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PAYDEN & RYGEL INVESTMENT GROUP
U.S. FIXED INCOME FUND
GNMA FUND
The Payden & Rygel Investment Group (the "Group") has registered the shares of
the Fund with the U.S. Securities and Exchange Commission ("SEC"). That
registration does not imply that the SEC approves or disapproves the securities
described in this prospectus, or has passed on the adequacy of the prospectus.
Any representation to the contrary is a criminal offense.
PROSPECTUS
August 27, 1999
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<TABLE>
TABLE OF CONTENTS
<S> <C>
U.S. Fixed Income Fund.............................................................................. 3
GNMA Fund................................................................................. 3
Additional Investment Strategies and Related Risks.................................................. 4
Management of the Fund.............................................................................. 6
Net Asset Value..................................................................................... 6
Dividends Distributions and Taxes................................................................... 6
Shareholder Services................................................................................ 7
How to Redeem Shares................................................................................ 9
How to Purchase Shares.............................................................................. 9
</TABLE>
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U.S. FIXED INCOME FUND
GNMA FUND
INVESTMENT OBJECTIVE:
The Fund seeks a high level of total return consistent with the preservation of
capital.
PRINCIPAL INVESTMENT STRATEGIES:
- - Under normal market conditions, the Fund invests at least 70% of its total
assets in Government National Mortgage Association mortgage backed
securities ("GNMA Securities"), which are debt securities representing part
ownership in a pool of mortgage loans backed by the U.S. Government. The
balance of the Fund's assets may be invested in other "U.S. Government
Obligations" - U.S. Treasury bonds, notes and bills, and other bonds and
obligations issued or guaranteed by the United States Government,
Government-sponsored enterprises or Federal agencies (such as the Federal
Home Loan Mortgage Corporation, Federal National Mortgage Association or
Federal Farm Credit Bank). The Fund may also invest in collateralized
mortgage obligations and repurchase agreements collateralized by U.S.
Government Obligations or GNMA Securities.
- - The Fund invests in debt securities of any maturity. Under normal market
conditions, the Fund's average portfolio maturity (on a dollar-weighted
basis) ranges from five to ten years.
- - The Fund invests in debt securities that the Adviser believes offer
attractive yields and are undervalued relative to securities of similar
credit quality and interest rate sensitivity.
PRINCIPAL INVESTMENT RISKS:
- - As with most bond funds, the value of your shares in the Fund will
fluctuate along with interest rates. When interest rates rise, the market
prices of the securities the Fund owns generally decline. When interest
rates fall, the securities' prices usually increase. However, falling
interest rates typically will not lift the prices of GNMA securities as
much as the prices of comparable debt securities. This is because the
markets tend to discount GNMA security prices for prepayment risk when
interest rates fall. Finally, the longer the Fund's average portfolio
maturity, generally the greater the fluctuation in price. By investing in
the Fund, therefore, you could lose money.
- - The Fund is subject to the prepayment risk applicable to the mortgages
underlying the GNMA securities and other mortgage-backed U.S. Government
Obligations. Prepayment risk is the chance that the mortgage-backed bonds
will be paid off early due to homeowners refinancing their mortgages during
periods of falling interest rates. Forced to reinvest the unanticipated
proceeds at lower rates, the Fund would experience a decline in income and
lose the opportunity for additional price appreciation associated with
falling rates. Prepayment risk is high for the Fund.
- - The Fund is "non-diversified," which means it can invest in fewer
securities than a "diversified" mutual fund. As a result, events that
affect a few -- or even one -- of the Fund's investments may have a greater
impact on the value of the Fund's shares than for a diversified fund.
PAST FUND PERFORMANCE:
The Fund opened on August 27, 1999.
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FEES AND EXPENSES:
The following table shows the fees and expenses you may pay if you buy and hold
shares of this Fund. The Fund does not have any front-end or deferred sales
loads and does not charge you for exchanging shares or reinvesting dividends.
<TABLE>
<S> <C>
SHAREHOLDER FEES (fees paid directly from your investment) 0.00%
ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets)
Management Fee 0.27%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses* 0.23%
TOTAL ANNUAL FUND OPERATING EXPENSES** 0.50%
Fee Waiver or Expense Reimbursement*** 0.15%
NET ANNUAL FUND OPERATING EXPENSES 0.35%
</TABLE>
* Other Expenses are based on estimated amounts for the current fiscal year.
** The Adviser has guaranteed that, for so long as it is the investment
adviser to the Fund, Total Annual Fund Operating Expenses (excluding
interest and taxes) will not exceed 0.50%.
*** The Adviser has agreed to reduce its fees or absorb expenses to limit Net
Annual Fund Operating Expenses (excluding interest and taxes) to 0.35%.
This contract has a one-year term, renewable at the end of each fiscal
year.
Example of Fund Expenses: This example will help you compare the cost of
investing in the Fund with the cost of investing in other mutual funds. It shows
what you would pay in expenses over time, whether or not you sold your shares at
the end of each period. It assumes (a) a $10,000 initial investment, (b) 5%
total return each year, and (c) no change in Net Annual Fund Operating Expenses
for the 1 year period, or Total Annual Fund Operating Expenses for the 3 year
period. The example is for comparison only. Your actual expenses and returns
will be different.
1 YEAR 3 YEARS
------ -------
$ 36 $ 146
ADDITIONAL INVESTMENT STRATEGIES AND RELATED RISKS
MORTGAGE-BACKED SECURITIES. The Fund may invest in obligations issued to provide
financing for U.S. residential housing mortgages, and in foreign
mortgage-related securities. Payments made on the underlying mortgages and
passed through to the Fund represent both regularly scheduled principal and
interest payments, as well as prepayments of principal. Investing in such
obligations involves special risks as a result of prepayments (which may require
the Fund to reinvest the proceeds at a lower rate), the illiquidity of certain
of such securities and the possible default by insurers or guarantors.
OPTIONS AND FUTURES CONTRACTS. The Fund may purchase and sell covered put and
call options (the right to buy or sell specified instruments at a specified
price on or before a specified date) on securities and securities indexes;
interest rate, and index futures contracts (agreements to take or make delivery
of a specified quantity of financial instruments at a specified price and date);
and 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.
The Fund may also employ combinations of put and call options, including without
limitation, straddles, spreads, collars, and strangles. The Fund generally uses
these techniques to hedge against changes in interest rates or securities prices
in order to establish more definitively the effective return on securities held
or intended to be acquired by the Fund, or as an efficient means of adjusting
exposure to the bond markets and not for speculation. However, the Fund may also
enter into options and futures transactions to enhance potential gain in
circumstances where hedging is not involved.
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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. Options and futures can be highly volatile and could reduce
the Fund's total return, and the Fund's attempt to use those instruments for
hedging may not succeed. The aggregate market value of the Fund's portfolio
securities covering put options on securities written by the Fund will not
exceed 50% of its net assets.
SWAPS. The Fund may enter into interest rate and index swap transactions. A swap
is a derivative instrument which involves an agreement between the Fund and
another party to exchange payments calculated as if they were interest on a
fictitious ("notional") principal amount (e.g., an exchange of floating rate
payments by one party for fixed rate payments by the other). A cap or floor is a
derivative instrument which entitles the purchaser, in exchange for a premium,
to receive payments of interest on a notional principal amount from the seller
of the cap or floor, to the extent that a specified reference rate or reference
index exceeds or falls below a predetermined level.
The Fund usually enters into such transactions on a "net" basis, with the Fund
receiving or paying, as the case may be, only the net amount of the two payment
streams. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each swap is accrued on a daily basis, and an
amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess is maintained in a segregated account by the Group's
Custodian. Swap transactions do not involve the delivery of securities or other
underlying assets or principal, and the risk of loss with respect to such
transactions is limited to the net amount of payments that the Fund is
contractually obligated to make or receive.
The use of swaps, caps and floors is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser's forecast of market
values, interest rates, currency rates of exchange and other applicable factors
is incorrect, the investment performance of the Fund will diminish compared with
the performance that could have been achieved if these investment techniques
were not used. Moreover, even if the Adviser's forecasts are correct, the Fund's
swap position may correlate imperfectly with an asset or liability being hedged.
In addition, if the other party to the transaction defaults, the Fund might
incur a loss.
TEMPORARY DEFENSIVE MEASURES. During times when the Adviser believes that a
temporary defensive posture is warranted, the Fund may hold part or all of its
assets in cash, U.S. Government and Government agency securities, money market
obligations, short-term corporate debt securities and money market funds. This
may help the Fund minimize or avoid losses during adverse market, economic or
political conditions. However, during such a period, the Fund may not achieve
its investment objective.
PORTFOLIO TURNOVER. The Adviser for the Fund will sell a security when
appropriate, regardless of how long the Fund has held that security. Buying and
selling securities generally involves some expense to the Fund, such as broker
commissions and other transaction costs, that adversely affect the Fund's
performance. In addition, selling a security may create a taxable capital gain
that may affect your after-tax return. No Fund can accurately predict its future
annual portfolio turnover rate, which could vary substantially. However, the
Fund expects to have up to 200% annual turnover.
YEAR 2000. The date-related computer issue known as the "Year 2000 problem"
could adversely affect the quality of services the Fund and its shareholders
receive. However, the Fund understands that its key service providers, including
the Adviser and its affiliates, are taking steps to address the issue. In
addition, the Year 2000 problem may adversely affect the issuers in which the
Fund invests. For example, issuers may incur substantial costs to address the
problem. They may also suffer losses caused by corporate and governmental data
processing errors. The Fund and the Adviser will continue to monitor
developments relating to this issue.
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MANAGEMENT OF THE FUND
INVESTMENT ADVISER
Payden & Rygel, located at 333 South Grand Avenue, Los Angeles, California
90071, serves as investment adviser to the Fund and to the other Funds of The
Payden & Rygel Investment Group. The Adviser is an investment counseling firm
founded in 1983, and currently has over $27 billion of assets under management.
Several teams, each responsible for a group of Funds, are responsible for the
day-to-day management of the Funds within the broad investment parameters
established by the Adviser's Global Investment Policy Committee. The Executive
Committee of the Global Investment Policy Committee, comprised of John Isaacson,
Scott Weiner, Scott King and Christopher Orndorff, supervises these teams.
John Isaacson is a Principal of Payden & Rygel. He joined the Company in 1988
and has 26 years of experience in the investment business. Scott King is a
Principal of Payden & Rygel. He was one of the original members of the Company
when it was founded in 1983 and has over 18 years of investment experience.
Christopher Orndorff is a Principal of Payden & Rygel; he joined the Company in
1990 and has 14 years of experience in the investment business. Mr. Weiner is a
Principal who joined the Company in 1993 and has 13 years of experience in the
investment business. Together, they 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.
NET ASSET VALUE
The price of the Fund's shares is its net asset value per share. The net asset
value per share of the 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 Fund by the number
of shares outstanding.
