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PAYDEN & RYGEL
PAYDEN & RYGEL VALUE STOCK FUND
PAYDEN & RYGEL GROWTH STOCK FUND
PROSPECTUS
DECEMBER 30, 1997
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TABLE OF CONTENTS
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<S> <C>
Funds Overview.........................................................4
Expense Information ...................................................5
Net Asset Value........................................................6
Dividends, Distributions and Taxes.....................................7
Investment Objectives and Policies ....................................9
Investment Practices..................................................11
Management of the Funds...............................................16
Shareholder Services..................................................19
Redemption of Shares..................................................22
How to Purchase Shares................................................22
</TABLE>
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PAYDEN & RYGEL INVESTMENT GROUP
333 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90071
(800) 5-PAYDEN
(213) 625-1900
The Payden & Rygel Investment Group (the "Group") is a professionally managed,
no-load, open-end management investment company. The Group currently consists of
a number of distinct portfolios with separate investment objectives. Information
about two of the portfolios, the Payden & Rygel Value Stock Fund and the Payden
& Rygel Growth Stock Fund (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 December 30, 1997, containing
additional information about each Fund, has been filed with the Securities and
Exchange Commission and is incorporated by reference into this Prospectus. It is
available without charge and may be obtained by writing the Group at 333 South
Grand Avenue, Los Angeles, California 90071 or by telephone at (213) 625-1900 or
(800) 5 PAYDEN (800-572-9336).
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, NOR ARE THE SHARES FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
This Prospectus should be read and retained for reference to information about
the Funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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 December 30, 1997.
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FUNDS OVERVIEW
FUND DESCRIPTIONS
The Payden & Rygel Value Stock Fund seeks long-term capital appreciation by
investing with a value discipline. Companies selected for investment exhibit one
or more of the following criteria: (a) a share price which appears to be
inexpensive relative to the growth rate of cash flow or the growth rate of
sales; (b) an ability to generate free cash flow internally; and (c) a positive
catalyst, e.g., a new product or successful business plan implementation,
resulting in a greater probability of realizing the company's potential
intrinsic value.
The Payden & Rygel Growth Stock Fund seeks long-term capital appreciation by
investing with a growth discipline. Companies selected for investment exhibit
one or more of the following criteria: (a) a potential expansion in
profitability based on factors such as industry profit levels, competitiveness,
and the company's own competitive advantages and business strategy; and (b)
achievement or the potential to achieve above average returns on equity.
INVESTMENT RISKS AND CONSIDERATIONS
Each of the Funds invests 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.
Each of the Funds invests principally in the equity securities of "small-cap"
and "mid-cap" companies (issuers whose stock has a total market value of $250
million to approximately $4 billion at the time of purchase). Historically,
small-cap and mid-cap stocks have been more volatile in price than the
larger-capitalization stocks included in the Standard & Poor's 500 Stock Price
Index ("S&P 500 Index"). Among the reasons for the greater price volatility of
these securities are the less certain growth prospects of smaller firms, the
lower degree of liquidity in the markets for such stocks, and the greater
sensitivity of medium- and small-size companies to changing economic conditions.
In addition to exhibiting greater volatility, medium- and small-size company
stocks may fluctuate independently of larger company stocks. Medium- and
small-size company stocks may decline in price as large company stocks rise, or
rise in price as large company stocks decline.
Each of the Funds may invest up to 15% of its total assets in securities of
foreign issuers through American Depository Receipts ("ADRs") publicly traded in
the U.S. Investing in securities of foreign issuers involves investment risks
that are different in some respects from those incurred by a fund that invests
only in securities of U.S. governmental entities and domestic companies,
including
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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.
PURCHASE AND REDEMPTION OF SHARES
Each Fund offers its Class R Shares through Payden & Rygel Distributors with no
sales charge. In general, the minimum initial investment is $5,000, and the
minimum additional investment is $1,000. Tax-sheltered Retirement Plans and the
Automated Investment Programs require different minimum investments. See
"Shareholder Services" and "How to Purchase Shares." Shares of each Fund may be
exchanged for any class of shares of any other portfolio of the Group.
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
Class R Shares of each Fund 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, the Advisory Fees, Other Expenses and Total
Fund Expenses, as an estimated percentage of average net assets for the first
year of operation after reimbursement of Advisory fees and Other expenses, are
as follows:
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VALUE STOCK FUND GROWTH STOCK FUND
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<S> <C> <C>
Advisory Fees 0.60% 0.60%
Other Expenses 0.20% 0.20%
Total Fund Expenses 0.80% 0.80%
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FUND EXPENSE LIMITS
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 1.00% of the Fund's average daily net assets on an annualized basis.
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In addition, the Adviser has voluntarily agreed to temporarily limit each Fund's
expense ratio to 0.80% of the Fund's average daily net assets 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).
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 Class R Shares of each Fund for
the fiscal year ending October 31, 1998, before reimbursement by the Adviser,
are estimated to be 2.50% of average daily net assets (annualized).
EXPENSES PER $1,000 INVESTMENT
The following table illustrates the expenses a shareholder would pay on a $1,000
investment in the Class R Shares of each Fund 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.
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1 YEAR 3 YEARS
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<S> <C> <C>
Value Stock Fund $10 $32
Growth Stock Fund $10 $32
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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.
NET ASSET VALUE
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. 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.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends are declared and distributed to shareholders semi-annually for each of
the Funds. Any net realized capital gains from the sale of portfolio securities
will be distributed no less frequently than once yearly. Dividend and capital
gain distributions of each Fund will be paid in the form of additional shares of
the Fund at the net asset value on the ex-dividend date unless the shareholder
elects to have them paid in cash by completing an appropriate request form.
Each Fund has elected and intends to qualify annually to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). As a regulated investment company, each Fund generally is not
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.
Dividends and distributions from long-term capital gains paid by the Funds are
taxable. Capital gains distributions are made when a Fund realizes net capital
gains on sale 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. Sale of a 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.
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Prior to purchasing shares of a Fund, an investor should carefully consider the
impact of the dividends or capital gains distributions which are expected to be
or have been announced. Any dividends or distributions paid shortly after a
purchase by an investor will have the effect of reducing the per share net asset
value of the investor's shares by the per share amount of the dividends or
distributions.
Distributions may be subject to additional state and local taxes, depending on
each shareholder's particular situation. Shareholders should consult their own
tax advisers with respect to the particular tax consequences to them of an
investment in a Fund. For further discussion of these matters, please see the
Statement of Additional Information.
CAPITALIZATION
The Group was organized as a Massachusetts business trust on January 22, 1992.
Its Declaration of Trust authorizes the Board of Trustees to issue an unlimited
number of shares of beneficial interest in the Group and to classify or
reclassify any unissued shares into one or more series or classes of shares.
Pursuant to such authority, the Board of Trustees has authorized the issuance of
twenty series of shares, including the two series of shares which are sold
through this prospectus. Each of the Funds currently offers one class of shares,
the Class R Shares. The other portfolios of the Trust also offer Class S Shares,
which bear the expenses of a shareholder service plan of up to 0.25% of average
annual net assets.
