%; Payden & Rygel Daily
Val 401K Plan, Los Angeles, CA 90071, 7.8%.
As of September 30, 1997, the following persons held of record more than 5% of
the outstanding shares of the Global Short Bond Fund: Annuity Board of the
Southern Baptist Convention, Dallas, TX 75221, 11.8%; Kaiser Permanente
Retirement Plan, Los Angeles, CA 90071, 11.9%; Hoag Memorial Hospital Board,
Los Angeles, CA 90051, 9.3%; Joint Industry Board of the Electrical Industry,
Flushing, NY 11365, 11.8%; Wisconsin Electric Power Company P&R, Milwaukee, WI
53201, 5.3%; Stryker Corporation, Los Angeles, CA 90051, 21.1%.
As of September 30, 1997, the following persons held of record more than 5% of
the outstanding shares of the Global Fixed Income Fund: UniHealth, Pittsburgh,
PA 15230, 10.2%; Federated Dept. St. Inc., Brooklyn, NY 12131, 5.8% SSM Health
Care System, Pittsburgh, PA 15230, 6.3%; Self-Realization Fellowship Church,
Los Angeles, CA 90065, 5.4%; Southern California Edison VEBA, Chicago, IL
60675, 5.3%.
As of September 30, 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, 74.3%; Liz Claiborne Profit Sharing, North Bergen, NJ 07047,
17.1%; Liz Claiborne Foundation, North Bergen, NJ 07047, 5.1%.
As of September 30, 1997, the following persons held of record more than 5% of
the outstanding shares of the International Equity Fund: Scottish Widows
Investment Management, Scotland, 15.8%; Dan Murphy Foundation, Los Angeles, CA
90016, 16.8%; Wasserman Foundation, Beverly Hills, CA 90210, 12.9%; Sheinberg
Family Trust, Beverly Hills, CA 90210, 8.5%; Payden & Rygel Daily Val 401k
Plan, 5.8%; Teague Family Trust #2, Palos Verdes, CA 90274, 6.3%; Teague Family
Trust #1, Palos Verdes, CA 90274, 5.5%; C. Leif, Beverly Hills, CA 90210,
7.1%;.
As of September 30, 1997, the following persons held of record more than 5% of
the outstanding shares of the Total Return Fund: The Academy Foundation,
Beverly Hills, CA 90211, 13.3%; Academy of Motion Picture Arts and Sciences,
Beverly Hills, CA 90211, 10.4%; Walt Disney Disability Trust, Burbank, CA
91521, 12.8%; Washington Suburban Sanitary Commission, Laurel, MD, 20702,
13.4%; Amateur Athletic Foundation, Los Angeles, CA 90018, 23.5%.
As of September 30, 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, 34.9%; Scottish Widows Investment Management,
Edenburgh, Scotland, 21.2%; CMA Management Company, Los Angeles, CA 90071,
13.6%;
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<PAGE> 132
C. Leif, Beverly Hills, CA 90210, 5.9%; Casey Myers Trusts, Beverly Hills, CA
90210, 6.3%.
As of September 30, 1997, the following persons held of record more than 5% of
the outstanding shares of the European Growth & Income Fund: CH Foundation,
Los Angeles, CA 90071, 16.2%; CMA Management Company, Los Angeles, CA 90071,
6.7%; Wertheimer Family Trust, Santa Monica, CA 90402, 7.8%; Sheinberg Family
Trust, Beverly Hills, CA 90210, 9.8%; Teague Family Trust #2, Palos Verdes, CA
90274, 4.0%; Teague Family Trust #1, Palos Verdes, CA 90274, 4.0%.
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 Market Return
Fund, 10%; and Global Balanced Fund, 12%).
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 R, S AND I 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 three series
of shares of the Funds. The Plan provides that Class R, Class S and Class I
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 S 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 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
53
<PAGE> 133
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 the
Adviser and the Distributor.
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<PAGE> 134
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' 1997 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' 1997 Annual Report to Shareholders may be
obtained at no charge by writing or telephoning the Group at the address or
number on the front page of this Statement of Additional Information.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not contain all
the information included in the Group's registration statement filed with the
Securities and Exchange Commission under the Securities Act of 1933 with
respect to the securities offered hereby, certain portions of which have been
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The registration statement, including the exhibits filed
therewith, may be examined at the offices of the Securities and Exchange
Commission in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference.