Domestic fixed income securities and other assets for which market quotations
are readily available (other than obligations with remaining maturities of 60
days or less) are valued at market value on the basis of quotes obtained from
brokers and dealers or pricing services, which take into account appropriate
factors such as institutional-sized trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data. Certain fixed income securities which may have a bid-ask
spread greater than ten (10) basis points may be valued, pursuant to guidelines
established by the Board of Trustees, with reference to fixed income securities
the prices of which are more readily obtainable and the risk of which is
comparable to the securities being valued. The Board of Trustees has determined
that debt securities with remaining maturities of 60 days or less will be valued
on an amortized cost basis, unless the Adviser determines that such basis does
not represent fair value at the time. Swaps, caps and floors are valued on the
basis of information provided by the institution with which the Fund entered
into the transaction.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund declares and distributes dividends to shareholders monthly. The Fund
distributes any net realized capital gains from the sale of portfolio securities
at least once yearly. The Fund pays dividend and capital gain distributions in
the form of additional shares of the Fund at the net asset value on the
ex-dividend date, unless you elect to receive them in cash by completing a
request form.
Dividends paid by the Fund, and distributions paid by the Fund from long-term
capital gains, are taxable to you. Any short-term capital gains or taxable
interest income, therefore, will be taxable to you as ordinary
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income. Your exchange or sale of the Fund's shares is a taxable event and may
result in a capital gain or loss.
Before purchasing shares of the Fund, you should carefully consider the impact
of the dividends or capital gains distributions which the Fund expects to
announce, or has announced. If you purchase shares shortly before the record
date for a dividend or distribution, you will receive some portion of your
purchase price back as a taxable dividend or distribution. Distributions may be
subject to additional state and local taxes, depending on your particular
situation. Consult your tax adviser with respect to the tax consequences to you
of an investment in the Fund.
SHAREHOLDER SERVICES
TAX-SHELTERED RETIREMENT PLANS
The Fund accepts 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
administration or custody for such plans. The Group currently pays the fiduciary
administration fees charged by IFTC associated with such plans.
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged for any class of shares of any other Fund of
the Group. Please call for a prospectus describing the Group's other Funds. The
minimum amount for any exchange is $1,000. Because an exchange is considered a
redemption and purchase of shares, you may realize a gain or loss for federal
income tax purposes.
The Fund must receive written exchange instructions signed by all account
owners. If you complete the telephone privilege authorization portion of the
Account Registration Form, you may make exchanges by calling the Distributor at
(213) 625-1900 or (800) 5PAYDEN (800-572-9336). You also may participate in the
Automatic Exchange Program to automatically redeem a fixed amount from one Fund
for investment in another Fund on a regular basis. The Group may modify or
discontinue this exchange privilege at any time on 60 days notice. The Group
also reserves the right to limit the number of exchanges you may make in any
year to avoid excessive Fund expenses.
TELEPHONE PRIVILEGE
You may exchange or redeem shares by telephone if you have elected this option
on your Account Registration Form. If you call before 1:00 p.m. (Pacific Time),
the exchange or redemption will be at the net asset value determined that day;
if you call 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 may be hard to reach the Group by
telephone. If so, you should follow the other exchange and redemption procedures
discussed in this prospectus.
By electing the telephone privilege, you may be giving up some security. The
Group employs procedures designed to provide reasonable assurance that
instructions communicated by telephone, telegraph or wire 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 exchange or redemption request if it believes that the person
making the request is not properly authorized. 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.
CHECKWRITING
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Checkwriting is available for investors of the Fund. Each check you write
on your Fund account must be at least $500. To obtain checks, call a Fund
Representative for a signature card and complete and return it to the Fund. To
pay the check, the Fund redeems shares from your Fund account at the net asset
value per share computed on the day the check is presented to the Fund for
payment. You may incur a taxable capital gain or loss on the shares redeemed
each time a check is paid. The Group may charge a transaction fee of $2.00 per
check to your account, if you have total assets with the Group of less than
$25,000. The Fund reserves the right to modify or terminate the checkwriting
privilege on 30 days notice.
The Fund credits checks received to your account on the day received by the
Fund. The Group may charge a $20.00 fee on the account if a check is returned
because it fails to meet the Fund's checkwriting criteria or if there are
insufficient funds in the account.
AUTOMATED INVESTMENT PROGRAMS
You may use two programs which permit automated investments in the Fund.
ELECTRONIC INVESTMENT PLAN. You elect to make additional investments in the Fund
using the Automated Clearing House System ("ACH"), which transfers money
directly from your bank account to the Fund for investment. You may not make an
initial investment in the Fund through ACH.
You have two investment options. First, you may elect to make investments on a
set schedule either monthly or quarterly. Under this option, your financial
institution will deduct an amount you authorize, which will normally be credited
to the Fund on the 15th day of the month (or next business day if the 15th is a
holiday or weekend day). Your financial institution will typically debit your
bank account the prior business day. The minimum initial investment, which may
be made by check or wire, is $2,500, with additional investments by ACH of at
least $250.
Under the second option, you may also elect to authorize ACH transfers via
telephone request. Money will be withdrawn from your account only when you
authorize it. Under this option, the minimum initial investment is $5,000, with
additional investments by ACH of at least $1,000. If the Fund receives your
telephone request before 12:30 p.m. (Pacific Time), the investment will be at
the net asset value determined on the next business day. For telephonic requests
received after 12:30 p.m. (Pacific Time), the investment will be at the net
asset value determined on the second business day.
Please note the following guidelines:
- - Your financial institution must be a member of the Automated Clearing House
System.
- - You must complete and return an Automated Investment Program form along
with a voided check or deposit slip at least 15 days before the initial
transaction.
- - You must establish an account with the Group before the Electronic
Investment Plan goes into effect.
- - The Electronic Investment Plan will automatically terminate if all your
shares are redeemed, or if your financial institution rejects the transfer
for any reason, e.g., insufficient funds.
- - You can terminate your participation only in writing, and it will become
effective the month following receipt.
AUTOMATIC EXCHANGE PLAN. You may participate in the Automatic Exchange Plan to
automatically redeem a fixed amount from one Fund of the Group for investment in
another Fund of the Group on a regular basis. You can elect 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 Funds. Please call for a prospectus describing the Group's
other Funds. The
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automatic transfer is effected on the 15th day of the month (or the next
business day if the 15th is a holiday or on a weekend).
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SHAREHOLDER INQUIRIES
For information, call the Group at (213) 625-1900 or (800) 5PAYDEN, visit our
Web site at www.payden.com, or write to Payden & Rygel Investment Group, 333
South Grand Avenue, Los Angeles, CA 90071.
HOW TO REDEEM SHARES
The Fund will redeem your shares at the net asset value next determined
following receipt of your request in proper form. You can redeem shares by
contacting the Distributor in writing, by telephone at (800) 5PAYDEN, by
telegraph or by other wire communication. The Fund does not charge for
redemptions. The shares of the Fund you redeem may be worth more or less than
your purchase price, depending on the market value of the investment securities
held by the Fund at the time of redemption.
Send your redemption requests in writing, via the internet to www.payden.com
(user registration required), or by telegraph or other wire communications to
the Group at 333 South Grand Avenue, Attn.: Fund Distributor, Los Angeles,
California 90071. The Fund will delay payment for redemption of recently
purchased shares until the purchase check has been honored, which may take up to
15 days after receipt of the check. If you want the Fund to pay the proceeds of
a written request to a person other than the record owner of the shares, or to
send the proceeds to an address other than the address of record, your signature
on the request must be guaranteed by a commercial bank, a trust company or
another eligible guarantor institution. The Group may reject a signature
guarantee if it believes it is not genuine or if it believes the transaction is
improper. The redemption price will ordinarily be wired to your bank or mailed
to your address of record one business day after we receive the request. The
Group may charge a $10.00 fee for any wire transfer, and payment by mail may
take up to seven days. During periods of drastic economic or market changes, it
may be hard to reach the Group by telephone. If so, you should follow the other
exchange and redemption procedures discussed in this prospectus.
The 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
You may purchase shares of the Fund at net asset value without a sales charge.
You may open an account by completing an application and mailing it to the
appropriate address below under "Initial Investment." You cannot purchase shares
until the Group has received a properly completed application. To open a
tax-sheltered retirement plan (such as an IRA), you must complete special
application forms. Please be sure to ask for an IRA information kit. Your broker
may charge transaction fees for the purchase and/or sale of shares.
INITIAL INVESTMENT
BY CHECK
- - Complete Application
- - Make check payable to the Fund and mail with application to:
Payden & Rygel Investment Group
P.O. Box 419318
Kansas City, MO 64141-6318
BY FEDERAL FUNDS WIRE
- - Complete application and mail to:
Payden & Rygel Investment Group
P.O. Box 419318
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Kansas City, MO 64141-6318
- - Wire funds as follows when application has been processed:
The Boston Safe Deposit and Trust Company
ABA 011001234
A/C #115762 Mutual Funds #6630
Credit to (name of Payden & Rygel Fund here)
For Account of (insert your account name here)
Please call the Group, at (213) 625-1900 or (800) 5PAYDEN, to advise of any
purchases by wire.
Your purchase will be at the net asset value per share next determined after the
Distributor receives your order in proper form. It will accept purchase orders
only on days on which the Funds and the Custodian are open for business.
The Fund and the Custodian are "open for business" on each day the New York
Stock Exchange is open for trading. The New York Stock Exchange is closed on the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
MINIMUM INVESTMENTS
The minimum initial and additional investments for the Fund for each type of
account are as follows:
<TABLE>
<CAPTION>
INITIAL ADDITIONAL
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
You may make additional investments 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
The Fund issues full and fractional shares, but does not issue certificates. The
Group reserves the right, in its sole discretion, to suspend the offering of
shares of the Fund or to reject purchase orders when, in the judgment of its
management, such suspension or rejection is in the best interest of the Fund;
and to redeem shares if information provided in the client application proves to
be incorrect in any material manner.
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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
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FOR MORE INFORMATION ABOUT THE PAYDEN & RYGEL GNMA FUND AND THE OTHER PAYDEN &
RYGEL MUTUAL FUNDS, THE FOLLOWING DOCUMENTS ARE AVAILABLE FREE UPON REQUEST:
ANNUAL/SEMI-ANNUAL REPORTS:
The Funds' annual and semi-annual reports to shareholders contain detailed
information on each Fund's investments. The annual report includes a discussion
of the market conditions and investment strategies that significantly affected
the Funds' performance during their last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI provides more detailed information about the GNMA Fund, including
operations and investment policies. It is incorporated by reference in this
prospectus and is legally considered a part of the prospectus.
You can get free copies of the Annual and Semi-Annual Reports and the SAI, or
request other information and discuss your questions about the GNMA Fund or any
other Payden & Rygel Fund, by calling us at 1-800-5PAYDEN, or by writing to us
at:
PAYDEN & RYGEL INVESTMENT GROUP
333 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90071
You can review the Funds' Annual and Semi-Annual Reports and the SAI for the
GNMA Fund at the Public Reference Room of the Securities and Exchange Commission
(SEC). You may also get copies:
- - For a fee, by writing the Public Reference Section of the SEC, Washington,
D.C. 20549-6009, or calling 1-800-SEC-0330.