VOTING
Shareholders have the right to vote in the election of Trustees and on any and
all matters on which they may be entitled to vote by law or the provisions of
the Declaration of Trust. Shares entitle their holders to one vote per share
(with proportionate voting for fractional shares). Shareholders will vote in the
aggregate and not by series or class except as otherwise required by law or when
the Board of Trustees of the Group determines that a matter to be voted on
affects only the interest of a particular series or class. Voting rights are not
cumulative, and accordingly the holders of more than 50% of the shares of the
Group may elect all of the Trustees. The Group is not required to hold regular
annual meetings of shareholders and does not intend to do so except when
required by law. The Declaration of Trust provides that the holders of not less
than two-thirds of the outstanding shares of the Group may remove a person
serving as Trustee at a shareholder meeting called by written request of the
holders of not less than 10% of the outstanding shares of the Group.
INVESTMENT OBJECTIVES AND POLICIES
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PAYDEN & RYGEL VALUE STOCK FUND
The Value Stock Fund's investment objective is to seek long term capital
appreciation. The Fund pursues its objective by investing primarily in common
stocks of small- and medium-capitalized companies. Currently, this group is
defined as those companies with a market capitalization of from $250 million to
approximately $4 billion. The Fund invests principally in publicly traded
securities of domestic companies, but may invest up to 15% of its total assets
in securities of foreign issuers through ADRs traded in the U.S.
The Adviser pursues the Fund's objective by using a value investment discipline.
In selecting companies for investment, the Adviser uses a proprietary
quantitative model to screen all publicly traded small-cap and mid-cap stocks
based on the following criteria related to cash flow. The Adviser then uses
fundamental analysis to select and weight the investment in 50-100 stocks from
the possible investments determined by the use of its quantitative analysis. As
a part of this qualitative analytical process, the Adviser evaluates the extent
to which a company meets the investment criteria set forth below. The weight
given to a particular investment criterion will depend upon the circumstances,
and some portfolio holdings may not meet all of the following criteria:
Price to value disparity. The Adviser seeks companies whose share price
appears to be inexpensive relative to the growth rate of cash flow and/or the
growth rate of sales. The Adviser believes that traditional methods of measuring
value, such as ratios of price to earnings or price to book value, are less
indicative of a company's true intrinsic value, due to the unprecedented
willingness of companies to write down assets and take charges to income. The
Adviser believes that fewer distortions are present in the cash flow and sales
measures, and this provides a more accurate measure of intrinsic value.
Ability to generate free cash flow internally. Cash flow is defined as
earnings before extraordinary items plus depreciation. The conceptual definition
of free cash flow is all the cash generated by operations that can be
distributed back to shareholders without affecting the current growth of the
firm. A shorthand estimation procedure for such free cash flow subtracts from
cash collections non-discretionary cash expenses and non-discretionary capital
expenditures. Using this concept, the firm can distribute these free cash flows
back to shareholders without reducing its market value, or use these free cash
flows to take advantage of new business opportunities. The firm can also use its
free cash flows to pay down debt, thereby increasing market value for
shareholders. The Adviser believes that a company that is able to generate free
cash flow internally is also a company with financial flexibility. We seek
companies with relatively clean financial statements that adhere to conservative
accounting practices.
Positive Catalyst. The Adviser believes that companies with a positive
catalyst have a greater probability of realizing their potential intrinsic
value. Such a catalyst may be a new product, a management addition or change, or
the successful implementation of a business plan.
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In general, the Value Fund will remain fully invested in equities, and the
Adviser will not maintain a significant cash position as part of an attempt to
time the market.
PAYDEN & RYGEL GROWTH STOCK FUND
The Growth Stock Fund's investment objective is to seek long term appreciation
of capital. The Fund pursues its objective by investing primarily in common
stocks of small- and medium-capitalized companies. Currently, this group is
defined as those companies with a market capitalization of from $250 million to
approximately $4 billion. The Fund invests principally in publicly traded
securities of domestic companies, but may invest up to 15% of its total assets
in securities of foreign issuers through ADRs traded in the U.S.
The Adviser pursues the Fund's objective by using a growth investment
discipline. In selecting companies for investment, the Adviser uses a
proprietary quantitative model to screen all publicly traded small-cap and
mid-cap stocks based on the investment criteria set forth below. The adviser
then uses fundamental analysis to select and weight the investment in 50-100
stocks from the possible investments determined by the use of its quantitative
analysis. As a part of this qualitative analytical process, the Adviser
evaluates the extent to which a company meets the investment criteria set forth
below. The weight given to a particular investment criterion will depend upon
the circumstances, and some portfolio holdings may not meet each of the
following criteria:
A potential expansion in profitability. The Adviser believes that an
expansion in profit margins generally results in an improved market valuation.
Therefore, the Adviser will look for companies that it believes have the
potential of sustainable levels of profitability greater than their current
levels. The factors used to assess a sustainable level of future profitability
for a company include industry profit levels, competitiveness, and the company's
competitive advantages and business strategy. Competitive advantages could
include a distinctive attribute that cannot easily be duplicated by present or
potential competitors, or a product or services are regarded as being of
superior quality which enables the company to obtain a premium price, or a
distinctive capability in sales, service, or distribution.
Returns on equity. The company should have achieved, or have the
potential to achieve, an above average return on equity through the efficient
use of assets and adequate margins.
Earnings Growth. The Company should have above average growth in
earnings before interest and taxes. The Adviser believes this is a key criteria
in defining the stock of a company as a "growth" stock.
In general, the Growth Stock Fund will remain fully invested in equities, and
the Adviser will not maintain a significant cash position as part of an attempt
to time the market.
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INVESTMENT PRACTICES
INVESTMENT TECHNIQUES
The Adviser utilizes various investment techniques in managing each Fund's
portfolio, including the following:
EQUITY SECURITIES. Each of the Funds will invest its assets in equity securities
of companies having various levels of market capitalization. Generally, the
market capitalization of the companies in the portfolio of each Fund will be in
the range of $250 million to $4 billion at the time of purchase.
AMERICAN DEPOSITORY RECEIPTS. Each of the Funds may invest up to 15% of its
assets in ADRs. Generally, an ADR is a dollar denominated security issued by a
U.S. bank or trust company that represents, and may be converted into, an
underlying foreign security. ADRs 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.
Investments in depository receipts entail risks similar to direct investments in
foreign securities.
STANDARD & POOR'S DEPOSITARY RECEIPTS. Standard & Poor's Depositary Receipts
("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 S&P 500 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. As a
matter of operating policy, a Fund will not invest more than 25% of its assets
in SPDRs.
WARRANTS. Each of the Funds may invest in warrants.
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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 involves 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.
OPTIONS AND FUTURES CONTRACTS. Each Fund may purchase and sell covered put and
call options on securities and securities indexes, 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 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 stock, bond and currency markets. 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.
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
option on an index gives the holder the rights, in return for the premium paid,
to require the writer to pay cash equal to the difference between the closing
price of the index and the exercise price of the option, times a specified
multiplier.
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.
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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".
MONEY MARKET FUNDS. To maintain liquidity, each Fund may invest in unaffiliated
money market funds. No money market fund investment by a Fund will be in excess
of 3% of the total assets of the money market fund. Neither Fund anticipates
investing more than 15% of its 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. 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.