55
<PAGE> 135
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 April 30, 1997, Statements of Operations
for the periods ended April 30, 1997, Statements of
Changes in Net Assets for the periods ended April 30,
1997, and Schedules of Portfolio Investments as of April
30, 1997, with respect to the Funds are incorporated by
reference 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).
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(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).
(1.15) Form of Amendment No. 14 to the Master Trust Agreement (u).
(1.16) Form of Amendment No. 15 to the Master Trust Agreement (u).
(1.17) Form of Amendment No. 16 to the Master Trust Agreement.
(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).
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(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 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 Amendment to Investment Management Agreement between
Registrant and Payden & Rygel adding European Growth &
Income Fund to the Agreement (u).
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(5.14) Form of Amendment to Investment Management Agreement between
Registrant and Payden & Rygel adding the PRAAM Money Market
Fund to the Agreement (u).
(5.15) Form of Amendment to Investment Management Agreement between
Registrant and Payden & Rygel adding the High Income Fund to
the Agreement.
(5.16) 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).
(5.17) Form of Subadvisory Agreement between Payden & Rygel and
Scottish Widows Investment Management Limited with respect
to the European Growth & Income Fund (t).
(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 (to be filed).
(11) Not applicable.
(12) Not applicable.
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(13) Investment letter of Payden & Rygel (b).
(14.1) Form of Payden & Rygel Investment Group Section 403(b)(7)
Custodial Account Agreement, including related application
material (t).
(14.2) Form of Payden & Rygel Individual Retirement Account
Disclosure Statement, including related application material
(t).
(15) The Payden & Rygel Investment Group Distribution Plan,
adopted September 9, 1997 (u).
(16) Total return calculations (o).
(17) Not applicable.
(18) The Payden & Rygel Investment Group Multiple Class Plan,
dated October 22, 1997.
(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.
(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.
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(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.
(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.
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(s) Filed as an exhibit to Post-Effective Amendment No. 5 to the
Registration Statement on March 1, 1994 and incorporated herein by
reference.
(a) Filed as an exhibit to Post-Effective Amendment No. 29 to the
Registration Statement on April 17, 1997 and incorporated herein by
reference.
(u) Filed as an exhibit to Post-Effective Amendment No. 31 to the
Registration Statement on September 24, 1997 and incorporated herein by
reference.
Item 25. Persons Controlled by or Under Common Control with Registrant.
As of September 30, 1997, the following persons held of record
more than 25% of the outstanding shares of the following classes of shares of
Registrant: Payden & Rygel Intermediate Bond Fund, Class A -- Bert Bell NFL
Retirement Plan (55.6%); Payden & Rygel U.S. Treasury Fund, Class A -- Dan
Murphy Foundation (46.0%) and L. Horvitz (27.2%); Payden & Rygel International
Bond Fund, Class A -- Consuelo Zobel Alger Foundation (74.3%); Payden & Rygel
Global Balanced Fund, Class A -- Lon V. Smith Foundation (34.9%); Payden & Rygel
International Equity Fund, Class A -- Dan Murphy Foundation (31.0%).
Item 26. Number of Holders of Securities.