- - Free from the SEC's Web site at http://www.sec.gov.
Payden & Rygel Investment Group: Investment Company Act File No. 811-6625
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THE PAYDEN & RYGEL INVESTMENT GROUP
PAYDEN & RYGEL GNMA FUND
333 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90071
1-800-5PAYDEN (572-9336)
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 27, 1999
The Payden & Rygel Investment Group (the "Group") is a professionally managed,
open-end management investment company with multiple funds (each a "Fund" and
collectively the "Funds"), including the Payden & Rygel GNMA Fund, available for
investment. This Statement of Additional Information ("SAI") contains
information about the Payden & Rygel GNMA Fund. This SAI contains information in
addition to that set forth in the prospectus for the Fund dated August 27, 1999.
The SAI is not a prospectus and should be read in conjunction with the
Prospectus. You may order copies of the Prospectus and the Group's 1998 Annual
Report without charge at the address or telephone number listed above.
<PAGE> 15
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE GROUP......................................................... 3
FUNDAMENTAL AND OPERATING POLICIES................................ 3
INVESTMENT STRATEGIES/TECHNIQUES AND RELATED RISKS................ 4
MANAGEMENT OF THE GROUP........................................... 16
PORTFOLIO TRANSACTIONS............................................ 19
PURCHASES AND REDEMPTIONS......................................... 19
VALUATION OF PORTFOLIO SECURITIES................................. 20
TAXATION.......................................................... 20
DISTRIBUTION AGREEMENTS........................................... 22
FUND PERFORMANCE.................................................. 22
OTHER INFORMATION................................................. 24
</TABLE>
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THE GROUP
The Group was organized as a Massachusetts business trust on January 22, 1992
under the name "P&R Investment Trust." On December 13, 1993, it changed its name
to "The Payden & Rygel Investment Group." The Group is a professionally managed,
open-end management investment company which is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Group currently offers
Class R Shares of each of its Funds, including the GNMA Fund.
FUNDAMENTAL AND OPERATING POLICIES
The Fund's investment objective is fundamental and may not be changed without
shareholder approval, as described below under "General Information Voting." Any
policy that is not specified in the Prospectus or in the SAI as being
fundamental is a non-fundamental, or operating, policy. If the Group's Board of
Trustees determines, that the Fund's investment objective may best be achieved
by changing a non-fundamental policy, the Group's Board may make such change
without shareholder approval. Any investment restriction which involves a
maximum percentage of securities or assets will not be violated unless an excess
occurs immediately after, and is caused by, an acquisition of securities or
other assets of, or borrowings by, the Fund.
FUNDAMENTAL POLICIES
As a matter of fundamental policy, the Fund may:
(1) BORROWING. Borrow money, except as a temporary measure for extraordinary or
emergency purposes or for the clearance of transactions, and then only in
amounts not exceeding 30% of its total assets valued at market (for this
purpose, reverse repurchase agreements and delayed delivery transactions covered
by segregated accounts are not considered to be borrowings).
(2) COMMODITIES. Purchase or sell commodities or commodity contracts, except
that (i) the Fund may enter into financial futures contracts and options on such
futures contracts, and (ii) the Fund may invest in instruments which have the
characteristics of both futures contracts and securities.
(3) LOANS. Make loans, except that (i) the Fund may purchase money market
securities and enter into repurchase agreements, (ii) the Fund may acquire
bonds, debentures, notes and other debt securities, and (iii) the Fund may lend
portfolio securities in an amount not to exceed 30% of its total assets (with
the value of all loan collateral being "marked to market" daily at no less than
100% of the loan amount).
(4) MARGIN. Purchase securities on margin, except that (i) the Fund may use
short-term credit necessary for clearance of purchases of portfolio securities,
and (ii) the 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 the 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 Fund's total assets, more than 5% of the 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 Fund's total assets, more than 10% of the outstanding
voting securities of any issuer would be held by the Fund (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities).
(8) REAL ESTATE. Purchase or sell real estate (although it may purchase
securities secured by real estate partnerships or interests therein, or issued
by companies or investment trusts which invest in real estate or interests
therein) or real estate limited partnership interests.
(9) SHORT SALES. Effect short sales of securities.
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(10) UNDERWRITING. Underwrite securities issued by other persons, except to the
extent that the Fund may be deemed to be an underwriter within the meaning of
the Securities Act of 1933 in connection with the purchase and sale of its
portfolio securities in the ordinary course of pursuing its investment program.
OPERATING POLICIES
As a matter of operating policy, the Fund may not:
(1) CONTROL OF PORTFOLIO COMPANIES. Invest in companies for the purpose of
exercising management or control.
(2) ILLIQUID SECURITIES. Purchase a security if, as a result of such purchase,
more than 15% of the Fund's net assets would be invested in illiquid securities
or other securities that are not readily marketable, including repurchase
agreements which do not provide for payment within seven days. For this purpose,
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 may be determined to be liquid.
(3) INVESTMENT COMPANIES. Purchase securities of open-end or closed-end
investment companies except in compliance with the 1940 Act.
(4) OIL AND GAS PROGRAMS. Purchase participations or other direct interests in
oil, gas, or other mineral exploration or development programs or leases.
(5) OPTIONS. Invest in puts, calls, or any combination thereof, except that the
Fund may invest in or commit its assets to purchasing and selling call and put
options to the extent permitted by the Prospectus and this SAI.
INVESTMENT STRATEGIES/TECHNIQUES AND RELATED RISKS
The investment objectives and general investment policies of the Fund are
described in the Prospectus. Additional information concerning investment
strategies/techniques and the characteristics of certain of the Fund's
investments, as well as related risks, is set forth below.
FUND DIVERSIFICATION
The Fund is classified as a "non-diversified" fund. As provided in the 1940 Act,
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. As
the Adviser may from time to time invest a large percentage of the Fund's assets
in securities of a limited number of issuers, the Fund may be more susceptible
to risks associated with a single economic, political or regulatory occurrence
than a diversified investment company. However, the Fund intends to qualify as a
"regulated investment company" under the Internal Revenue Code, and therefore is
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.
FIXED INCOME SECURITIES
Fixed income securities in which the Fund may invest as noted below include, but
are not limited to, the following:
U.S. TREASURY OBLIGATIONS
U.S. Treasury 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 (e.g., Treasury bills mature in one year or less, and
Treasury notes and bonds mature in two to thirty years).
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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. These securities
may have maturities from one day to 40 years, are generally not callable and
normally have interest rates that are fixed for the life of the security.
BANK OBLIGATIONS
Bank obligations include certificates of deposit, bankers' acceptances, and
other debt obligations. Certificates of deposit are short-term obligations of
commercial banks. A bankers' acceptance is a time draft drawn on a commercial
bank by a borrower, usually in connection with an international commercial
transaction.
The Fund will not invest in any security issued by a commercial bank unless (i)
the bank has total assets of at least $1 billion, or the equivalent in other
currencies, (ii) in the case of U.S. banks, the bank is a member of the Federal
Deposit Insurance Corporation, and (iii) in the case of foreign banks, the
security is, in the opinion of Payden & Rygel, of an investment quality
comparable with other debt securities which may be purchased by the Fund. These
limitations do not prohibit investments in securities issued by foreign branches
of U.S. banks, provided such U.S. banks meet the foregoing requirements.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities are interests in pools of mortgage loans made to
U.S. residential home buyers, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations. The Funds may also invest in debt
securities which are secured with collateral consisting of U.S. mortgage-related
securities, and in other types of U.S. mortgage-related securities.
U.S. MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the individual
borrowers on their residential mortgage loans, net of any fees paid to the
issuer or guarantor of such securities. Additional payments are caused by
repayments of principal resulting from the sale of the underlying residential
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by the
Government National Mortgage Association) are described as "modified
pass-through." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment.
The principal governmental guarantor of U.S. mortgage-related securities is the
Government National Mortgage Association ("GNMA"). GNMA is a wholly owned United
State Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
mortgages insured by the Federal Housing Agency or guaranteed by the Veterans
Administration.
Government-related guarantors include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders and
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional residential mortgages not insured or guaranteed by
any government agency from a list of approved seller/services which include
state and federally chartered savings and loan associations, mutual savings
banks, commercial banks and credit unions and mortgage bankers. FHLMC is a
government-sponsored corporation created to increase availability of mortgage
credit for residential housing and owned entirely by private stockholders. FHLMC
issues participation certificates which represent interests in conventional
mortgages from FHLMC's
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national portfolio. Pass-through securities issued by FNMA and participation
certificates issued by FHLMC are guaranteed as to timely payment of principal
and interest by FNMA and FHLMC, respectively, but are not backed by the full
faith and credit of the U.S. Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may,
in addition, be the originators or services of the underlying mortgage loans as
well as the guarantors of the mortgage-related securities. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because they lack direct or indirect
government or agency guarantees of payment. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit, issued by governmental entities, private insurers and
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Fund's investment quality standards. However, there can be no
assurance that private insurers or guarantors will meet their obligations. In
addition, the Fund may buy mortgage-related securities without insurance or
guarantees if through an examination of the loan experience and practices of the
originator/services and poolers the Adviser determines that the securities meet
the Fund's quality standards.
Although the underlying mortgage loans in a pool may have maturities of up to 30
years, the actual average life of the pool certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Prepayment rates vary widely
and may be affected by changes in market interest rates. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening the
actual average life of the pool certificates. Conversely, when interest rates
are rising, the rate of prepayments tends to decrease, thereby lengthening the
actual average life of the certificates. Accordingly, it is not possible to
predict accurately the average life of a particular pool.
Although the market for mortgage pass-through securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable. The Funds will not purchase mortgage-related securities
which in the Adviser's opinion are illiquid if, as a result, more than 15% of
the value of the Fund's total assets will be illiquid.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Like a bond, interest
and prepaid principal is paid, in most cases, semi-annually. CMOs may be
collateralized by whole mortgage loans, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC or
FNMA.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life depend upon the prepayment experience
of the collateral. CMOs provide for a modified form of call protection through a
de facto breakdown of the underlying pool of mortgages according to how quickly
the loans are repaid. Monthly payment of principal received from the pool of
underlying mortgages, including prepayments, is first returned to investors
holding the shortest maturity class. Investors holding the longer maturity
classes receive principal only after the earlier classes have been retired.
OTHER MORTGAGE-RELATED SECURITIES. Other mortgage-related securities include
securities of U.S. issuers that directly or indirectly represent a participation
in, or are secured by and payable from, mortgage loans on real property. These
other mortgage-related securities may be equity or debt securities issued by
governmental agencies or instrumentalities or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks, partnerships,
trusts and special purpose entities.