REPURCHASE AGREEMENTS. For the purpose of maintaining liquidity or realizing
additional income, each Fund may enter into repurchase agreements (agreements to
purchase U.S. Treasury notes and bills, subject to the seller's agreement to
repurchase them at a specified time and price) with well-established registered
securities dealers or banks. Repurchase agreements are the economic equivalent
of loans by a Fund. In the event of a bankruptcy or default of any such dealer
or bank, a Fund could experience costs and delays in liquidating the underlying
securities which are held as collateral, and the Fund might incur a loss if the
value of the collateral held declines during this period.
REVERSE REPURCHASE AGREEMENTS. 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.
RESERVES. Each Fund may establish and maintain reserves when the Adviser
determines that such reserves would be desirable to enable it to take advantage
of buying opportunities. A
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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 securities 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. Neither Fund will 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.
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 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.
FOREIGN INVESTMENTS
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Each of the Funds may invest in securities of foreign issuers, through ADRs.
Investments in foreign 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. 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. Changes in foreign exchange rates will affect
the value of the securities held in each of the Funds. Fluctuations in foreign
currency exchange rates will also affect the value of dividends earned, gains
and losses realized on the sale of securities and net investment income and
gains, if any, distributed to shareholders. 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. It may also be more difficult to
obtain and enforce judgments against foreign entities.
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 may not be
successful. The aggregate market value of a Fund's portfolio securities covering
put options on securities written by the Fund will not exceed 50% of its net
assets.
OTHER INVESTMENT POLICIES
15
<PAGE> 16
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, a Fund will not purchase any security which would cause
25% or more of the value of the Fund's total assets at the time of purchase to
be invested in the securities of any one or more issuers conducting their
principal business activities in the same industry, provided that (1) there is
no limitation with respect to U.S. Government obligations and repurchase
obligations secured by such obligations, (2) wholly owned finance companies will
be considered to be in the industries of their parents, (3) SPDRs will be
divided according to the industries of their underlying common stocks, and (4)
utilities will be divided according to their services (for example, gas, gas
transmission, electric and telephone will each be considered a separate
industry).
OTHER INVESTMENT POLICIES. As a matter of operating policy, neither Fund will
(1) purchase a security of any one issuer if, as a result, 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 (2) purchase additional
securities when borrowings exceed 5% of the Fund's total assets.
PORTFOLIO TURNOVER. Neither Fund can accurately predict its future annual
portfolio turnover rate. The Value Fund's portfolio turnover is expected to be
less than 100%. Annual portfolio turnover for the Growth Stock Fund is expected
to be less than 200%. High turnover rates increase transaction costs and may
increase taxable capital gains. The Adviser considers these effects when
evaluating the anticipated benefits of short term investing.
Neither Fund can accurately predict it's future annual portfolio turnover rate.
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.
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<PAGE> 17
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 twenty
portfolios of the Group, including the Funds, and reviews, supervises and
administers all investments. Several teams, each responsible for a number of
portfolios of the Group, including the Funds, are responsible for the day-to-day
management of these portfolios 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 & 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 the portfolios
for which the team has responsibility. The strategy team responsible for the
Funds is the Equity Strategy Group, which is headed by Mr. Orndorff.
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<PAGE> 18
Since its organization in 1983, the Adviser has principally managed fixed income
portfolios. However, the Adviser and the members of its Equity Strategy Group
also have experience in various capacities managing portfolios invested
primarily in equity and equity-related securities. Their experience includes
development and management of the Payden & Rygel Growth & Income Fund and the
Payden & Rygel European Growth & Income Fund series of the Group, oversight of
the Payden & Rygel Global Balanced Fund and Payden & Rygel International Equity
Fund series of the Group (for which Scottish Widows Investment Management
provides day-to-day portfolio management services), and research and development
of the stock selection methodologies and techniques used in management of the
Value Stock Fund and Growth Stock Fund, as well as some past management of
separate account equity portfolios.
The Adviser receives a monthly fee from each Fund at the following annual rates:
0.60% for the first $1 billion of the Fund's average daily net assets, and 0.50%
of the Fund's average daily net assets above $1 billion.
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
801 Pennsylvania, 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 accounting services and dividend disbursing and
transfer agency services. Certain out-of-pocket expenses are also reimbursed at
actual cost.
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<PAGE> 19
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.
PERFORMANCE INFORMATION
Each of the Funds may, from time to time, include the yield and total return for
its Class R Shares in advertisements or reports to shareholders or prospective
investors. Yield will be quoted using the SEC definition, which is the
annualized net investment income per share during a particular 30-day (or one
month) period. Quotations of average annual total return will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in a Fund over specified periods.
OFFERING
Copies of the Group's 1998 Semi-Annual Report and Annual Report will be made
available upon publication 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 does not provide fiduciary
19
<PAGE> 20
administration or custody for such plans. The Group currently waives the
Fiduciary Administration Fees charged by IFTC associated with such plans.
EXCHANGE PRIVILEGE
The Group currently consists of nineteen investment portfolios, including the
Funds, with varying investment objectives or policies, and other investment
portfolios may be created. Class R Shares of each 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.
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 an identically registered account in one of the other available
portfolios by a telephone call to the Distributor at (213) 625-1900 or (800)
5PAYDEN (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 portfolio on a regular basis. See "Automated Investment
Programs."
The Exchange Privilege may be modified or discontinued by the Group at any time
upon 60 days' notice to shareholders. The Group also reserves the right to limit
the number of exchanges a shareholder may make in any year to avoid excessive
Fund expenses. The Exchange Privilege is only available in states where the
exchange may be legally made.
TELEPHONE PRIVILEGE
Shareholders may exchange or redeem shares by telephone if they have elected
this option on the Account Registration Form. If a shareholder calls before 1:00
p.m. (Pacific Time), the exchange or redemption will be at the net asset value
determined that day; if a shareholder calls after 1:00 p.m. (Pacific Time), the
exchange or redemption will be at the net asset value determined on the next
business day. During periods of drastic economic or market changes, it is
possible that the telephone exchange privilege may be difficult to implement. In
this event, shareholders should follow the other exchange and redemption
procedures discussed in this prospectus.
20
<PAGE> 21
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.
AUTOMATED INVESTMENT PROGRAMS
Shareholders may take advantage of two programs which permit automated
investments in the Group's Funds.
ELECTRONIC INVESTMENT PLAN. If authorized by the shareholder, additional
investments in either 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 the Funds 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
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<PAGE> 22
investment will be at the net asset value determined on the second business day
following receipt of the call.
Please note the following guidelines:
o The shareholder's financial institution must be a member of the Automated
Clearing House System.
o 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.
o An account with the Group must be established before the Electronic
Investment Plan goes into effect.
o The Electronic Investment Plan will automatically terminate if all shares
are redeemed, or if the shareholder's financial institution rejects the
transfer for any reason, e.g., insufficient funds.
o 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. Before
effecting an exchange, you should obtain the current prospectus of the portfolio
into which the exchange is to be made. An exchange will be treated as a
redemption and purchase for tax purposes.