As of September 23, 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>
Shares of beneficial interest of Payden
& Rygel Global Fixed Income Fund - Class A 254
- Class B 0
Shares of beneficial interest of Payden
& Rygel International Bond Fund - Class A 10
- Class B 0
Shares of beneficial interest of Payden
& Rygel Tax Exempt Bond Fund - Class A 74
- Class B 0
Shares of beneficial interest of Payden
& Rygel Short Duration Tax Exempt Fund
- Class A 53
- Class B 0
</TABLE>
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<TABLE>
<S> <C>
Shares of beneficial interest of Payden
& Rygel Short Bond Fund - Class A 61
- Class B 0
Shares of beneficial interest of Payden
& Rygel Intermediate Bond Fund - Class A 44
- Class B 0
Shares of beneficial interest of Payden
& Rygel Investment Quality Bond
Fund - Class A 63
- Class B 0
Shares of beneficial interest of Payden
& Rygel Limited Maturity Fun d - Class A 233
- Class B 0
Shares of beneficial interest of Payden
& Rygel U.S. Treasury Fund - Class A 28
- Class B 0
Shares of beneficial interest of Payden
& Rygel Market Return Fund - Class A 118
- Class B 0
Shares of beneficial interest of Payden
& Rygel Growth & Income Fund - Class A 4,359
- Class B 0
Shares of beneficial interest of Payden
& Rygel Global Short Bond Fund - Class A 33
- Class B 0
Shares of beneficial interest of Payden
& Rygel Total Return Fund - Class A 39
- Class B 0
Shares of beneficial interest of Payden
& Rygel Global Balanced Fund - Class A 54
- Class B 0
Shares of beneficial interest of Payden
& Rygel International Equity Fund - Class A 76
- Class B 0
Shares of beneficial interest of Payden
& Rygel European Growth and Income
Fund - Class A 511
- Class B 0
</TABLE>
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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> 144
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.
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
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> 145
<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
Chief Executive Officer
Christopher N. Orndorff Director Trustee
Shirley T. Hosoi Vice President and President and
Chief Operating Officer Chief Operating
Officer
Thomas J. Barrett Chief Financial
Officer
</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.
C-11
<PAGE> 146
Registrant hereby undertakes to file a post-effective amendment, using
financial statements which need not be certified for the High Income Fund,
within four to six months of the effective date of Post-Effective Amendment No.
32 to Registrant's Form N-1A Registration Statement.
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.
C-12
<PAGE> 147
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 17th
day of October, 1997.
THE & 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 October 17, 1997
- ------------------------------- Principal
Joan A. Payden Executive Officer
J. Clayburn La Force* Trustee October 17, 1997
- -------------------------------
J. Clayburn La Force
Dennis C. Poulsen* Trustee October 17, 1997
- -------------------------------
Dennis C. Poulsen
Thomas McKernan, Jr.* Trustee October 17, 1997
- -------------------------------
Thomas McKernan, Jr.
Stender E. Sweeney* Trustee October 17, 1997
- -------------------------------
Stender E. Sweeney
W.D. Hilton, Jr.* Trustee October 17, 1997
- -------------------------------
W.D. Hilton, Jr.
/s/Lynda L. Faber Trustee October 17, 1997
- -------------------------------
Lynda L. Faber
/s/John Paul Isaacson Trustee October 17, 1997
- -------------------------------
John Paul Isaacson
/s/Christopher N. Orndorff Trustee October 17, 1997
- -------------------------------
Christopher N. Orndorff
/s/Thomas J. Barrett Principal October 17, 1997
- ------------------------------- Financial and
Thomas J. Barrett Accounting Officer
/s/Joan A. Payden
- -------------------------------
By: Joan A. Payden
Attorney-In-Fact
</TABLE>
C-13
<PAGE> 148
EXHIBIT INDEX
THE PAYDEN & RYGEL INVESTMENT GROUP
FORM N-1A REGISTRATION STATEMENT
Post-Effective Amendment No. 32
Exhibit No. Title of Exhibit
(1.17) Form of Amendment No. 16 to the Master Trust Agreement.
(5.15) Form of Amendment to Investment Management Agreement
between Registrant and Payden & Rygel adding High Income
Fund to the Agreement.
(18) The Payden & Rygel Investment Group Multiple Class Plan,
dated October 22, 1997.
<PAGE> 1
EXHIBIT 1.17
THE PAYDEN & RYGEL INVESTMENT GROUP
AMENDMENT NO. 16 TO
MASTER TRUST AGREEMENT
This Amendment No. 16 to the Master Trust Agreement of The Payden &
Rygel Investment Group dated January 22, 1992, as amended (the "Agreement"), is
made as of December 16, 1997.