FLOATING RATE AND VARIABLE RATE DEMAND NOTES
Floating rate and variable rate demand notes and bonds have a stated maturity in
excess of one year, but permit a holder to demand payment of principal plus
accrued interest upon a specified number of days notice. Frequently, such
obligations are secured by letters of credit or other credit support
arrangements provided by banks. The issuer has a corresponding right, after a
given period, to prepay in its discretion the outstanding principal of the
obligation plus accrued interest upon a specific number of days notice to the
holders. The interest rate of a floating rate instrument may be based on a known
lending rate, such as a bank's prime rate, and is reset whenever such rate is
adjusted. The interest rate on a variable rate demand note is reset at specified
intervals at a market rate.
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Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. The quality of the underlying creditor
or of the bank, as the case may be, must, as determined by the Adviser under the
supervision of the Board of Trustees, also be equivalent to the quality
standards set forth above. In addition, the Adviser monitors the earning power,
cash flow and other liquidity ratios of the issuers of such obligations, as well
as the creditworthiness of the institution responsible for paying the principal
amount of the obligations under the demand feature.
OBLIGATIONS WITH PUTS ATTACHED
Obligations with puts attached are long-term fixed rate debt obligations that
have been coupled with an option granted by a third party financial institution
allowing the Fund at specified intervals to tender (or "put") such debt
obligations to the institution and receive the face value. These third party
puts are available in many different forms, and may be represented by custodial
receipts or trust certificates and may be combined with other features such as
interest rate swaps. The financial institution granting the option does not
provide credit enhancement. If there is a default on, or significant downgrading
of, the bond or a loss of its tax-exempt status, the put option will terminate
automatically. The risk to the Fund will then be that of holding a long-term
bond.
These investments may require that the Fund pay a tender fee or other fee for
the features provided. In addition, the Fund may acquire "stand-by commitments"
from banks or broker dealers with respect to the securities held in its
portfolios. Under a stand-by commitment, a bank or broker/dealer agrees to
purchase at the Fund's option a specific security at a specific price on a
specific date. The Fund may pay for a stand-by commitment either separately, in
cash, or in the form of a higher price paid for the security. The Fund will
acquire stand-by commitments solely to facilitate portfolio liquidity.
MONEY MARKET FUNDS
To maintain liquidity, the Fund may invest in unaffiliated money market funds.
No money market fund investment by the Fund will be in excess of 3% of the total
assets of the money market fund. The Fund does not anticipate investing more
than 15% of its net assets in money market funds. An investment in a money
market mutual fund by the 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
Money market obligations include U.S. dollar denominated bank certificates of
deposit, bankers acceptances, commercial paper and other short-term debt
obligations of U.S. and foreign issuers, including U.S. Government and agency
obligations. All money market obligations are considered high quality, meaning
that the security is 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, is determined by
the Adviser to be of comparable quality.
REPURCHASE AGREEMENTS
To maintain liquidity, the Fund may enter into repurchase agreements (agreements
to purchase U.S. Treasury notes and bills, subject to the seller's agreement to
repurchase them at a specified time and price) with well-established registered
securities dealers or banks.
Repurchase agreements are the economic equivalent of loans by the Fund. In the
event of a bankruptcy or default of any registered dealer or bank, the Fund
could experience costs and delays in liquidating the underlying securities which
are held as collateral, and the Fund might incur a loss if the value of the
collateral declines during this period.
DELAYED DELIVERY TRANSACTIONS
These transactions involve a commitment by the Fund to purchase or sell
securities for a predetermined price or yield, with payment and delivery taking
place more than seven days in the future, or after a period longer than the
customary settlement period for that type of security. When delayed delivery
purchases are outstanding, the Fund will set aside and maintain until the
settlement date in a segregated account cash, U.S. Government securities or high
grade debt obligations in an amount sufficient to meet the purchase price. When
purchasing a security on a delayed delivery basis, the Fund assumes the rights
and risks of ownership of the security, including the risk of price and yield
fluctuations, and takes such fluctuations into account when determining its net
asset value, but does not accrue income on the security until delivery. When the
Fund sells a security on a delayed delivery basis, it does not
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participate in future gains or losses with respect to the security. If the other
party to a delayed delivery transaction fails to deliver or pay for the
securities, the Fund could miss a favorable price or yield opportunity or could
suffer a loss. The Fund will not invest more than 35% of its total assets in
when-issued and delayed delivery transactions.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements (agreements to sell
portfolio securities, subject to the Fund's agreement to repurchase them at a
specified time and price) with well-established registered dealers and banks.
The 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 the Fund, and are entered into by the Fund to enable it to avoid
selling securities to meet redemption requests during market conditions deemed
unfavorable by the Adviser.
ILLIQUID SECURITIES
The Fund may not invest more than 15% of the value of its net assets in
securities that at the time of purchase have legal or contractual restrictions
on resale or are otherwise illiquid. The Adviser will monitor the amount of
illiquid securities in the Fund's portfolio, to ensure compliance with the
Fund's investment restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placement or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and the Fund might
be unable to dispose of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty satisfying redemption
requests within seven days. The Fund might also have to register such restricted
securities in order to dispose of them, resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed for certain
securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. In accordance with guidelines established by the Board, the Adviser
will determine the liquidity of each investment using various factors such as
(1) the frequency of trades and quotations, (2) the number of dealers and
prospective purchasers in the marketplace, (3) dealer undertakings to make a
market, (4) the nature of the security (including any demand or tender features)
and (5) the likelihood of continued marketability and credit quality of the
issuer.
OPTIONS AND FUTURES CONTRACTS
As described in the Prospectus, the Fund may trade in futures and put and call
options. If other types of options, futures contracts, or futures options are
traded in the future, the Fund may also use those instruments, provided the
Board of Trustees determines that their use is consistent with the Fund's
investment objectives, and their use is consistent with restrictions applicable
to options and futures contracts currently eligible for use by the Fund.
OPTIONS ON SECURITIES OR INDICES
The Fund may purchase and write options on securities and indices. An index is a
statistical measure designed to reflect specified facets of a particular
financial or securities market, a specific group of financial instruments or
securities, or certain economic indicators such as the Merrill Lynch 1 to 3 year
Global Government Bond Index, the JP Morgan Global Government Bond Index, and
the Lehman Brothers Government/Corporate Index.
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An option on a security (or an index) is a contract that gives the holder of the
option, in return for a premium, the right to buy from (in the case of a call)
or sell to (in the case of a put) the writer of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option (in the case of "American Style"
options) or at the expiration of the option (in the case of "European Style"
options). The writer of a call or put option on a security is obligated upon
exercise of the option to deliver the underlying security upon payment of the
exercise price or to pay the exercise price upon delivery of the underlying
security, as the case may be. The writer of an option on an index is obligated
upon exercise of the option to pay the difference between the cash value of the
index and the exercise price multiplied by a specified multiplier for the index
option.
The Fund will write call options and put options only if they are "covered." In
the case of a call option on a security, the option is covered if the Fund owns
the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if additional
cash consideration is required, cash or cash equivalents in such amount are
placed in a segregated account with the 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 the Fund expires unexercised, the Fund realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by the Fund expires unexercised, the Fund realizes a
capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out by
an offsetting purchase or sale of an option of the same series (i.e., of the
type, traded on the same exchange, with respect to the same underlying security
or index, and with the same exercise price and expiration date). The Fund will
realize a capital gain from a closing purchase transaction if the cost of the
closing option is less than the premium received from writing the option; if it
is more, the Fund will realize a capital loss. If the premium received from a
closing sale transaction is more than the premium paid to purchase the option,
the Fund will realize a capital gain; if it is less, the Fund will realize a
capital loss. The principal factors affecting the market value of a put or a
call option include supply and demand, interest rates, the current market price
of the underlying security or index in relation to the exercise price of the
option, the volatility of the underlying security or index, and the time
remaining until the expiration date.
The premium paid for a put or call option purchased by the Fund is an asset of
the Fund. The premium received for an option written by the Fund is recorded as
a deferred credit. The value of an option purchased or written is marked to
market daily and is valued at the closing price on the exchange on which it is
traded or, if not traded on an exchange or no closing price is available, at the
mean between the last bid and asked prices.
COMBINATIONS OF OPTIONS
There are also certain combinations of put and call options. A "straddle"
involves the purchase of a put and call option on the same security with the
same exercise prices and expiration dates. A "strangle" involves the purchase of
a put option and a call option on the same security with the same expiration
dates but different exercise prices. A "collar" involves the purchase of a put
option and the sale of a call option on the same security with the same
expiration dates but different exercise prices. A "spread" involves the sale of
a put option and the purchase of a call option on the same security with the
same or different expiration dates and different exercise prices.
RISKS ASSOCIATED WITH OPTIONS
Several risks are associated with transactions in options on securities, indices
and currencies. For example, significant differences between the securities and
options markets could result in an imperfect correlation between those markets,
causing a given transaction not to achieve its objectives. A decision as to
whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
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There can be no assurance that a liquid market will exist when the Fund seeks to
close out an option position. Among the possible reasons for the absence of a
liquid secondary market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities; (iv)
interruption of the normal operations of an exchange; (v) inadequacy of the
facilities of an exchange or the Options Clearing Corporation to handle current
trading volume; or (vi) a decision by an exchange to discontinue the trading of
options or a particular class or series of options (in which event the secondary
market on that exchange or in that class or series of options could cease to
exist, although outstanding options on that exchange that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
generally continue to be exercisable in accordance with their terms). If the
Fund were unable to close out an option that it had purchased on a security, it
would have to exercise the option in order to realize any profit. If the Fund
were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security unless the option
expired without exercise. As the writer of a covered call option, the Fund
forgoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call.
If trading were suspended in an option purchased by the Fund, the Fund would not
be able to close out the option. If restrictions on exercise were imposed, the
Fund might be unable to exercise an option it has purchased. Except to the
extent that a call option on a security, currency or index written by the Fund
is covered by an option on the same security, currency or index purchased by the
Fund, movements in the index may result in a loss to the Fund; however, such
losses may be mitigated by changes in the value of the Fund's securities during
the period the option was outstanding.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Fund may use interest rate or index futures contracts, as specified in the
Prospectus. An interest rate contract provides for the future sale by one party
and purchase by another party of a specified quantity of a financial instrument
at a specified price and time. A futures contract on an index is an agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the close of the
last trading day of the contract and the price at which the index contract was
originally written. Although the value of an index might be a function of the
value of certain specified securities, no physical delivery of these securities
is made.
A public market exists in futures contracts covering several indices as well as
a number of financial instruments, including U.S. Treasury bonds, U.S. Treasury
notes, GNMA Certificates, three-month U.S. Treasury bills, 90-day commercial
paper, and bank certificates of deposit. Other futures contracts are likely to
be developed and traded in the future. The Fund will only enter into futures
contracts and futures options which are standardized and traded on a U.S. or
foreign exchange, board of trade, or similar entity, or quoted on an automated
quotation system.
The Fund may also purchase and write call and put options on futures contracts.