SHAREHOLDER INQUIRIES
Shareholders with inquires concerning either of the Funds may call the Group at
(213) 625-1900, or (800) 5-PAYDEN, or write to Payden & Rygel Investment Group,
333 South Grand Avenue, Los Angeles, CA 90071.
REDEMPTION OF SHARES
Each Fund will redeem its shares at the net asset value next determined
following receipt of the request in proper form. Redemptions may be made in
writing, by calling the Distributor at (800) 5-PAYDEN, by telegraph or by other
wire communication. No charge is made for redemptions. Shares redeemed may be
worth more or less than the purchase price of the shares, depending on the
market value of the investment securities held by the Funds at the time of
redemption.
Redemption requests in writing or by telegraph or other wire communications
should be directed to the Group at 333 South Grand Avenue, Attn.: Fund
Distributor, Los Angeles,
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<PAGE> 23
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; the latter may
take up to seven days. Telephone redemptions may be difficult to implement
during periods of drastic economic or market changes, which may result in an
unusually high volume of telephone calls.
A Fund may suspend the right of redemption or postpone the payment date at times
when the New York Stock Exchange is closed or during certain other periods as
permitted under the federal securities laws.
HOW TO PURCHASE SHARES
Shares of the Funds may be purchased at net asset value without a sales charge.
The minimum initial and additional investment levels per Fund are as set forth
below. An account may only be opened by completing an application and mailing it
to the appropriate address below under "Initial Investment." Shares cannot be
purchased until a properly completed application is received by the Group. If
you wish to open a tax-sheltered retirement plan (such as an IRA), 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
o Complete Application
o 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
o Complete application and mail to:
Payden & Rygel Investment Group
P.O. Box 419318
Kansas City, MO 64141-6318
o Wire Funds as follows when application has been processed:
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<PAGE> 24
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.
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.
Each Fund is "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 each type of account
are as follows:
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
ACCOUNT TYPE INVESTMENT INVESTMENT
------------ ---------- ----------
<S> <C> <C>
Regular $5,000 $1,000
Tax-Sheltered $2,000 $1,000
Electronic Investment Plan
Set schedule $2,500 $250
No set schedule $5,000 $1,000
</TABLE>
ADDITIONAL INVESTMENTS
Additional investments may be made at any time at net asset value by check, by
ACH, or by calling the Distributor and wiring federal funds to the Custodian as
described above.
OTHER PURCHASE INFORMATION
Purchases of each Fund's shares will be made in full and fractional shares.
Certificates for shares will not be issued. The Group reserves the right, in its
sole discretion, to suspend the offering of shares of any Fund or to reject
purchase orders when, in the judgment of its
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<PAGE> 25
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.
25
<PAGE> 26
INVESTMENT ADVISER
Payden & Rygel
333 South Grand Avenue
Los Angeles, California 90071
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
801 Pennsylvania
Kansas City, Missouri 64105
AUDITORS
Deloitte & Touche LLP
1700 Courthouse Plaza Northeast
Dayton, Ohio 45402
COUNSEL
Paul, Hastings, Janofsky and Walker LLP
555 South Flower Street
Los Angeles, California 90071
December 30, 1997
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<PAGE> 27
PAYDEN & RYGEL INVESTMENT GROUP
PAYDEN & RYGEL VALUE STOCK FUND
PAYDEN & RYGEL GROWTH STOCK FUND
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 30, 1997
The Payden & Rygel Value Stock Fund ("Value Stock Fund") and Payden & Rygel
Growth Stock Fund ("Growth Stock 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).
1
<PAGE> 28
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES...................................................3
FUNDAMENTAL AND OPERATING POLICIES..................................................13
PORTFOLIO TRANSACTIONS..............................................................15
VALUATION OF PORTFOLIO SECURITIES...................................................15
FUND PERFORMANCE....................................................................16
TAXATION............................................................................17
MANAGEMENT OF THE GROUP.............................................................21
PURCHASES AND REDEMPTIONS...........................................................26
OTHER INFORMATION...................................................................27
</TABLE>
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<PAGE> 29
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.
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<PAGE> 30
FIXED INCOME SECURITIES
Fixed Income 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.
BANK OBLIGATIONS
Bank obligations include certificates of deposit, bankers' acceptances, and
other debt obligations. Certificates of deposit are short-term obligations of
commercial banks. A bankers' acceptance is a time draft drawn on a commercial
bank by a borrower, usually in connection with an international commercial
transaction.
The Funds will not invest in any security issued by a commercial bank unless (i)
the bank has total assets of at least $1 billion, or the equivalent in other
currencies, (ii) in the case of U.S. banks, the bank is a member of the Federal
Deposit Insurance Corporation, and (iii) in the case of foreign banks, the
security is, in the opinion of Payden & Rygel, of an investment quality
comparable with other debt securities which may be purchased by the Fund. These
limitations do not prohibit investments in securities issued by foreign branches
of U.S. banks, provided such U.S. banks meet the foregoing requirements.
4
<PAGE> 31
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.
REVERSE REPURCHASE AGREEMENTS
Each Fund covers its obligations under a reverse repurchase agreement by
maintaining a segregated account comprised of cash, U.S. Government securities
or high-grade debt obligations, maturing no later than the expiration of the
agreement, in an amount (marked-to-market daily) equal to its obligations under
the agreement. Reverse repurchase agreements are the economic equivalent of
borrowing by a Fund, and are entered into by a Fund to enable it to avoid
selling securities to meet redemption requests during market conditions deemed
unfavorable by the Adviser.
ILLIQUID SECURITIES
Neither 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. 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
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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 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.
<TABLE>
<CAPTION>
Pacific Basin Western Europe North America
- ------------- -------------- -------------
<S> <C> <C>
Australia Austria Canada
Japan Belgium United States
New Zealand Denmark
Finland
France
Germany
Ireland
Italy
Netherlands
Norway
Spain
Sweden
Switzerland
United Kingdom
</TABLE>
OPTIONS AND FUTURES CONTRACTS
Each Fund may purchase and sell ("write") both put options and call options on
securities and securities indices, enter into index 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
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
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difference between the cash value of the index and the exercise price multiplied
by a specified multiplier for the index option.
A Fund will write call options and put options only if they are "covered." In
the case of a call option on a security, the option is covered if the Fund owns
the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if additional
cash consideration is required, cash or cash equivalents in such amount are
placed in a segregated account with the Group's Custodian) upon conversion or
exchange of other securities held by the Fund. A call option on an index is
covered if the Fund maintains with its Custodian cash or cash equivalents equal
to the contract value. A call option is also covered if the Fund holds a call on
the same security or index as the call written, and the exercise price of the
call held is (i) equal to or less than the exercise price of the call written,
or (ii) greater than the exercise price of the call written, provided the
difference is maintained by the Fund in cash or cash equivalents in a segregated
account with its Custodian. A put option on a security or an index is covered if
the Fund maintains cash or cash equivalents equal to the exercise price in a
segregated account with its Custodian. A put option is also covered if the Fund
holds a put on the same security or index as the put written, and the exercise
price of the put held is (i) equal to or greater than the exercise price of the
put written, or (ii) less than the exercise price of the put written, provided
the difference is maintained by the Fund in cash or cash equivalents in a
segregated account with its Custodian.