WHEREAS, pursuant to the Agreement, the Trustees have previously
established and designated seventeen sub-trusts known as the Payden & Rygel
Global Fixed Income Fund, the Payden & Rygel International Bond Fund, the
Payden & Rygel Tax Exempt Bond Fund, the Payden & Rygel Short Bond Fund, the
Payden & Rygel Intermediate Bond Fund, the Payden & Rygel Opportunity Fund, the
Payden & Rygel Limited Maturity Fund, the Payden & Rygel Short Duration Tax
Exempt Fund, the Payden & Rygel U.S. Treasury Fund, the Payden & Rygel Market
Return Fund, the Payden & Rygel Growth & Income Fund, the Payden & Rygel Global
Short Bond Fund, the Payden & Rygel Total Return Fund, the Payden & Rygel
International Equity Fund, the Payden & Rygel Global Balanced Fund, the Payden
& Rygel European Growth & Income Fund, and the PRAAM Money Market Fund; and
WHEREAS, the Trustees have the authority, without shareholder
approval, under Section 7.3 of the Agreement, to amend the Agreement in any
manner, so long as such amendment does not adversely affect the rights of any
shareholder and is not in contravention of applicable law; and
WHEREAS, the Trustees hereby desire to establish and designate one
additional sub-trust, to be known as the Payden & Rygel High Income Fund, and
to fix the rights and preferences of the shares of such additional sub-trust;
and
WHEREAS, the Trustees hereby desire to rename the classes of shares
for each of the existing seventeen sub-trusts, such that with respect to (a)
the PRAAM Money Market Fund, the Series A Shares and Series B Shares are
renamed the Series R Shares and Series D Shares, respectively, and (b) each of
the remaining sixteen sub-trusts, the Series A Shares and Series B Shares are
renamed the Series R Shares and Series S, respectively.
WHEREAS, the Trustees hereby desire to add a third class of shares,
the Class I Shares, to each of the Intermediate Bond, Investment Quality Bond
and Total Return Funds;
NOW THEREFORE:
The first paragraph of Section 4.2 of the Agreement is hereby amended
to read in pertinent part as follow:
<PAGE> 2
"Section 4.2 Establishment and Designation of Sub-Trusts.
Without limiting the authority of the Trustee set forth in Section 4.1
to establish and designate any further Sub-Trusts, the Trustees hereby
establish and designate eighteen Sub-Trusts and classes thereof: the
Payden & Rygel Global Fixed Income Fund, which shall consist of two
classes of shares designated as "Class R" and "Class S" shares; the
Payden & Rygel International Bond Fund, which shall consist of two
classes of shares designated as "Class R" and "Class S" shares; the
Payden & Rygel Tax Exempt Bond Fund, which shall consist of two classes
of shares designated as "Class R" and "Class S" shares; the Payden &
Rygel Short Bond Fund, which shall consist of two classes of shares
designated as "Class R" and "Class S" shares; the Payden & Rygel
Intermediate Bond Fund, which shall consist of three classes of shares
designated as "Class R", "Class S" and "Class I" shares; the Payden &
Rygel Investment Quality Bond Fund, which shall consist of three
classes of shares designated as "Class R", "Class S" and "Class I"
shares; the Payden & Rygel Limited Maturity Fund, which shall consist
of two classes of shares designated as "Class R" and "Class S" shares;
the Payden & Rygel Short Duration Tax Exempt Bond Fund, which shall
consist of two classes of shares designated as "Class R" and "Class S"
shares; the Payden & Rygel U.S. Treasury Fund, which shall consist of
two classes of shares designated as "Class R" and "Class S" shares; the
Payden & Rygel Market Return Fund, which shall consist of two classes
of shares designated as "Class R" and "Class S" shares; the Payden &
Rygel Growth & Income Fund, which shall consist of two classes of
shares designated as "Class R" and "Class S" shares; the Payden & Rygel
Global Short Bond Fund, which shall consist of two classes of shares
designated as "Class R" and "Class S" shares; the Payden & Rygel Total
Return Fund, which shall consist of three classes of shares designated
as "Class R", "Class S" and "Class I" shares; the Payden & Rygel
International Equity Fund, which shall consist of two classes of shares
designated as "Class R" and "Class S" shares; the Payden & Rygel Global
Balanced Fund, which shall consist of two classes of shares designated
as "Class R" and "Class S" shares; the Payden & Rygel European Growth &
Income Fund, which shall consist of two classes of shares designated as
<PAGE> 3
"Class R" and "Class S" shares; the Payden & Rygel High Income Fund,
which shall consist of two classes of shares designated as "Class R"
and "Class S" shares; and the PRAAM Money Market Fund, which shall
consist of two classes of shares designated as "Class R" and "Class D"
shares. The shares of each Sub-Trust and classes thereof and any
shares of any further Sub-Trusts and classes thereof that may from
time to time be established and designated by the Trustees shall
(unless the Trustees otherwise determine with respect to some further
Sub-Trust or class a the time of establishing and designating the
same) have the following relative rights and preferences:".