Futures options possess many of the same characteristics as options on
securities and indices. A futures option gives the holder the right, in return
for the premium paid, to assume a long position (call) or short position (put)
in a futures contract at a specified exercise price at any time during the
period of the option. Upon exercise of a call option, the holder acquires a long
position in the futures contract and the writer is assigned the opposite short
position. In the case of a put option, the opposite is true.
As long as required by regulatory authorities the Fund 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, the Fund might use futures contracts
to hedge against anticipated changes in interest rates that might adversely
affect either the value of the Fund's securities or the price of the securities
which the Fund intends to purchase. The Fund's hedging activities may include
sales of futures contracts as an offset against the effect of expected increases
in interest rates, and purchases of futures contracts as an offset against the
effect of expected declines in interest rates. Although other techniques could
be used to reduce the Fund's exposure to interest rate fluctuations, the Fund
may be able to hedge its exposure more effectively and at a lower cost by using
futures contracts and futures options.
When a purchase or sale of a futures contract is made by the Fund, the Fund is
required to deposit with its Custodian (or futures commission merchant, if
legally permitted) a specified amount of cash or U.S. Government securities
("initial margin"). The margin required for a futures contract is set by the
exchange on which the contract is traded and may be modified during the term of
the contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to
10
<PAGE> 24
the Fund upon termination of the contract, assuming all contractual obligations
have been satisfied. The Fund expects to earn interest income on its initial
margin deposits. A futures contract held by the Fund is valued daily at the
official settlement price of the exchange on which it is traded. Each day the
Fund pays or receives cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as "marking to market."
Variation margin does not represent a borrowing or loan by the Fund but is
instead a settlement between the Fund and the futures commission merchant of the
amount one would owe the other if the futures contract expired. In computing
daily net asset value, the Fund will mark to market its open futures positions.
The Fund is also required to deposit and maintain margin with respect to put and
call options on futures contracts written by it. Such margin deposits will vary
depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts
(contracts traded on the same exchange, on the same underlying security or
index, and with the same delivery month). If an offsetting purchase price is
less than the original sale price, the Fund realizes a capital gain; if it is
more, the Fund realizes a capital loss. Conversely, if an offsetting sale price
is more than the original purchase price, the Fund realizes a capital gains; if
it is less, the Fund realizes a capital loss. The transaction costs must also be
included in these calculations.
LIMITATIONS ON USE OF FUTURES AND FUTURES OPTIONS
The Fund will not enter into a futures contract or futures option contract if,
immediately thereafter, the aggregate initial margin deposits relating to such
positions plus premiums paid by it for open futures option positions, less the
amount by which any such options are "in-the-money," would exceed 5% of the
Fund's total assets. A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise price. A put
option is "in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
When purchasing a futures contract, the Fund will maintain with its Custodian
(and mark to market on a daily basis) cash, U.S. Government securities, or other
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, the Fund may "cover" its position by purchasing a put
option on the same futures contract with a strike price as high or higher than
the price of the contract held by the Fund.
When selling a futures contract, the Fund will maintain with its Custodian (and
mark to market on a daily basis) liquid assets that, when added to the amount
deposited with a futures commission merchant as margin, are equal to the market
value of the instruments underlying the contract. Alternatively, the Fund may
"cover" its position by owning the instruments underlying the contract (or, in
the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Fund's Custodian).
When selling a call option on a futures contract, the Fund will maintain with
its custodian (and mark to market on a daily basis) cash, U.S. Government
securities, or other 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, the Fund may
cover its position by entering into a long position in the same futures contract
at a price no higher than the strike price of the call option, by owning the
instruments underlying the futures contract, or by holding a separate call
option permitting the Fund to purchase the same futures contract at a price not
higher than the strike price of the call option sold by the Fund.
When selling a put option on a futures contract, the Fund will maintain with its
custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, or other liquid securities that equal the purchase price of the
futures contract, less any margin on deposit. Alternatively, the Fund may cover
the position either by entering into a short position in the same futures
contract, or by owning a separate put option permitting it to sell the same
futures contract so long as the strike price of the purchased put option is the
same or higher than the strike price of the put option sold by the Fund.
In order to comply with applicable regulations of the Commodity Futures Trading
Commission ("CFTC") for exemption from the definition of a "commodity pool," the
Fund is limited in its futures trading activities to: (1) positions which
constitute "bona fide hedging" positions within the meaning and intent of
applicable CFTC rules, and (2) other positions for the establishment of which
the
11
<PAGE> 25
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 Fund may enter into futures, futures options or
forward contracts. See "Taxation."
12
<PAGE> 26
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS
There are several risks associated with the use of futures contracts and futures
options as hedging techniques. A purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract. There
can be no guarantee that there will be a correlation between price movements in
the hedging vehicle and in the Fund securities being hedged. In addition, there
are significant differences between the securities and futures markets that
could result in an imperfect correlation between the markets, causing a given
hedge not to achieve its objectives. The degree of imperfection of correlation
depends on circumstances such as variations in speculative market demand for
futures and futures options on securities, including technical influences in
futures trading and futures options, and differences between the financial
instruments being hedged and the instruments underlying the standard contracts
available for trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected interest
rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses, because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when the
Fund seeks to close out a futures contract or a futures option position, in
which event the Fund would remain obligated to meet margin requirements until
the position is closed. In addition, many of the contracts discussed above are
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will develop or
continue to exist.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in futures contracts or options, the Fund could experience delays
and losses in liquidating open positions purchased or sold through the broker,
and incur a loss of all or part of its margin deposits with the broker.
DEALER OPTIONS
The Fund may engage in transactions involving dealer options on securities or
indices as well as exchange-traded options. Certain risks are specific to dealer
options. While the Fund would look to a clearing corporation to exercise
exchange-traded options, if the Fund were to purchase a dealer option it would
rely on the dealer from whom it purchased the option to perform if the option
were exercised. Failure by the dealer to do so would result in the loss of the
premium paid by the Fund as well as loss of the expected benefit of the
transaction.
Exchange-traded options generally have a continuous liquid market while dealer
options may not. Consequently, the Fund may generally be able to realize the
value of a dealer option it has purchased only by exercising or reselling the
option to the dealer who issued it. Similarly, when the Fund writes a dealer
option, the Fund may generally be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to whom the Fund originally wrote the option. While the Fund will seek to enter
into dealer options only with dealers 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 the Fund, as a covered
dealer call option writer, is able to effect a closing purchase transaction, it
will not be able to liquidate securities (or other assets) used as cover until
the option expires or is exercised. In the event of insolvency of the other
party, the Fund may be unable to liquidate a dealer option. With respect to
options written by the Fund, the inability to enter into a closing transaction
may result in material losses to the Fund. For example, since the Fund must
maintain a secured position with respect to any call option on security it
writes, the Fund may not sell the assets which it has segregated to secure the
position while it is obligated under the option. This requirement may impair the
Fund's ability to sell portfolio securities at a time when such sale might be
advantageous.
13
<PAGE> 27
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.
The Fund may treat the cover used for these written dealer options as liquid if
the dealer agrees that the Fund may repurchase the dealer option it has written
for a maximum price to be calculated by a predetermined formula. In such cases,
the dealer option would be considered illiquid only to the extent the maximum
purchase price under the formula exceeds the intrinsic value of the option.
Accordingly, the 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.
SWAPS
The Fund will enter into any swap, cap or floor transaction unless the unsecured
senior debt or the claims paying ability of the other party to the transaction
is rated at least "A" at the time of purchase by at least one of the established
rating agencies. The swap market has grown substantially in recent years, with a
large number of banks and investment banking firms acting both as principals and
agents utilizing standard swap documentation, and the Adviser has determined
that the swap market has become relatively liquid. Swap transactions do not
involve the delivery of securities or other underlying assets or principal, and
the risk of loss with respect to such transactions is limited to the net amount
of payments that the Fund is contractually obligated to make or receive. Caps
and floors are more recent innovations for which standardized documentation has
not yet been developed and, accordingly, they are less liquid than swaps. The
Fund will not enter into a swap transaction at any time that the aggregate
amount of its net obligations under such transactions exceeds 15% of its total
assets.
The aggregate purchase price of caps and floors held by the Fund may not exceed
5% of its total assets at the time of purchase, and they are considered by the
Fund to be illiquid assets; it may sell caps and floors without limitation other
than the segregated account requirement described above.
The use of swaps, caps and floors is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser's forecast of market
values, interest rates, currency rates of exchange and other applicable factors
is incorrect, the investment performance of the Fund will diminish compared with
the performance that could have been achieved if these investment techniques
were not used. Moreover, even if the Adviser's forecasts are correct, the Fund's
swap position may correlate imperfectly with an asset or liability being hedged.
In addition, in the event of a default by the other party to the transaction,
the Fund might incur a loss.
INTEREST RATE AND INDEX SWAPS
An interest rate swap is a contract between two entities ("counterparties") to
exchange interest payments (of the same currency) between the parties. In the
most common interest rate swap structure, one counterparty agrees to make
floating rate payments to the other counterparty, which in turn makes fixed rate
payments to the first counterparty. Interest payments are determined by applying
the respective interest rates to an agreed upon amount, referred to as the
"notional principal amount." In most such transactions, the floating rate
payments are tied to the London Interbank Offered Rate, which is the offered
rate for short-term eurodollar deposits between major international banks. The
same process applies when dealing with an index swap. The buyer of the swap pays
on a floating rate basis and receives a fixed rate payment, based on the total
return of the particular reference index.
SWAP OPTIONS
A swap option is a contract that gives a counterparty the right (but not the
obligation) to enter into a new swap agreement or to shorten, extend, cancel or
otherwise change an existing swap agreement, at some designated future time on
specified terms. It is different from a forward swap, which is a commitment to
enter into a swap that starts at some future date with specified rates. A swap
option may be structured European-style (exercisable on the pre specified date)
or American-style (exercisable during a designated period). The right pursuant
to a swap option must be exercised by the right holder. The buyer of the right
to pay fixed pursuant to a swap option is said to own a put. The buyer of the
right to receive fixed pursuant to a swap option is said to own a call.
CAPS AND FLOORS
An interest rate cap is a right to receive periodic cash payments over the life
of the cap equal to the difference between any higher actual level of interest
rates in the future and a specified strike (or "cap") level. The cap buyer
purchases protection for a floating rate
14
<PAGE> 28
move above the strike. An interest rate floor is the right to receive periodic
cash payments over the life of the floor equal to the difference between any
lower actual level of interest rates in the future and a specified strike (or
"floor") level. The floor buyer purchases protection for a floating rate move
below the strike. The strikes are typically based on the three-month LIBOR
(although other indices are available) and are measured quarterly. Rights
arising pursuant to both caps and floors are exercised automatically if the
strike is in the money. Caps and floors eliminate the risk that the buyer fails
to exercise an in-the-money option.