If an option written by a Fund expires unexercised, the Fund realizes a capital
gain equal to the premium received at the time the option was written. If an
option purchased by a Fund expires unexercised, the Fund realizes a capital loss
equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out by
an offsetting purchase or sale of an option of the same series (i.e., of the
type, traded on the same exchange, with respect to the same underlying security
or index, and with the same exercise price and expiration date). A Fund will
realize a capital gain from a closing purchase transaction if the cost of the
closing option is less than the premium received from writing the option; if it
is more, the Fund will realize a capital loss. If the premium received from a
closing sale transaction is more than the premium paid to purchase the option,
the Fund will realize a capital gain; if it is less, the Fund will realize a
capital loss. The principal factors affecting the market value of a put or a
call option include supply and demand, interest rates, the current market price
of the underlying security or index in relation to the exercise price of the
option, the volatility of the underlying security or index, and the time
remaining until the expiration date.
The premium paid for a put or call option purchased by a Fund is an asset of the
Fund. The premium received for an option written by a Fund is recorded as a
deferred credit. The value of an option purchased or written is marked to market
daily and is valued at the closing price on the exchange on which it is traded
or, if not traded on an exchange or no closing price is available, at the mean
between the last bid and asked prices.
COMBINATIONS OF OPTIONS
As indicated in the Prospectus, each Fund may employ certain combinations of put
and call options. A "straddle" involves the purchase of a put and call option on
the same security with the same exercise prices and expiration dates. A
"strangle" involves the purchase of a put option and a call option on the same
security with the same expiration dates but different exercise prices. A
"collar"
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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 and
indices. For example, significant differences between the securities and options
markets could result in an imperfect correlation between those markets, causing
a given transaction not to achieve its objectives. A decision as to whether,
when and how to use options involves the exercise of skill and judgment, and
even a well-conceived transaction may be unsuccessful to some degree because of
market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Fund seeks to
close out an option position. Among the possible reasons for the absence of a
liquid secondary market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities; (iv)
interruption of the normal operations of an exchange; (v) inadequacy of the
facilities of an exchange or the Options Clearing Corporation to handle current
trading volume; or (vi) a decision by an exchange to discontinue the trading of
options or a particular class or series of options (in which event the secondary
market on that exchange or in that class or series of options could cease to
exist, although outstanding options on that exchange that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
generally continue to be exercisable in accordance with their terms). If a Fund
were unable to close out an option that it had purchased on a security, it would
have to exercise the option in order to realize any profit. If a Fund were
unable to close out a covered call option that it had written on a security, it
would not be able to sell the underlying security unless the option expired
without exercise. As the writer of a covered call option, a Fund forgoes, during
the option's life, the opportunity to profit from increases in the market value
of the security covering the call option above the sum of the premium and the
exercise price of the call.
If trading were suspended in an option purchased by a Fund, the Fund would not
be able to close out the option. If restrictions on exercise were imposed, the
Fund might be unable to exercise an option it has purchased. Except to the
extent that a call option on a security or index written by a Fund is covered by
an option on the same security 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
Each Fund may use index futures contracts, as specified in the Prospectus. 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.
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<PAGE> 35
A public market exists in futures contracts covering several indices. 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.
Each Fund may also purchase and write call and put options on futures contracts.
Futures options possess many of the same characteristics as options on
securities and indices. A futures option gives the holder the right, in return
for the premium paid, to assume a long position (call) or short position (put)
in a futures contract at a specified exercise price at any time during the
period of the option. Upon exercise of a call option, the holder acquires a long
position in the futures contract and the writer is assigned the opposite short
position. In the case of a put option, the opposite is true.
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 the stock market 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 decreases
in stock indices, and purchases of futures contracts as an offset against the
effect of expected increases in stock indices. Although other techniques could
be used to reduce a Fund's exposure to market fluctuations, a Fund may be able
to hedge its exposure more effectively and at a lower cost by using futures
contracts and futures options.
When a purchase or sale of a futures contract is made by a Fund, the Fund is
required to deposit with its Custodian (or futures commission merchant, if
legally permitted) a specified amount of cash or U.S. Government securities
("initial margin"). The margin required for a futures contract is set by the
exchange on which the contract is traded and may be modified during the term of
the contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. The Funds expect to earn interest income on their initial margin
deposits. A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day a Fund pays or
receives cash, called "variation margin," equal to the daily change in value of
the futures contract. This process is known as "marking to market." Variation
margin does not represent a borrowing or loan by a Fund but is instead a
settlement between the Fund and the futures commission merchant of the amount
one would owe the other if the futures contract expired. In computing daily net
asset value, the Funds will mark to market their open futures positions.
Each Fund is also required to deposit and maintain margin with respect to put
and call options on futures contracts written by it. Such margin deposits will
vary depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.
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<PAGE> 36
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts
(contracts traded on the same exchange, on the same underlying security or
index, and with the same delivery month). If an offsetting purchase price is
less than the original sale price, the Fund realizes a capital gain; if it is
more, a Fund realizes a capital loss. Conversely, if an offsetting sale price is
more than the original purchase price, a Fund realizes a capital gains; if it is
less, a Fund realizes a capital loss. The transaction costs must also be
included in these calculations.
LIMITATIONS ON USE OF FUTURES AND FUTURES OPTIONS
A Fund will not enter into a futures contract or futures option contract if,
immediately thereafter, the aggregate initial margin deposits relating to such
positions plus premiums paid by it for open futures option positions, less the
amount by which any such options are "in-the-money," would exceed 5% of the
Fund's total assets. A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise price. A put
option is "in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
When purchasing a futures contract, a Fund will maintain with its Custodian (and
mark to market on a daily basis) cash, U.S. Government securities, or other
liquid securities that, when added to the amounts deposited with a futures
commission merchant as margin, are equal to the market value of the futures
contract. Alternatively, a Fund may "cover" its position by purchasing a put
option on the same futures contract with a strike price as high or higher than
the price of the contract held by the Fund.
When selling a futures contract, a Fund will maintain with its Custodian (and
mark to market on a daily basis) liquid assets that, when added to the amount
deposited with a futures commission merchant as margin, are equal to the market
value of the instruments underlying the contract. Alternatively, a Fund may
"cover" its position by owning the instruments underlying the contract (or, in
the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Fund's Custodian).
When selling a call option on a futures contract, a Fund will maintain with its
custodian (and mark to market on a daily basis) cash, U.S. Government
securities, or other liquid securities that, when added to the amounts deposited
with a futures commission merchant as margin, equal the total market value of
the futures contract underlying the call option. Alternatively, a Fund may cover
its position by entering into a long position in the same futures contract at a
price no higher than the strike price of the call option, by owning the
instruments underlying the futures contract, or by holding a separate call
option permitting the Fund to purchase the same futures contract at a price not
higher than the strike price of the call option sold by the Fund.
When selling a put option on a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, or other liquid securities that equal the purchase price of the
futures contract, less any margin on deposit. Alternatively, a Fund may cover
the position either by entering into a short position in the same futures
contract, or by owning a separate put option permitting it to sell the same
futures contract so long as the strike price of the purchased put option is the
same or higher than the strike price of the put option sold by the Fund.
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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. 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 stock
market or individual security trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses, because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when a Fund
seeks to close out a futures contract or a futures option position, in which
event the Fund would remain obligated to meet margin requirements until the
position is closed. In addition, many of the contracts discussed above are
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will develop or
continue to exist.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in futures contracts or options, the Fund could experience delays
and losses in liquidating open positions
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<PAGE> 38
purchased or sold through the broker, and incur a loss of all or part of its
margin deposits with the broker.