The undersigned hereby certify that the Amendment set forth above has
been duly adopted in accordance with the provisions of the Master Trust
Agreement.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands for
themselves and their assigns, as of the day and year first above written. This
instrument may be executed in one or more counterparts, all of which shall
together constitute a single instrument.
- ------------------------------- -------------------------------
Joan A. Payden Lynda L. Faber
- ------------------------------- -------------------------------
John Paul Isaacson Christopher N. Orndorff
- ------------------------------- -------------------------------
A. Clayburn La Force Dennis C. Poulsen
- ------------------------------- -------------------------------
Stender E. Sweeney Thomas V. McKernan, Jr.
- -------------------------------
W.D. Hilton, Jr.
<PAGE> 1
EXHIBIT 5.15
THE PAYDEN & RYGEL INVESTMENT GROUP
333 South Grand Avenue, 32nd Floor
Los Angeles, California 90071
December 16, 1997
Payden & Rygel
333 South Grand Avenue, 32nd Floor
Los Angeles, CA 90071
Ladies and Gentlemen:
As you know, we wish to retain Payden & Rygel to act as investment
adviser to our newly created High Income Fund series. Accordingly, this will
confirm our agreement to amend Exhibit A to the Investment Management Agreement
between us dated as of June 24, 1992, as heretofore amended, by adding the
following paragraph:
High Income Fund Series
Annual Advisory Fees (as a percentage of average daily net assets) --
0.35% of net assets.
Operating Expense Limitation (as a percentage of average daily net
assets) - Class A shares, 0.75%; Class B shares, 1.00%.
In all other respects, the Investment Management Agreement between us,
as heretofore amended, will remain unchanged. Please sign this letter below to
confirm your agreement to this amendment.
Very truly yours,
Joan A. Payden
President
AGREED:
PAYDEN & RYGEL
BY:
--------------------------------
TITLE:
------------------------------
<PAGE> 1
THE PAYDEN & RYGEL INVESTMENT GROUP
MULTIPLE CLASS PLAN
This Multiple Class Plan ("Plan") has been
prepared, pursuant to the requirements of rule 18f-3(d) under the Investment
Company Act of 1940 ("Investment Company Act" or "Act"), in connection with the
offer and sale of shares of the various series of The Payden & Rygel Investment
Group (the "Trust"). Each series (each a "Fund" and collectively the "Funds") is
a multiple class fund within the meaning of rule 18f-3.
In accordance with the requirements of rule 18f-3,
this Plan describes the differences among the classes of shares that are issued
by the Funds, including the various services offered to shareholders, the
distribution arrangement that pertains to each class, the methods of allocating
expenses relating to those differences, and the conversion features or exchange
privileges relating to the classes.
I. Background
The Trust is an open-end investment company
registered under the Investment Company Act. The Trust currently has 18 series,
including the PRAAM Money Market Fund (the "Money Market Fund") and 17 other
series, and may have other Funds in the future. Each Fund has differing
investment objectives and policies.
Each Fund has two classes of shares -- the Money
Market Fund has Class R (formerly designated as Class A) and Class D shares, and
each other Fund has Class R and Class S (formerly designated as Class B) shares.