RISKS ASSOCIATED WITH SWAPS
The risks associated with swaps, caps and floors are similar to those described
above with respect to dealer options. In connection with such transactions, the
Fund relies on the other party to the transaction to perform its obligations
pursuant to the underlying agreement. If there were a default by the other party
to the transaction, the Fund would have contractual remedies pursuant to the
agreement, but could incur delays in obtaining the expected benefit of the
transaction or loss of such benefit. In the event of insolvency of the other
party, the Fund might be unable to obtain its expected benefit. In addition,
while the Fund will seek to enter into such transactions only with parties which
are capable of entering into closing transactions with the Fund, there can be no
assurance that the Fund will be able to close out such a transaction with the
other party, or obtain an offsetting position with any other party, at any time
prior to the end of the term of the underlying agreement. This may impair the
Fund's ability to enter into other transactions at a time when doing so might be
advantageous.
LENDING OF PORTFOLIO SECURITIES
To realize additional income, the Fund may lend securities with a value of up to
33% of its total assets to broker-dealers, institutional investors or other
persons. Each loan will be secured by collateral which is maintained at no less
than 100% of the value of the securities loaned by "marking to market" daily.
The Fund will have the right to call each loan and obtain the securities on five
business days' notice or, in connection with securities trading on foreign
markets, within a longer period of time which coincides with the normal
settlement period for purchases and sales of such securities in such foreign
markets. Loans will only be made to persons deemed by the Adviser to be of good
standing in accordance with standards approved by the Board of Trustees and will
not be made unless, in the judgment of the Adviser, the consideration to be
earned from such loans would justify the risk.
RESERVES
The Fund may establish and maintain reserves when the Adviser determines that
such reserves would be desirable for temporary defensive purposes (for example,
during periods of substantial volatility in interest rates) or to enable it to
take advantage of buying opportunities. The Fund's reserves may be invested in
domestic and foreign money market instruments, including government obligations,
BORROWING
The Fund may borrow for temporary, extraordinary or emergency purposes, or for
the clearance of transactions. The Investment Company Act of 1940 (the "1940
Act") requires the Fund to maintain continuous asset coverage (that is, total
assets including borrowings, less liabilities exclusive of borrowings) of 300%
of the amount borrowed. If the 300% asset coverage should decline as a result of
market fluctuations or other reasons, the Fund may be required to sell some of
its portfolio holdings within three days to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. To avoid the potential leveraging
effects of the Fund's borrowings, additional investments will not be made while
borrowings are in excess of 5% of the Fund's total assets. Money borrowed will
be subject to interest costs which may or may not be recovered by appreciation
of the securities purchased. The Fund also may be required to maintain minimum
average balances in connection with any such borrowings or to pay a commitment
or other fee to maintain a line of credit, either of which would increase the
cost of borrowing over the stated interest rate.
AVERAGE MATURITY AND DURATION CALCULATIONS
AVERAGE MATURITY
The portfolio average maturity of the Fund will be computed by weighting the
maturity of each security in the Fund's portfolio by the market value of that
security. For securities which have put dates, reset dates, or trade based on
average maturity, the put date, reset
15
<PAGE> 29
date or average maturity will be used instead of the final maturity date for the
average maturity calculation. Average maturity is normally used when trading
mortgage backed securities and asset backed securities.
16
<PAGE> 30
DURATION
One common measure of the price volatility of a fixed income security is
duration, a weighted average term-to-maturity of the present value of a
security's cash flows. As it is a weighted term-to-maturity, duration is
generally measured in years and can vary from zero to the time-to-maturity of
the security. Duration is a complex formula that utilizes each cash flow and the
market yield of the security. Bonds of the same maturity can have different
durations if they have different coupon rates or yields.
For securities which pay periodic coupons and have a relatively short maturity,
duration tends to approximate the time to maturity. As the maturity of the bond
extends, the duration also extends but at a slower rate. For example, the
duration of a 2-year security can be about 1.8 years; the duration of a 30-year
bond will be roughly 10 to 11 years. However, the duration of any security that
pays interest only at maturity is the time to maturity. Thus a 30-year zero
coupon bond has a duration of 30 years.
If the duration of the security is divided by the sum of one plus its yield, the
resultant number is called the modified duration of the security. Modified
duration is important to portfolio managers as it is used to determine the
sensitivity of the security to changes in interest rates. For small changes in
yield, the price of a security, as a percentage of its initial price, will move
inversely to the yield change by an amount equal to the modified duration times
the yield change. The market price of a security with a modified duration of ten
years will change twice as much as a security with a with a five year duration.
Modified duration is a much better indicator of price volatility than time to
maturity. For example, the times to maturity for a 30 year bond and a 30 year
zero coupon security are both 30 years. A portfolio manager using average
maturity to judge price volatility would expect to see no difference in
portfolio impact from these two securities (given equal yield). However, the
zero coupon bond will experience a percentage price change roughly three times
greater than the 30 year bond.
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<PAGE> 31
MANAGEMENT OF THE GROUP
TRUSTEES AND OFFICERS
The Trustees are responsible for the overall management of the Fund, including
establishing the Fund's policies, general supervision and review of their
investment activities. The officers who administer the Fund's daily operations
are appointed by the Board of Trustees. The current Trustees and officers of the
Group who perform a policy-making function and their affiliations and principal
occupations for the past five years are as set forth below. Unless otherwise
indicated, the address of each of the persons listed below is 333 South Grand
Avenue, Los Angeles, California 90071.
BOARD OF TRUSTEES:
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME THE GROUP DURING PAST FIVE YEARS
---- ------------- -----------------------
<S> <C> <C>
* Joan A. Payden(1) Chairman of the Board, President, Payden & Rygel
and Chief Executive
Officer, Trustee
* John Paul Isaacson Trustee Managing Principal, Payden & Rygel
* Christopher N. Orndorff Trustee Managing Principal, Payden & Rygel
J. Clayburn La Force P.O. Box 1009 Trustee Dean Emeritus, The John E. Anderson
Pauma Valley, CA 92061 Graduate School of Management at
University of California, Los
Angeles; Director, The Timken Company
(since February, 1994); Trustee for
PIC Institutional Growth Portfolio,
PIC Institutional Balanced Portfolio
and PIC Small Capital Portfolio
Thomas V. McKernan, Jr.(1) Trustee President and Chief Executive
3333 Fairview Road Officer, Automobile Club of Southern
Costa Mesa, CA 92626 California
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
W.D. Hilton, Jr. Trustee Managing Trustee, NGC Settlement
2608 Eastland Avenue, Suite 202 Trust; previously, Chief Financial
Greenville, TX 75402 Officer, Texas Association of School
Boards and Board Member, First
Greenville National Bank
</TABLE>
* An "interested person" of the Group, as defined in the 1940 Act.
(1) Ms. Payden is a Director of the Automobile Club of Southern California, of
which Mr. McKernan is President and Chief Executive Officer.
Trustees other than those affiliated with the Adviser 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, 1998, to the Trustees who are not affiliated
with the
18
<PAGE> 32
Adviser and the aggregate compensation paid to such Trustees for services on the
Trust's Board; the Group does not maintain a retirement plan for its Trustees.
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 TOTAL
BENEFITS ESTIMATED COMPENSATION
ACCRUED AS ANNUAL FROM GROUP
AGGREGATE PART OF BENEFITS AND GROUP
COMPENSATION GROUP UPON COMPLEX PAID
NAME FROM GROUP EXPENSES RETIREMENT TO TRUSTEE
---- ----------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Dennis Poulsen $ 26,000 None N/A $ 26,000
James Clayburn La Force $ 27,500 None N/A $ 27,500
Stender Sweeney $ 29,000 None N/A $ 29,000
W.D. Hilton $ 29,000 None N/A $ 29,000
Thomas V. McKernan, Jr. $ 29,000 None N/A $ 29,000
Lynda L. Faber $ 29,000 None N/A $ 29,000
</TABLE>
OFFICERS:
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME THE GROUP DURING PAST FIVE YEARS
---- ------------- -----------------------
<S> <C> <C>
John C. Siciliano President, Chief Operating Officer Managing Director, Payden & Rygel (since 1998);
previously, Senior Vice President, Dresdner
Kleinwort Benson North America; Executive Vice
President and Chief Financial Officer,
Technicolor, Inc.
Bradley F. Hersh Vice President, Treasurer Controller, Payden & Rygel (since 1998);
previously, Assistant Controller, Sierra
Capital Management
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, Wells Fargo Bank
Yot Chattrabhuti Vice President Manager - Mutual Fund Operations, Payden &
Rygel (since 1997); previously, Bank of
America: Vice President and Manager, Securities
Processing, Assistant Vice President and
Manager of various finance related functions,
and Senior Trust Officer, Employee Benefit
Trust Accounts
Edward S. Garlock Secretary General Counsel, Payden & Rygel (since 1997);
previously, Senior Vice President and Group
General Counsel, First Interstate Bancorp
</TABLE>
ADVISER
Payden & Rygel was founded in 1983 as an independent investment counseling
organization specializing in the management of short term fixed income
securities. The firm is owned by Joan Payden and several other employees. As of
October 31, 1998, its staff consisted of 90 employees, 43 of whom either have
advanced degrees and/or are Chartered Financial Analysts. As of such date, it
had
19
<PAGE> 33
over 200 clients, including pension funds, endowments, credit unions,
foundations, corporate cash accounts and individuals, and managed total assets
of over $26 billion, with about $6 billion invested globally.
The Adviser's focus is the management of fixed income securities in both the
domestic and global markets. These include securities that have absolute or
average maturities out to five years with a bias toward very high quality and
liquidity. Portfolios are actively managed according to client-approved
guidelines and benchmarks. Payden & Rygel also utilizes futures and options
strategies, primarily as defensive measures to control interest rate and
currency volatility.
The Adviser provides investment management services to the Fund pursuant to an
Investment Management Agreement with the Group dated as of June 24, 1992, as
amended. The Agreement provides that the Adviser will pay all expenses incurred
in connection with managing the ordinary course of the Fund's business, except
the following expenses, which are paid by the Fund: (i) the fees and expenses
incurred by the 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
the Fund in connection with its securities and futures transactions; (vi) all
taxes and corporate fees payable by the 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 the Fund and of its shares with the
SEC, registering the Group as a broker or dealer and qualifying the shares of
the Fund under state securities laws, including the preparation and printing of
the Trust's registration statements, prospectuses and statements of additional
information for filing under federal and state securities laws for such
purposes; (x) communications expenses with respect to investor services and all
expenses of shareholders' and trustees' meetings and of preparing, printing and
mailing reports to shareholders in the amount necessary for distribution to the
shareholders; (xi) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Trust's
business, and (xii) any expenses assumed by the Group pursuant to a plan of
distribution adopted in conformity with Rule 12b-1 under the 1940 Act.
The Investment Advisory Agreement provides that the Adviser receives a monthly
fee from the Fund at the annual rate of 0.27% of the Fund's average daily net
assets.