DEALER OPTIONS
Each Fund 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 a Fund 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, each Fund will treat certain dealer options as subject to the
Fund's 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.
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
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<PAGE> 39
disadvantageous from an investment standpoint to sell securities at that time.
To avoid the potential leveraging effects of a Fund's borrowings, additional
investments will not be made while borrowings are in excess of 5% of the Fund's
total assets. Money borrowed will be subject to interest costs which may or may
not be recovered by appreciation of the securities purchased. The Funds also may
be required to maintain minimum average balances in connection with any such
borrowings or to pay a commitment or other fee to maintain a line of credit,
either of which would increase the cost of borrowing over the stated interest
rate.
RISKS OF FOREIGN INVESTING
There are special risks in investing in any foreign securities in addition to
those relating to investments in U.S. securities.
POLITICAL AND ECONOMIC FACTORS
Individual foreign economies of certain countries may differ favorably or
unfavorably from the United States' economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency, diversification and balance of payments position. The internal
politics of certain foreign countries may not be as stable as those of the
United States.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could include restrictions on
foreign investment, nationalization, expropriation of goods or imposition of
taxes, and could have a significant effect on market prices of securities and
payment of interest. The economies of many foreign countries are heavily
dependent upon international trade and are accordingly affected by the trade
policies and economic conditions of their trading partners. Enactment by these
trading partners of protectionist trade legislation could have a significant
adverse effect upon the securities markets of such countries.
MARKET CHARACTERISTICS
The value of a Fund's portfolio positions may also be adversely impacted by
delays in the Fund's ability to act upon economic events occurring in foreign
markets during non-business hours in the United States.
LEGAL AND REGULATORY MATTERS
Certain foreign countries may have less supervision of securities markets,
brokers and issuers of securities, and less financial information available to
issuers, than is available in the United States.
TAXES
The interest payable on certain of 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.
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FUNDAMENTAL AND OPERATING POLICIES
Each Fund has adopted the investment restrictions described below. Fundamental
policies of a Fund may not be changed without the approval of the lesser of (1)
67% of the Fund's shares present at a meeting of shareholders if the holders of
more than 50% of the outstanding shares are present in person or by proxy or (2)
more than 50% of the Fund's outstanding shares. Operating policies are subject
to change by the Board of Trustees without shareholder approval. Any investment
restriction which involves a maximum percentage of securities or assets will not
be considered to be violated unless an excess occurs immediately after, and is
caused by, an acquisition of securities or assets of, or borrowings by, the
Fund.
FUNDAMENTAL POLICIES
As a matter of fundamental policy, a Fund may not:
(1) BORROWING. Borrow money, except as a temporary measure for extraordinary or
emergency purposes or for the clearance of transactions, and then only in
amounts not exceeding 30% of its total assets valued at market (for this
purpose, reverse repurchase agreements covered by segregated accounts are not
considered to be borrowings).
(2) COMMODITIES. Purchase or sell commodities or commodity contracts, except
that (i) a Fund may enter into futures contracts and options on such futures
contracts, and (ii) a 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, and (ii) a Fund may acquire
bonds, debentures, notes and other debt securities.
(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 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).
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(8) REAL ESTATE. Purchase or sell real estate (although it may purchase
securities secured by real estate partnerships or interests therein, or issued
by companies or investment trusts which invest in real estate or interests
therein) or real estate limited partnership interests.
(9) SHORT SALES. Effect short sales of securities.
(10) UNDERWRITING. Underwrite securities issued by other persons, except to the
extent that a Fund may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its portfolio
securities in the ordinary course of pursuing its investment program.
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.
PORTFOLIO TRANSACTIONS
The Funds pay commissions to brokers in connection with the purchase and sale of
equity securities, options and futures contracts. In underwritten offerings, the
price paid by a Fund includes a disclosed, fixed commission or discount retained
by the underwriter or dealer. Agency transactions involve the payment by a Fund
of negotiated brokerage commissions. Such commissions vary among different
brokers. Also, a particular broker may charge different commissions according to
such factors as the difficulty and size of the transaction. Transactions in
foreign securities involve commissions which are generally higher than those in
the United States.
The Adviser places all orders for the purchase and sale of portfolio securities,
options and futures contracts for the Funds 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 seeks the best
15
<PAGE> 42
execution available. In seeking the most favorable execution, the Adviser
considers all factors it deems relevant, including, by way of illustration,
price, the size of the transaction, the nature of the market for the security,
the amount of the commission, the timing of the transaction taking into account
market prices and trends, the reputation, experience and financial stability of
the broker-dealer involved and the quality of service rendered by the
broker-dealer in other transactions.
Some securities considered for investment by a Fund's portfolio may also be
appropriate for other clients served by the Adviser. If a purchase or sale of
securities consistent with the investment policies of a Fund is considered at or
about the same time as a similar transaction for one or more other clients
served by the Adviser, transactions in such securities will be allocated among
the Fund and other clients in a manner deemed fair and reasonable by the
Adviser. Although there is no specified formula for allocating such
transactions, the various allocation methods used by the Adviser, and the
results of such allocations, are subject to periodic review by the Board of
Trustees.
The Adviser manages the Funds without regard generally to restrictions on
portfolio turnover, except those imposed on its ability to engage in short-term
trading by provisions of the federal tax laws (see "Taxation"). 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 Board of Trustees will periodically review the Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Funds.
VALUATION OF PORTFOLIO SECURITIES
Equity securities for which the primary market is the U.S. are valued at last
sale price or, if no sale has occurred, at the closing bid price. 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 U.S. government securities, money market instruments and
repurchase agreements, is substantially completed each day at various times
prior to the close of regular trading on the New York Stock Exchange. The values
of any such securities held by a Fund are determined as of such times for the
purpose of computing the Fund's net asset value. If an extraordinary event that
is expected to affect the value of a portfolio security materially occurs after
the close of an exchange on which that security is traded, then the security
will be valued at fair value as determined in good faith under procedures
established by and under the general supervision of the Board of Trustees.
FUND PERFORMANCE
16
<PAGE> 43
Each Fund may quote its 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 Standard & Poor's 500 Stock Index) or indices prepared by Lipper
Analytical Services and other entities or organizations which track the
performance of investment companies or investment advisers. Comparisons may also
be made to indices or data in publications such as The Bond Buyer, Forbes,
Barron's, The Wall Street Journal, The New York Times, and Business Week. For
example, a Fund may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance a Fund
to other funds in appropriate categories over specific periods of time may also
be quoted in advertising. Unmanaged indices generally do not reflect deductions
for administrative and management costs and expenses. Payden & Rygel may also
report to shareholders or to the public in advertisements concerning the
performance of Payden & Rygel as adviser to clients other than the Funds, and on
the comparative performance or standing of Payden & Rygel in relation to other
money managers. Such comparative information may be compiled or provided by
independent rating services or other organizations.