In addition, each of the Intermediate Bond Fund, Investment Quality Bond Fund,
and Total Return Fund has a third class of shares, Class I. The classes of each
Fund represent interests in the same portfolio of investments held by the Fund
and, except as described below, are identical in all respects. The classes
differ in the following respects: (1) in the shareholder service plan
attributable to Class S shares but not the other classes of shares; (2) in the
distribution plan attributable to Class D shares but not the other classes of
<PAGE> 2
shares; (3) in the other shareholder services which are available to Class R, S
and D shareholders but not Class I shareholders; (4) in the expenses that may be
incurred by or allocated to one class as compared to another, and in the expense
limitations applicable to one class as compared to the others; (5) in the
substantially greater minimum investment required to purchase Class I shares
than the other classes of shares; and (6) in the voting rights accorded to each
class. These differences are discussed below in more detail.
II. Discussion of Differences
A. Shareholder Service Arrangements
An investor in a Fund pays no front-end or
contingent deferred sales charge in connection with the purchase of Class R,
Class S, Class D or Class I shares. However, Class S shares are subject to a
Shareholder Service Plan (the "Service Plan"). Pursuant to the Service Plan,
Class S shares of a Fund pay the Fund's Distributor an annual fee of up to 0.25%
of the average net assets of the Fund attributable to the Class S shares. These
payments are for services provided by the Distributor, broker-dealers and other
service organizations to the beneficial owners of Class S 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 Service Plan are not
primarily intended to result in the sale or distribution of Class S shares of a
Fund. The Service 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 limitation under the Service Plan, the unpaid
amount is carried forward from month to month while the Service 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
-2-
<PAGE> 3
was incurred, and no interest, carrying or other finance charge is borne by the
Class S shares with respect to any amount carried forward.
B. Distribution Plan Arrangements
Class D shares of the Money Market Fund are
subject to a Distribution Plan. Pursuant to the Distribution Plan, Class D
shares of the Money Market Fund pay the Fund's Distributor an annual fee of up
to 0.35% of the average net assets of the Fund attributable to Class D shares.
These payments are for expenses incurred by the Distributor in connection with
advertising and marketing Class D shares of the Fund; periodic payments of fees
for distribution assistance made to one or more securities dealers or other
industry professionals (such as investment advisers, accountants, estate
planning firms and the Distributor itself); and expenses incurred in preparing,
printing and distributing the Fund's prospectus and statement of additional
information (except those used for regulatory purposes or for distribution to
existing shareholders of the Fund).
The Distribution Plan is a "reimbursement" plan,
which means that the fees paid to the Distributor for distribution services
rendered are payable only to the extent of the reimbursable amounts expended by
the Distributor. If in any month the Distributor is due more fees for
distribution services than are immediately payable because of the expense
limitation under the Distribution Plan, the unpaid amount is carried forward
from month to month while the Distribution 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 D shares with respect to any amount
carried forward.
C. Minimum Investment.
In general, the minimum initial investment in
Class I shares is $3,000,000, and the minimum additional investment is $100,000.
In general, the minimum initial investment in Class R, Class S and Class D
shares is $5,000, and the minimum additional investment is $1,000.
-3-
<PAGE> 4
D. Expense Limitations.
The Fund's 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 and extraordinary expenses), will not
exceed a specified percentage of the Fund's average daily net assets on an
annualized basis. Each Fund will reimburse the Adviser for fees foregone or
other expenses paid by the Adviser in any fiscal year pursuant to the expense
guarantee 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. 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.
The expense limitation for Class R shares will be
lower than for Class S or Class D shares by the amount of the Service Plan fees
attributable to Class S shares and the amount of the Distribution Plan fees
attributable to Class D shares, as the case may be. In addition, the expense
limitation for Class I shares will be lower than for Class R shares, because of
the lower expenses allocable to Class I shares resulting from the higher minimum
investment in Class I shares and the more limited shareholder services provided
to the holders of Class I shares.
E. General
These arrangements permit an investor to choose
the method of purchasing shares that the investor determines is most beneficial
given the amount which the investor is prepared to invest, the level of services
that the investor wishes to receive from a Fund or the broker-dealer or other
service organization through which the investor has purchased shares of a Fund,
and other circumstances related to the investor's overall relationship with such
broker-dealer or other service organization.