The Agreement provides that the Adviser will not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the performance of the Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or gross negligence in the
performance of the Adviser's duties or from reckless disregard by the Adviser of
its duties and obligations thereunder. Unless earlier terminated as described
below, the Agreement will continue in effect with respect to the Fund for two
years after the Fund's inclusion in its Master Trust Agreement (on or around its
commencement of operations) and then continue for the Fund for periods not
exceeding one year so long as such continuation is approved annually by the
Board of Trustees (or by a majority of the outstanding voting shares of the Fund
as defined in the 1940 Act) and by a majority of the Trustees who are not
interested persons of any party to the Agreement by vote cast in person at a
meeting called for such purpose. The Agreement terminates upon assignment and
may be terminated with respect to the Fund without penalty on 60 days' written
notice at the option of either party thereto or by the vote of the shareholders
of the Fund.
ADMINISTRATOR, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT
Treasury Plus, Incorporated, located at 333 South Grand Avenue, Los Angeles,
California 90071, is a wholly owned subsidiary of the Adviser which 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.
For providing administrative services to the Group, the Administrator receives a
monthly fee at the annual rate of 0.08% of the daily net assets of the Group.
Investors Fiduciary Trust Company ("IFTC"), located at 801 Pennsylvania, Kansas
City, Missouri 64105, provides fund accounting and transfer agency services to
the Group. IFTC calculates daily expense accruals and net asset value per share
of the Fund, issues and
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<PAGE> 34
redeems Fund shares, maintains shareholder accounts and prepares annual investor
tax statements. 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.
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.
PORTFOLIO TRANSACTIONS
The Fund pays commissions to brokers in connection with the purchase and sale of
options and futures contracts. There is generally no stated commission in the
case of fixed-income securities, which are traded in the over-the-counter
markets, but the price paid by the Fund usually includes an undisclosed dealer
commission or mark-up. In underwritten offerings, the price paid by the Fund
includes a disclosed, fixed commission or discount retained by the underwriter
or dealer. Agency transactions involve the payment by the Fund of negotiated
brokerage commissions. Such commissions vary among different brokers. Also, a
particular broker may charge different commissions according to such factors as
the difficulty and size of the transaction. The Adviser places all orders for
the purchase and sale of portfolio securities, options and futures contracts for
the Fund and buys and sells such securities, options and futures for the Fund
through a substantial number of brokers and dealers. In so doing, the Adviser
seeks the best execution available. In seeking the most favorable execution, the
Adviser considers all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of the market for
the security, the amount of the commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience and financial
stability of the broker-dealer involved and the quality of service rendered by
the broker-dealer in other transactions.
Some securities considered for investment by the Fund's portfolio may also be
appropriate for other clients served by the Adviser. If a purchase or sale of
securities consistent with the investment policies of the Fund is considered at
or about the same time as a similar transaction for one or more other clients
served by the Adviser, transactions in such securities will be allocated among
the Fund and other clients in a manner deemed fair and reasonable by the
Adviser. Although there is no specified formula for allocating such
transactions, the various allocation methods used by the Adviser, and the
results of such allocations, are subject to periodic review by the Board of
Trustees.
The Adviser manages the Fund without regard generally to restrictions on
portfolio turnover, except those imposed on its ability to engage in short-term
trading by provisions of the federal tax laws (see "Taxation"). Trading in
fixed-income securities does not generally involve the payment of brokerage
commissions, but does involve indirect transaction costs. The higher the rate of
portfolio turnover, the higher these transaction costs borne by the Fund
generally will be. The turnover rate of the Fund is calculated by dividing (a)
the lesser of purchases or sales of portfolio securities for a particular fiscal
year by (b) the monthly average of the value of the portfolio securities owned
by the Fund during the fiscal year. In calculating the rate of portfolio
turnover, all securities, including options, whose maturities or expiration
dates at the time of acquisition were one year or less, are excluded. 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
their responsibilities in connection with the placement of portfolio
transactions on behalf of the Fund.
PURCHASES AND REDEMPTIONS
Certain managed account clients of the Adviser may purchase shares of the Fund.
To avoid the imposition of duplicative fees, the Adviser may be required to make
adjustments in the management fees charged separately by the Adviser to these
clients to offset the generally higher level of management fees and expenses
resulting from a client's investment in the Fund.
The Fund reserves the right to suspend or postpone redemptions during any period
when: (a) trading on the New York Stock Exchange is restricted, as determined by
the Securities and Exchange Commission, or that Exchange is closed for other
than customary weekend and holiday closings; (b) the Securities and Exchange
Commission has by order permitted such suspension; or (c) an emergency, as
determined by the Securities and Exchange Commission, exists, making disposal of
portfolio securities or valuation of net assets of the Fund not reasonably
practicable.
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<PAGE> 35
The 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. The Fund
reserves the right to pay any redemption price exceeding this amount in whole or
in part by a distribution in kind of securities held by the Fund in lieu of
cash. It is highly unlikely that shares would ever be redeemed in kind. If
shares are redeemed in kind, however, the redeeming shareholder would incur
transaction costs upon the disposition of the securities received in the
distribution.
Due to the relatively high cost of maintaining smaller accounts, the Fund
reserves the right to redeem shares in any account for their then-current value
(which will be promptly be paid to the investor) if at any time, due to
shareholder redemption, the shares in the Fund account do not have a value of at
least $5,000. An investor will be notified that the value of his account is less
than the minimum and allowed at least 30 days to bring the value of the account
up to at least $5,000 before the redemption is processed. The Declaration of
Trust also authorizes the Fund to redeem shares under certain other
circumstances as may be specified by the Board of Trustees
VALUATION OF PORTFOLIO SECURITIES
Fixed income securities are valued on the basis of valuations furnished by a
pricing service which utilizes both dealer-supplied valuations and electronic
data processing techniques. Such techniques take into account appropriate
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon quoted prices or exchange
or over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities.
Generally, trading in corporate bonds, U.S. government securities, money market
instruments and repurchase agreements, is substantially completed each day at
various times prior to the close of regular trading on the New York Stock
Exchange. The values of any such securities held by the Fund are determined as
of such times for the purpose of computing the Fund's net asset value. If an
extraordinary event that is expected to affect the value of a portfolio security
materially occurs after the close of an exchange on which that security is
traded, then the security will be valued at fair value as determined in good
faith under procedures established by and under the general supervision of the
Board of Trustees.
The amortized cost method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Fund would receive if it sold the instrument.
During these periods, the yield to an existing shareholder may differ somewhat
from that which could be obtained from a similar fund which marks its portfolio
securities to market each day.
TAXATION
The Fund intends to qualify annually and has elected to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). To qualify as a regulated investment company, the Fund must, among
other things, (a) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of stock, securities or foreign currencies,
or other income (including gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies ("Qualifying Income Test"); (b) diversify its holdings so that, at
the end of each quarter of the taxable year, (i) at least 50% of the market
value of the 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 the 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 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.
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<PAGE> 36
In addition, no definitive guidance currently exists with respect to the
classification of interest rate swaps and cross-currency swaps as securities or
foreign currencies for purposes of certain of the tests described above.
Accordingly, to avoid the possibility of disqualification as a regulated
investment company, the Fund will limit its positions in swaps to transactions
for the purpose of hedging against either interest rate or currency fluctuation
risks, and will treat swaps as excluded assets for purposes of determining
compliance with the Diversification Test.
As a regulated investment company, the Fund will not be subject to U.S. federal
income tax on its investment company taxable income and net capital gains (any
net long-term capital gains in excess of the sum of net short-term capital
losses and capital loss carryovers from the prior eight years) designated by the
Fund as capital gain dividends, if any, that it distributes to shareholders. The
Fund intends to distribute to its shareholders substantially all of its
investment company taxable income monthly and any net capital gains annually.
Investment company taxable income or net capital gains not distributed by the
Fund on a timely basis in accordance with a calendar year distribution
requirement are subject to a nondeductible 4% excise tax. To avoid the tax, the
Fund must distribute during each calendar year an amount at least equal to the
sum of (1) 98% of its ordinary income (with adjustments) for the calendar year
and foreign currency gains or losses for the calendar year, (2) at least 98% of
its capital gains in excess of its capital losses (and adjusted for certain
ordinary losses) for the twelve month period ending on October 31 of the
calendar year, and (3) all ordinary income and capital gains for previous years
that were not distributed during such years. A distribution will be treated as
paid on December 31 of the calendar year if it is declared by the Fund in
October, November, or December of that year to shareholders of record on a date
in such a month and paid by the Fund during January of the following year. Such
distributions will be taxable to shareholders (other than those not subject to
federal income tax) in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
To avoid application of the excise tax, the Fund intends to make its
distributions in accordance with the distribution requirements.
DISTRIBUTIONS
Dividends paid out of the Fund's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. Distributions received by
tax-exempt shareholders will not be subject to federal income tax to the extent
permitted under the applicable tax exemption.
Dividends paid by the Fund generally are not expected to qualify for the
deduction for dividends received by corporations. Distributions of net capital
gains, if any, are taxable as long-term capital gains, regardless of how long
the shareholder has held the Fund's shares and are not eligible for the
dividends received deduction. The tax treatment of dividends and distributions
will be the same whether a shareholder reinvests them in additional shares or
elects to receive them in cash.
HEDGING TRANSACTIONS
Many of the options, futures contracts and forward contracts used by the Fund
are "section 1256 contracts." Any gains or losses on section 1256 contracts are
generally considered 60% long-term and 40% short-term capital gains or losses
("60/40"). Also, section 1256 contracts held by the Fund at the end of each
taxable year (and, for purposes of the 4% excise tax, on certain other dates as
prescribed under the Code) are "marked to market" with the result that
unrealized gains or losses are treated as though they were realized and the
resulting gain or loss is treated as ordinary or 60/40 gain or loss, depending
on the circumstances.
Generally, the hedging transactions and certain other transactions in options,
futures and forward contracts undertaken by the Fund, may result in "straddles"
for U.S. federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the investment company taxable income or net capital gain for the taxable year
in which such losses are realized. Because limited regulations implementing the
straddle rules have been promulgated, the tax consequences of transactions in
options, futures and forward contracts to the Fund are not entirely clear. The
transactions may increase the amount of short-term capital gain realized by the
Fund which is taxed as ordinary income when distributed to shareholders.
The Fund may make one or more of the elections available under the Code which
are applicable to straddles. If the Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections operate to
accelerate the recognition of gains or losses from the affected straddle
positions.
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<PAGE> 37
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 the 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 the Fund will be able to engage in
transactions in options, futures contracts or forward contracts.
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<PAGE> 38
SALES OF SHARES
Upon disposition of shares of the Fund (whether by redemption, sale or
exchange), a shareholder will realize a gain or loss. Such gain or loss will be
capital gain or loss if the shares are capital assets in the shareholder's
hands, and will be long-term, 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
The Fund may be required to withhold for U.S. federal income taxes 31% of all
taxable distributions payable to shareholders who fail to provide the Fund with
their correct taxpayer identification numbers or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain other
shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal tax liability.