Information regarding a Fund may also be included in newsletters or other
general communications by Payden & Rygel to advisory clients and potential
clients. These publications principally contain information regarding market and
economic trends and other general matters of interest to investors, such as:
principles of investing which, among other things includes asset allocation,
model portfolios, diversification, risk tolerance and goal setting, saving for
college or other goals or charitable giving; long-term economic or market
trends; historical studies of gold, other commodities, equities, fixed income
securities and statistical market indices; new investment theories or
techniques; economic and/or political trends in foreign countries and their
impact on the United States; municipal bond market fundamentals and trends;
corporate financing trends and other factors that may impact corporate debt; and
housing trends and other economic factors that may impact mortgage rates and
lending activity. In addition, Payden & Rygel may quote financial or business
publications and periodicals as they relate to fund management, investment
philosophy and investment techniques. Materials may also include discussions
regarding Payden & Rygel's asset allocation services and other Payden & Rygel
funds, products and services.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills and the U.S. rate
of inflation (based on the Consumer Price Index) and a combination of various
capital markets. The Group may use the long-term performance of these capital
markets in order to demonstrate general long-term risk-versus-reward investment
scenarios or the value of a hypothetical investment in any of these capital
markets. The performance of these capital markets is based on the returns of
several different indices. Ibbotson calculates total returns in the same method
as the Group. Performance comparisons could also include the value of a
hypothetical investment in any of the capital markets.
17
<PAGE> 44
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.
TOTAL RETURN CALCULATIONS
Total returns quoted in advertising with respect to a class of shares of a 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.
In addition to average annual total returns, a Fund may quote unaveraged or
cumulative total returns for each class of shares reflecting the simple change
in value of an investment over a stated period of time. Average annual and
cumulative total returns may be quoted as a percentage or as a dollar amount,
and may be calculated for a single investment, a series of investments, and/or a
series of redemptions, over any time period. Total returns may be broken down
into their components of income, capital (including capital gains and changes in
share price) and currency returns in order to illustrate the relationship of
these factors and their contributions to total return. Total returns, yields and
other performance information maybe quoted numerically, or in a table, graph or
similar illustration.
TAXATION
Each Fund intends to qualify annually and has elected to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). To qualify as a regulated investment company, a Fund must, among
other things, (a) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of stock, securities or foreign currencies,
or other income (including gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies ("Qualifying Income Test"); (b) 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 net exempt interest income each
taxable year. The Treasury Department is authorized to promulgate regulations
under which
18
<PAGE> 45
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.
As a regulated investment company, a Fund will not be subject to U.S. federal
income tax on its investment company taxable income and net capital gains (any
net long-term capital gains in excess of the sum of net short-term capital
losses and capital loss carryovers from the prior eight years) designated by the
Fund as capital gain dividends, if any, that it distributes to shareholders.
Each Fund intends to distribute to its shareholders substantially all of its
investment company taxable income monthly and any net capital gains annually.
Investment company taxable income or net capital gains not distributed by a Fund
on a timely basis in accordance with a calendar year distribution requirement
may be 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 actually 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 requirements.
DISTRIBUTIONS
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.
If certain holding requirements are satisfied, dividends paid by a Fund to
corporate shareholders will be eligible for the 70% dividends received deduction
to the extent that the income of the Fund is derived from dividends on common or
preferred stock of domestic 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.
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<PAGE> 46
Generally, the hedging transactions and certain other transactions in options,
futures and forward contracts undertaken by a Fund, may result in "straddles"
for U.S. federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by a Fund. In addition, losses realized
by a Fund on positions that are part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the
investment company taxable income or net capital gain for the taxable year in
which such losses are realized. Because 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
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<PAGE> 47
withholding is not an additional tax. Any amounts withheld may be credited
against the shareholder's U.S. federal tax liability.
FOREIGN INVESTMENTS
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 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 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 is modified for purposes of the Federal alternative minimum tax and can
be used to offset
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<PAGE> 48
only 90% of the alternative minimum tax imposed on corporations and individuals
and foreign taxes generally are not deductible in computing alternative minimum
taxable income.
OTHER TAXES
Distributions also may be subject to additional state, local and foreign taxes,
depending on each shareholder's particular situation. Under the laws of various
states, distributions of investment company taxable income generally are taxable
to shareholders even though all or a substantial portion of such distributions
may be derived from interest on certain Federal obligations which, if the
interest were received directly by a resident of such state, would be exempt
from such state's income tax ("qualifying Federal obligations"). However, some
states may exempt all or a portion of such distributions from income tax to the
extent the shareholder is able to establish that the distribution is derived
from qualifying Federal obligations. 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.
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<PAGE> 49
BOARD OF TRUSTEES:
<TABLE>
<CAPTION>
Position with Principal Occupations
Name the Group During Past Five Years
---- ------------- ----------------------
<S> <C> <C>
*Joan A. Payden(1) Chairman of the Board, President, Payden & Rygel
Chief 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
P.O. Box 1009 Graduate School of Management at
Pauma Valley, CA 92061 University of California, Los Angeles;
Director, The Timken Company (since
February, 1994); Trustee for PIC
Institutional Growth Portfolio, PIC
Institutional Balanced Portfolio and PIC
Small Capital Portfolio (since June,
1992)
Thomas McKernan, Jr. (1) Trustee President and Chief Executive Officer,
3333 Fairview Road Automobile Club of Southern California
Costa Mesa, CA 92626
Dennis C. Poulsen Trustee Chairman of Board since 1997;
3900 South Workman Mill Road previously, President and Chief
Whittier, CA 90601 Executive Officer, Rose Hills Company
Stender E. Sweeney Trustee Private Investor since 1994; previously,
Vice President, Finance, Times Mirror
Company
W.D. Hilton, Jr. Trustee Managing Trustee, NGC Settlement Trust;
2608 Eastland Avenue, Suite 202 previously, Chief Financial Officer,
Greenville, TX 75402 Texas Association of School Boards and
Board Member, First Greenville National
Bank
</TABLE>
* An "interested person" of the Group, as defined in the 1940 Act.
(1) Ms. Payden is a Director of the Automobile Club of Southern California, of
which Mr. McKernan is President and Chief Executive Officer.
23
<PAGE> 50
Trustees other than those affiliated with the Adviser currently 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
Benefits Estimated Total
Accrued as Annual Compensation
Aggregate Part of Benefits from Group and
Compensation Groupn Upon Group Complex
Name from Group Expenses Retirement Paid to Trustee
- ---- ------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C>
Dennis Poulsen $23,500 None N/A $23,500
James Clayburn La Force $23,500 None N/A $23,500
Stender Sweeney $25,000 None N/A $25,000
W.D. Hilton $23,500 None N/A $23,500
Thomas V. McKernan, Jr. $25,000 None N/A $25,000
</TABLE>
OFFICERS:
<TABLE>
<CAPTION>
Position with Principal Occupations
Name the Group During Past Five Years
- ---- ------------- ----------------------
<S> <C> <C>
Shirley T. Hosoi President, Chief Operating Chief Operating Officer,
Officer Payden & Rygel (since 1996);
previously, First Interstate
Bancorp: Director of
Corporate Communications,
Executive Assistant to the
Chairman and President and
CEO, First Interstate
Franchise Services
Thomas Barrett Vice President, Treasurer Controller, Payden & Rygel
(since 1995); previously,
Manager, Finance and
Administration, Marine Spill
Response Corp.