The net income attributable to Class S and D
shares and the dividends payable on Class S and D shares will be reduced below
those of the Class R shares by the amount of the shareholder servicing or
distribution plan fees attributable to the Class S and Class D shares, as well
as by certain incremental expenses associated with such
-4-
<PAGE> 5
fees, as described below. The net income attributable to Class I shares and the
dividends payable on Class I shares will be greater than those of the Class R
shares as a result of the lower expenses and expense limitation applicable to
Class I shares.
B. Paying for Expenses
1. Expenses Allocated to a Particular Class
Certain expenses of a Fund will be allocated
solely to a particular class of shares of the Fund because
they relate only to the expenses of that class. Such
expenses include:
(a) distribution expenses associated with distribution of
Class D shares of the Money Market Fund and for which
distribution plan fees will be assessed, and shareholder
servicing expenses associated with the servicing of Class
S shareholders of the other Funds and for which a
shareholder servicing fee will be assessed;
(b) incremental transfer agent fees identified by the transfer
agent as being attributable to a specific class;
(c) printing and postage expenses related to preparing and
distributing materials such as shareholder reports,
prospectuses, and proxies to shareholders of a particular
class;
(d) blue sky registration fees incurred by a
particular class;
(e) SEC registration fees incurred by a particular
class;
(f) the expenses of administrative personnel and services as
required to support the shareholders of a particular
class;
(g) accounting expenses relating to one class;
(h) litigation or other legal expenses relating to one
class;
-5-
<PAGE> 6
(i) trustees' fees and expenses incurred as a result
of issues relating to one class;
(j) any other incremental expenses subsequently identified
that should be properly allocated to one class of shares.
2. Expenses Allocated to All Classes
Other expenses of a Fund will be allocated to all
classes of shares of the Fund in accordance with the requirements of rule
18f-3(c). These include the management fee paid to the Adviser to the Fund; the
custodial fee; and certain other expenses of the Fund. These expenses will be
allocated to each class of a Fund based on the net asset value of such class in
relation to the net asset value of the Fund.
C. Differences in Services Offered
Class R, Class S and Class D shareholders receive
the same services from the Trust, except as follows:
(a) The holders of Class S shares of a Fund are entitled to
receive the additional assistance referred to above from
the broker-dealer or other service organization which is
receiving shareholder service fees in connection with the
Service Plan.
(b) The holders of Class D shares of a Fund may receive the
additional assistance referred to above from the
broker-dealers or other industry professionals referred to
above which is receiving distribution fees in connection
with the Distribution Plan.
The extent to which such services are available to the holders of Class S and
Class D shares will depend on the holders' separately-negotiated arrangements
with their broker-dealer or other service organization, if any.
Class I shareholders do not receive services
available under the Service Plan or Distribution Plan, and do not receive the
following services which are available to other shareholders of the Trust: Class
I shares of a Fund may be exchanged only for Class I shares of other Funds, and
-6-
<PAGE> 7
not for Class R, S or D shares of other Funds. In addition, Class I shareholders
do not have telephone privileges or automated investment program privileges
available to shareholders of other classes.
D. Voting of Class Shares
The voting rights of each shareholder of a Fund
are the same, except that Class S and Class D shares will have the exclusive
right to vote on matters relating to the Service Plan or Distribution Plan, as
the case may be, to the extent that such a shareholder vote is required by the
Investment Company Act or otherwise requested. Rule 12b-1 adopted by the
Securities and Exchange Commission under the Investment Company Act requires
that (i) any amendment of the Distribution Plan to increase materially the costs
which the Class D shares of a Fund may bear for distribution services under the
Plan must be approved by a vote of a majority of the outstanding Class D shares
of the Fund; and (ii) the Distribution Plan may be terminated at any time by
vote of a majority of the outstanding Class D shares of the Fund. Nothing in the
Investment Company Act, the Service Plan or the Trust's governing documents
currently requires a shareholder vote in connection with the adoption,
administration or revision of the Service Plan. Each shareholder is entitled to
one vote for each full share held and fractional votes for fractional shares
held. Shareholders will vote in the aggregate and not by class or series, except
as noted above and where otherwise required by law (or when permitted by the
Board of Trustees).
Amended as of , 1997
-7-