OTHER TAXES
Distributions also may be subject to additional state, local and foreign taxes,
depending on each shareholder's particular situation. Under the laws of various
states, distributions of investment company taxable income generally are taxable
to shareholders even though all or a substantial portion of such distributions
may be derived from interest on certain Federal obligations which, if the
interest were received directly by a resident of such state, would be exempt
from such state's income tax ("qualifying Federal obligations"). However, some
states may exempt all or a portion of such distributions from income tax to the
extent the shareholder is able to establish that the distribution is derived
from qualifying Federal obligations. Moreover, for state income tax purposes,
interest on some Federal obligations generally is not exempt from taxation,
whether received directly by a shareholder or through distributions of
investment company taxable income (for example, interest on Federal National
Mortgage Association Certificates and Government National Mortgage Association
Certificates). The Fund will provide information annually to shareholders
indicating the amount and percentage of the Fund's dividend distribution which
is attributable to interest on Federal obligations, and will indicate to the
extent possible from what types of Federal obligations such dividends are
derived. Shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in the Fund.
DISTRIBUTION ARRANGEMENTS
Payden & Rygel Distributors, 333 South Grand Avenue, Los Angeles, California
90071, acts as Distributor to the Group pursuant to a Distribution Agreement
with the Group dated as of June 24, 1992, as amended. The Distributor has agreed
to use its best efforts to effect sales of shares of the Fund, but is not
obligated to sell any specified number of shares. The Distribution Agreement
contains provisions with respect to renewal and termination similar to those in
the Investment Management Agreement described above. Pursuant to the Agreement,
the 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 Fund to the Distributor for its distribution
services, except pursuant to the Distribution Plan described below. The
Distributor pays for the personnel involved in accepting orders for purchase and
redemption of Fund shares, expenses incurred in connection with the printing of
Prospectuses and Statements of Additional Information (other than those sent to
existing shareholders), sales literature, advertising and other communications
used in the public offering of shares of the Fund, and other expenses associated
with performing services as distributor of the Fund's shares. The Fund pays the
expenses of issuance, registration and transfer of its shares, including filing
fees and legal fees.
FUND PERFORMANCE
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The Fund may quote its performance in various ways. All performance information
supplied by the Fund in advertising is historical and is not intended to
indicate future returns. The Fund's share price, yield and total returns
fluctuate in response to market conditions and other factors, and the value of
Fund shares when redeemed may be more or less than their original cost.
Performance information for the Fund may be compared to various unmanaged
indices (such as the Lehman Brothers Municipal Bond Index) or indices prepared
by Lipper Analytical Services and other entities or organizations which track
the performance of investment companies or investment advisers. Comparisons may
also be made to indices or data in publications such as The Bond Buyer, Forbes,
Barron's, The Wall Street Journal, The New York Times, and Business Week. For
example, the Fund may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance the
Fund to other funds in appropriate categories over specific periods of time may
also be quoted in advertising. Unmanaged indices generally do not reflect
deductions for administrative and management costs and expenses. Payden & Rygel
may also report to shareholders or to the public in advertisements concerning
the performance of Payden & Rygel as adviser to clients other than the Fund, and
on the comparative performance or standing of Payden & Rygel in relation to
other money managers. Such comparative information may be compiled or provided
by independent rating services or other organizations.
Information regarding the Fund may also be included in newsletters or other
general communications by Payden & Rygel to advisory clients and potential
clients. These publications principally contain information regarding market and
economic trends and other general matters of interest to investors, such as:
principles of investing which, among other things includes asset allocation,
model portfolios, diversification, risk tolerance and goal setting, saving for
college or other goals or charitable giving; long-term economic or market
trends; historical studies of gold, other commodities, equities, fixed income
securities and statistical market indices; new investment theories or
techniques; economic and/or political trends in foreign countries and their
impact on the United States; municipal bond market fundamentals and trends;
corporate financing trends and other factors that may impact corporate debt; and
housing trends and other economic factors that may impact mortgage rates and
lending activity. In addition, Payden & Rygel may quote financial or business
publications and periodicals as they relate to fund management, investment
philosophy and investment techniques. Materials may also include discussions
regarding Payden & Rygel's asset allocation services and other Payden & Rygel
funds, products and services.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills and the U.S. rate
of inflation (based on the Consumer Price Index) and a combination of various
capital markets. The Group may use the long-term performance of these capital
markets in order to demonstrate general long-term risk-versus-reward investment
scenarios or the value of a hypothetical investment in any of these capital
markets. The performance of these capital markets is based on the returns of
several different indices. Ibbotson calculates total returns in the same method
as the Group. Performance comparisons could also include the value of a
hypothetical investment in any of the capital markets.
If appropriate, the Group may compare the performance of the Fund or the
performance of securities in which the Fund may invest to averages published by
IBC USA (Publications, Inc.). These averages assume reinvestment of
distributions. The IBC/Donoghue's Money Fund Averages(TM)/All Taxable, which is
reported in the Donoghue's Money Fund Report(R), covers over 772 taxable money
market funds. The Fund may quote its fund number, Quotron(TM) number and CUSIP
number or quote its current portfolio manager or any member of Payden & Rygel's
market strategy group.
YIELD CALCULATIONS
Yields for the Fund used in advertising are computed by dividing the interest
income of the Fund for a given 30-day or one month period, net of expenses, by
the average number of shares of the Fund entitled to receive dividends during
the period, dividing this figure by the Fund's net asset value per share at the
end of the period and annualizing the result (assuming compounding of income) in
order to arrive at an annual percentage rate. Income is calculated for purposes
of yield quotations in accordance with standardized methods applicable to bond
funds. In general, interest income is reduced with respect to bonds trading at a
premium over their par value by subtracting a portion of the premium from income
on a daily basis, and is increased with respect to bonds trading at a discount
by adding a portion of the discount to daily income. Capital gains and losses
are generally excluded from the calculation.
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<PAGE> 40
The Fund may, from time to time, include the current yield or effective yield in
advertisements or reports to shareholders or prospective investors. These
performance figures are based on historical results calculated under uniform SEC
formulas and are not intended to indicate future performance.
Yield refers to the income generated by an investment in the Fund over a
seven-day period, expressed as an annual percentage rate. Effective yields are
calculated similarly, but assume that the income earned from the Fund is
reinvested in the Fund. Because of the effects of compounding, effective yields
are slightly higher than yields.
Because yield accounting methods differ from the methods used for other
accounting purposes, the Fund's yield may not equal its distribution rate or
income reported in the Fund's financial statements. Yields and other performance
information maybe quoted numerically, or in a table, graph or similar
illustration.
TOTAL RETURN CALCULATIONS
Total returns quoted in advertising with respect to the Fund reflect all aspects
of the Fund's return, including the effect of reinvesting dividends and capital
gain distributions, and any change in the Fund's net asset value per share over
the period. Average annual total returns are calculated by determining the
growth or decline in value of a hypothetical historical investment in the Fund
over a stated period, and then calculating the annually compounded percentage
rate that would have produced the same result if the rate of growth or decline
in value had been constant over the period. For example, a cumulative return of
100% over ten years would result from an average annual total return of 7.18%,
which is the steady annual total return that would equal 100% growth on a
compounded basis in ten years. While average annual total returns are a
convenient means of comparing investment alternatives, investors should realize
that the Fund's performance is not constant over time, but changes from year to
year, and that average annual total returns represent averaged figures as
opposed to the actual year-to-year performance of the Fund.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns 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.
OTHER INFORMATION
CAPITALIZATION
The Fund is a series of The Payden & Rygel Investment Group, an open-end
management investment company organized as a Massachusetts business trust in
January 1992 (initially called P&R Investment Trust). The capitalization of the
Fund consists solely of an unlimited number of shares of beneficial interest.
The Board of Trustees has currently authorized twenty-three series of shares:
Limited Maturity Fund, Short Bond Fund, U.S. Government Fund, Investment Quality
Bond Fund, Total Return Fund, , GNMA Fund, High Income Fund, Bunker Hill Money
Market Fund, Short Duration Tax Exempt Fund, Tax Exempt Bond Fund, California
Municipal Income Fund, Growth & Income Fund, Market Return Fund, Small Cap Value
Stock Fund, Small Cap Growth Stock Fund, U.S. Growth Leaders Fund, Global Short
Bond Fund, Global Fixed Income Fund, Emerging Markets Bond Fund, Global Balanced
Fund, European Growth & Income Fund, EuroDirect Fund and European Aggressive
Growth Fund.
The Board of Trustees has established Class R Shares of all Funds, and Class D
Shares of the Bunker Hill Money Market Fund. Advisory and administrative fees
will generally 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.
The Board of Trustees may establish additional funds (with different investment
objectives and fundamental policies) and additional classes of shares at any
time in the future. Establishment and offering of additional portfolios will not
alter the rights of the Fund's shareholders. Shares do not have preemptive
rights or subscription rights. All shares, when issued, will be fully paid and
non-assessable by the Group. In liquidation of the Fund, each shareholder is
entitled to receive his pro rata share of the assets of the Fund.
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<PAGE> 41
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, 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.
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<PAGE> 42
DECLARATION OF TRUST
Under Massachusetts law, shareholders of the Fund could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration of Trust disclaims liability of the shareholders of any
Fund for acts or obligations of the Group, provided that the obligations of the
Fund are binding only on the assets and property of the Fund, and requires that
notice of the disclaimer be given in each contract or obligation entered into or
executed by the Fund or the Trustees. The Declaration of Trust provides for
indemnification out of Fund property for all loss and expense of any shareholder
held personally liable for the obligations of the Fund. The risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the 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 Fund and any other series of the Group will vote in the
aggregate and not by series or class except as otherwise required by law or when
the Board of Trustees determines that the matter to be voted upon affects only
the interests of the shareholders of a particular series or class of shares.
Pursuant to Rule 18f-2 under the 1940 Act, the approval of an investment
advisory agreement or any change in a fundamental policy would be acted upon
separately by the series affected. Matters such as ratification of the
independent public accountants and election of Trustees are not subject to
separate voting requirements and may be acted upon by shareholders of the Group
voting without regard to series or class.
CUSTODIAN
The Boston Safe Deposit and Trust Company serves as Custodian for the assets of
the Fund. 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 the Fund; hold
and disburse portfolio securities and other assets on behalf of the Fund;
collect and make disbursements of money on behalf of the Fund; and receive all
income and other payments and distributions on account of the Fund's portfolio
securities.
INDEPENDENT AUDITORS
Deloitte & Touche LLP serves as the independent auditors for the Group's 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.
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FINANCIAL STATEMENTS
Copies of the Group's' 1998 Annual Report to Shareholders may be obtained at no
charge by writing or telephoning the Group at the address or number on the front
page of this Statement of Additional Information.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not contain all
the information included in the Group's registration statement filed with the
Securities and Exchange Commission under the Securities Act of 1933 with respect
to the securities offered hereby, certain portions of which have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The registration statement, including the exhibits filed therewith, may be
examined at the offices of the Securities and Exchange Commission in Washington,
D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other documents
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by such reference.
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