David L. Wagner Vice President Portfolio Manager, Payden &
Rygel
Gregory P. Brown Vice President Institutional Marketing,
Payden & Rygel (since 1996);
previously, Vice President,
Corporate Banking at Wells
Fargo Bank
</TABLE>
24
<PAGE> 51
<TABLE>
<CAPTION>
Position with Principal Occupations
Name the Group During Past Five Years
- ---- ------------- ----------------------
<S> <C> <C>
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 85 employees, of whom 34 either have
advanced degrees and/or are Chartered Financial Analysts. As of such date, it
had over 200 clients, including pension funds, endowments, credit unions,
foundations, corporate cash accounts and individuals, and managed total assets
of over $22 billion, with about $5 billion invested globally.
The Adviser's focus is the management of fixed income securities in both the
domestic and global markets. These include securities that have absolute or
average maturities out to five years with a bias toward very high quality and
liquidity. Portfolios are actively managed according to client approved
guidelines and benchmarks. Payden & Rygel also utilizes futures and options
strategies, primarily as defensive measures to control interest rate and
currency volatility.
The Adviser provides investment management services to the Funds pursuant to an
Investment Management Agreement with the Group dated as of June 24, 1992. 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
25
<PAGE> 52
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.
The Agreement provides that the Adviser will not be liable for any error of
judgment or mistake of law or for any loss suffered by the Funds in connection
with the performance of the Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or gross negligence in the
performance of the Adviser's duties or from reckless disregard by the Adviser of
its duties and obligations thereunder. Unless earlier terminated as described
below, the Agreement will continue in effect with respect to each Fund until
June 14, 1995 and thereafter for successive annual periods, subject to annual
approval by the Board of Trustees (or by a majority of the outstanding voting
shares of each Fund as defined in the 1940 Act) and by a majority of the
Trustees who are not interested persons of any party to the Agreement by vote
cast in person at a meeting called for such purpose. The Agreement terminates
upon assignment and may be terminated with respect to a Fund without penalty on
60 days' written notice at the option of either party thereto or by the vote of
the shareholders of the Fund.
ADMINISTRATOR, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT
Treasury Plus, Incorporated, a wholly owned subsidiary of the Adviser serves as
Administrator to the Fund. Under its Administration Agreement with the Group,
the Administrator has agreed to prepare periodic reports to regulatory
authorities, maintain financial accounts and records of the Fund, transmit
communications by the Fund to shareholders of record, make periodic reports to
the Board of Trustees regarding Fund operations, and overview the work of the
fund accountant and transfer agent.
Investors Fiduciary Trust Company ("IFTC") provides fund accounting and transfer
agency services to the Group. IFTC calculates daily expense accruals and net
asset value per share of the Funds, issues and redeems Fund shares, maintains
shareholder accounts and prepares annual investor tax statements.
The liability provisions of the Group's agreements with Treasury Plus and IFTC
are similar to those of the Investment Management Agreement discussed above. In
addition, the Group has agreed to indemnify IFTC against certain liabilities.
The respective agreements may be terminated by either party on 90 days notice.
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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.
DISTRIBUTOR
Payden & Rygel Distributors, 333 South Grand Avenue, Los Angeles, California
90071, acts as Distributor to the Group pursuant to a Distribution Agreement
with the Group dated as of June 24, 1992, as amended. The Distributor has agreed
to use its best efforts to effect sales of shares of the Funds, but is not
obligated to sell any specified number of shares. The Distribution Agreement
contains provisions with respect to renewal and termination similar to those in
the Investment Management Agreement described above. Pursuant to the Agreement,
the Group has agreed to indemnify the Distributor to the extent permitted by
applicable law against certain liabilities under the Securities Act of 1933.
No compensation is payable by the Funds to the Distributor for its distribution
services. The Distributor pays for the personnel involved in accepting orders
for purchase and redemption of Fund shares, expenses incurred in connection with
the printing of Prospectuses and Statements of Additional Information (other
than those sent to existing shareholders), sales literature, advertising and
other communications used in the public offering of shares of a Fund, and other
expenses associated with performing services as distributor of the Funds'
shares. Each Fund pays the expenses of issuance, registration and transfer of
its shares, including filing fees and legal fees.
PURCHASES AND REDEMPTIONS
Certain managed account clients of the Adviser may purchase shares of the Fund.
To avoid the imposition of duplicative fees, the Adviser may be required to make
adjustments in the management fees charged separately by the Adviser to these
clients to offset the generally higher level of management fees and expenses
resulting from a client's investment in the Fund.
The Funds reserve the right to suspend or postpone redemptions during any period
when: (a) trading on the New York Stock Exchange is restricted, as determined by
the Securities and Exchange Commission, or that Exchange is closed for other
than customary weekend and holiday closings; (b) the Securities and Exchange
Commission has by order permitted such suspension; or (c) an emergency, as
determined by the Securities and Exchange Commission, exists, making disposal of
portfolio securities or valuation of net assets of the Fund not reasonably
practicable.
Each Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of its net assets during any 90-day period for any one shareholder. Each Fund
reserves the right to pay any redemption price exceeding this amount in whole or
in part by a distribution in kind of securities held by the Fund in lieu of
cash. It is highly unlikely that shares would ever be redeemed in kind. If
shares are redeemed
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in kind, however, the redeeming shareholder would incur transaction costs upon
the disposition of the securities received in the distribution.
Due to the relatively high cost of maintaining smaller accounts, each Fund
reserves the right to redeem shares in any account for their then-current value
(which will be promptly be paid to the investor) if at any time, due to
shareholder redemption, the shares in the Fund account do not have a value of at
least $5,000. An investor will be notified that the value of his account is less
than the minimum and allowed at least 30 days to bring the value of the account
up to at least $5,000 before the redemption is processed. The Declaration of
Trust also authorizes the Funds to redeem shares under certain other
circumstances as may be specified by the Board of Trustees
OTHER INFORMATION
CAPITALIZATION
Each Fund is a series of Payden & Rygel Investment Group, an open-end management
investment company organized as a Massachusetts business trust in January 1992
(initially called P&R Investment Trust). The capitalization of the Funds
consists solely of an unlimited number of shares of beneficial interest. The
Board of Trustees has currently authorized nineteen series of shares: Global
Fixed Income Fund, Global Short Bond Fund, Short Duration Tax Exempt Fund, Tax
Exempt Bond Fund, Limited Maturity Fund, Short Bond Fund, Intermediate Bond
Fund, Investment Quality Bond Fund, High Income Fund, U.S. Treasury Fund, Growth
& Income Fund, Market Return Fund, Value Stock Fund, Growth Stock Fund, Total
Return Fund, Global Balanced Fund, European Growth & Income Fund, International
Equity Fund and Bunker Hill 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.
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
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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.
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
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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.
LICENSE AGREEMENT
The Adviser has entered into a non-exclusive License Agreement with the Group
which permits the Group to use the name "Payden & Rygel". The Adviser has the
right to require the Group to cease using the name at such time as the Adviser
is no longer employed as investment manager to the Group.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not contain all
the information included in the Group's registration statement filed with the
Securities and Exchange Commission under the Securities Act of 1933 with respect
to the securities offered hereby, certain portions of which have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The registration statement, including the exhibits filed therewith, may be
examined at the offices of the Securities and Exchange Commission in Washington,
D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other documents
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by such reference.
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